<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
ENACT HEALTH MANAGEMENT SYSTEMS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 8082 77-0326649
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1975 WEST EL CAMINO REAL, SUITE 306
MOUNTAIN VIEW, CA 94040
(650) 967-0379
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,OF
PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL EXECUTIVE OFFICERS)
----------------
MATTHEW SANDERS
CHIEF EXECUTIVE OFFICER
ENACT HEALTH MANAGEMENT SYSTEMS
1975 WEST EL CAMINO REAL, SUITE 306
MOUNTAIN VIEW, CA 94040
PHONE: (650) 967-0379
FACSIMILE: (650) 967-9223
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
J. HOWARD CLOWES, ESQ. DONALD J. MURRAY, ESQ.
GRAY CARY WARE & FREIDENRICH DEWEY BALLANTINE LLP
A PROFESSIONAL CORPORATION 1301 AVENUE OF THE AMERICAS
400 HAMILTON AVENUE NEW YORK, NY 10019
PALO ALTO, CALIFORNIA 94301 PHONE: (212) 259-8000
PHONE: (650) 328-6561 FACSIMILE: (212) 259-6333
FACSIMILE: (650) 327-3699
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value.. 3,450,000 $12.00 $41,400,000 $12,546
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 450,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act
of 1933, as amended.
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
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<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 28, 1997
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
3,000,000 SHARES
[LOGO OF ENACT]
COMMON STOCK
--------
All of the shares of Common Stock offered hereby are being sold by ENACT
Health Management Systems ("ENACT" or the "Company").
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $10.00 and $12.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Company has applied for quotation of the Common
Stock on the Nasdaq Stock Market's National Market under the symbol "ENCT."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------
Total(3) $ $ $
===============================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about ,
1997 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001.
--------
SMITH BARNEY INC. LEHMAN BROTHERS
, 1997
<PAGE>
TELE-HEALTH MONITORING
LINKING PATIENTS, PROVIDERS
AND PLANS IN MINUTES
[Picture of a young girl breathing into the AirWatch monitor]
[Picture of the AirWatch monitor and the LifeScan blood glucose meter
superimposed on a picture of four sample Monthly Care Reports]
Cost effective home monitoring
Objective, physiological data for providers, patients and payors
Defining a new paradigm in health management
Provides information to allow care team to remotely monitor patients between
office visits
[Picture of two people taking part in the monitoring process]
[Picture of a doctor giving information to a patient]
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as it
determines.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PERSONAL HEALTH MONITORS
Respiratory
- -----------
The AirWatch(R) monitor measures and stores lung function data for use in
managing asthma and other pulmonary diseases. Data is transmitted to Care
Central via telephone lines.
[Picture of the AirWatch monitor]
Diabetes
- --------
Blood glucose meters manufactured by Johnson & Johnson's LifeScan subsidiary
connect to the ENACT Reporter. The meters store blood glucose measurements and
the ENACT Reporter transmits these readings to Care Central.
[Picture of LifeScan's blood glucose meter]
[Picture of the ENACT Reporter]
[Picture of Care Central]
Others
- ------
Many other types of personal health monitors have the potential to connect to
the ENACT System. Other potential applications include congestive heart
failure, hypertension and drug delivery monitoring.
[Computer generated image representing other types of personal health
monitors which can connect to the ENACT system]
ENACT CARE CENTRAL
Database
- --------
ENACT's Care Central receives data from personal health monitors and stores
and formats it in a relational database. Care Central's scalable architecture
is designed to handle large patient population.
[Computer generated image of the ENACT Reporter]
<PAGE>
INFORMATION PRODUCTS
[Picture of three sample Monthly Care Reports]
Reports
- -------
Reports can be generated automatically or on demand from Care Central and sent
within minutes to members of the care team. Monthly Care Reports(TM) are mailed
to enrolled patients.
[Picture of a computer accessing the worldwide web]
Internet Access
- ---------------
Via the worldwide web, data from Care Central is also available electronically
to healthcare professionals. ENACT's sophisticated Internet tools, as well as
standard reports, provide clinicians the data needed to manage large patient
populations.
THE CARE TEAM
The Case Manager
- ----------------
Using ENACT's Internet tools, case managers at managed care organizations can
target patients requiring intervention and lower the utilization of expensive
healthcare services.
[Picture of a case manager]
The Physician
- -------------
The ENACT tele-health system enables physicians to remotely monitor their
patients between office visits. This improved monitoring can help evaluate the
patient's compliance and assures medication effectiveness.
[Picture of a physician]
The Patient
- -----------
As patients take more responsibility for their own health and treatment, the
ENACT System provides them a new paradigm. Knowing their health state data is
stored safely, they can direct it to the healthcare providers and payors of
their choice.
[Picture of a young girl breathing into the AirWatch monitor]
The Pharmacist
- --------------
The role of the pharmacist in providing patient counseling and other cognitive
services is increasing. The ENACT System gives pharmacists a powerful new tool
for evaluating drug therapies and helping their customers manage chronic
illnesses.
[Picture of a pharmacist]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Investors should carefully consider the information set forth
under the heading "Risk Factors."
THE COMPANY
ENACT is a tele-health monitoring company which collects objective
physiological data regarding patients' health states and provides timely, low-
cost reporting of that information to patients, case managers, clinicians and
other members of the care team. The Company believes its health monitoring and
reporting system (the "ENACT System") appeals both to patients who are
increasingly taking a more active role in managing their own health and managed
care organizations seeking cost savings. ENACT's initial development and
marketing efforts are focused on the management of chronic diseases such as
asthma, diabetes and cardiovascular disease. The Company has enrolled patients
in a health monitoring program using the ENACT System for asthma, which
includes the Company's Food and Drug Administration ("FDA") 510(k)-cleared
AirWatch personal health monitor, and is preparing to launch a program for
diabetes, which will include the Company's Reporter interface which connects to
blood glucose monitors. To supplement its internal marketing programs, the
Company seeks to develop strategic relationships with market leaders in
specific disease states to take advantage of their installed patient bases,
marketing expertise and distribution resources. Consistent with this objective,
the Company recently formed an alliance in diabetes with Johnson & Johnson's
LifeScan subsidiary, the market leader for diabetes monitoring equipment.
The ENACT System consists of (i) personal health monitors, which are used by
patients to collect objective medical data; (ii) a communications interface
(the "ENACT Interface"), which links the personal health monitors to the
Company's on-line database ("Care Central"); (iii) the Care Central database,
which formats and stores the medical data; and (iv) information services, which
produce and distribute processed data in a variety of formatted reports and
through a case management capability available via the Internet and other
electronic media.
While healthcare payors have been successful in achieving cost savings
through negotiated discounts with healthcare providers and the reduction of
unnecessary use of healthcare services, payors are now seeking new methods to
curb healthcare costs. Payors have identified chronic disease treatment as a
potential source of healthcare cost reductions. Chronic disease treatment costs
totaled $425 billion in 1990. Despite only comprising 40% of the population,
chronic disease patients account for more than 70% of healthcare expenditures.
Traditionally, healthcare providers have treated chronic diseases reactively
by responding to acute medical episodes and the complications arising from a
substantial deterioration in a patient's health state. This mode of treatment
often results in expensive emergency room care and hospitalizations. A
significant number of these acute medical episodes and health declines are the
consequence of patients' failure to comply with prescribed treatment programs
and caregivers' lack of information about the patients' compliance and current
health state. Studies suggest that between 30-60% of chronic disease patients
fail to comply with their treatment regimes. Recently, payors have recognized
that their costs can be reduced by adopting more proactive programs which
emphasize improved patient compliance. While current health management programs
have laid the ground work for improved patient compliance, these programs
generally lack objective physiological data to guide medical treatment
decisions and often require expensive, labor-intensive telephonic contact.
The Company believes that the ENACT System both addresses many of the
shortcomings of current health monitoring programs for chronic disease and
enables new forms of health monitoring. Specifically, the ENACT System
establishes a low-cost link between the patient at home and the care team,
provides objective physiological data and the means to encourage patient
compliance, reduces reporting errors, creates a relational database of patient
outcomes which enables providers and payors to analyze the cost effectiveness
of various treatment methodologies, and may help minimize expensive emergency
room visits and unnecessary hospital utilization.
The Company's goal is to become the leading provider of tele-health
monitoring systems for objective patient health information. The key elements
of the Company's strategy to achieve this goal include (i) focusing the initial
implementation of the ENACT System on asthma, diabetes and cardiovascular
disease; (ii) aligning with market leaders in various disease states to gain
market acceptance; (iii) marketing directly with customers and partners to
build primary demand for ENACT's products and services; and (iv) capitalizing
on the broad applicability of the ENACT System across additional healthcare
applications.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock being offered.................... 3,000,000 shares (1)
Common Stock outstanding after the offering... 8,912,853 shares (1)(2)
Use of proceeds............................... For marketing programs, advertising and
product development efforts; repayment of
debt to an existing stockholder; working
capital and other general corporate purpos-
es.
Proposed Nasdaq National Market Symbol........ ENCT
</TABLE>
- --------
(1) Excludes up to 450,000 shares of Common Stock that may be sold by the
Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Based on the number of shares outstanding as of September 30, 1997.
Includes (i) 3,389,533 shares of Common Stock issuable upon the automatic
conversion of all outstanding shares of the Company's Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock (collectively, the "Convertible Preferred Stock"), upon
completion of this offering, and (ii) 131,420 shares of Common Stock
issuable upon the exercise of warrants to purchase Convertible Preferred
Stock which terminate upon the completion of this offering. Excludes (i)
746,944 shares of Common Stock issuable upon exercise of options with a
weighted average exercise price of $2.19 per share, (ii) 853,156 shares of
Common Stock reserved for issuance of options which may be granted in the
future under the Company's stock option plans, (iii) 200,000 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan (the "Purchase Plan"), (iv) 60,000 shares of Common Stock
issuable upon exercise of warrants with a weighted average exercise price
of $ 0.48 per share which do not terminate upon the completion of this
offering and (v) 338,454 shares of Common Stock issuable upon the
conversion of convertible promissory notes in the aggregate principal
amount of $2,000,000. See "Management--Stock Plans" and Notes 5, 6 and 8 of
Notes to Financial Statements.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................. $ 140 $ 614 $ 3,096 $ 1,813 $ 5,458
Operating costs and expenses:
Cost of revenues............. -- -- 1,796 833 4,512
Research and development..... 1,417 1,365 1,752 1,280 1,485
Sales and marketing.......... -- 1,185 1,475 1,039 1,803
General and administrative... 288 420 770 542 821
------- ------- ------- -------- --------
Total operating costs and
expenses...................... 1,705 2,970 5,793 3,694 8,621
------- ------- ------- -------- --------
Loss from operations........... (1,565) (2,356) (2,697) (1,881) (3,163)
Interest income (expense),
net........................... 9 (24) (110) (52) (179)
------- ------- ------- -------- --------
Net loss....................... $(1,556) $(2,380) $(2,807) $ (1,933) $ (3,342)
======= ======= ======= ======== ========
Pro forma net loss per share
(1)........................... $ (0.49) $ (0.57)
======= ========
Shares used in computing pro
forma net loss per share (1).. 5,772 5,902
======= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................. $(371) $29,219
Total assets.......................................... 3,537 33,127
Notes payable to stockholders......................... 3,000 2,000
Accumulated deficit................................... (10,678) (10,678)
Total stockholders' equity (net capital deficiency)... (3,026) 27,564
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing pro forma net loss per share.
(2) Adjusted to reflect (i) the issuance of 131,420 shares of Common Stock upon
the exercise of warrants to purchase Convertible Preferred Stock which
terminate upon the completion of this offering at a weighted average
exercise price of $4.95 and (ii) the sale of shares of Common Stock offered
hereby at an assumed offering price of $11.00 per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds."
----------------
Unless otherwise indicated, information in this Prospectus, including shares
and per share data, (i) assumes an initial public offering price of $11.00,
(ii) gives effect to the reincorporation of the Company in Delaware prior to
the effective date of this offering, (iii) assumes the exercise of warrants to
purchase Convertible Preferred Stock which terminate on the completion of this
offering and the conversion thereof into 131,420 shares of Common Stock, (iv)
reflects the conversion of all of the outstanding shares of the Convertible
Preferred Stock into 3,389,533 shares of Common Stock upon completion of this
offering (For purposes of determining the number of shares of Common Stock
issuable upon conversion of the Company's Series D Preferred Stock, this
Prospectus assumes an initial public offering price of $11.00 and a closing
date prior to February 20, 1997. See "Certain Transactions.") and (v) assumes
no exercise of the Underwriters' option to purchase from the Company up to
450,000 additional shares of Common Stock to cover over-allotments, if any. See
"Description of Capital Stock" and "Underwriting."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider the following risk factors in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.
This Prospectus contains forward-looking statements that involve certain risks
and uncertainties. The Company's actual results and the timing of certain
events may differ significantly from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below as well as those
discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; CONTINUING OPERATING LOSSES
The Company was formed in October 1992, is in an early stage of development
and has a limited operating history from which to evaluate its performance. To
date, the Company has generated limited revenues and through September 30,
1997 had incurred cumulative losses of $10.7 million. The Company expects such
losses to continue for the foreseeable future. The Company's cumulative
revenues are $9.3 million, consisting primarily of revenues from non-recurring
sources, including a development contract and sales of monitors and services
for clinical and marketing trials conducted by customers. The Company may
encounter problems and delays in its product development and sales and
marketing efforts, and the failure to address these problems and delays
successfully could have a material adverse effect on the Company's business
prospects. The Company's prospects also must be considered in light of the
numerous risks, expenses, delays and difficulties frequently encountered in
the establishment of a new business in an industry characterized by intense
competition, as well as the risks inherent in the commercialization of new
services. There can be no assurance that the Company's efforts will result in
an ability to provide any services that can be marketed or operated in a
commercially successful manner, or that any such services will be able to
compete with other services that might be in the market now or in the future.
There can be no assurance that the Company will achieve recurring revenue or
profitability on a consistent basis or at all. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements.
UNCERTAINTY OF MARKET ACCEPTANCE; LIMITATIONS OF COMMERCIALIZATION STRATEGY
The Company's products and services represent a new approach to healthcare
management. Demand and market acceptance for newly introduced products and
services are subject to a high level of uncertainty. Further, the acceptance
of new products and services is particularly uncertain due to an emphasis in
the healthcare industry on cost containment and the necessity of securing
approvals for reimbursement. As the Company's products and services have only
been introduced on a limited commercial scale, there can be no assurance that
payors or patients will find the prices of the Company's products and services
acceptable or that patients will be successful in obtaining widespread
reimbursement. If the Company is not successful in obtaining advance payments
through managed care contracts or reimbursement approvals from payors, the
market for the Company's products and services will be limited. To date the
Company has enrolled a limited number of patients in its asthma program and no
patients in any other program other than those enrolled through various pilot
diabetes programs. The Company intends to commence a substantial sales and
marketing effort for its AirWatch personal health monitor ("AirWatch Monitor")
and related tele-health services following this offering, and the market
acceptance of such products and services will depend in part upon whether such
sales and marketing effort is successful. Further, the transmission and
availability of patient data electronically is a relatively new development,
and patient and healthcare industry concerns regarding confidentiality could
limit the acceptance of the Company's products and services. There can be no
assurance that the Company's products and services will achieve market
acceptance or that any market for the Company's services will develop. See
"Business--Sales and Marketing."
DEPENDENCE ON CUSTOMERS AND PARTNERS FOR MARKETING AND PATIENT ENROLLMENT
The Company has limited marketing experience and limited financial,
personnel and other resources to undertake extensive marketing activities. One
element of the Company's marketing strategy involves marketing its products
and services to pharmacies, managed care organizations, diversified healthcare
companies and
6
<PAGE>
pharmaceutical companies with the intent that those customers and partners
will market its products and services directly to customers or integrate the
Company's tele-health monitoring system into health management programs.
Another element of the Company's marketing strategy is to form strategic
alliances with market leaders in several disease states, which leaders have
greater resources and marketing experience than the Company, in order to
effectively co-market the Company's products and services. Accordingly, the
Company will be dependent upon its customers and partners, over whom it has no
control, for the marketing and implementation of its tele-health monitoring
system, and the timing and extent of patient enrollment (and related revenues)
will be substantially within the control of the Company's customers and
partners. The Company's ability to generate recurring revenue is dependent on
enrollment of patients in healthcare programs which utilize the Company's
tele-health monitoring system. To the extent that an adequate number of
patients are not enrolled in programs which incorporate the Company's tele-
health monitoring system, the Company will be unable to generate recurring
revenue or achieve profitability. See "Business--Collaborative Agreements."
SIGNIFICANT AND EXTENSIVE CHANGES IN THE HEALTHCARE INDUSTRY
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operations
of healthcare industry participants. The reform of the United States
healthcare system remains an important concern of both federal and state
lawmakers. Several lawmakers have proposed programs that contain proposals to
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the Company and its targeted
customers. Healthcare industry participants may react to these proposals and
the uncertainty surrounding such proposals by curtailing or deferring certain
expenditures, including those which may utilize the Company's services.
Although the Company cannot predict what further changes in the healthcare
industry may occur, any such changes could have a material adverse effect on
its business, financial condition and results of operations. In addition many
healthcare providers are consolidating to create larger healthcare delivery
enterprises with greater regional market power. As a result, the remaining
enterprises could have greater bargaining power, which could adversely affect
the Company's ability to establish and maintain adequate price levels for its
products and services. The failure of the Company to establish and maintain
adequate price levels could have a material adverse effect on the Company.
DEPENDENCE ON THIRD-PARTY MANUFACTURER
The Company does not engage in any direct manufacturing operations. The
Company's AirWatch Monitor and ENACT Reporter are manufactured by a
subcontractor at a single manufacturing facility. The occurrence of
operational problems at such facility or any other event as a result of which
the sub-contractor cannot or will not furnish to the Company its requirements
of personal health monitors would have a material adverse effect on the
Company's business and results of operations. The Company anticipates that the
manufacture of any future Company products also will be subcontracted out and
thus will be subject to the same risks. There can be no assurance that the
Company will be able to successfully outsource such products or,
alternatively, develop in-house manufacturing capabilities.
DEPENDENCE ON TELECOMMUNICATIONS SYSTEMS; RAPID TECHNOLOGICAL CHANGE AND
OBSOLESCENCE
The business of the Company is dependent upon its ability to store,
retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. As the Company expands its commercial activities, an
increased burden will be placed upon the Company's telecommunications and data
processing equipment. Interruptions of telephone service for any extended
length of time, loss of stored data, programming errors or other computer
problems could have a material adverse effect on the business of the Company.
Moreover, the communications and information technology industries are subject
to rapid and significant technological change, and the ability of the Company
to operate and compete is dependent in significant part on its ability to
update and enhance its tele-health monitoring system on an ongoing basis. In
order to do so, the Company must be able to effectively implement new
technologies in order to enhance its tele-health monitoring system, while not
jeopardizing its ability to provide its current services. There can be no
assurance that the Company will be able to develop and implement technological
changes to its tele-health monitoring system. Furthermore, following
7
<PAGE>
this offering, the Company will maintain a significant investment in its
technology, and therefore is subject to the risk of technological
obsolescence. In addition, advances in medical therapies or other innovations
in health management could render the Company's services obsolete. If the
Company's technology or services were rendered obsolete, the Company's
business and operating results would be materially adversely affected. See
"Business--The ENACT Tele-Health Monitoring System. "
COMPETITION
The market for healthcare information products, services and devices for
health state management is a relatively new and emerging market. Although the
Company currently has only limited direct competition, it faces indirect
competition from a number of sources and expects to experience intense
competition in the future if its products and services are accepted in the
marketplace. The Company's potential competitors include specialty healthcare
companies, healthcare information system and software vendors, healthcare
management organizations, pharmaceutical companies and other service companies
within the healthcare industry. In particular, the Company is aware of several
large pharmaceutical and medical service companies that have stated publicly
that they intend to be involved in providing comprehensive health state
management services. The Company also expects to compete against other
companies that provide statistical and data management services, including
clinical trial services to pharmaceutical companies. Many of these competitors
have substantial installed customer bases in the healthcare industry and the
ability to fund significant product development and acquisition efforts. The
Company's potential competitors include companies with significantly greater
financial, technical, product development and marketing resources than the
Company. There can be no assurance that a competitor will not develop and
successfully introduce competitive products or services, that the introduction
of such products or services will not cause a reduction in the price at which
the Company sells its products and services or that the Company will be able
to compete successfully with any of these potential competitors. See
"Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend upon its ability to retain members of its
senior management team, including a core group of key officers and employees.
The loss of certain key employees or the Company's inability to attract and
retain other qualified employees could have a material adverse effect on the
Company's business. Also, the Company's ability to transition from development
stage to commercial operations will depend upon, among other things, the
successful recruiting of highly skilled managerial and marketing personnel
with experience in business activities such as those contemplated by the
Company. Competition for the type of highly skilled individuals sought by the
Company is intense. There can be no assurance that the Company will be able to
retain existing employees or that it will be able to find, attract and retain
skilled personnel on acceptable terms. See "Management."
SUBSTANTIAL FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations may fluctuate significantly from quarter
to quarter as a result of a number of factors, including, without limitation,
the timing and success of the Company's future marketing and sales efforts,
the timing of performance and payments under development agreements, if any,
the rate at which customers and partners implement disease state management
and other health information programs within their patient populations, the
rate of patient enrollment in such programs, the entry into the Company's
market of additional competitors, the number and size of clinical trials in
which the Company participates, and general economic conditions. Accordingly,
the Company's future operating results are likely to be subject to variability
from quarter to quarter and could be adversely affected in any particular
quarter. Due to the foregoing, there can be assurance that the Company's
operating results will not be below the expectations of public market analysts
and investors. In such event, the price of the Common Stock could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS RELATED TO PROPRIETARY RIGHTS
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary rights. Although the Company continues to
implement protective measures and intends to defend its proprietary
8
<PAGE>
rights, there can be no assurance that these measures will be successful or
that its patents will provide meaningful protection against potential
competitors developing substantially similar products and services. The
Company has filed nine patent applications in the United States, two of which
have resulted in issued patents and two others of which have had claims
allowed by the Patent and Trademark Office. The Company has not yet filed
patent applications outside the United States and may determine to pursue such
filings in only a limited number of jurisdictions. There can be no assurance
that patents will issue from any pending application, that the Company's
patent application filings, if any, outside the United States will be adequate
to protect its interests, that any patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide a competitive advantage to the Company.
The Company is not currently aware of any pending or threatened claims of
infringement of the proprietary rights of others with respect to the Company's
current or planned products. However, there can be no assurance that third
parties will not assert such claims or that any such claims will not require
the Company to enter into license agreements or result in costly and
protracted litigation, regardless of the merits of such claims. No assurance
can be given that any necessary licenses will be available or that, if
available, such licenses will be obtainable on commercially reasonable terms.
See "Business--Proprietary Rights."
EXTENSIVE GOVERNMENT REGULATION
The manufacture and sale of the Company's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign agencies. The regulatory approval process is lengthy,
expensive and uncertain, and there can be no assurance that any approvals or
clearances that the Company may seek will ultimately be obtained. Product
approvals and clearances, if issued, can be withdrawn for failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial marketing. Foreign governments also have review processes for new
products that present many of the same risks. The Company and any
manufacturing contractor used by the Company is also required to adhere to FDA
regulations setting forth requirements for Good Manufacturing Practices
("GMP") and similar regulations in other countries, which include extensive
testing, control and documentation requirements. Failure to comply with
applicable regulations could result in sanctions being imposed on the Company,
including fines, injunctions, civil penalties, failure of the government to
grant premarket clearances or premarket approvals, delays, suspension or
withdrawal of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. See "Business--Government Regulation."
Additionally, state laws prohibit the practice of medicine and nursing
without a license. There can be no assurance that the Company's operations
will not be challenged as constituting the unlicensed practice of medicine or
nursing. If such a challenge were made successfully in any state, the Company
could be subject to civil and criminal penalties and could be required to
restructure its contractual arrangements in that state. Such results or the
inability to successfully restructure its contractual arrangements could have
a material adverse effect on the Company.
The Company is subject to Federal and state laws governing the
confidentiality of patient information. In addition, Federal legislation
adopted in 1996 requires that new national standards for the security of
electronic health information transactions be issued in 1998. The legislation
also requires that standards for privacy of individually identifiable health
information be adopted by January 21, 2000. The Company expects further
legislation and regulations will be enacted as methods of transmitting and
storing patient records evolve. Such regulations could adversely affect the
Company or its customers and partners. The Company and its customers and
partners may also be subject to Federal and state laws and regulations which
govern financial and other arrangements between healthcare providers,
including fee splitting arrangements between healthcare providers and
payments, referrals or other financial arrangements that are designed to
induce the referral of patients to a particular provider for medical products
and services. Sanctions for violation of these laws and regulations include
civil and criminal penalties and exclusion from participation in Medicare and
Medicaid programs. Failure to comply with these laws and regulations could
have a material adverse effect on the Company. See "Business--Government
Regulation."
9
<PAGE>
Regulation in the healthcare field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental
approvals, comply with applicable regulations or comply with existing or
future laws, rules or regulations or their interpretations.
POTENTIAL LIABILITY AND INSURANCE
The Company will provide information to healthcare providers and payors upon
which determinations affecting medical care will be made, and claims could be
made against it for liabilities resulting from adverse medical consequences to
patients. In addition, the Company could have potential legal liability in the
event it fails to correctly record or disseminate patient information. There
can be no assurance that the Company's procedures for limiting liability have
been or will be effective, that the Company will not be subject to litigation
that may adversely affect the Company's results of operations, that adequate
insurance will be available to it in the future at acceptable cost or at all
or that any insurance maintained by the Company will cover, as to scope or
amount, any claims that may be made against the Company.
POSSIBLE NEED FOR ADDITIONAL FINANCING
In order to successfully exploit the ENACT System and implement programs
using the Company's medical data analysis and reporting system, the Company
may be required to make substantial additional investments to market and
promote its products. The Company will also be required to retain the services
of employees in advance of obtaining contracts to provide its services. The
Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the anticipated costs of marketing and
promotion of the Company's tele-health monitoring system), that the proceeds
of this offering, together with available resources, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 18 months
following the consummation of this offering. In the event that the Company's
plans change, or its assumptions change or prove to be inaccurate, the Company
could be required to seek additional financing or curtail its activities. The
Company has limited current arrangements with respect to, or sources of,
additional financing. Any additional equity financing may involve substantial
dilution to the interest of the Company's stockholders, and any debt financing
could result in operational or financial restrictions on the Company. There
can be no assurance that any additional financing will be available to the
Company on acceptable terms or at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
CONTROL OF THE COMPANY
Following this offering, the executive officers and directors of the Company
together with their affiliates will beneficially own, in the aggregate,
approximately 34.3% of the outstanding Common Stock. As a result of such
ownership, these stockholders, in the event they act in concert, will have
control over the management policies of the Company and all matters requiring
approval by the stockholders of the Company, including the election of
directors. See "Principal Stockholders."
MANAGEMENT'S DISCRETION WITH RESPECT TO USE OF PROCEEDS
The Company intends to use approximately $15.0 million of the net proceeds
to accelerate the national commercialization of the ENACT System by hiring
sales and marketing personnel, funding advertising programs and launching the
Company's pharmacy programs and managed care sales initiatives. The Company
will also expend up to $1.0 million towards the repayment of a promissory note
held by a current stockholder of the Company. The balance of the net proceeds
has not been designated for any specific use. The Company intends to use any
such balance primarily for general corporate purposes, including product
development efforts, expansion of the Company's computer system, working
capital and potential acquisitions of companies, products and technologies
that complement or expand the Company's business. Accordingly, management will
have significant flexibility in applying the net proceeds of this offering.
There can be no assurance that the use of proceeds will not change from that
currently anticipated.
10
<PAGE>
DILUTION; DIVIDENDS
The initial public offering price per share of the Common Stock will exceed
the negative net tangible book value per share of the Common Stock.
Accordingly, purchasers of shares of Common Stock in this offering will
experience immediate dilution in net tangible book value per share of $7.91
(assuming a public offering price of $11.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses). The
Company has not paid any dividends on its Common Stock and does not anticipate
paying any dividends on such stock in the foreseeable future. See "Use of
Proceeds," "Dilution" and "Dividend Policy."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock has been determined by
negotiations between the Company and the Representatives of the Underwriters.
For a description of the factors considered in determining the initial public
offering price, see "Underwriting." The market price of the Common Stock
following this offering may be highly volatile, as has been the case with the
securities of other early stage companies. The stock market recently has
experienced a high level of price and volume volatility, and market prices for
the stock of many companies (particularly of small and emerging growth
companies) have experienced wide price fluctuations which have not necessarily
been related to the operating performance of such companies. There can be no
assurance that these broad market fluctuations or other factors will not have
a material adverse effect on the market price of the Common Stock.
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of outstanding shares of Common Stock and shares of
Common Stock issuable upon exercise of outstanding options and warrants will
become eligible for sale in the public market at prescribed times after this
offering.
Upon completion of this offering, the Company will have outstanding
8,912,853 shares of Common Stock, based on the number of shares of Common
Stock outstanding as of September 30, 1997. Of these shares, the 3,000,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act unless purchased by "affiliates"
of the Company as that term is defined in Rule 144 of the Securities Act. The
remaining 5,912,853 shares will be "restricted securities" as that term is
defined under Rule 144 (the "Restricted Shares"). Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act. Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock.
Upon completion of this offering 2,186,027 Restricted Shares of Common Stock
( of which are subject to the lock-up agreements described below) held by
current stockholders will be immediately eligible for sale in the public
market without restriction pursuant to Rule 144(k) of the Securities Act. An
additional 3,130,842 Restricted Shares of Common Stock ( of which are
subject to the lock-up agreements described below) will be eligible for sale
beginning 90 days after the date of this Prospectus pursuant to Rule 144 of
the Securities Act. All directors, officers and certain stockholders holding
in the aggregate shares of Common Stock outstanding prior to this offering
have agreed that for a period of 180 days after the date of this Prospectus
they will not, without prior written consent of Smith Barney Inc., offer,
sell, contract to sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for any shares
of Common Stock. See "Underwriting."
Commencing six months after the date of this Prospectus, certain security
holders of the Company holding shares of Common Stock and a note
convertible into an additional 3,389,533 shares of Common Stock,
11
<PAGE>
will be entitled to certain rights with respect to the registration of such
shares of Common Stock for sale to the public. See "Shares Eligible for Future
Sale."
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and bylaws
may inhibit changes in control of the Company not approved by the Company's
board of directors. The Company will also be afforded the protection of
Section 203 of the Delaware General Corporation Law ("Delaware Law"), which
could have similar effects. Additionally, the Company's collaborative
agreement with Johnson & Johnson's LifeScan subsidiary contains provisions
that could delay or hinder a change in control of the Company in the event
that certain LifeScan competitors attempt to merger with or acquire the
Company. These provisions could limit the price that investors might be
willing to pay in the future for shares of Common Stock. There can be no
assurance that these factors will not have an adverse effect on the market for
the Common Stock. See "Description of Capital Stock."
12
<PAGE>
THE COMPANY
The Company was incorporated in California on October 28, 1992 and will be
reincorporated in Delaware concurrently with the closing of this offering. The
Company's principal executive offices are located at 1975 West El Camino Real,
Suite 306, Mountain View, CA 94040 and its telephone number at that address is
(650) 967-0379. AirWatch and AirWatch Care are registered trademarks of the
Company. This Prospectus also contains trade names of companies other than the
Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being
offered hereby are estimated to be approximately $29.9 million ($34.5 million
if the Underwriters' over-allotment option is exercised in full), assuming a
public offering price of $11.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
The Company intends to use approximately $15.0 million of the net proceeds
to accelerate the national commercialization of the ENACT System by hiring
sales and marketing personnel, funding advertising programs and launching the
Company's pharmacy programs and managed care sales initiatives. The Company
will repay $1.0 million of outstanding indebtedness under its loan agreement
with a stockholder. Such note bears interest at the prime rate (8.5% as of
November 26, 1997) and becomes due and payable on June 30, 2000. Any funds not
used for the purposes stated above will be used for general corporate purposes
including product development efforts and expansion of the Company's computer
system. Management will have broad discretion in the application of the net
proceeds. The Company may consider using the net proceeds for the acquisition
of complementary businesses, products or technologies. However, the Company is
not currently a party to any letter of intent or definitive agreement with
respect to any such acquisitions.
Pending such uses, the Company intends to invest the net proceeds in short-
term, investment-grade, interest bearing securities. See "Risk Factors--
Management's Discretion with Respect to Use of Proceeds".
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain all of its earnings, if any, for use in the
operation and expansion of its business. The payment of future dividends, if
any, will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's future earnings, financial condition, capital
requirements and such other factors as the Company's Board of Directors deems
relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, (i) on a pro forma basis to reflect the conversion of the
Convertible Preferred Stock into Common Stock and the issuance of 131,420
shares of Common Stock upon exercise of warrants which terminate on the
completion of this offering and (ii) on a pro forma as adjusted basis to
reflect the sale of the shares of Common Stock offered hereby (at an assumed
public offering price of $11.00 per share) after deducting underwriting
discounts and commissions and estimated offering expenses and the application
of the net proceeds therefrom as described in "Use of Proceeds." This table
should be read in conjunction with the financial statements of the Company and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to stockholders............................ $ 3,000 $ 2,000
Long-term capital lease obligations...................... 357 357
-------- -------
Total long-term obligations........................... 3,357 2,357
Stockholders' equity:
Preferred Stock, $.001 par value, 2,000,000 authorized,
none issued and outstanding, as adjusted.............. -- --
Common Stock, $.001 par value, 50,000,000 shares
authorized, 5,912,853 shares issued and outstanding,
pro forma; 8,912,853 shares issued and outstanding, as
adjusted (1).......................................... 6 9
Additional paid-in capital............................. 8,342 38,279
Other.................................................. (46) (46)
Accumulated deficit.................................... (10,678) (10,678)
-------- -------
Total stockholders' equity (net capital deficiency)... (2,376) 27,564
-------- -------
Total capitalization................................. $ 981 $29,921
======== =======
</TABLE>
- --------
(1) Excludes (i) 746,944 shares of Common Stock issuable upon exercise of
options with a weighted average exercise price of $2.19 per share (ii)
853,156 shares of Common Stock reserved for issuance of options which may
be granted in the future under the Company's stock option plans, (iii)
200,000 shares of Common Stock reserved for issuance under the Company's
1997 Employee Stock Purchase Plan, (iv) 60,000 shares of Common Stock
issuable upon exercise of warrants with a weighted average exercise price
of $0.48 per share which do not terminate upon the completion of this
offering and (v) 388,454 shares of Common Stock issuable upon the
conversion of convertible promissory notes in the aggregate principal
amount of $2,000,000. See "Management--Stock Plans" and Notes 5, 6 and 8
of Notes to Financial Statements.
14
<PAGE>
DILUTION
The pro forma negative net tangible book value of the Company at September
30, 1997 was $2.4 million, or $0.40 per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the pro forma net
tangible book value (total tangible assets less total liabilities) of the
Company at September 30, 1997 by the number of shares of Common Stock
outstanding, assuming conversion of the Convertible Preferred Stock and the
issuance of 131,420 shares of Common Stock upon the exercise of warrants which
terminate on the completion of this offering. Dilution per share represents the
difference between the amount per share paid by purchasers of Common Stock in
this offering and the pro forma net tangible book value per share of Common
Stock immediately after this offering. Without taking into account any changes
in pro forma net tangible book value after September 30, 1997, other than to
give effect to the sale of the shares of Common Stock offered hereby (at an
assumed public offering price of $11.00 per share and after deduction of
estimated underwriting discounts and commissions and offering expenses), the
adjusted pro forma net tangible book value of the Company at September 30,
1997, would have been $27.6 million, or $3.09 per share. This represents an
immediate dilution in net tangible book value of $7.91 per share to new
investors purchasing shares in this offering and an immediate increase in net
tangible book value of $3.49 per share to existing stockholders. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $11.00
Pro forma net tangible book value per share at September
30, 1997................................................. $(0.40)
Increase per share attributable to new investors.......... 3.49
------
Pro forma net tangible book value per share after offering.. 3.09
------
Dilution per share to new investors (2)..................... $ 7.91
======
</TABLE>
The following table sets forth on a pro forma basis as of September 30, 1997
the number of shares of Common Stock purchased from the Company, the total
consideration paid (based upon, in the case of new investors, an assumed public
offering price of $11.00 per share and before deduction of estimated
underwriting discounts and commissions and offering expenses) and the average
price per share paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 5,912,853 66% $ 8,498,989 20% $ 1.44
New investors............... 3,000,000 34 33,000,000 80 11.00
--------- --- ----------- ---
Total..................... 8,912,853 100% $41,498,989 100%
========= === =========== ===
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or outstanding stock options after September 30, 1997, and no conversion
of outstanding convertible promissory notes in the aggregate amount of $2
million. As of September 30, 1997, there were options outstanding to purchase a
total of 746,944 shares of Common Stock under the Company's stock option plan,
at a weighted average exercise price of $2.19 per share, and warrants to
purchase a total of 60,000 shares of Common Stock at a weighted average
exercise price of $0.48 per share. To the extent that any of these options and
warrants, or additional options or warrants granted after September 30, 1997,
are exercised, or the convertible promissory notes are converted, there will be
further dilution to new investors. See "Management--Stock Plan" and Note 6 of
Notes to Financial Statements.
15
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data at December 31, 1995 and 1996 and for
each of the three years in the period ended December 31, 1996 have been
derived from financial statements of ENACT audited by Ernst & Young LLP,
independent auditors, and included elsewhere herein. The selected financial
data at December 31, 1993 and 1994 and for the period from inception to
December 31, 1993 are derived from the audited financial statements not
included herein. The selected financial data at September 30, 1997 and for the
nine month periods ended September 30, 1996 and 1997 are derived from
unaudited financial statements included elsewhere herein. The unaudited
financial statements have been prepared by the Company on a basis consistent
with the Company's audited financial statements and, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, which ENACT considers necessary for a fair presentation of the
Company's financial position and the results of operations for these periods.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year
ending December 31, 1997 or any future period. The selected financial data
should be read in conjunction with the financial statements, related notes,
and other financial information included herein.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 28,
1992 NINE MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER, 31 ---------------------------- --------------------
1993 1994 1995 1996 1996 1997
-------------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues......... $ -- $ 140 $ 614 $ 3,096 $ 1,813 $ 5,458
Operating costs and
expenses:
Cost of revenues..... -- -- -- 1,796 833 4,512
Research and
development......... 335 1,417 1,365 1,752 1,280 1,485
Sales and marketing.. -- -- 1,185 1,475 1,039 1,803
General and
administrative...... 257 288 420 770 542 821
----- -------- -------- -------- --------- ---------
Total operating costs
and expenses.......... 593 1,705 2,970 5,793 3,694 8,621
----- -------- -------- -------- --------- ---------
Loss from operations... (593) (1,565) (2,356) (2,697) (1,881) (3,163)
Interest income
(expense), net........ -- 9 (24) (110) (52) (179)
----- -------- -------- -------- --------- ---------
Net loss............... $(593) $ (1,556) $ (2,380) $ (2,807) $ (1,933) $ (3,342)
===== ======== ======== ======== ========= =========
Pro forma net loss per
share (1)............. $ (0.49) $ (0.57)
======== =========
Shares used in
computing pro forma
net loss per share
(1)................... 5,772 5,902
======== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997
------ ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $1,018 $ 230 $ 787 $ (33) $ (371)
Total assets................. 1,066 434 3,646 2,899 3,537
Notes payable to
stockholders................ -- -- 1,000 3,000 3,000
Long-term capital lease
obligations................. -- -- 69 243 357
Accumulated deficit.......... (593) (2,149) (4,529) (7,336) (10,678)
Total stockholders' equity
(net capital deficiency).... 1,038 277 (80) (2,828) (3,026)
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing pro forma net loss per share.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the
actual events or results may differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors"
and "Business," as well as those discussed elsewhere in this Prospectus. The
historical results set forth in this discussion and analysis are not
indicative of trends with respect to any actual or projected future financial
performance of the Company. This discussion and analysis should be read in
conjunction with the audited financial statements of ENACT and Notes thereto
included elsewhere in this Prospectus.
OVERVIEW
The Company was founded in October 1992 to link chronic disease populations
with their care providers through the use of personal devices and the
Company's tele-health monitoring system. The Company has enrolled patients in
a health monitoring program using the ENACT System for asthma which includes
the Company's AirWatch Monitor and is preparing to launch a program for
diabetes, which will include the Company's Reporter interface which connects
to blood glucose monitors. The Company received 510(k) clearance from the FDA
for its AirWatch Monitor in November 1994 and began commercial introduction on
a limited basis in November 1995. To date, the Company has generated limited
revenues and through September 30, 1997 had incurred cumulative losses of
$10.7 million. The Company expects such losses to continue for the foreseeable
future.
The Company's revenues are primarily derived from three sources: device
sales, enrollments, and contract revenue. Devices are priced for rapid market
penetration to facilitate patient enrollments and consequently have relatively
low margins. Enrollment revenue represents monthly or annual fees for access
to the Company's Care Central database and related information services. The
Company intends for enrollments to form the basis of a recurring revenue
stream and intends to price enrollments, at high volumes, to generate higher
margins than devices. The Company also, from time to time, enters into
development contracts with customers and partners which generate contract
revenue. The margins associated with these programs vary by contract.
The Company's cost of revenues represents the cost for producing devices and
providing tele-health monitoring services and the direct costs of fulfilling
the Company's obligations under development contracts. Sales and marketing
expenses consist primarily of commission payments, marketing personnel costs,
promotional material, travel and administrative support for the Company's
marketing efforts. Research and development expenses relate to the development
of software to facilitate access to the Company's Care Central database and
development of devices to communicate with Care Central and consist primarily
of personnel costs, facilities, administrative items, computing, supplies and
other costs allocated to such activities. General and administrative costs
consist primarily of the cost of corporate operations and personnel, legal,
accounting and other general operating expenses of the Company.
To date, the Company's cumulative revenues have been $9.3 million and have
consisted primarily of revenues from non-recurring sources, including a
development contract and sales of devices and services for clinical and
marketing trials conducted by customers. The Company's primary focus is on
developing revenue from sales of its devices and services through retail
pharmacies and managed care organizations. The Company is commencing a
substantial sales and marketing campaign for the ENACT System, including the
AirWatch Monitor and related Care Central information services for the asthma
market and intends to use a significant portion of the proceeds of this
offering to launch such campaign. As a result, the Company expects sales and
marketing expenses to increase substantially in absolute dollars and as a
percentage of revenues.
As historical revenues relate primarily to non-recurring revenue sources,
trends in revenues to date are not relevant to the Company's expected future
performance. Future revenues will depend substantially upon the success of the
Company's future marketing and sales efforts in generating recurring revenue,
and there can be no assurance that the Company will generate meaningful
revenue from these or other programs, or that such revenues will have
significant margins.
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RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996.
Total revenues increased to $5.5 million for the nine months ended September
30, 1997 from $1.8 million for the nine months ended September 30, 1996, an
increase of $3.6 million or 201%. Revenues in the 1997 period resulted
primarily from the sale of AirWatch Monitors to a major domestic customer for
a marketing trial, and revenues in the 1996 period resulted primarily from the
Company's agreement with Teijin, Ltd ("Teijin").
Cost of revenues increased to $4.5 million for the nine months ended
September 30, 1997 from $0.8 million for the nine months ended September 30,
1996, an increase of $3.7 million. The development contract which comprised
the majority of revenue in the 1996 period had a substantially higher gross
margin than the device sales which comprised the majority of revenue in the
1997 period.
The Company's research and development expenses increased to $1.5 million
for the nine months ended September 30, 1997 from $1.3 million for the nine
months ended September 30, 1996, an increase of $0.2 million or 16%. This
increase was primarily due to the development of new reporting devices, the
addition of new disease applications for its reporting system and the
development of software for use in analyzing data captured by Care Central.
Sales and marketing expenses increased to $1.8 million for the nine months
ended September 30, 1997 from $1.0 million for the nine months ended September
30, 1996, an increase of $0.8 million or 74%. This increase was the result of
expansion of the Company's marketing efforts, including the hiring of
additional sales and marketing personnel. The Company intends to expand its
marketing effort in 1998 to facilitate the growth of sales of the AirWatch
Monitors and enrollments and anticipates a rapid increase in marketing
expenditures in future quarters in absolute dollars and as a percentage of
revenues.
The Company's general and administrative expenses increased to $0.8 million
for the nine months ended September 30, 1997 from $0.5 million for the nine
months ended September 30, 1996, an increase of 51%. The increase in absolute
dollars from the 1996 period to the 1997 period primarily reflects added
administrative capacity necessary to support Company growth.
Years Ended December 31, 1996, 1995 and 1994
Total revenues increased to $3.1 million in 1996 from $0.6 million in 1995
and $0.1 million in 1994. The increase from 1994 to 1995 was due principally
to revenue recognized under the Company's agreement with Teijin. The increase
from 1995 to 1996 was due to revenue recognized under the Company's agreement
with Teijin and to the commercial launch of the AirWatch Monitor in the United
States in late 1995.
Cost of revenues were $1.8 million in 1996 and were negligible in 1995 and
1994. Increases in cost of revenues were related to costs associated with
decreased sales, the provision of tele-health monitoring services and costs
associated with the Company's development contract.
Research and development expenses increased to $1.8 million in 1996 from
$1.4 million in 1995 and 1994, an increase of 28%. The increase from 1995 to
1996 was due to the development of additional disease applications for its
reporting system and to the development of software for use in analyzing and
delivering data captured by Care Central.
Sales and marketing expenses increased to $1.5 million in 1996 from $1.2
million in 1995, an increase of 24%. There were no sales and marketing
expenditures in 1994. The Company began its pre-commercial marketing efforts
in early 1995 after receiving 510(k) clearance for the AirWatch Monitor in
late 1994 and expanded its marketing effort in 1996 to promote the growth of
AirWatch Monitor sales.
The Company's general and administrative expenses increased to $0.8 million
in 1996 from $0.4 million in 1995 and $0.3 million in 1994, increases of 83%
and 46%, respectively. The increases reflect growth in the
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Company's infrastructure to support the commercial launch of the Company's
respiratory program in late 1995 and to support commercial operations in 1996.
The Company has not recorded an income tax expense (benefit) as the Company
has not been profitable to date. At December 31, 1996, the Company had net
operating loss carryforwards for federal and state income tax purposes of
approximately $6.6 million and $3.9 million, respectively, which expire at
various dates through 2011, if not utilized. Utilization of the net operating
loss carryforwards may be subject to an annual limitation due to the "change
of ownership" provisions of the Internal Revenue Code and similar state
provisions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
$2.6 million raised in private financings, $3.0 million of net borrowings from
stockholders and $5.3 million from corporate partners' equity investments. As
of September 30, 1997, the Company has $1.9 million of cash and $1.0 million
available for borrowing under a convertible note agreement with a stockholder.
Operations used net cash of $2.0 million during the nine months ended
September 30, 1997, used net cash of $4.1 million in 1996, generated a
negligible amount in 1995, and used $1.5 million in 1994. Cash used in
operations in the nine months ended September 30, 1997 was due to increased
inventories and payables offset in part by device sales and collections on
accounts receivable. Cash used in operations in 1996 related primarily to the
timing of sales in the fourth quarter and the resulting increase in accounts
receivable, and to a reduction in deferred revenue pursuant to revenue
recognized under an agreement with Teijin entered into in 1995. Cash was
generated in 1995 due primarily to the timing of a payment from Teijin. Cash
usage in 1994 approximated the net loss for the period.
Net cash provided by financing activities was $2.9 million for the nine
months ended September 30, 1997 and net cash provided by financing activities
was $1.9 million in 1996, $2.9 million in 1995 and $0.8 million in 1994. Other
than $1.0 million in 1995 and $2.0 million in 1996, which amounts represent
the proceeds of loans from stockholders, cash provided by financing activities
was generated from the sale of common and preferred stock to individuals,
employees and corporate partners.
Of the $3.0 million of borrowings from stockholders, $2.0 million bears
interest at the prime rate and $1.0 million bears interest at the prime rate
plus 1.75%. Of the outstanding borrowings, $1.0 million is due on December 31,
1998 and is convertible into 166,666 shares of common stock on the closing of
the offering at the option of the lenders. The remaining $2.0 million of
borrowings is due on June 30, 2000, of which $1.0 million is convertible into
171,788 shares of common stock at the option of the lender.
The actual amount of the Company's future capital requirements will depend
on many factors, including the extent and success of its marketing programs,
retention of enrolled patients, continued progress in its development
programs, continued good relations with its manufacturing partner, the ability
of the Company to establish profitable customer and partner relationships, the
total amount of future revenues and the ability of the Company to collect its
accounts receivable in a timely manner. The development of the Company's
future products and markets may require substantial amounts of cash for
development, equipment and marketing purposes, and in the long term the
Company's ability to meet these cash obligations will depend on achieving
profitable operations and the timely collection of its accounts receivable. To
date, inflation has not had a material impact on the Company's revenue or
losses.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the anticipated costs of marketing and
promotion of the Company's tele-health monitoring system), that the proceeds
of this offering, together with available resources, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 18 months
following the consummation of this offering. In the event that the Company's
plans change, or its assumptions change or prove to be inaccurate, the Company
could be required to seek additional financing or curtail its activities. The
Company has limited current arrangements with respect to, or sources of,
additional financing.
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BUSINESS
OVERVIEW
ENACT is a tele-health monitoring company which collects objective
physiological data regarding patients' health states and provides timely, low-
cost reporting of that information to patients, case managers, clinicians and
other members of the care team. The Company believes its health monitoring and
reporting system (the "ENACT System") appeals both to patients who are
increasingly taking a more active role in managing their own health and
managed care organizations seeking cost savings. ENACT's initial development
and marketing efforts are focused on the management of chronic diseases such
as asthma, diabetes and cardiovascular disease. The Company has enrolled
patients in a health monitoring program using the ENACT System for asthma,
which includes the Company's FDA 510(k)-cleared AirWatch personal health
monitor, and is preparing to launch a program for diabetes, which will include
the Company's Reporter interface, which connects to blood glucose monitors. To
supplement its internal marketing programs, the Company seeks to develop
strategic relationships with market leaders in specific disease states to take
advantage of their installed patient bases, marketing expertise and
distribution resources. Consistent with this objective, the Company recently
formed an alliance in diabetes with LifeScan, a subsidiary of Johnson &
Johnson ("LifeScan"), the market leader for diabetes monitoring equipment.
The ENACT System consists of (i) personal health monitors, which are used by
patients to collect objective medical data; (ii) a communications interface
(the "ENACT Interface"), which links the personal health monitors to the
Company's on-line database ("Care Central"); (iii) the Care Central database,
which formats and stores the medical data; and (iv) information services,
which produce and distribute processed data in a variety of formatted reports
and through a case management capability available via the Internet and other
electronic media.
INDUSTRY BACKGROUND
Despite various attempts by government and private payors to control
healthcare spending, there has been a dramatic increase in U.S. healthcare
expenditures. According to the Health Care Financing Administration,
healthcare costs grew from $697.5 billion in 1990 to $988.5 billion in 1995,
an increase of 41.7%. Managed care organizations arose, in part, as a response
to this trend of increasing healthcare costs. While payors have been
successful in achieving cost savings through managed care initiatives such as
negotiated price discounts with healthcare providers and the reduction of
unnecessary healthcare services, payors are now searching for new methods to
curb healthcare costs.
Recently, payors and managed care organizations have identified chronic
disease treatment as a potential source of healthcare cost reductions. Direct
medical costs for chronic disease treatment, which include physician fees,
hospital care, emergency services and medication, totaled $425 billion in
1990. Despite only comprising 40% of the population, chronic disease patients
account for more than 70% of direct healthcare expenditures. The majority of
chronic disease patients fall into a limited number of disease states, thus
allowing for some degree of treatment standardization aimed at preventing
acute episodes and complications as well as improving quality of life. Most
chronic diseases run their course over a long period of time, thus providing a
stable patient base and an opportunity for long-term savings. The rise of
managed care organizations has created an opportunity to monitor large patient
groups and to concentrate cost and quality improvement efforts on these
patient populations.
Chronic Disease
Chronic diseases are long-term disorders, generally with no known cure. The
complications associated with a chronic disease vary across disease states,
ranging from inconvenient to life-threatening. Typically, chronic diseases are
treated by a life-long course of drug therapy and lifestyle modification. To
maximize the effectiveness of drug therapies and achieve the associated
savings in healthcare costs, both the patient and caregiver must monitor the
patient's health state and compliance with the therapeutic program throughout
the
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patient's life. Chronic diseases include asthma, diabetes and cardiovascular
disease. Each of these diseases has a large patient base and represents a
substantial cost to the healthcare system.
Asthma. Asthma affects approximately 14 million people in the United States
and over 100 million people worldwide. In the United States, people with
asthma collectively have more than 100 million days of restricted activity and
470,000 hospitalizations annually. More than 5,000 Americans die of asthma
each year. Total costs associated with asthma are estimated to be $6.2 billion
annually, $2.2 billion of which represents direct costs and the remainder of
which represents indirect costs including opportunity costs associated with
lost work days. The National Institutes of Health ("NIH") reports that asthma
can be controlled with programs based on patient education, effective therapy
and patient monitoring. The NIH recommends lung function monitoring for all
moderate and severe asthmatics.
Diabetes. There are approximately 16 million people with diabetes in the
United States and more than 60 million worldwide. The American Diabetes
Association ("ADA") estimates that the direct and indirect cost of treating
diabetes is $92 billion annually. A study has estimated that diabetics
comprise 4% of the population but account for 15% of the total healthcare
costs in the United States. The NIH sponsored Diabetes Control and
Complications Trial ("DCCT") demonstrated that close blood glucose monitoring
and more frequent and accurate insulin intake can prevent the onset and
progression of complications by up to 60%.
Cardiovascular Disease. There are multiple diseases which affect the
cardiovascular system, including hypertension, congestive heart failure,
coronary artery disease, arrhythmia and stroke. The American Medical
Association estimates that over 60 million Americans suffer from one or more
of these cardiovascular diseases. The annual direct cost for treatment of
cardiovascular disease is estimated to be $129 billion.
Approaches to Chronic Disease
Traditionally, healthcare providers have treated chronic diseases reactively
by responding to acute medical episodes and the complications arising from a
substantial deterioration in a patient's health state. This mode of treatment
often results in expensive emergency room care and hospitalizations. A
significant number of these acute medical episodes and health declines are the
consequence of patients' failure to comply with their prescribed treatment
programs and caregivers' lack of information about the patients' compliance
and current health state. Recent estimates by the Task Force For Compliance
place the costs of non-compliance with prescribed therapies at $100 billion
annually in the United States. Studies suggest that between 30-60% of chronic
disease patients fail to comply with their treatment regimes. Recently, payors
have recognized that their costs can be reduced by adopting more proactive
programs which emphasize improved patient compliance. To date, these programs
have taken one or more of the following forms:
Education. Educational programs have been introduced to foster patient
involvement in the care process by increasing patient knowledge of the disease
and its treatment. Such programs, typically taking the form of patient
seminars and the distribution of brochures, have stressed the importance of
compliance with therapeutic programs and have attempted to increase patient
awareness of changes in their condition which may indicate the onset of an
acute episode or the need to vary their treatment regimes. Generally, these
programs are of limited scope and do not provide patients with opportunities
for feedback or supervision and, as a consequence, provide patients with only
limited motivation to continue their treatment programs.
Proactive Supervision. Medical care providers are increasingly using case
management to improve patient compliance with treatment programs and avoid
acute care incidents. In case management, nurses and other personnel contact
patients in order to collect information about both their health states and
their compliance with prescribed treatment programs. Such information provides
case managers with the opportunity to encourage and reward compliance and may
enable intervention to prevent acute episodes. Although case management
programs provide a higher degree of proactive care without the expense of
physician office visits, most of these programs
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are highly labor-intensive. Moreover, the data gathered by case managers tends
to be either subjective or subject to intentional or unintentional patient
reporting errors and thus does not provide care providers with current
objective medical data necessary to monitor and control a chronic disease.
Self Monitoring. In recent years, there has been a proliferation of low-cost
health monitoring devices which allow patients to obtain objective medical
data with respect to their conditions without visiting a doctor. These
devices, which are designed to be used at the patient's home, have been
increasingly incorporated into treatment programs. If the data gathered with
such devices is reviewed regularly by the patient and/or care provider, it can
be used as an information source in a proactive program to improve compliance
and avoid acute episodes. However, these products have several shortcomings.
First, because existing personal health monitors typically require patients to
measure test results and manually record test data, the potential for
inaccurate evaluations, erroneous entries and forgotten or fabricated
measurements is great. Second, the collected data is typically provided to
healthcare providers only during costly office visits or through labor-
intensive case monitoring. Third, because the information gathered by these
devices is only sporadically provided to care providers, there is limited
opportunity for early warning and assessment or for real-time evaluation of
monitoring compliance. Finally, such devices are generally not integrated into
computerized data collection and retrieval systems and, therefore, the
information collected by such devices cannot be readily accessed or
distributed to healthcare providers.
Current programs have laid the ground work for improved patient compliance
with treatment programs through patient involvement and health state
monitoring. However, these current programs generally lack objective
physiological data to guide medical treatment decisions and often require
labor-intensive data collection and monitoring.
THE ENACT SOLUTION
ENACT has designed a nationwide tele-health monitoring and reporting system
(the "ENACT System") which collects objective physiological data regarding
patients' health states and provides timely, low-cost reporting of that
information to patients, case managers, clinicians and other members of the
care team. The Company believes the ENACT System appeals both to patients who
are increasingly taking a more active role in managing their own health and
managed care organizations seeking to achieve cost savings. Specifically, the
ENACT System establishes a low-cost link between the patient at home and the
care team, provides objective physiological data and the means to encourage
patient compliance, reduces reporting errors, creates a relational database of
patient outcomes which enables providers and payors to analyze the cost
effectiveness of various treatment methodologies, and may help minimize
expensive emergency room visits and unnecessary hospital utilization.
The ENACT System consists of several components. The system collects
information by means of a personal health monitor, which is disease specific
and may be designed either by the Company or a third party. The personal
health monitor is used by the patient in the home to collect and store
objective physiological data regarding the patient's disease state. When
plugged into a standard phone line, the monitor transmits data by means of a
communications interface (the "ENACT Interface") to a central database ("Care
Central"). Care Central receives, stores and formats the data. An electronic
publishing system distributes processed data by mail, fax, e-mail or via the
Internet to the care team in the form of standard or customized reports. Once
the patient initiates a transmission, the remaining process is fully automated
and is completed in a matter of minutes.
Benefits of the ENACT System
The ENACT System enables payors and the care team to:
. Obtain objective data. Objective physiological data collected by the
ENACT System is transmitted to the care team without patient
interpretation or manipulation, thus providing relevant clinical
information and eliminating one of the primary causes of reporting
errors.
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. Remotely monitor patients between office visits. The ENACT System sends
periodic updates on the patient's status to the care team, linking the
patient at home with the care team and providing a flow of information
which typically would not occur between irregular office visits.
. Detect early warning signs of deterioration. Using trend reports to
assess a patient's status, the ENACT System provides caregivers with the
means to detect early signs of deterioration and adjust the patient's
therapy to reduce acute episodes and other complications which may
require emergency care.
. Encourage compliance through patient-specific feedback and reward
programs. Because all patient data is automatically recorded with the
time and date, the ENACT System can provide real-time information about
compliance with the health monitoring program, which can form the basis
of patient incentive and reward programs.
. Develop case management action plans to optimize therapy. By establishing
a historical database of objective medical information relating to a
patient's health state, the ENACT System enables the care team to adopt a
proactive approach in its treatment of chronic diseases by allowing the
care team to monitor and evaluate a patient's response to a variety of
therapeutic approaches over time.
. Provide objective outcomes analysis. The ENACT System's centralized
relational database can provide a platform for multiple healthcare
professionals to access and analyze the responses of a broad-based
patient population to a variety of treatment programs for various disease
states, including patients with multiple diseases.
. Educate patients on improving control of disease. The ENACT System
provides objective feedback to patients. By educating patients on how to
interpret the results of personal monitoring, the caregiver can enhance
the patient's ability to identify deteriorations in condition and alter
treatment or seek care in order to improve quality of life.
. Realize substantial cost savings. By providing the benefits described
above, the ENACT System enables payors and members of the care team to
improve compliance and avoid acute care incidents, resulting in
substantial reductions in the cost of care. The ENACT System provides a
low-cost, automated, and faster alternative to current labor-intensive
information collection and distribution systems.
STRATEGY
The Company's goal is to become the leading provider of tele-health
monitoring systems for objective patient health information. The key elements
of the Company's strategy to achieve this goal are to:
. Focus Initial Implementation on Asthma, Diabetes and Cardiovascular
Disease. Asthma, diabetes and cardiovascular disease represent large
market opportunities, yet are serviced by a relatively concentrated group
of healthcare providers, pharmaceutical companies and other healthcare
industry participants. Moreover, each of these disease states has a large
population of patients for whom studies have shown a significant benefit
from ongoing objective monitoring. The Company believes that focusing its
efforts initially on these three disease states will enable it to achieve
maximum leverage of its financial, marketing and other resources to
create a large installed base of users.
. Align with Market Leaders in Various Disease States to Gain Market
Acceptance. The Company intends to continue to develop strategic
relationships with diversified health and pharmaceutical companies which
have leading positions with respect to the treatment of various chronic
diseases. Such companies have shown a desire to implement advanced health
management programs which they believe will result in more effective
treatment and cost reductions to payors. By working with market leaders
to design and implement health management programs which utilize the
ENACT System for particular chronic diseases, the Company believes that
it can leverage the existing market position of such partners. To date,
the Company has formed alliances with Johnson & Johnson's LifeScan
subsidiary with respect to diabetes and with Teijin Ltd. in Japan with
respect to asthma.
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. Market with Partners and Customers to Create Demand for ENACT Products
and Services. The Company intends to develop broad awareness of the ENACT
System among payors, medical professionals and patients through joint
marketing of health monitoring solutions with collaborative partners and
customers. In addition, the Company plans to build market demand among
patients and healthcare providers through advertising and direct
marketing and by continually innovating product and service offerings to
meet the evolving demands of consumers across different disease states.
. Build a Direct-to-Consumer Franchise. Recognizing the recent trend
towards increased patient involvement in their own healthcare, the
Company intends to drive demand for its products and services with
targeted marketing to chronic disease populations. By appealing directly
to consumers, the Company believes that it can build primary demand
without being reliant solely on doctors' recommendations (although the
AirWatch Monitor requires a prescription). The Company believes that
distribution through pharmacies will be a crucial element in building
this primary demand, and the Company intends to actively pursue
distribution arrangements with major pharmacy chains. Pharmacies have
created a strong customer awareness of similar product offerings such as
advanced thermometers, blood glucose meters and home blood pressure
monitors. In addition, sales through pharmacies may simplify enrollment
and reimbursement issues by moving administration out of the doctor's
office.
. Capitalize on Broad Applicability of the ENACT System Across Additional
Markets. The Company intends to extend its services beyond the asthma,
diabetes and cardiovascular disease markets by exploiting the
adaptability and flexibility of the ENACT System. Because Care Central,
the backbone of the ENACT System, has been designed to have general
applicability throughout the healthcare industry and the ENACT Interface
is readily adaptable to new and existing monitoring devices, the Company
believes it is positioned to develop additional applications for the
ENACT System both within and outside of the chronic disease field. Many
medical conditions are well suited for home monitoring programs utilizing
the ENACT System such as chronic obstructive pulmonary disease and
obstructive sleep apnea within the chronic disease field and high risk
pregnancy outside of the chronic disease field.
THE ENACT TELE-HEALTH MONITORING SYSTEM
The ENACT System is a proprietary health monitoring and reporting system
which is designed to facilitate the collection, analysis and distribution of
objective physiological data relating to a wide variety of medical conditions.
The ENACT System has four basic components: (i) personal health monitors,
which are used by patients to collect objective medical data, (ii) the ENACT
Interface, which is used to send such data to the Company's Care Central
database, (iii) the Care Central database, which stores and formats the data
and (iv) information services for producing and distributing reports of
patient data in a variety of forms to patients and members of the care team.
Personal Health Monitors
Personal health monitors are portable, usually hand-held, devices which
collect and store objective physiological data from patients with respect to
specific disease states. These proprietary devices allow for the collection of
accurate data outside of a clinical setting without the need for recording or
interpretation by the patient. The ENACT System is designed to accommodate
personal health monitors which are developed by either the Company, such as
the AirWatch Monitor for the Company's asthma program, or by third parties,
such as blood glucose monitors manufactured by Johnson & Johnson's LifeScan
subsidiary. The Company intends, when possible, to develop personal health
monitors in conjunction with market leaders in the care and treatment of
specific diseases in order to take advantage of the market acceptance that may
be generated by collaborations with such partners.
The ENACT Interface
The ENACT Interface is a communications protocol that links personal health
monitors to the Company's Care Central database. The interface can be directly
embedded in a monitor or configured as an external device
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(the "ENACT Reporter") attached to a monitor. The ENACT Interface has been
designed to make the process of transmitting monitored data from the personal
health monitor to Care Central both simple and error free. To download
objective monitored data directly to Care Central, the patient connects his or
her personal health monitor to a phone line and presses a button. The ENACT
Interface automatically dials a pre-programmed 800 number, identifies the
patient by means of the serial number which has been assigned to the patient's
monitor and transfers the objective patient data which has been collected and
stored by the personal health monitor to the Care Central database.
Care Central Database
Care Central, the core of the ENACT System, is the Company's on-line medical
data storage, processing and retrieval system which is designed to support all
of the Company's current and contemplated programs. Care Central receives data
from personal health monitors and stores and formats it in a relational
database for distribution in accordance with one of the Company's information
services. This entire process is fully automated and takes place in a matter
of minutes. Care Central combines the following components: (i) data receiver
with error protection, (ii) secure on-line transaction system and relational
database, (iii) automated database publishing with graphical reports, (iv)
high throughput electronic delivery system, and (v) fully redundant subsystems
and automatic back-up. Care Central has been designed so that it can be
expanded to serve growing patient populations and new disease monitoring
programs by adding readily available hardware. Care Central is owned and
operated by the Company with redundant facilities in separate locations.
ENACT Information Services
The ENACT System produces and distributes reports containing the objective
medical data stored in the Care Central database to case managers, doctors,
pharmacists, patients, payors and other members of the care team. The ENACT
System provides users with a high degree of flexibility with respect to the
form and content of such reports. Information is distributed through commonly
available, low cost methods, including fax, direct modem dial-up and the
postal service. In addition, the Company introduced e-mail and secure
Internet-based reporting services in 1997. The ENACT System provides the
following types of information services across the disease states being
monitored:
Report Generation and Delivery. The ENACT System publishes easy to read,
graphical reports, which can be readily customized to satisfy a variety of
differing needs. Typically, these reports involve short term and long term
trend charts, compliance calculations and bar charts illustrating a patient's
health status. Reports may be assembled and disseminated according to pre-set
instructions residing in the Care Central database or may be customized
pursuant to the telephonic voice response system that is incorporated into
Care Central.
Information Analysis. The ENACT System enables authorized users to access
patient reports to ascertain a patient's level of compliance with daily
monitoring requirements and progress over long intervals of time. These
reports not only help patients and their caregivers understand the development
of a patient's disease, but can be used by healthcare professionals to
identify developing medical problems before they develop into a crisis state.
The care team can use these reports to evaluate the effectiveness of a therapy
program and to compare individual results to those of similar patient
populations. Additionally, by allowing institutional healthcare providers to
evaluate patient compliance with monitoring regimes, such reports can be used
as a basis for providing patient incentives which could include reduced
insurance premiums or other rewards.
Remote Case Management Access Tools. The Company is currently testing an
application that is accessible via the Internet using a standard web browser,
which allows case managers to access current patient information including
ranks and reviews of all patients in a managed population. This service will
be used to monitor patients' conditions remotely, identify non-compliant
patients, detect signs of deterioration and determine when interventions to
avoid costly exacerbations are necessary.
Health Plan Reporting and Access. The Company anticipates that Care Central
will contain a large database of objective information relating to various
disease states across broad patient populations. Care Central is designed to
facilitate analysis and reporting for patients on particular therapies or
patients enrolled in a
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particular health plan. The Company intends to position itself to be able to
deliver reports covering a range of demographic information that can be used
to improve the treatment of various patient populations.
Interactive Capabilities. The ENACT System contains an interactive voice
response system which enables the ENACT System to provide a report to any
authorized user within minutes of a call placed to the twenty-four hour
request line. This interactive capability also allows the ENACT System to
conduct outbound quality of life and patient satisfaction surveys quickly and
cost effectively by having patients respond to a series of pre-programmed
questions using a touch-tone phone. Finally, payors and members of the care
team can utilize the ENACT System to send automated, outbound reminder calls
to patients with historically low compliance rates.
ENACT HEALTH MONITORING PROGRAMS
The Company has devoted substantial efforts in connection with the
development of programs for the following diseases:
Asthma
Asthma is a chronic disease in which patients experience breathing
difficulties due to narrowing of the bronchial tubes. Experts believe that the
high incidence of asthma emergencies leading to hospitalization and urgent
care results from caregivers' and case managers' failure to detect early
warning signs of medical emergencies and to assess the severity of changes in
patients' conditions. In 1997, the NIH issued updated guidelines that
recommend the use of anti-inflammatory drugs to treat underlying inflammation
of the bronchial tubes, and monitoring of lung function for patients with
moderate or severe asthma to assess severity and to guide therapy. The NIH
recommended that asthma patients on regular medication be considered for
regular objective monitoring of their lung functions based on the patients'
peak flow (i.e., the maximum rate of air flow out of a patient's lungs at a
given time), or FEV1 (i.e., the total volume of air expelled in a one second
period). This type of monitoring can indicate deterioration of lung
performance before an asthma crisis.
The prevailing method for monitoring peak flow is for a patient to blow into
a simple plastic mechanical meter. The patient reads a value from the meter,
then writes the value, time, and date onto a graph to produce a hand-made
chart which is delivered to the patient's physician at irregular intervals.
The Company believes that the majority of the patient health monitors
currently available for home use do not record FEV1, which medical experts
considers to be a more useful measurement of lung function than peak flow.
Patients monitoring their condition frequently find it inconvenient to write
down graph information and often fail to keep accurate records. Moreover, most
patients' caregivers do not have timely access to the data collected by their
patients and as a consequence are not able to observe and take a proactive
role with respect to the patients' disease states.
The Company has developed a respiratory monitoring system consisting of the
Company's proprietary AirWatch Monitor and Care Central database that it
believes solves many of the problems relating to the accuracy, consistency and
speed of patient data collection and distribution. In 1994, the Company
developed and received FDA clearance for the prescription marketing of its
AirWatch Monitor, and in November 1995 began the commercial introduction of
this device in the United States on a limited basis. Approximately the size of
a pager, the AirWatch Monitor is designed for patient ambulatory use. The
AirWatch Monitor measures both peak flow and FEV1 and retains the results of
the last 500 tests. According to researchers, FEV1 is the best single measure
of pulmonary function and is the most reproducible measure, linearly related
to the severity of airway obstruction. Because of its sophisticated software
and inexpensive sensor, the AirWatch Monitor makes both peak flow and FEV1
data available at a low cost. In addition, in accordance with NIH Expert Panel
guidelines, the AirWatch Monitor calculates each measurement as a percent of
the patient's personal best peak flow as determined by his or her doctor and
programmed into the AirWatch Monitor.
In order to monitor his or her peak flow and FEV1, a patient blows into the
AirWatch Monitor. The results of the patient's test are digitally recorded and
stored in the monitor and indicated in three ways. First, a zone
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chart on the monitor's display contains a cell which emits a blinking green,
yellow, or red light depending on the peak flow value. Second, a character
icon, Wilby(TM), smiles or frowns depending on the peak flow value. Finally,
the actual reading (in liters per minute) is presented above the zone chart
together with the percent of personal best for that reading. The monitor's
display also shows the patient's nine most recent measurements so that the
patient can see the trend of his or her recent lung function, and displays a
medical alert warning for readings which indicate potentially dangerous
conditions. The device contains a post-medication event marker, which allows
patients to mark measurements recorded immediately after taking medication by
pressing a button after exhaling into the AirWatch Monitor.
Information collected through the AirWatch Monitor may be downloaded to Care
Central through an ENACT Interface which is built into the AirWatch Monitor.
Patients are typically instructed to make routine data transmissions on a bi-
weekly or monthly basis. Once the data has been received by Care Central, it
can be used to automatically generate several types of standard and customized
reports, which can be transmitted to patients and healthcare professionals via
mail, facsimile, and e-mail or the Internet.
The Company believes that the use of the AirWatch Monitor in conjunction
with the ENACT System can significantly improve management of patients with
moderate or severe asthma. The Company anticipates that customers for the
ENACT respiratory program will range from payors to patients. Current or past
customers for the AirWatch Monitor and the related Care Central database
include Glaxo Wellcome, Inc., Zeneca Pharmaceuticals, Inc., Abbott
Laboratories, Boehringer-Ingelheim, Novartis, Kaiser-Permanente, Merck and The
National Jewish Center for Immunology and Respiratory Medicine, all of which
have used the Company's respiratory program in connection with various
clinical and marketing trials. The Company intends to use some of the proceeds
from this offering to accelerate the national commercialization of the ENACT
System by hiring sales and marketing personnel, funding advertising programs
and launching the Company's pharmacy programs and managed care sales
initiatives. See "Use of Proceeds." The Company anticipates distributing the
AirWatch Monitor and enrollment services both directly to the patient through
retail pharmacies and indirectly through managed care organizations. The
Company has obtained approval from over 100 health plans for reimbursement of
the Company's devices and services on a claim by claim basis.
Diabetes
Diabetes is a chronic, life-threatening disease, for which there is no known
cure. In patients with diabetes, the body does not produce or respond
adequately to insulin, a hormone produced by the pancreas that is critical to
the metabolism of glucose. There are two types of diabetes: (i) Type 1, which
usually begins in young people and is the more severe form of the disease, and
(ii) Type 2, which is the more prevalent form of the disease and often
develops later in life. Diabetes often leads to serious and potentially fatal
complications. According to the ADA, diabetes is not only the sixth leading
cause of death by disease (169,000 deaths in 1992), but is also the leading
cause of blindness in adults 20 to 74 years old (12,000-24,000 new cases
annually), renal failure (more than 19,000 cases in 1992), amputations
(approximately 54,000 cases annually), as well as a major contributor to
cardiovascular disease. According to the ADA, diabetes afflicts approximately
16 million people (approximately half of whom are undiagnosed) in the United
States, 800,000 of whom are estimated by the ADA to suffer from Type 1
diabetes. According to industry sources, there are approximately 3.0 million
Type 2 patients using insulin. The ADA estimates that the direct and indirect
cost of treating diabetes is $92 billion annually.
To avoid the acute effects of diabetes and to reduce the associated
complications, patients with Type 1 diabetes (and many Type 2 patients) must
use insulin daily to control glucose levels. A patient's glucose level will
vary depending upon food intake, insulin availability, exercise, stress and
illness. The landmark NIH sponsored DCCT study published in The New England
Journal of Medicine in September 1993 established that close glucose control
based on monitoring and insulin intake can prevent the onset and progression
of complications by up to 60%.
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<PAGE>
To ascertain the actual amount of insulin needed, a patient typically
measures his or her glucose level at least several times per day. Currently,
this is accomplished by pricking a finger with a small lancet, drawing a drop
of blood, placing it on a disposable strip, inserting the strip into a glucose
meter about the size of a beeper and waiting from 12 seconds to two minutes
for a number to appear on the display. The patient must then assess his or her
carbohydrate intake, determine the appropriate amount of insulin required, if
any, and administer that amount of insulin using a syringe, a pen injector or
an infusion pump. While some of these blood glucose meters are capable of
storing objective data and downloading it when brought to a healthcare
facility, the primary shortcoming of these systems is that they do not provide
a direct link between the patient at home and the care provider or case
manager. As a result, even if data is regularly collected, it is not readily
available to the care team.
The worldwide market for glucose meters, strips and related disposables has
been estimated to be approximately $1.3 billion. Currently, there are several
companies offering glucose monitors for sale, including LifeScan, Boehringer-
Mannheim, Bayer and MediSense (a division of Abbott Laboratories, Inc.).
Industry sources have estimated that LifeScan is the market leader with over
40% of the installed base in the United States. See "--Collaborative
Agreements."
The Company has formed an alliance with LifeScan to interface various
LifeScan blood glucose monitors with Care Central. The Company has developed a
device, the ENACT Reporter, which extracts data from LifeScan blood glucose
meters and transmits this data via phone line to Care Central. At Care
Central, data is compiled into clinical reports and automatically delivered to
designated recipients.
Cardiovascular Disease
There are multiple diseases which affect the cardiovascular system,
including hypertension, congestive heart failure, coronary artery disease,
arrhythmia and stroke. The American Medical Association estimates that over 60
million Americans suffer from one or more of these cardiovascular diseases.
The annual direct cost for treatment of cardiovascular disease in the United
States is estimated to be $129 billion. The Company believes the ENACT
Reporter can support extraction and communication of data from the wide
variety of portable cardiovascular devices that are currently available. The
Company is actively pursuing corporate partners within various segments of the
cardiovascular disease market.
Other Chronic Diseases
The Company has designed the ENACT System so that it may be used to monitor
a wide variety of medical conditions. The Company believes that the ENACT
System can be a valuable component in health maintenance programs where
patients' self-monitoring of their medical conditions can help prevent
deterioration and acute medical episodes. The Company is currently researching
the use of the ENACT System in programs related to chronic obstructive
pulmonary disease and sleep apnea.
SALES AND MARKETING
The Company intends to focus its marketing efforts on sales directly to
patients through pharmacies and bundled sales of product and services to
managed care organizations. In addition, from time to time, the Company
provides its products and services for use in clinical and marketing trials.
Pharmacies. The Company believes that pharmacies are particularly well-
suited for distribution of the Company's products and services directly to
patients because they have proven effective for distribution of other home
medical devices, including blood glucose meters, home blood pressure monitors
and electronic thermometers. In addition, the Company believes that the trend
in pharmacies to enhance their relationship with high-utilizing, chronic
disease patients will create an incentive for pharmacies to facilitate the
enrollment and reimbursement process for users of the Company's products.
Furthermore, because pharmacies are the primary point of sale for
pharmaceutical products for chronic disease patients, the Company believes
that they are a logical distribution channel for its products.
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Managed Care Organizations. The Company is developing programs to address
the managed care market. The standard program is targeted at managed care
organizations with in-house case managers that can utilize the ENACT System,
including the Internet case manager access tool, to manage their populations
of chronic disease patients. The enhanced program is targeted at managed care
organizations that seek to outsource or supplement their disease management
function, including case managers. The Company intends to contract or partner
with a company or companies that have counseling capabilities, which coupled
with the objective clinical data generated from the ENACT System, will
comprise a complete health management solution.
Clinical and Marketing Trials. The Company believes that clinical trials
have generated a high degree of awareness of the Company's products and
services among medical opinion leaders. Clinical trials, which evaluate the
efficacy of a particular therapy, share features with chronic disease
management programs and thus may serve as a starting point for future
relationships. Glaxo Wellcome Inc., Abbott Laboratories, Merck, Zeneca
Pharmaceutical, Inc., Boehringer-Ingerheim, Novartis, Kaiser-Permanente and
the National Jewish Center for Immunology and Respiratory Medicine have all
incorporated the ENACT System in certain of their clinical or marketing
trials. The Company also hopes to assist in the design and implementation of
trials with prestigious academic institutions and respected managed care
organizations both to document the value of the ENACT System and to provide
early marketing opportunities with potential customers.
The Company employs a Vice President of Sales and Marketing and a sales and
marketing staff of nine persons to market the ENACT System. In addition, the
senior members of the Company's management are actively engaged in marketing
the ENACT System. The Company intends to use proceeds from this offering to
hire sales and marketing personnel, fund advertising programs, launch the
Company's pharmacy marketing program and managed care sales initiative, and
fund the development of additional new products. See "Use of Proceeds."
COLLABORATIVE AGREEMENTS
The Company seeks to develop strategic relationships with diversified health
and pharmaceutical companies which have leading positions with respect to the
treatment of various chronic diseases. By working with market leaders to
design and implement health management programs which utilize the ENACT System
for particular chronic diseases, the Company believes that it can leverage the
existing market position of such partners. To date, the Company has formed
alliances with Johnson & Johnson with respect to diabetes and with ALZA
Corporation and Teijin with respect to asthma.
Johnson & Johnson's LifeScan Subsidiary. The Company entered into a
Development and Marketing Agreement with LifeScan and a related stock purchase
agreement with Johnson & Johnson Development Corporation in July 1997. The
agreement between LifeScan and the Company provides for the use of various
LifeScan blood glucose monitors with the ENACT Reporter and the development of
Care Central reports and services to meet the needs of healthcare providers
and patients in the diabetes field. Under the agreement, LifeScan has agreed
to provide specifications for Care Central services for use in diabetes
management, undertake pilot market studies, prepare marketing programs for the
ENACT Reporter and Care Central services for use with LifeScan monitors and
attempt to achieve a commercial launch of ENACT's products and services within
a specified time frame. The Company has agreed to work with LifeScan to tailor
the ENACT System to meet the needs of the diabetes market. The initial term of
the agreement is from execution through December 31, 2000 with a one-year
renewal option and requires ENACT to work exclusively with LifeScan in the
area of diabetes monitoring and reporting in a defined territory, provided
LifeScan meets minimum enrollment targets. The agreement provides for payment
of milestone payments in connection with the establishment of a pilot program,
a substantial portion of which the Company has received to date. The stock
purchase agreement provides for the purchase of 250,000 shares of Series D
Preferred Stock (which will convert into 419,580 shares of Common Stock upon
completion of this offering) at an aggregate sales price of $3.0 million.
ALZA. The Company and ALZA Corporation ("ALZA") entered into an agreement in
August 1995 pursuant to which ALZA supplements the Company's sales force by
presenting the Company's AirWatch Monitors and related services to managed
care accounts. In addition, ALZA agreed to act as the Company's agent
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for obtaining additional approvals for third-party reimbursement. In return
for these services, the Company has agreed to pay ALZA a commission on all net
sales of asthma related products in the United States unless the agreement is
terminated for cause. In addition, ALZA has made debt and equity investments
totaling $4.0 million. To date, the Company has obtained approval from over
100 payors for reimbursement of the Company's devices and services on a claim
by claim basis.
Teijin. The Company entered into a strategic relationship in November 1995
with Teijin, a Japanese conglomerate diversifying into home healthcare, for
the implementation of the ENACT System as part of a health management program
for respiratory disease in Japan. Under the agreement, Teijin is conducting
trials in Japan and seeking Japanese governmental approval for the commercial
introduction of AirWatch Monitor and the ENACT System in Japan. Subject to
obtaining such approval, the parties have agreed to negotiate an agreement for
Teijin's exclusive distribution of the AirWatch Monitor and the ENACT System
for asthma in Japan.
PAYMENT AND REIMBURSEMENT
Historically, the Company has received payment for its products and services
through contracts with collaborative partners and customers conducting
clinical and marketing trials. The company has also obtained approval from
over 100 payors for reimbursement of the Company's devices and services on a
claim by claim basis. The Company intends to develop a pharmacy based
distribution channel and to negotiate contracts with managed care
organizations which provide for direct payment of the Company's products and
services. When directly marketing to customers via pharmacies, the Company
intends to include with its products a reimbursement package which will
include a certificate of medical necessity for the physician to complete and
instructions for the patient on submitting the certificate and other materials
to the payor for reimbursement. In marketing to managed care organizations,
the Company intends to contract directly with, and be paid directly by,
managed care organizations for provision of products and services to their
patient populations. Failure of the Company to obtain additional reimbursement
approvals from payors for the Company's products and services could have a
material adverse effect on the Company's business and operating results. There
can be no assurance that the Company will be successful in entering contracts
with managed care organizations, or in promoting its products to consumers in
pharmacies.
COMPETITION
The market for healthcare information products, services and devices for
health state management is a relatively new and emerging market. Although the
Company has limited direct competition, it faces indirect competition from a
number of sources and expects to experience intense competition in the future
if its products and services are accepted in the marketplace. The Company's
potential competitors include specialty healthcare companies, healthcare
information system and software vendors, healthcare management organizations,
pharmaceutical companies and other service companies within the healthcare
industry. In particular, the Company is aware of several large pharmaceutical
and medical service companies that have stated publicly that they intend to be
involved in providing comprehensive health state management services. The
Company also expects to compete against other companies that provide
statistical and data management services, including clinical trial services to
pharmaceutical companies. The Company's potential competitors include
companies with significantly greater financial, technical, product development
and marketing resources than the Company. There can be no assurance that a
competitor will not develop and successfully introduce competitive products or
services, that the introduction of such products or services will not cause a
reduction in the price at which the Company sells its products and services or
that the Company will be able to compete successfully with any of these
potential competitors. See "Risk Factors--Competition."
MANUFACTURING
The Company does not currently engage in any direct manufacturing
operations. The Company currently uses Flextronics, Ltd. ("Flextronics"), a
manufacturing sub-contractor, to act as a turnkey provider for the Company-
designed monitoring and data reporting devices. Devices are manufactured to
Company specifications and quality standards. Flextronics is ISO 9002
registered and has considerable experience in manufacturing medical devices.
Under its agreement with the Company, Flextronics is responsible for materials
purchasing, inventory management, tooling, and test fixturing, and ships
finished goods inventory to the Company or its designees from plants located
in the Far East.
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FDA AND OTHER GOVERNMENT REGULATIONS
The Company's products and services are subject to substantial regulation in
the United States and foreign countries.
Medical Products. The Company's medical products are subject to stringent
government regulation in the United States and other countries. In the United
States, the Food, Drug, and Cosmetic Act, as amended ("FDC Act"), and other
statutes and regulations govern or influence the testing, manufacture, safety,
labeling, storage, record keeping, approval, advertising and promotion of such
products. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals or clearances, refusal to approve or
clear new applications or notices and criminal prosecution.
The regulatory process is lengthy, expensive and uncertain. Prior to
commercial sale in the United States, most medical devices, including the
Company's products, must be cleared or approved by the FDA. Securing FDA
approvals and clearances may require the submission of extensive clinical data
and supporting information to the FDA.
Under the FDC Act, medical devices are classified into one of three classes
(i.e., class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness can
reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to Good Manufacturing
Practices) and for class II devices through the use of general and special
controls (e.g., performance standards, postmarket surveillance, patient
registries and FDA guidelines). Generally, class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life supporting and implantable devices
or new devices which have been found not to be substantially equivalent to
legally marketed devices.)
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval ("PMA"). A 510(k) clearance will be
granted if the submitted data establishes that the proposed device is
"substantially equivalent" to a legally marketed class I or class II medical
device, or to a class III medical device for which the FDA has not called for
PMAs. It generally takes from four to 12 months from submission to obtain
510(k) premarket clearance, although it may take longer. The FDA may determine
that the proposed device is not substantially equivalent, or that additional
clinical data are needed before a substantial equivalence determination can be
made. Modifications or enhancements to products that are cleared through the
510(k) process that could significantly affect safety or effectiveness or
effect a major change in the intended use of the device require new 510(k)
submissions. The Company's manufacturer is also required to adhere to FDA Good
Manufacturing Practices and similar regulations in other countries, which
include testing, control and documentation requirements enforced by periodic
inspections.
The Company's AirWatch Monitor has received clearance through the 510(k)
process as a Class II device and the Company intends to obtain clearance for
additional personal health monitors pursuant to Section 510(k) of the FDC Act
whenever necessary. The AirWatch Monitor has been cleared as a prescription
device only. FDA clearance of a new 510(k) submission would be required should
the Company decide to market the AirWatch Monitor as an over-the-counter
device. No assurance can be given that the necessary clearances for its
products will be obtained by the Company on a timely basis, if at all, or that
extensive clinical data and supporting information or a PMA application will
not be required. FDA clearance is subject to continual review, and later
discovery of previously unknown problems may result in restrictions on a
product's marketing or withdrawal of the product from the market.
The Company understands that the FDA has recently required a more rigorous
demonstration of substantial equivalence in connection with 510(k)
notifications and that in many cases the time periods required for product
approvals have increased. If additional data is requested by the FDA, it could
delay the Company's market introduction of future monitors. There can be no
assurance that the FDA will not require additional data or that the Company
will receive marketing clearance from the FDA for any of its future monitors.
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Medical Services. A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide healthcare
services. Additionally, services provided to health benefit plans in certain
cases are subject to the provisions of the Employee Retirement Income Security
Act ("ERISA") and may be affected by other state and Federal statutes.
Generally, state laws prohibit the practice of medicine and nursing without a
license. Many states interpret the practice of nursing to include health
teaching, health counseling, the provision of care supportive to or
restorative of life and well being and the execution of medical regimens
prescribed by a physician. Accordingly, to the extent that the Company assists
providers in improving patient compliance by publishing educational materials
or providing behavior modification training to patients, such activities could
be deemed by a state to be the practice of medicine or nursing. Although the
Company has not conducted a survey of the applicable law in all 50 states, it
believes that it is not engaged in the practice of medicine or nursing. There
can be no assurance, however, that the Company's operations will not be
challenged as constituting the unlicensed practice of medicine or nursing. If
such a challenge were made successfully in any state, the Company could be
subject to civil and criminal penalties under such state's law and could be
required to restructure its contractual arrangements in that state. Such
results or the inability to successfully restructure its contractual
arrangements could have a material adverse effect on the Company.
Confidentiality Requirements. The confidentiality of patient information is
subject to regulation by state law. A variety of statutes and regulations
exist safeguarding privacy and regulating the disclosure and use of medical
information. State constitutions may provide privacy rights and states may
provide private causes of action for violations of an individual's
"expectation of privacy." Tort liability may result from unauthorized access
and breaches of patient confidence. The Company intends to comply with state
law and regulations governing medical information privacy.
In addition, on August 21, 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996, P.L. 104-191 (the "HIPPA"). This
legislation requires the Secretary of Health and Human Services to adopt
national standards for electronic health transactions and the data elements
used in such transactions. The Secretary is required to adopt safeguards to
ensure the integrity and confidentiality of such health information. Violation
of the standards is punishable by fines and, in the case of wrongful
disclosure of individually identifiable health information, imprisonment. The
Secretary is required to issue the standards not later than February 21, 1998.
Separately, the HIPPA also requires the Secretary to submit recommendations to
Congress on standards for the privacy of individually identifiable health
information. These recommendations, which were submitted in September 1997,
propose restrictions on the disclosure and use of patient-identifiable
information, guarantees of rights of patients to information and access to
their health records and punishment for the misuse of personal health
information. Under the HIPPA, Congress has until August 1999 to adopt
legislation regarding the privacy of individually identifiable health
information. If Congress does not act, the Secretary is required to issue
regulations by January 21, 2000. The Company cannot predict what requirements
will ultimately be adopted by Congress however, any limitations imposed by or
the cost of compliance with such requirements could have an adverse effect on
the Company's business.
The Company and its customers may be subject to Federal and state laws and
regulations which govern financial and other arrangements between healthcare
providers. These laws prohibit certain fee splitting arrangements between
healthcare providers, as well as direct and indirect payments, referrals or
other financial arrangements that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Possible sanctions for violation of these
restrictions include civil and criminal penalties. Further, criminal
violations may result in mandatory exclusions of up to five years and
additional permissive exclusions from participation in Medicare and Medicaid
programs.
Regulation in the healthcare field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental
approvals, comply with applicable regulations or comply with existing or
future laws, rules or regulations or their interpretations.
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PROPRIETARY RIGHTS
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary technology. Although the Company continues
to implement protective measures and intends to defend its proprietary rights,
there can be no assurance that these measures will be successful or that its
patents will provide meaningful protection against potential competitors
developing substantially similar products and services. The Company has filed
nine patent applications in the United States, two of which have resulted in
issued patents and two others of which have had claims allowed by the Patent
and Trademark Office relating to the AirWatch Monitor and certain aspects of
the ENACT Reporter and Care Central database system. The Company intends to
file additional applications as appropriate for patents covering the ENACT
System. There can be no assurance that patents will issue from any of these
pending applications, that any patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide proprietary protection to the Company.
The Company is not currently aware of any pending or threatened claims of
infringement of the proprietary rights of others with respect to the Company's
current or planned products. However, there can be no assurance that third
parties will not assert such claims or that any such claims will not require
the Company to enter into license agreements or result in costly protracted
litigation, regardless of the merits of such claims. No assurance can be given
that any necessary licenses will be available or that, if available, such
licenses will be obtainable on commercially reasonable terms.
EMPLOYEES
As of September 30, 1997, the Company had 36 employees and three nearly
full-time contractors, comprising nine in sales and marketing, 13 in systems
development and operations, five in product development, eight in customer
service and four in administration.
FACILITIES
The Company's principal administrative and product development facility
occupies approximately 4,500 square feet in Mountain View, California pursuant
to a lease that expires in October 1998. The Company's Care Central database
is resident on redundant systems in two separate facilities. Although the
Company believes that its existing facilities are adequate for its current
requirements, the Company intends to relocate to larger facilities in the near
future.
LEGAL MATTERS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information with respect to the
directors, executive officers and other key employees of the Company as of
September 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Matthew H. L. Sanders................ 44 Chairman of the Board, President and Chief
Executive Officer
Gilbert S. Mott, Jr. ................ 46 Executive Vice President and Director
Eitan M. Fenson, Ph.D. .............. 43 Vice President, Information Services
John H. Hyle......................... 49 Vice President, Sales and Marketing
Chris A. Tacklind.................... 40 Vice President, Advanced Technology, Secretary
and Director
Henry W. Evans....................... 36 Vice President, Finance and Chief Financial
Officer
Wayne C. Wager (1)(2)................ 42 Director
A. Crawford Cooley (1)(2)............ 71 Director
Ernest Mario, Ph.D. (1)(2)........... 59 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Matthew H. L. Sanders is the co-founder of the Company and has served as its
President, Chief Executive Officer and Chairman of the Board of Directors
since its inception in October 1992. Mr. Sanders has nearly 20 years of
experience in the information technology field. Mr. Sanders was a founder of
Ardent Computer ("Ardent"), a maker of graphics supercomputers, and served in
various executive capacities with Ardent, including Chief Operating Officer
and Co-Chairman of the Board of Directors. Mr. Sanders served in various
capacities with Convergent Technologies, a maker of desktop and workstation
computers, from October 1979 to October 1984, including Division Vice
President and General Manager of several divisions. Mr. Sanders has also
worked in new product development at Hewlett-Packard Co. Mr. Sanders received
a B.S. in Mechanical Engineering and a M.S. in Product Design from Stanford
University.
Gilbert S. Mott, Jr. joined the Company as its Senior Vice President,
Marketing and Sales and a Director in March 1995 and has served as the
Company's Executive Vice President, since March 1997. Mr. Mott was with Glaxo,
Inc. from January 1979 to February 1995. He served as Vice President of
Marketing for Glaxo's Health Management Division and Vice President of Managed
Care before joining ENACT from June 1993 to February 1995. He was Vice
President of Marketing for Glaxo's Allen & Hanburg Division from January 1991
to June 1993. Mr. Mott has served on the Board of the American Lung
Association and the Allergy and Asthma Foundation of America. Mr. Mott
received a B.A. from the University of Miami in Coral Gables, Florida in 1973.
Eitan M. Fenson, Ph.D. has served as the Company's Vice President,
Information Services since July 1994. Dr. Fenson was employed by OnTrack,
Inc., a private computer systems consultant serving clients including
Motorola, Inc. and Auspex Systems, Inc. from January 1992 to July 1994. Dr.
Fenson was Director of Customer Service at Auspex Systems, a Network Server
Manufacturer, from August 1990 to January 1992. He also served as a Director
of Customer Service at Ardent from October 1986 to August 1990. Dr. Fenson
served in a variety of positions at AT&T Bell Laboratories, Unix Development
Laboratory, including Product Manager for UNIX System V from June 1981 to
October 1986. Dr. Fenson received a B.A. in Mathematics from Amherst College
and an M.A. in Mathematics, an M.A. in Computer Science and a Ph.D. in
mathematics from the University of Michigan.
John H. Hyle has served as the Company's Vice President, Sales and Marketing
since March 1997. Mr. Hyle was employed by Thermoscan Inc. where he held the
title of Vice President and was responsible for sales and marketing, customer
service, professional relations and international operations from May 1989 to
March
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1997. Mr. Hyle attended The United States Naval Academy, received a B.A. in
Economics from Albright College and is a graduate of the Program for
Executives at Carnegie Mellon University.
Chris A. Tacklind is a co-founder of the Company and has served as its Vice-
President, Advanced Technology since July 1997 and as Secretary and a Director
since its inception in October 1992. From inception to July 1997, Mr. Tacklind
served as the Company's Vice President, Product Development. Mr. Tacklind was
a principal in Tacklind Design, a private engineering and design consulting,
from January 1985 to October 1992, where he participated in the design and
development of products for clients in the industrial, medical, computer and
consumer fields. Prior to that, Mr. Tacklind held various positions on the
technical staff at Hewlett-Packard Co. from July 1979 to December 1985 where
he was a co-inventor of the technology and patents for Hewlett-Packard's Ink
Jet printing technology. Mr. Tacklind received a B.A. in Mathematics and
Physics at the University of California, Santa Cruz, and an M.S. in Mechanical
Engineering from Stanford University.
Henry W. Evans has served as the Company's Chief Financial Officer since
September 1995. Prior to that time, Mr. Evans was a Senior Manager in Ernst &
Young LLP's Life Sciences Group in Palo Alto, California from August 1992 to
September 1995. Mr. Evans received a B.S. in Accounting from the University of
Notre Dame and an M.B.A. from Stanford University.
Wayne C. Wager has served as a Director of the Company since November 1993.
Mr. Wager has been the President of Cascadia Ventures, a private venture
capital firm, since January 1997, and has been a partner with Cable & Howse
Ventures, a private venture capital firm, since June 1983. Mr. Wager received
a B.S. in Engineering and an M.B.A. from Stanford University.
A. Crawford Cooley has served as a Director of the Company since April 1994.
Mr. Cooley is currently a private investor, and was a partner with the venture
firm of Draper, Gaither, Anderson from 1959 to 1967. He currently serves on
the board of directors of E.D. Bullard Co. and Pacific Coast Farm Credit
Services.
Ernest Mario, Ph.D. has served as a Director of the Company since April
1997. Dr. Mario has been the Co-Chairman and Chief Executive Officer of ALZA
Corporation, a designer and producer of therapeutic drug delivery systems,
since August 1993. Dr. Mario was the Chief Executive Officer of Glaxo Holdings
P.L.C. from July 1988 to March 1993, served as a member of the Board of
Directors of that company from April 1988 to March 1993, and served as its
Deputy Chairman from January 1992 to March 1993. Dr. Mario also served as the
President and Chief Operating Officer of Glaxo, Inc., a subsidiary of Glaxo
Holdings, from September 1986 until April 1988. Prior to that time, Dr. Mario
held a number of positions with Squibb Corporation from 1977 to 1986,
including President and Chief Executive Officer of Squibb Medical Products and
served as a member of the Board of Directors of Squibb from May 1984 to August
1986. Dr. Mario serves on the Board of Directors of ATL Ultrasound, Inc.,
Catalytica, Inc., Catalytica Pharmaceuticals, Cor Therapeutics and
Pharmaceutical Product Development, Inc. Dr. Mario received a B.S. in pharmacy
from Rutgers University and a M.S. and a Ph.D. in physical sciences from the
University of Rhode Island.
The Company's Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes with the directors in each class
serving staggered three-year terms. The Class I directors are Messrs. Wager
and Tacklind, whose current terms will end in 1998; the Class II directors are
Messrs. Cooley and Sanders, whose current terms will end in 1999; and the
Class III directors are Messrs. Mario and Mott, whose current terms will end
in 2000. At each annual meeting of the stockholders of the Company, the
successors to the class of directors whose term expires at such meeting will
be elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. See
"Description of Capital Stock--Delaware Law and Certain Charter Provisions."
The Company's executive officers are appointed by and serve at the
discretion of the Board of Directors.
35
<PAGE>
There are currently two standing committees of the Board of Directors: the
Compensation Committee and the Audit Committee. The Compensation Committee has
responsibility for reviewing the performance of the officers of the Company
and making recommendations to the Board of Directors concerning salaries and
incentive compensation for such officers. The Compensation Committee currently
consists of Mr. Wager, Mr. Cooley and Dr. Mario. The Audit Committee has
responsibility for reviewing the Company's financial statements and
significant audit and accounting practices with the Company's independent
auditors and making recommendations to the Board of Directors with respect
thereto. The Audit Committee currently consists of Mr. Wager, Mr. Cooley and
Dr. Mario.
DIRECTOR COMPENSATION
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Board of Directors and committees thereof.
In March 1996, in connection with his service on the Board of Directors, Mr.
Cooley received an option to purchase 20,000 fully-vested shares of Common
Stock at an exercise price of $0.50 per share. In March 1996, in connection
with Mr. Wager's service on the Board of Directors, Mr. Wager and certain of
his business associates received options to purchase an aggregate of 20,000
fully-vested shares of Common Stock at an exercise price of $0.50 per share.
In December 1997, in consideration for consulting services provided by
Mr. Wager, Mr. Wager received an option to purchase 20,000 fully-vested shares
of Common Stock at an exercise price of $5.00 per share. In February 1997, in
connection with his appointment to the Company's Board of Directors, Dr.
Ernest Mario received a fully vested option to purchase 25,000 shares of the
Company's common stock at an exercise price of $5.00 per share. In addition,
the Company has adopted, subject to shareholder approval, the 1997 Directors
Stock Option Plan, which provides for formula-based grants of options to non-
employee directors. See "--Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Messrs. Wager, Cooley and Mario.
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of
directors or compensation committee. The Compensation Committee makes
recommendations regarding the Company's employee stock plans and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
EXECUTIVE COMPENSATION
The following table shows the compensation received in the most recent
fiscal year by the Company's President and Chief Executive Officer and by the
Company's other four most highly compensated executive officers (collectively,
the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------- ---------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- --------------------------- ---------- --------- --------------------- ------------
<S> <C> <C> <C> <C>
Matthew H.L. Sanders.... $180,000 $ 0 0 $ 0
Chief Executive Officer
and President
Gilbert S. Mott, Jr..... 238,000 0 0 12,000(1)
Executive Vice
President
Chris A. Tacklind....... 144,000 0 0 0
Vice President,
Advanced Development,
Secretary
Eitan M. Fenson......... 133,625 0 50,000 0
Vice President,
Information Services
Henry W. Evans.......... 96,000 0 30,000 0
Chief Financial Officer
</TABLE>
- --------
(1) Represents a monthly expense allowance paid by the Company.
36
<PAGE>
STOCK INCENTIVE PLANS
The following tables set forth information with respect to stock options
granted to, and exercised by, each of the Named Executive Officers for the
fiscal year ended December 31, 1996.
STOCK OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE 10-YEAR OPTION
OPTIONS EMPLOYEES IN PRICE EXPIRATION TERM ($)(4)
NAME GRANTED (#)(1) FISCAL YEAR(2) $/SHARE(3) DATE 5% 10%
---- -------------- -------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Matthew H. L. Sanders... -- -- N/A N/A N/A N/A
Gilbert S. Mott, Jr..... -- -- N/A N/A N/A N/A
Chris A. Tacklind....... -- -- N/A N/A N/A N/A
Eitan M. Fenson......... 50,000 27% $5.00 9/06/06 $157,224 $398,436
Henry W. Evans.......... 30,000 16 5.00 9/06/06 94,334 239,061
</TABLE>
- --------
(1) Consist of stock options granted pursuant to the Company's 1995 Stock
Option Plan. Each option is immediately exercisable at the date of grant
but vests over a three-year period at a rate of approximately 1/36 at the
end of one month following the date of grant and approximately 1/36 per
month thereafter, as long as the optionee remains an employee of the
Company. The maximum term of each option granted is ten years from the
date of grant. The exercise price exceeds the fair market value of the
stock on the grant date as determined by the Board of Directors.
(2) The Company granted options to purchase 185,000 shares of Common Stock for
the fiscal year ended December 31, 1996.
(3) All options were granted at an exercise price in excess of the fair market
value of the Company's Common Stock as determined by the Board of
Directors on the date of grant.
(4) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future Common Stock price. Actual gains, if any, on stock option
exercises are dependent on the future financial performance of the
Company, overall market conditions and the option holders' continued
employment through the vesting period. This table does not take into
account any appreciation in the price of the Common Stock from the date of
grant to the date of this Prospectus, other than the columns reflecting
assumed rates of appreciation of 5% and 10%.
AGGREGATE OPTION EXERCISES IN THE 1996 FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 12/31/96 (2) 12/31/96 ($)(3)
SHARES ACQUIRED VALUE ------------------------ ------------------------
NAME ON EXERCISE REALIZED(1) VESTED UNVESTED VESTED UNVESTED
---- --------------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Matthew H. L. Sanders... 0 -- -- -- -- --
Gilbert S. Mott, Jr..... 0 -- 233,337 166,663 $ 81,668 $ 58,332
Chris A. Tacklind....... 0 -- -- -- -- --
Eitan M. Fenson......... 0 -- 4,168 45,832 0 0
Henry W. Evans.......... 65,000 0 2,500 27,500 0 0
</TABLE>
- --------
(1) Calculated by determining the difference between the fair value of the
securities underlying the option at the date of exercise ($0.50 per share
as determined by the Board of Directors) and the exercise price of the
named Executive Officer's option.
(2) Exercisable in accordance with the vesting provisions described above on
Note 1 to the table entitled "Stock Option Grants."
(3) Calculated by determining the difference between the fair value of the
securities underlying the option at December 31, 1996 ($0.50 per share as
determined by the Board of Directors) and the exercise price of the Named
Executive Officer's option.
1995 Stock Option Plan. The 1995 Stock Option Plan (the "1995 Option Plan")
provides for the grant of stock options to employees (including officers),
directors and consultants of the Company and its subsidiaries. The 1995 Option
Plan provides for the grant of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
nonstatutory stock options, although incentive stock options may be granted
only to employees. As of September 30, 1997, options to purchase an aggregate
561,444 shares of Common Stock were outstanding under the 1995 Option Plan.
Options granted under the 1995
37
<PAGE>
Option Plan will remain outstanding in accordance with their terms, but the
Board of Directors has determined that no further options will be granted
under the 1995 Option Plan.
1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the "1997
Option Plan") was adopted by the Board of Directors in March 1997 and approved
by the shareholders in July 1997. The Board of Directors has reserved 913,656
shares of Common Stock for issuance under the Company's 1997 Option Plan. As
of September 30, 1997, there were outstanding options to purchase 185,500
shares of Common Stock under the 1997 Plan of which 50,334 were vested and
exercisable. Options may be granted to the Company's employees (including
officers), directors and consultants, although only employees and officers and
directors who are also employees may receive "incentive stock options"
intended to qualify for certain tax treatment. Nonemployees, including
nonemployee directors, may receive nonstatutory stock options, which do not
qualify for such treatment. The exercise price of incentive stock options
under the 1997 Option Plan must at least equal the fair market value of the
Common Stock on the date of grant, while the exercise price of nonstatutory
options must at least equal 85% of such market value and must be no less than
100% of such market value if such options are to qualify for certain tax
treatment as performance based compensation. Each option is immediately
exercisable at the date of grant but vests over a three-year period at a rate
of approximately 1/36 at the end of one month following the date of grant and
approximately 1/36 per month thereafter, as long as the optionee remains an
employee of the Company. The term of each option is no more than ten years
from the date of grant unless terminated sooner pursuant to the provisions of
the 1997 Plan. In the event of a change of control of the Company, including a
merger or sale of substantially all of the Company's assets, outstanding
options will terminate unless they are assumed by the acquiring corporation.
1997 Directors' Stock Option Plan. The 1997 Directors' Stock Option Plan
(the "Directors' Plan") was adopted by the Board of Directors in November
1997, subject to stockholder approval. A total of 125,000 shares of Common
Stock have been reserved for issuance under the Directors' Plan. The
Directors' Plan provides for the grant of nonstatutory stock options to
nonemployee directors of the Company. The Directors' Plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the Board of Directors. The Directors Plan
provides that each future nonemployee director of the Company will be granted
an option to purchase 20,000 shares of Common Stock on the date on which the
optionee first becomes a nonemployee director of the Company (the "Initial
Grant"). Thereafter, on the date of each annual meeting of the Company's
stockholders, each nonemployee director who has served on the Board of
Directors continuously for 6 months will be granted an additional option to
purchase 5,000 shares of Common Stock (an "Annual Grant"). Subject to an
optionee's continuous service with the Company, the Initial Grant will become
exercisable 1/36 per month. Each Annual Grant will become exercisable in
twelve monthly installments beginning in the 36th month after the date of
grant, subject to the optionee's continuous service. The exercise price per
share of all options granted under the Directors Plan will equal the fair
market value of a share of Common Stock on the date of grant. Options granted
under the Directors Plan have a term of ten years and are non-transferable. In
the event of certain changes in control of the Company, options outstanding
under the Directors Plan will become immediately exercisable and vested in
full.
Employee Stock Purchase Plan. A total of 200,000 shares of the Company's
Common Stock have been reserved for issuance under the Company's 1997 Employee
Stock Purchase Plan (the "Purchase Plan"), none of which have yet been issued.
The Purchase Plan permits full time employees of the Company or a parent or
subsidiary of the Company as designated by the Board of Directors to purchase
Common Stock at a discount, but only through payroll deductions, during
concurrent 24-month offering periods. Each offering period will be divided
into four consecutive six-month purchase periods. The price at which stock is
purchased under the Purchase Plan is equal to 85% of the fair market value of
the Common Stock on the first day of the offering period or the last day of
the purchase period, whichever is lower. The initial offering period will
commence approximately two weeks prior to the effective date of this offering.
Employment Agreements
The Company entered into an employment agreement with Mr. Mott on March 1,
1995 for a term of three years. The agreement provides that Mr. Mott will
serve as Senior Vice President, Sales and Marketing, and will
38
<PAGE>
be nominated to join the Board of Directors of the Company. The agreement sets
forth an initial base salary of $238,000, subject to an annual raise and/or
bonus consistent with the Company's practices, provides for customary employee
benefits and provides for an expense allowance of up to $1,000 a month. The
agreement provides for a grant of an option to purchase 400,000 shares of the
Company's Common Stock at the time of the execution of the employment
agreement (the "Employment Option") which will vest monthly over a three year
period. In the event of Mr. Mott's termination of employment with the Company
for any reason, the agreement provides Mr. Mott with any unpaid salary,
expenses and benefits up to his date of termination. In the event that Mr.
Mott's employment with the Company is terminated without "cause" or he resigns
for "good reason" (as these terms are defined in the agreement), Mr. Mott will
also be entitled to any unpaid bonus earned to his date of termination, a one-
time, lump-sum severance payment of $250,000, and accelerated vesting of one
year on his Employment Options. In the event that the Company is involved in a
merger where it is not the surviving entity or the Company sells substantially
all its assets, the Employment Option will become 100% vested. The agreement
also contains nonsolicitation, intellectual property assignment, and
confidentiality provisions.
The Company entered into an at will employment agreement with Mr. Evans on
September 8, 1995 for an unspecified term for the position of Vice President,
Finance and Chief Financial Officer. The agreement sets forth an initial base
salary of $96,000, subject to an annual raise consistent with the Company's
practices and provides for customary employee benefits. The agreement provides
for a grant of an option to purchase 65,000 shares of the Company's Common
Stock which will vest monthly over a three year period. In the event the
Company is acquired by another entity, the agreement provides that all of Mr.
Evans' unvested options will vest automatically. In the event that Mr. Evans
is terminated by the Company, the agreement provides for a one-time, lump-sum
severance payment of $50,000 in return for Mr. Evans promptly returning all
Company property and proprietary information and continuing to maintain the
Company's confidentiality agreements.
Limitations on Directors' Liabilities and Indemnification
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which
provide that directors of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) an act related to the unlawful stock
repurchase or payment of a dividend under Section 174 of Delaware General
Corporation Law; and (iv) transactions from which the director derived an
improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company
intends to enter into separate indemnification agreements with its directors
and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
39
<PAGE>
CERTAIN TRANSACTIONS
In August 1995, the Company sold shares of Series C Preferred Stock
convertible into 381,024 shares of Common Stock at a price of $5.25 to ALZA
Corporation ("ALZA"), a 10.7% stockholder of the Company, in return for
aggregate cash consideration of $2.0 million. The Company also entered into a
loan agreement with ALZA pursuant to which it issued ALZA a warrant to
purchase shares of Series C Preferred Stock convertible into 72,327 shares of
Common Stock, at an exercise price of $6.913 per share, (the "ALZA Warrant")
in return for a loan commitment of up to $2.0 million, of which the Company
drew down $1.0 million. The Company also entered into an agreement with ALZA
pursuant to which ALZA undertook to act as a promotional representative for
the Company's AirWatch products and services in the United States to the
managed care industry and third party payors, and the Company agreed to pay
ALZA certain commissions, as set forth in the agreement, on the net sales in
the United States of products and/or services which are related to the
measurement and reporting of pulmonary function in connection with respiratory
illness unless the agreement is terminated for cause. Through September 30,
1997, the Company has paid ALZA $378,000 in commissions pursuant to this
agreement.
In April 1995, R.D. Merrill Corporation ("R.D. Merrill"), together with its
affiliates a 12.7% stockholder of the Company, loaned an aggregate of $500,000
to the Company in return for a term note, which was repaid in fiscal 1995, and
a warrant to purchase shares of Series C Preferred Stock convertible into
95,256 shares of Common Stock at an exercise price of $4.20 per share. The
right to purchase 47,628 of such shares was subsequently transferred to
affiliates of R.D. Merrill Corporation.
In March 1996, the Company issued to each of Mr. Wager (and his assignees)
and Mr. Cooley, directors of the Company, options to purchase 20,000 shares of
common stock at an exercise price of $0.50 per share in consideration of
services rendered to the Company.
In August 1996, the Company and ALZA entered into an amendment to the
original loan agreement, pursuant to which the Company issued a $1.0 million
convertible note, $250,000 of which is convertible into 36,164 shares of
Series C Preferred Stock at a conversion price of $6.913 per share and
$750,000 of which is convertible in 135,624 shares of Series C Preferred Stock
at a conversion price of $5.53 per share, and cancelled a portion of the
warrant representing 36,163 shares of Series C Preferred Stock with an
exercise price of $6.913 per share.
In September 1996, the Company issued a warrant to purchase 9,000 shares of
Common Stock at an exercise price of $0.50 per share to R.D. Merrill and
issued warrants to purchase 9,000 shares of Common Stock at an exercise price
of $0.50 per share to certain affiliates of R.D. Merrill in connection with
the November 1995 loan.
In October 1996, R.D. Merrill agreed to loan the Company up to an aggregate
of $1.5 million under the terms of a Convertible Note. The Company has drawn
down $500,000 under such Convertible Note which is convertible into 83,333
shares of Common Stock upon the consummation of this offering.
In December 1996, the Company issued to Mr. Wager, a director of the
Company, in consideration of certain consulting services rendered to the
Company, an option to purchase 20,000 shares of Common Stock at an exercise
price of $5.00 per share. Also in 1996 the Company paid a $250,000 commission
to Cable & Howse Ventures, a private venture capital firm, of which Mr. Wager
is a partner in connection with their services securing the Teijin agreement.
In July 1997, the Company sold 250,000 and 25,373 shares of Series D
Convertible Preferred Stock to Johnson & Johnson Development Corporation
("J&J"), a 7.1% stockholder and ALZA, respectively, at a price per share of
$12.00 (the "Series D Shares"). The Series D Convertible Preferred Stock is
convertible into common stock based on a percentage of the price per share
paid in a subsequent equity financing which results in gross proceeds of at
least $10,000,000. If this offering closes on or prior to February 20, 1998
the Series D Shares held by J&J and ALZA will convert into 419,580 and 42,584
shares of Common Stock, respectively (assuming an initial public offering
price of $11.00 per share). If this offering closes after February 20, 1998,
the Series D Shares held by J&J and ALZA will convert into 545,454 and 55,359
shares of Common Stock, respectively. The Company also entered into a
Development and Marketing Agreement with LifeScan which provides for the use
of various LifeScan blood glucose monitors with the ENACT Reporter and the
development of Care Central reports and services to meet the needs of
healthcare providers and patients in the diabetes field.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of September 30, 1997 (after
giving effect to the conversion of the Convertible Preferred Stock, the
exercise of warrants to purchase Convertible Preferred Stock of the Company
and the conversion thereof into 131,420 shares of Common Stock), and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by
(i) each person who is known by the Company to be the beneficial owner of more
than 5% of the Common Stock, (ii) each of the named executive officers, (iii)
each of the Company's directors, and (iv) all directors and executive officers
as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OWNED
SHARES -------------------------
NAMES AND ADDRESSES BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNERS(1) OWNED (2) THE OFFERING THE OFFERING
- ----------------------- ------------ ------------ ------------
<S> <C> <C> <C>
5% STOCKHOLDERS
R. D. Merrill Company.............. 764,589(3) 12.7% 8.5%
95 South Jackson Street, Suite 300
Seattle, WA 98104-2818
ALZA Corporation................... 656,560(4) 10.7 7.2
950 Page Mill Road
Palo Alto, CA 94304
Johnson & Johnson Development 419,580 7.1 4.7
Corporation.......................
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
First Marathon Securities, Ltd..... 305,300 5.2 3.4
Commerce Place
400 Burrad St., Suite 2001
Vancouver, BC Canada V6C 3A6
DIRECTORS AND NAMED EXECUTIVE
OFFICERS
Matthew H. L. Sanders.............. 1,303,752 22.0 14.6
Chris A. Tacklind.................. 480,000(5) 8.1 5.4
Gilbert S. Mott, Jr................ 400,000(6) 6.3 4.3
Eitan M. Fenson, Ph.D. ............ 125,000(7) 2.1 1.4
Wayne C. Wager..................... 78,733(8) 1.3 .89
A. Crawford Cooley................. 126,500(9) 2.1 1.4
Ernest Mario, Ph.D. ............... 656,560(10) 10.7 7.2
Henry W. Evans..................... 95,000(11) 1.6 1.0
All directors and executive 3,299,193(12) 49.9 34.3
officers as a group (9 persons)...
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, the business address is in care of the
Company.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of September
30, 1997 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of
each other person. The persons named in this table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and except as indicated in the other footnotes to this table.
41
<PAGE>
(3) Includes 284,000 shares of Common Stock held by affiliates of R.D.
Merrill, 83,333 shares of common stock issuable upon conversion of a
convertible note and 18,000 shares of Common Stock issuable upon exercise
of warrants which do not terminate on the completion of this offering, of
which 9,000 shares are held of record by affiliates of R.D. Merrill.
Although R.D. Merrill may be deemed to be a beneficial owner of the
shares and shares subject to warrants held by its affiliates, it
disclaims all such beneficial ownership except to the extent of any
pecuniary interest therein which it may have.
(4) Includes 171,788 shares of Common Stock issuable upon conversion of a
convertible note and 25,000 shares of Common Stock held of record by Dr.
Mario who is Chief Executive Officer of ALZA Corporation. Although ALZA
Corporation may be deemed to be a beneficial owner of such shares, it
disclaims all such beneficial ownership except to the extent of any
pecuniary interest therein which it may have.
(5) Includes 30,000 shares of Common Stock held of record by a trust for the
benefit of the minor children of Mr. Tacklind. Although Mr. Tacklind may
be deemed to be a beneficial owner of such shares, he disclaims all such
beneficial ownership except to the extent of any pecuniary interest
therein which he may have.
(6) Includes 400,000 shares of Common Stock issuable upon exercise of stock
options, of which 44,443 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from September 30,
1997.
(7) Includes 50,000 shares of Common Stock issuable upon exercise of stock
options, of which 30,555 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from September 30,
1997.
(8) Includes 20,000 shares of Common Stock issuable upon exercise of stock
options, of which 10,833 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from September 30,
1997.
(9) Includes 35,500 shares of Common Stock held of record by a trust for
which Mr. Cooley is trustee. Although Mr. Cooley may be deemed to be a
beneficial owner of such shares, he disclaims all such beneficial
ownership except to the extent of any pecuriary interest therein he may
have.
(10) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options in favor of the Company on the date 60 days from September 30,
1997 and 631,560 shares of Common Stock and 171,788 shares of Common
Stock issuable upon conversion of a convertible note held of record by
ALZA Corporation, of which Dr. Mario is Chief Executive Officer. Although
Dr. Mario may be deemed to be a beneficial owner of such shares, he
disclaims all such beneficial ownership except to the extent of any
pecuniary interest therein which he may have.
(11) Includes 30,000 shares of Common Stock issuable upon exercise of stock
options, of which 20,000 were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from September 30,
1997.
(12) Includes 525,000 shares of Common Stock issuable upon exercise of stock
options, of which 105,831 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from September 30,
1997, 65,500 shares held of record by trusts for which an officer or
director is trustee and 656,560 shares owned by ALZA Corporation, of
which Dr. Mario is Chief Executive Officer, 171,788 shares of which are
issuable upon conversion of a convertible note.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 of Common Stock, $.001 par value, of which
8,912,853 shares will be outstanding and 2,000,000 of Preferred Stock, $.001
par value. Each outstanding share of Convertible Preferred Stock will be
automatically converted into one share of Common Stock upon the closing of the
offering being made hereby. Upon such conversion, such Preferred Stock will
revert to authorized but unissued shares of preferred stock. The following
description of the capital stock of the Company and certain provisions of the
Company's Certificate of Incorporation (the "Certificate of Incorporation")
and Bylaws is a summary and is qualified in its entirety by the provisions of
the Certificate of Incorporation and Bylaws, copies of which have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
At September 30, 1997, there were 8,912,853 shares of Common Stock
outstanding held of record by 108 holders after giving effect to the
conversion of all outstanding shares of Convertible Preferred Stock and the
exercise of outstanding warrants which terminate upon the closing of this
offering. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders.
Stockholders do not have the right to cumulate their votes in the election of
directors. Subject to preferences that may be applicable to any outstanding
shares of Convertible Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available for the payment of dividends. See "Dividend
Policy." Holders of Common Stock have no preemptive rights and no right to
convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock. All outstanding
shares of Common Stock are, and all shares of Common Stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 2,000,000 shares of undesignated Preferred Stock. The Board of
Directors will have the authority to (i) issue the undesignated Preferred
Stock in one or more series and to determine the powers, preferences and
rights and the qualifications, limitations or restrictions granted to or
imposed upon any wholly unissued series of undesignated Preferred Stock and
(ii) fix the number of shares constituting any series and the designation of
such series without any further vote or action by the shareholders. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of Common Stock. At present, the Company has no plans to issue any
shares of Preferred Stock.
REGISTRATION RIGHTS
After this offering, the holders of 3,389,533 shares of the Company's Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of the agreement between
the Company and the holders of such registrable securities, if the Company
proposes to register any of its securities under the Securities Act, either
for its own account or for the account of other securityholders exercising
registration rights, such holders are entitled to notice of such registration
and are entitled to include shares of such Common Stock therein. Subject to
certain limitations in the agreement, the holders of registrable shares may
require, on two occasions, that the Company use its best efforts to register
such shares for public resale, subject to certain limitations. Further,
holders may require the Company to file additional registration statements on
Form S-3 at the Company's expense. These rights are subject to certain
conditions and limitation, among them the right of the underwriters of an
offering to limit the number of shares included in such registration in
certain circumstances.
43
<PAGE>
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law.
In general, Section 203 of the Delaware Law prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have an anti-takeover effect, including attempts that might result
in a premium over the market price for the shares of Common Stock held by
stockholders.
The Company's Certificate of Incorporation provides that, upon the closing
of this offering, the Board of Directors will be divided into three classes of
directors with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
the Company and may maintain the incumbency of the Board of Directors, as it
generally makes it more difficult for stockholders to replace a majority of
the directors. The Company's Certificate of Incorporation also eliminates the
right of stockholders to act without a meeting and does not provide for
cumulative voting in the election of directors. These and other provisions may
have the effect of deferring hostile takeovers or delaying changes in control
or management of the Company. The amendment of any of these provisions would
require approval by holders of 66 2/3% or more of the outstanding Common
Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for shares of Common
Stock of the Company. Future sales of substantial amounts of Common Stock in
the public market could adversely affect market prices prevailing from time to
time.
Upon completion of this offering, the Company will have outstanding
8,912,853 shares of Common Stock, based on the number of shares of Common
Stock outstanding as of September 30, 1997 and giving effect to the conversion
of all outstanding shares of Convertible Preferred Stock and the exercise of
outstanding warrants which terminate upon completion of this Offering. Of
these shares, the 3,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act
unless purchased by "affiliates" of the Company as that term is defined in
Rule 144 of the Securities Act. The remaining 5,912,853 shares will be
"restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares"). Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are
summarized below. Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the number
of shares of Common Stock then outstanding or the average weekly trading
volume of the Common Stock as reported through the Nasdaq National Market
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. In addition, a person who is not deemed to have
been an "affiliate" of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned for at least two years the shares
proposed to be sold, would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. In general, Rule 701
permits resale of shares issued pursuant to certain compensatory benefit plans
and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144.
Upon completion of this offering 2,186,027 Restricted Shares of Common Stock
( of which are subject to the lock-up agreements described below) held by
current stockholders will be immediately eligible for sale in the public
market without restriction pursuant to Rule 144(k) of the Securities Act. An
additional 3,130,842 Restricted Shares of Common Stock ( of which are
subject to the lock-up agreements described below) will be eligible for sale
beginning 90 days after the date of this Prospectus pursuant to Rule 144 of
the Securities Act.
All directors, officers and certain stockholders holding in the aggregate
shares of Common Stock outstanding prior to this offering have agreed that
for a period of 180 days after the date of this Prospectus (the "Lockup
Period") they will not, without the prior written consent of Smith Barney,
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
any shares of Common Stock. See "Underwriting."
The Company has granted registration rights to certain of its
securityholders. See "Description of Capital Stock--Registration Rights."
45
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company has agreed to sell to such Underwriter,
shares of Common Stock which equal the number of shares set forth opposite the
name of such Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc......................................................
Lehman Brothers Inc...................................................
---------
Total............................................................... 3,000,000
=========
</TABLE>
The Underwriters are obligated to take and pay for all shares of Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. ("Smith Barney") and Lehman
Brothers Inc. are acting as Representatives, propose initially to offer part
of the shares of Common Stock directly to the public at the public offering
price set forth on the cover page hereof and part to certain dealers at a
price that represents a concession not in excess of $ per share under the
public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to other Underwriters or
to certain other dealers. After the initial public offering, the public
offering price and such concessions may be changed by the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an aggregate of
450,000 additional shares of Common Stock at the public offering price set
forth on the cover page hereof less underwriting discounts and commissions.
The Underwriters may exercise such option to purchase additional shares solely
for the purpose of covering over-allotments, if any, incurred in connection
with the sale of the shares offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
In connection with this offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more shares of Common Stock than the
total amount shown on the list of Underwriters and participations which appear
above) and may effect transactions which stabilize, maintain or otherwise
affect the market price of the shares of Common Stock at levels above those
which might otherwise prevail in the open market. Such transactions may
include placing bids for the shares of Common Stock or effecting purchases of
the shares of Common Stock for the purpose of pegging, fixing or maintaining
the price of the shares of Common Stock or for the purpose of reducing a
syndicate short position created in connection with this offering. A syndicate
short position may be covered by exercise of the option described above in
lieu of or in addition to open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby, if the
Underwriters purchase shares of Common Stock in the open market for the
account of the underwriting syndicate and the securities purchased can be
traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to
46
<PAGE>
purchase the shares of Common Stock in question at the cost price to the
syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
The Company and its directors, officers and stockholders holding in the
aggregate shares of Common Stock outstanding prior to this offering, have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of Smith Barney, offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for any shares of
Common Stock except, in the case of the Company, in certain limited
circumstances.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
has been determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors considered in
determining the initial public offering price will be the history of, and the
prospects for, the Company's business and the industry in which it competes,
an assessment of the Company's management, its past and present operations,
its past and present earnings and the trend of such earnings, the prospects
for earnings of the Company, the present state of the Company's development,
the general condition of the securities market at the time of this offering
and the market prices and earnings of similar securities of comparable
companies at the time of this offering.
Lehman Brothers Inc., an Underwriter of this offering, acted as financial
advisor to the Company in connection with the sale by the Company of 250,000
shares of Series D Convertible Preferred Stock to Johnson & Johnson
Development Corporation in July 1997 for which the Company received net
proceeds of $2.8 million. For its services, Lehman Brothers Inc. will receive
customary compensation and reimbursement of its related expenses.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by its counsel, Gray Cary Ware and Freidenrich, A Professional
Corporation ("GCWF"), 400 Hamilton Avenue, Palo Alto, CA 94301. Certain legal
matters will be passed upon for the Underwriters by Dewey Ballantine LLP, 1301
Avenue of the Americas, New York, New York 10019. GCWF and Partners I, an
investment partnership composed of certain current and former attorneys of
GCWF, beneficially owns 14,200 shares of the Common Stock of the Company.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1996, and
for each of the three years in the period ended December 31, 1996, appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, of which this Prospectus constitutes a
part, under the Securities Act with respect to the shares of Common Stock
offered hereby This Prospectus omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement
and the exhibits and schedules thereto for further
47
<PAGE>
information with respect to the Company and the Common Stock offered hereby
Statements contained herein concerning the provisions of any documents are not
necessarily complete, and in each instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement, including exhibits and schedules filed therewith, may be inspected
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 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 10007 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W, Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois, at prescribed rates. In addition,
certain of the documents filed by the Company with the Commission are
available through the Commission's Electronic Data Gathering and Retrieval
Septum ("EDGAR") at http://www.sec.gov. For further information pertaining to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the Financial
Statements notes and schedules included as a part thereof.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements audited by its independent auditors
and such other reports as it determines.
48
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Audited Financial Statements
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statement of Stockholders' Equity (Net Capital Deficiency).................. F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ENACT Health Management Systems
We have audited the accompanying balance sheets of ENACT Health Management
Systems as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ENACT Health Management
Systems at December 31, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
March 27, 1997, except for Note 8, as to which the date is
November 25, 1997
F-2
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY (NET
CAPITAL
DECEMBER 31, DEFICIENCY) AT
---------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997 (NOTE 8)
------- ------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 3,284 $ 1,048 $ 1,935
Accounts receivable, net of
allowance for doubtful
accounts of $2, $79 and $37
in 1995, 1996 and 1997,
respectively................. 53 1,162 247
Inventories................... 90 224 503
Other current assets.......... 17 17 150
------- ------- --------
Total current assets............ 3,444 2,451 2,835
Property and equipment, net..... 150 435 692
Deposits........................ 52 13 10
------- ------- --------
$ 3,646 $ 2,899 $ 3,537
======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable.............. $ 578 $ 579 $ 1,006
Accrued liabilities........... -- 153 487
Current portion of capital
lease obligations............ 59 180 306
Deferred revenue.............. 2,020 1,572 1,407
------- ------- --------
Total current liabilities....... 2,657 2,484 3,206
Long-term capital lease
obligations.................... 69 243 357
Note payable to stockholder..... 1,000 1,000 1,000
Convertible notes payable to
stockholders................... -- 2,000 2,000
Commitments
Stockholders' equity (net
capital deficiency):
Convertible Preferred Stock,
$0.001 par value, 10,000,000
shares authorized, issuable
in series; 2,927,369 shares
issued and outstanding at
December 31, 1995 and 1996
and 3,202,742 shares issued
and outstanding at September
30, 1997; 2,000,000 shares
authorized and no shares
issued and outstanding pro
forma (aggregate liquidation
preference of $7,742,000 at
September 30, 1997), at
amounts paid in.............. 4,374 4,374 7,492 $ --
Common Stock, $0.001 par
value, 20,000,000 shares
authorized, 2,225,000,
2,389,500 and 2,391,900
shares issued and outstanding
at December 31, 1995, 1996
and September 30, 1997,
respectively; 50,000,000
shares authorized, 5,781,433
shares issued and outstanding
pro forma.................... 147 205 206 6
Additional paid-in capital.... -- -- -- 7,692
Deferred compensation......... (72) (39) (14) (14)
Note receivable from
stockholder.................. -- (32) (32) (32)
Accumulated deficit........... (4,529) (7,336) (10,678) (10,678)
------- ------- -------- --------
Total stockholders' equity (net
capital deficiency)............ (80) (2,828) (3,026) $ (3,026)
------- ------- -------- ========
$ 3,646 $ 2,899 $ 3,537
======= ======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product sales.................. $ -- $ -- $ 1,162 $ 188 $ 3,961
Service revenue................ -- -- 414 205 643
Contract and other revenue..... 140 614 1,520 1,420 854
------- ------- ------- -------- --------
Total revenue.................. 140 614 3,096 1,813 5,458
Operating costs and expenses:
Cost of product sales........ -- -- 877 146 3,421
Cost of service revenue...... -- -- 435 211 772
Cost of contract and other
revenue..................... -- -- 484 476 319
Research and development..... 1,417 1,365 1,752 1,280 1,485
Sales and marketing.......... -- 1,185 1,475 1,039 1,803
General and administrative... 288 420 770 542 821
------- ------- ------- -------- --------
Total operating costs and ex-
penses........................ 1,705 2,970 5,793 3,694 8,621
------- ------- ------- -------- --------
Loss from operations........... (1,565) (2,356) (2,697) (1,881) (3,163)
Interest income................ 14 29 61 51 71
Interest expense............... (5) (53) (171) (103) (250)
------- ------- ------- -------- --------
Net loss....................... $(1,556) $(2,380) $(2,807) $ (1,933) $ (3,342)
======= ======= ======= ======== ========
Pro forma net loss per share... $ (0.49) $ (0.57)
======= ========
Shares used in computing pro
forma net loss per share...... 5,772 5,902
======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
NOTE STOCKHOLDERS'
CONVERTIBLE RECEIVABLE EQUITY
PREFERRED COMMON DEFERRED FROM ACCUMULATED (NET CAPITAL
STOCK STOCK COMPENSATION STOCKHOLDER DEFICIT DEFICIENCY)
----------- ------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... $1,628 $ 28 $ -- $(25) $ (593) $ 1,038
Cash payment on
receivable from
stockholder.......... -- -- -- 25 -- 25
Issuance of 14,200
shares of Series A
convertible Preferred
Stock for cash at
$0.704 per share..... 10 -- -- -- -- 10
Issuance of 220,385
shares of Series B
convertible Preferred
Stock for cash at
$3.63 per share, net
of issuance costs of
$40.................. 760 -- -- -- -- 760
Net loss.............. -- -- -- -- (1,556) (1,556)
------ ---- ----- ---- -------- -------
Balance at December 31,
1994................... 2,398 28 -- -- (2,149) 277
Issuance of 125,000
shares of Common
Stock for services at
$0.15 per share...... -- 19 -- -- -- 19
Issuance of 381,024
shares of Series C
convertible Preferred
Stock for cash at
$5.25 per share, net
of issuance costs of
$24.................. 1,976 -- -- -- -- 1,976
Deferred compensation
related to grant of
stock options........ -- 100 (100) -- -- --
Amortization of
deferred
compensation......... -- -- 28 -- -- 28
Net loss.............. -- -- -- -- (2,380) (2,380)
------ ---- ----- ---- -------- -------
Balance at December 31,
1995................... 4,374 147 (72) -- (4,529) (80)
Issuance of 50,000
shares of Common
Stock upon exercise
of warrants.......... -- 1 -- -- -- 1
Issuance of 114,500
shares of Common
Stock upon exercise
of options........... -- 57 -- (32) -- 25
Amortization of
deferred
compensation......... -- -- 33 -- -- 33
Net loss.............. -- -- -- -- (2,807) (2,807)
------ ---- ----- ---- -------- -------
Balance at December 31,
1996................... 4,374 205 (39) (32) (7,336) (2,828)
Issuance of 275,373
shares of Series D
convertible Preferred
Stock for cash at
$12.00 per share, net
of issuance costs of
$186 (unaudited)..... 3,118 -- -- -- -- 3,118
Issuance of 2,400
shares of Common
Stock upon exercise
of options
(unaudited).......... -- 1 -- -- -- 1
Amortization of
deferred compensation
(unaudited).......... -- -- 25 -- -- 25
Net loss (unaudited).. -- -- -- -- (3,342) (3,342)
------ ---- ----- ---- -------- -------
Balance at September 30,
1997 (unaudited)....... $7,492 $206 $ (14) $(32) $(10,678) $(3,026)
====== ==== ===== ==== ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss....................... $(1,556) $(2,380) $(2,807) $ (1,933) $ (3,342)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation and
amortization................ 37 49 199 144 233
Amortization of deferred
compensation................ -- 28 33 25 25
Issuance of Common Stock for
services.................... -- 19 -- -- --
Changes in operating assets
and liabilities:
Accounts receivable........ -- (53) (1,109) (232) 915
Inventories................ -- (90) (134) (622) (279)
Other assets............... -- (69) 39 46 (130)
Accounts payable and
accrued liabilities....... 53 498 154 405 761
Deferred revenue........... -- 2,020 (448) (1,191) (165)
------- ------- ------- -------- --------
Net cash provided by (used in)
operating activities.......... (1,466) 22 (4,073) (3,358) (1,982)
------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of property and
equipment, net................ (17) (21) (34) (34) (56)
------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds from sale of
Preferred and Common Stock.... 770 1,976 26 7 3,119
Proceeds from issuance of notes
payable....................... -- 1,500 2,000 1,000 --
Repayment of note payable...... -- (500) -- -- --
Payment of note receivable from
stockholder................... 25 -- -- -- --
Principal payments on capital
lease obligations............. (18) (33) (155) (111) (194)
------- ------- ------- -------- --------
Net cash provided by financing
activities.................... 777 2,943 1,871 896 2,925
------- ------- ------- -------- --------
Net increase (decrease) in cash
and cash equivalents.......... (706) 2,944 (2,236) (2,496) 887
Cash and cash equivalents at
beginning of period........... 1,046 340 3,284 3,284 1,048
------- ------- ------- -------- --------
Cash and cash equivalents at
end of period................. $ 340 $ 3,284 $ 1,048 $ 788 $ 1,935
======= ======= ======= ======== ========
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITIES
Acquisition of equipment with
capital lease financing....... $ 94 $ 84 $ 450 $ 378 $ 434
======= ======= ======= ======== ========
Deferred compensation related
to grant of stock options..... $ -- $ 100 $ -- $ -- $ --
======= ======= ======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest......... $ 5 $ 53 $ 110 $ 89 $ 252
======= ======= ======= ======== ========
Issuance of Common Stock for
stockholder note.............. $ -- $ -- $ 32 $ -- $ --
======= ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
ENACT Health Management Systems (the "Company" or "ENACT"), a California
corporation is a tele-health monitoring company which collects objective
physiological data regarding patients' health states and provides timely low-
cost reporting of that information to patients, case managers, clinicians and
other members of the care team. Through December 31, 1995, the Company was
considered to be in the development stage.
The Company has funded its operations to date through issuances of Common
and Preferred Stock, notes payable, technology licensing arrangements and
product sales. In the absence of positive cash flows from operations,
management believes that additional funds will be available from public or
private equity or debt financings, collaborative or other arrangements with
corporate partners or from other sources in amounts sufficient to fund
continuing operations. The Company has limited arrangements with respect to,
or sources of, additional financing. Any additional financing may involve
substantial dilution to the interest of the Company's stockholders, and any
debt financing could result in operational or financial restrictions on the
Company. If adequate funds are not available, the Company may be required to
substantially reduce its operations, eliminate one or more of its research or
development programs or obtain funds through arrangements with corporate
partners or others which may require the Company to relinquish certain rights
to its technologies or product candidates that it would otherwise seek to
retain. There can be no assurance that any additional financing will be
available to the Company on acceptable terms or at all.
INTERIM FINANCIAL INFORMATION
The financial information at September 30, 1997 and for the nine-month
periods ended September 30, 1996 and 1997 is unaudited but includes all
adjustments (consisting only of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position
at such date and the operating results and cash flows for those periods.
Results for the interim periods are not necessarily indicative of the results
for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
The Company invests its excess cash in a money market account which bears
minimal risk and is available on demand. The Company has not experienced any
realized gains or losses on its cash equivalents. The fair value of the money
market account approximates its carrying value at December 31, 1995 and 1996.
CONCENTRATION OF CREDIT RISK
The Company sells directly to major pharmaceutical companies under
contractual arrangements and to individual physicians and others through a
combination of direct sales, distributors and corporate partners. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. Uncollectible accounts receivable have not been
significant. At December 31, 1996, three customers accounted
F-7
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
for 73% of accounts receivable. Revenues from customers representing 10% or
more of total revenue are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- --------------
1995 1996 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Source:
Customer A.................................. 81% 49% 78% 3%
Customer B.................................. -- 23% -- 2%
Customer C.................................. -- -- -- 68%
Customer D.................................. -- -- -- 13%
</TABLE>
INVENTORIES
Inventory, consisting primarily of finished goods and purchased components,
is valued at the lower of cost or market on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three years.
REVENUE RECOGNITION
Revenues from the sale of monitoring devices are recognized upon shipment.
Revenues from monitoring services are recognized as the services are performed
over the contract term. Revenues from collaborations with corporate partners
are recognized as the Company fulfills its obligations under the related
contracts (see Note 2). Deferred revenue primarily represents unrecognized
contract and service revenue.
STOCK-BASED COMPENSATION
The Company has elected to continue to use the intrinsic value method of
accounting for stock-based compensation, as permitted by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and thus recognizes no compensation expense for
options granted with exercise prices that are not less than the fair value of
the Company's Common Stock on the date of grant.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted-average number of Common Shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletins, common and common equivalent shares issued during the
12-month period prior to the initial filing of the proposed offering at prices
below the assumed public offering price have been included in the calculation
as if they were outstanding for all periods presented (using the treasury
stock method for stock options at the estimated public offering price).
F-8
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Historical net loss per share calculated on this basis information is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT (UNAUDITED)
PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net loss per share.......... $ (0.58) $ (0.86) $ (0.99) $ (0.69) $ (1.12)
======= ======= ======= ======== ========
Shares used in computing net
loss per share............. 2,685 2,777 2,844 2,811 2,975
======= ======= ======= ======== ========
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of the convertible Preferred Stock not included
above that will automatically convert upon completion of the Company's initial
public offering (using the as-if-converted method) from the original date of
issuance.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. The impact is not expected to result in a change
in primary earnings per share for the nine months ended September 30, 1996 and
1997 as the Company incurred net losses in those periods.
2. DEVELOPMENT AND MARKETING AGREEMENTS
In August 1995, the Company entered into an agreement with ALZA Corporation
("ALZA"), under which ALZA will promote certain products and services provided
by the Company to customers in the managed care industry and to third-party
payors. Under the agreement, the Company shall pay ALZA a commission on net
sales until the agreement terminates on March 1, 2001, or after termination
under certain conditions. During the year ended December 31, 1996 and the nine
months ended September 30, 1997, the Company recognized commission expense of
$88,000 and $290,000, respectively, pursuant to this agreement. In conjunction
with this arrangement, ALZA purchased 381,024 shares of Series C convertible
Preferred Stock and, subject to the satisfaction of certain conditions, made
available to the Company a $2.0 million line of credit (see Note 5).
In September and November 1995, the Company entered into agreements with
Teijin, Ltd. ("Teijin") under which the Company agreed to license its
monitoring technology in the asthma field for evaluation and clinical trial
purposes in Japan. In exchange, the Company received certain payments which
are being recognized as revenue as the Company's obligations under the
contract are fulfilled. The Company may also receive additional amounts upon
the achievement of certain milestones, including the negotiation of a
distribution agreement between the parties. During the years ended December
31, 1995 and 1996, revenue totaling $500,000 and $1,520,000, respectively, was
recognized pursuant to this agreement. During 1996, the Company paid a
$250,000 commission related to this contract to a firm in which one of the
Company's directors is a partner.
In July 1997, the Company entered into an agreement with LifeScan, Inc., a
subsidiary of Johnson & Johnson ("LifeScan"), under which LifeScan will
develop, market and distribute various products and services which utilize the
Company's health monitoring and reporting systems in the diabetes field. Under
the agreement, the Company will complete commercial development of its
product, manufacture a specified number of pilot production units, and provide
monitoring and reporting services for a specified number of patients. In
exchange, the Company is entitled to receive certain payments at various dates
through January 1998. Additionally, the Company issued 250,000 shares of
Series D Preferred Stock at $12 per share to Johnson & Johnson for gross
proceeds of $3,000,000 (see Note 6). During the nine months ended September
30, 1997, the Company recognized $700,000 in revenues under this agreement.
Remaining amounts will be recognized as the Company fulfills its obligations
under the agreement.
F-9
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures................................... $ 2 $ 4
Computers and purchased software......................... 255 737
------- -------
257 741
Less accumulated depreciation............................ (107) (306)
------- -------
Property and equipment, net.............................. $ 150 $ 435
======= =======
</TABLE>
Computers and purchased software include approximately $628,000 recorded
under capital leases at December 31, 1996 ($178,000 at December 31, 1995). The
related accumulated amortization totaled approximately $231,000 at December
31, 1996 ($56,000 at December 31, 1995).
4. COMMITMENTS
OPERATING LEASE COMMITMENTS
The Company leases its facilities under agreements expiring in October 1998.
Rent expense was approximately $24,000, $48,000 and $115,000 for the years
ended December 31, 1994, 1995 and 1996, respectively, and approximately
$85,000 and $129,000 for the nine-month periods ended September 30, 1996 and
1997. At December 31, 1996, minimum rental payments under operating leases
were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997..................................................... $121
1998..................................................... 103
----
$224
====
</TABLE>
CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under noncancelable capital leases.
Obligations under capital leases represent the present value of future
noncancelable rental payments under various lease agreements. Upon completion
of each lease, the Company has the option to renew the lease or purchase the
equipment for $1.00.
Future minimum lease payments under capital leases are as follows at
December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year ended
1997...................................................... $ 221
1998...................................................... 198
1999...................................................... 67
-----
Total minimum lease payments................................ 486
Less amount representing interest........................... (63)
-----
Present value of net minimum lease payments................. 423
Less current portion........................................ (180)
-----
Long-term portion........................................... $ 243
=====
</TABLE>
F-10
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
PURCHASE COMMITMENTS
The Company's monitoring devices are currently manufactured by a single
supplier. While alternate sources of supply exist, in the event of the
discontinuance of the supplier relationship, the Company would be required to
locate and qualify a new supplier or suppliers, which could take up to several
months. At December 31, 1996, the Company had commitments to purchase
approximately $2,360,000 of inventory during 1997, $1,221,000 of which was
covered by firm purchase orders. Purchase commitments at September 31, 1997
were immaterial.
5. LINES OF CREDIT
The Company has a $2 million line of credit with ALZA (see Note 2), all of
which was outstanding at December 31, 1996 and September 30, 1997. Borrowings
under the line of credit must be repaid by June 30, 2000. Interest is payable
quarterly at the then current prime rate (8.25% at December 31, 1996). During
1996, the line of credit was modified to permit ALZA to convert $1 million of
outstanding borrowings under the line of credit into shares of Series C
Preferred Stock. The initial $250,000 of the convertible portion of the line
of credit is convertible at any time by the lender into 36,164 shares of
Series C Preferred Stock. The remaining $750,000 is convertible at any time
after June 30, 1997 into 135,624 shares of Series C Preferred Stock. The
interest rate on the $1 million of convertible borrowings increased to prime
plus 1.75% on June 30, 1997.
The Company also has an additional $2 million of convertible credit
facilities from two lenders which expire on December 31, 1997 (see Note 8), $1
million of which was outstanding at December 31, 1996 and September 30, 1997.
The credit facilities are subordinated to the outstanding borrowings described
in the paragraph above, and become convertible into the class of equity
securities issued by the Company in an offering which generates gross proceeds
to the Company of at least $10 million, at a conversion price equal to 80% of
the price per share in such offering (see Note 8). The outstanding borrowings
bear interest at the prime rate.
The carrying value of the above obligations approximate their fair value
based on prevailing interest rates.
6. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock consists of the following at September 30, 1997:
<TABLE>
<CAPTION>
LIQUIDATION TOTAL
SHARES SHARES PREFERENCE LIQUIDATION
DESIGNATION AUTHORIZED OUTSTANDING PER SHARE PREFERENCE
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series A.................... 2,340,160 2,325,960 $0.704 $1,638,000
Series B.................... 220,385 220,385 $ 3.63 800,000
Series C.................... 684,231 381,024 $5.249 2,000,000
Series D.................... 550,746 275,373 $12.00 3,304,000
Undesignated................ 6,204,478 -- --
---------- --------- ----------
10,000,000 3,202,742 $7,742,000
========== ========= ==========
</TABLE>
Each share of Series A, B and C Preferred Stock is convertible, at the
option of the holder, into a share of Common Stock, on a one-for-one basis,
subject to certain adjustments for dilution, if any, resulting from future
stock issuances, stock splits or stock dividends. The conversion price for the
Series D Preferred Stock will be based upon the date of the closing of an
equity financing in excess of $10,000,000 and the price per share paid in such
offering, but in no event will be less than $5.25 per share. Additionally,
shares of Preferred Stock automatically convert into Common Stock concurrent
with the closing of an underwritten public offering of Common Stock under the
Securities Act of 1933 in which the Company receives at least $10,000,000 in
gross proceeds and the price per share is at least $7.50 (subject to
adjustment for a recapitalization, stock splits or stock dividends).
F-11
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Series D preferred stockholders are entitled to receive a stock dividend of
one share of Series D Preferred Stock if the Company has not received at least
$10,000,000 in gross proceeds from sales of equity securities within 210 days
following the date of the first issuance of any Series D Preferred Stock (the
"Series D Stock Dividend"). Series A, B, C and D preferred stockholders are
entitled to annual noncumulative dividends, before and in preference to any
dividends paid on Common Stock, when and as declared by the board of
directors. No dividends have been declared.
The Series A, B, C and D preferred stockholders are entitled to receive,
upon liquidation or certain merger transactions, a distribution of $0.704,
$3.63, $5.249 and $12.00 ($6.00 per share after the Series D stock dividend)
per share, respectively (subject to adjustment for a recapitalization) plus
all declared but unpaid dividends. Thereafter, the remaining assets and funds,
if any, shall be distributed ratably on a per-share basis among the common
stockholders and the Series A, B, C and D preferred stockholders, on an as-
converted basis.
If, upon liquidation or certain merger transactions, the assets and funds
distributed among the preferred stockholders are insufficient to permit the
payment to which they are entitled as set forth above, the entire assets and
funds of the Company legally available for distribution shall be distributed
ratably among the holders of Series A, B, C and D Preferred Stock in
proportion to the aggregate preferential amounts owed to each such holder.
The Series A, B, C and D preferred stockholders have voting rights
substantially equal to the common shares they would own upon conversion. The
holders of Series A Preferred Stock, voting together as a class, are entitled
to elect one director. The holders of Series B, C and D Preferred Stock also
enjoy certain preferential voting rights in the event of a liquidation,
dissolution or winding up of the Company.
After the earlier of August 29, 1998 or six months after the effective date
of the first registration statement for a public offering of the Company's
securities, a majority of the preferred stockholders may request the Company
file a registration statement covering the registration of at least 50% of the
registrable securities outstanding, as defined in the Amended and Restated
Rights Agreement.
COMMON STOCK
Certain outstanding common shares are subject to repurchase rights which
generally expire ratably over three years from date of issuance. At December
31, 1995 and 1996, 66,300 and 65,222 shares were subject to repurchase at
their original issue prices (25,096 shares at September 30, 1997).
The Company has reserved shares of Common Stock for issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Outstanding stock options...................... 573,500 746,944
Future grants of stock options................. 112,000 78,156
Outstanding Common Stock warrants.............. 60,000 60,000
Conversion of Preferred Stock and warrants..... 3,058,788 3,688,213
Conversion of notes payable to stockholders.... 338,455 338,455
--------- ---------
4,142,743 4,911,768
========= =========
</TABLE>
Common Stock reserved for issuance upon the conversion of Series D Preferred
Stock and the notes payable to stockholders is based on the maximum number of
shares issuable upon conversion.
F-12
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
WARRANTS
In 1993, the Company issued two warrants to a consultant and a vendor to
purchase a total of 12,000 shares of Common Stock at an exercise price of
$0.02 per share. One of the warrants was fully exercised during fiscal 1996
for 10,000 shares of Common Stock. The other warrant expires in August 2000.
In 1994, the Company issued two warrants to a consultant to purchase a total
of 40,000 shares of Common Stock at an exercise price of $0.02 per share.
These warrants were fully exercised during fiscal 1996.
In April 1995, the Company issued a warrant to a lender to purchase 95,256
shares of Series C Convertible Preferred Stock at an exercise price of $4.199
per share. The warrant expires on the earliest to occur of April 14, 2000 or
the consummation of an underwritten public offering of the Common Stock of the
Company. In September 1995, in connection with a line of credit, the Company
issued a warrant to purchase 72,327 shares of Series C Convertible Preferred
Stock at an exercise price of $6.913 per share. The warrant expires on the
earliest to occur of December 31, 2003, a change in control, sale or transfer
of substantially all of the assets of the Company or the consummation of an
underwritten public offering of the Common Stock of the Company. The fair
value of the warrants was determined to be immaterial and was not recorded.
During 1996, warrants to purchase 36,163 shares of Series C Convertible
Preferred Stock were canceled.
In July and September 1996, the Company issued warrants to purchase a total
of 58,000 shares of Common Stock at an exercise price of $0.50 per share to
various third parties including a lender. The warrants expire at various dates
in 2001.
1995 AND 1997 STOCK OPTION PLANS
In March 1995, the board of directors adopted the 1995 Stock Option Plan
(the "1995 Plan") which provides for issuance of Common Stock options to
employees, consultants and directors. Incentive stock options may be granted
under the 1995 Plan with exercise prices not less than the fair value, and
nonstatutory options may be granted with exercise prices of no less than 85%
of the fair value of the Company's Common Stock on the date of the grant, as
determined by the board of directors. Options become exercisable as determined
by the board of directors (generally over four years) and expire after ten
years.
In March 1997, the board of directors adopted the 1997 Stock Option Plan
(the "1997 Plan") which provides for issuance of Common Stock options to
employees, consultants and directors. Incentive stock options may be granted
under the 1997 Plan with exercise prices of not less than the fair value,
nonstatutory options may be granted with exercise prices of no less than 85%
of the fair value, and 10% owner options may be granted with exercise prices
of no less than 110% of the fair value of the Company's Common Stock on the
date of the grant, as determined by the board of directors. A 10% owner option
means options granted to an optionee who, at the date of the grant, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company. Options become exercisable as determined by the board of
directors (generally over five years) and expire after ten years. Shares
previously reserved for grant under the 1995 Plan are available for grant
under the terms of the 1997 Plan.
F-13
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Activity under the Option Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------
WEIGHTED-
AVAILABLE NUMBER AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Options authorized.................. 600,000 -- --
Options granted at exercise prices
equal to fair value................ (503,000) 503,000 $ 0.22
-------- --------
Balance at December 31, 1995.......... 97,000 503,000 $ 0.22
Options authorized.................. 200,000 -- --
Options granted at exercise prices
equal to fair value................ (54,000) 54,000 $0.50
Options granted at exercise prices
greater than fair value (131,000) 131,000 $5.00
Options exercised................... -- (114,500) $0.50
-------- --------
Balance at December 31, 1996.......... 112,000 573,500 $1.29
Options authorized.................. 142,000 -- --
Options granted at exercise prices
equal to fair value................ (185,500) 185,500 $5.00
Options exercised................... -- (2,400) $0.50
Options canceled.................... 9,656 (9,656) $2.55
-------- --------
Balance at September 30, 1997......... 78,156 746,944 $2.19
======== ========
</TABLE>
At September 30, 1997 and December 31, 1996, options to purchase 420,714 and
325,737 shares were exercisable, respectively, (106,493 shares at December 31,
1995). Stock options outstanding at December 31, 1996 had exercise prices as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------------------
WEIGHTED-
AVERAGE NUMBER
EXERCISE NUMBER REMAINING OF OPTIONS
PRICES OF SHARES CONTRACTUAL LIFE EXERCISABLE
-------- --------- ---------------- -----------
(IN YEARS)
<S> <C> <C> <C>
$0.15 400,000 8.25 233,337
$0.50 42,500 9.20 82,901
$5.00 131,000 9.80 9,499
------- -------
573,500 8.68 325,737
======= =======
</TABLE>
During 1996, the Company adopted SFAS 123. The effect of applying the
minimum value method of value options and stock purchase rights granted to
employees in 1995 and 1996 did not result in a pro forma net loss materially
different from the historical amounts reported. Therefore, such pro forma
information has not been presented. SFAS 123 is applicable only for options
granted subsequent to December 31, 1994 and therefore, its pro forma effect
will not be fully realized until 1998. In future years, the application of
SFAS 123 may result in a pro forma net loss which is materially different from
actual reported results. The fair value of stock options granted in 1995 and
1996 was estimated at the date of grant using the minimum value method with
the following weighted-average assumptions: risk-free interest rates for 1995
and 1996 of 6.30% and 5.74%, respectively, an expected option life of three
years, and no dividends. The weighted-average fair value of options granted in
1995 was $0.03 per share. The weighted-average fair value of options granted
in 1996 at exercise prices equal to fair value was $0.05 per share. The
weighted-average fair value of options granted in 1996 at exercise prices in
excess of fair value was negligible.
F-14
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES
At December 31, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $6,600,000 and
$3,900,000, respectively. At December 31, 1996, the Company also has federal
and California research and development credit carryforwards of approximately
$200,000. The federal net operating loss and credit carryforwards expire at
various dates beginning in the year 2007 through 2011, if not utilized. The
State of California net operating losses will expire at various dates
beginning in 1997 through 2001, if not utilized.
Utilization of the Company's net operating loss carryforwards and credits
may be subject to an annual limitation due to the "change of ownership"
provisions of the Internal Revenue Code and similar state provisions. The
annual limitation may result in the expiration of the net operating losses
prior to utilization.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward................. $ 700,000 $ 2,500,000
Research and development credit carryforward.... 150,000 200,000
Deferred revenue................................ 1,000,000 200,000
----------- -----------
Gross deferred tax assets....................... 1,850,000 2,900,000
Valuation allowance............................. (1,850,000) (2,900,000)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased by $707,000, $984,000 and $1,050,000 for
the fiscal years ended 1994, 1995 and 1996, respectively.
8. SUBSEQUENT EVENTS
In October 1997, the Board of Directors authorized the Company to proceed
with an initial public offering (the "Offering") of the Company's Common
Stock. If the Offering is consummated under the terms presently anticipated,
including an assumed offering price of $11.00 per share, all of the
outstanding Preferred Stock at September 30, 1997 will automatically convert
into 3,389,533 shares of Common Stock. Unaudited pro forma stockholders'
equity (net capital deficiency), as adjusted for the assumed conversion of all
outstanding shares of Convertible Preferred Stock, is set forth on the
accompanying balance sheet. Concurrent with the closing of the Offering, the
Company expects to reincorporate in the State of Delaware and to file Articles
of Incorporation which authorize the issuance of 50,000,000 shares of Common
Stock and 2,000,000 shares of Preferred Stock.
In November 1997, the Company's credit facilities with two lenders (see Note
5) were extended to December 31, 1998. In addition, the lenders agreed that
outstanding borrowings at September 30, 1997 in the aggregate principal amount
of $1,000,000 under the credit facilities will become convertible into Common
Stock upon the closing of the Offering at the greater of $6.00 per share or
50% of the initial public offering price.
F-15
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
In November 1997, the Board of Directors adopted, subject to stockholder
approval, the 1997 Directors' Stock Option Plan (the "Directors' Plan") and
reserved 125,000 shares of Common Stock for issuance thereunder. The
Directors' Plan provides for automatic grants of options to purchase shares of
Common Stock to nonemployee directors of the Company. The Directors' Plan is
effective upon the closing of the Offering and no options have been granted
under the Directors' Plan. The Board of Directors also approved, subject to
stockholder approval, a 650,000 share increase in the number of shares of
Common Stock reserved for issuance under the Company's 1997 Stock Option Plan.
In November 1997, the Board of Directors adopted, subject to stockholder
approval, the Employee Stock Purchase Plan (the "Purchase Plan"), and reserved
200,000 shares of issuance thereunder. Under the terms of the Purchase Plan,
employees may purchase shares of Common Stock at the lower of 85% of fair
market value at the beginning or end of the applicable offering period.
F-16
<PAGE>
BETTER INFORMATION--
BETTER UNDERSTANDING
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN, OR MADE, SUCH INFORMATION REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HERE-
BY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUM-
STANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS COR-
RECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 20
Management............................................................... 34
Certain Transactions..................................................... 40
Principal Stockholders................................................... 41
Description of Capital Stock............................................. 43
Shares Eligible for Future Sale.......................................... 45
Underwriting............................................................. 46
Legal Matters............................................................ 47
Experts.................................................................. 47
Additional Information................................................... 47
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1998, (25 DAYS FROM THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE-
LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF ENACT LOGO]
COMMON STOCK
--------
PROSPECTUS
, 1997
--------
SMITH BARNEY INC.
LEHMAN BROTHERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All amounts shown are estimates
except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
Registration fee................................................ $ 12,546
NASD filing fee................................................. $ 4,640
Nasdaq National Market fee...................................... $ 17,500
Blue sky qualification fees and expenses........................ $ 15,000
Printing and engraving expenses................................. $140,000
Legal fees and expenses......................................... $250,000
Accounting fees and expenses.................................... $150,000
Transfer agent and registrar fees............................... $ 1,500
Miscellaneous................................................... $158,814
--------
Total......................................................... $750,000
========
</TABLE>
- --------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Pursuant to Section 145 of the Delaware General Corporation Law, a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of a corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful.
With respect to suits by or in the right of a corporation, however,
indemnification is not available if such person is adjudged to be liable for
negligence or misconduct in the performance of his duty to the corporation
unless the court determines that indemnification is appropriate. In addition,
a corporation has the power to purchase and maintain insurance for such
persons. The statute also expressly provides that the power to indemnify
authorized thereby is not exclusive of any rights granted under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise.
The Registrant's Certificate of Incorporation includes provisions
eliminating a director's personal liability for monetary damages to the
Registrant and its stockholders arising from a breach of a director's
fiduciary duty, except for liability under Section 174 of the Delaware General
Corporation Law or liability for any breach of the director's duty of loyalty
to the Registrant or its stockholders, for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law or for
any transaction in which the director derived an improper personal benefit.
The Registrant's Bylaws provide generally for indemnification of officers,
directors, agents and employees of the Registrant to the extent authorized by
the General Corporation Law of the State of Delaware.
The Registrant anticipates that it will enter into indemnification
agreements (Exhibit 10. ) with directors. These agreements will provide
substantially broader indemnity rights than those provided under the Delaware
General Corporation Law and the Registrant's Bylaws. The proposed
indemnification agreements are not intended to deny or otherwise limit third
party or derivative suits against the Registrant or its directors or officers,
but to the extent a director or officer were entitled to indemnity or
contribution under the indemnification
II-1
<PAGE>
agreement, the financial burden of a third party suit would be borne by the
Registrant, and the Registrant would not benefit from derivative recoveries
against the director or officer. Such recoveries would accrue to the benefit
of the Registrant but would be offset by the Registrant's obligations to the
director or officer under the indemnification agreement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since January 1, 1994, the Registrant has sold the following
unregistered securities:
(1) In June 1994, the Registrant issued warrants to purchase 450,000
shares of Common Stock at an exercise price of $0.02 per share to a
sophisticated investor as consideration for consulting services previously
provided to the Registrant by the investors. These warrants were exercised
in 1996.
(2) In September 1994, the Registrant sold 14,200 shares of Series A
Preferred Stock to GCW&F Partners I for aggregate cash consideration of
$10,000.
(3) In September 1994, the Registrant sold 220,385 shares of Series B
Preferred Stock to two sophisticated foreign investors for aggregate cash
consideration of $800,489.
(4) In April 1995, the Registrant sold 125,000 shares of Common Stock to
employees of the Registrant in return for promissory notes in the aggregate
amount of $18,750. Said promissory notes were canceled by the Registrant
pursuant to their terms upon the completion by the employees of four months
employment with the Registrant.
(5) In April 1995, the Registrant issued warrants to purchase 95,256
shares of Series C Preferred Stock at an exercise price of $4.20 per share
to a sophisticated investor as consideration for a loan made to the
Registrant by said investor.
(6) In July 1996, the Registrant issued two warrants to purchase 40,000
shares of Common Stock at an exercise price of $0.50 per share to
sophisticated investors as consideration for services provided by a vendor
and customer.
(7) In September 1995, the Registrant sold 381,024 shares of Series C
Preferred Stock in return for aggregate cash consideration of $1,999,995,
and issued a warrant to purchase an additional 72,327 shares of Series C
Preferred Stock at an exercise price of $6.913 per share to ALZA
Corporation.
(8) In August 1996, the Registrant issued a Convertible Promissory Note
to ALZA Corporation in the amount of $1,000,000, which will be convertible
upon the completion of this offering into 171,788 shares of Common Stock at
a weighted average price of $5.82 per share.
(9) In September 1996, the Registrant issued warrants to purchase 18,000
shares of Common Stock at an exercise price of $0.50 per share to
sophisticated investors in connection with the issuance of the warrants
described in (5) above.
(10) In October 1996, the Registrant issued Convertible Promissory Notes,
which were amended in November 1997, to sophisticated investors in the
aggregate amount of up to $2,000,000 in return for loan commitments of up
to $2,000,000 of which $1,000,000 is outstanding, which will convert into
166,667 shares of Common Stock (or 287,879 shares of Common Stock if the
Company draws down the entire [$2,000,000]) at a weighted average price of
$6.95 per share upon the completion of this offering.
(11) In July 1997, the Registrant sold 275,373 shares of Series D
Preferred Stock to Johnson & Johnson Development Corp. and ALZA Corporation
for aggregate cash consideration of $3,304,476, or $12 per share. If this
offering closes on or prior to February 20, 1998, these shares will convert
into 462,164 shares of Common Stock. If this offering closes after February
20, 1998, these shares will convert into 600,813 shares of Common Stock.
(12) From March 1995 to September 30, 1997, the Registrant issued options
to purchase an aggregate of 873,500 shares of Common Stock under the
Company's stock option plans, of which options to purchase 116,900 shares
have been exercised.
II-2
<PAGE>
(b) The issuances of securities described in Item 15(a)(1) through (13) were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not involving
any public offering. The issuance's of securities described in Item 15(a)(14)
were deemed to be exempt from registration under the Securities Act in
reliance on Rule 701 promulgated thereunder as transactions pursuant to a
compensatory benefit plan or a written contract relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits filed herewith as part of this
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger between ENACT Health Management
Systems, a California corporation, and ENACT Health Management
Systems, a Delaware Corporation.
3.1 Amended and Restated Articles of Incorporation of ENACT Health
Management Systems, a California Corporation.
3.2* Certificate of Incorporation of ENACT Health Management Systems, a
Delaware corporation.
3.3 Bylaws of ENACT Health Management Systems, a California corporation.
3.4* Bylaws of ENACT Health Management Systems, a Delaware corporation.
4.1* Form of certificate for Common Stock.
5.1 Legal Opinion of Gray Cary Ware & Freidenrich, A Professional
Corporation, with respect to the Common Stock being registered.
10.1* Form of Indemnity Agreement for officers and directors.
10.2 The Registrant's 1995 Stock Option Plan, form of Incentive Stock
Option Agreement and form of Nonstatutory Stock Option Agreement
thereunder.
10.3 The Registrant's 1997 Stock Option Plan form of Nonstatutory Stock
Option Agreement and form of Incentive Stock Option Agreement
thereunder.
10.4* The Registrant's 1997 Directors' Stock Option Plan.
10.5* The Registrant's 1997 Employee Stock Purchase Plan and form of
Subscription Agreement thereunder.
10.6 Amended and Restated Rights Agreement dated August 29, 1996, as
amended.
10.7 Convertible Note issued by ENACT Health Management Systems to R.D.
Merrill Associates II dated October 17, 1996.
10.8 Convertible Note issued by ENACT Health Management Systems Health
Management Systems to ALZA Corporation dated August 30, 1996.
10.9 Convertible Note issued by ENACT Health Management Systems to Nippon
Enterprise Development Corp. dated October 21, 1996.
10.10 Form of Warrant to Purchase Common Stock (the "Form") issued by ENACT
Health Management Systems (see Schedule A in Exhibit 10.10 for a list
of other documents omitted from this Index and a statement of the
material details in which such documents differ from the Form).
10.11 Warrant to Purchase Series C Preferred Stock issued by ENACT Health
Management Systems to ALZA Corporation dated August 30, 1996.
10.12* Form of Warrant to Purchase Series C Preferred Stock ("Form of
Warrant") issued by ENACT Health Management Systems (see Schedule A in
Exhibit 10.12 for a list of other documents omitted from this Index to
Exhibits and a statement of the material details in which such
documents differ from the Form of Warrant).
10.13 Employment Agreement by and between ENACT Health Management Systems
and Gilbert S. Mott dated March 1, 1995.
10.14 Offer Letter by ENACT Health Management Systems to Henry Evans dated
September 8, 1995.
10.15 Consulting Agreement by and between ENACT Health Management Systems
and Wayne Wager Cascadia Ventures dated December 1, 1996.
10.16* Memorandum by and between ENACT Health Management Systems and Teijin
Ltd. dated September 21, 1995.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<C> <S>
10.17* Agreement by and between ENACT Health Management Systems and Teijin
Ltd. dated November 21, 1995.
10.18* Operating Agreement by and between ENACT Health Management Systems and
ALZA dated August 29, 1995.
10.19* Development and Marketing Agreement by and between ENACT Health
Management Systems and LifeScan, Inc. dated July 25, 1997.
10.20 Lease Agreement between ENACT Health Management Systems and El Camino
Office Investments dated September 19, 1995.
10.21 Lease Agreement between ENACT Health Management Systems and North
Hills Property, Inc.
11.1 Statement of Computation of Net Loss Per Share.
21.1 List of Subsidiaries of ENACT Health Management Systems (none).
23.1 Consent of Ernst & Young LLP, Independent Auditors (See page II-6).
23.2 Consent of Gray Cary Ware & Freidenrich, A Professional Corporation,
(included in Exhibit 5.1).
24.1 Power of Attorney (See page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts has been included at S-1.
Other schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
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 Mountain View, State of California, on the 26th day
of November, 1997.
Enact Health Management Systems
/s/ Matthew Sanders
By: _________________________________
MATTHEW SANDERS
CHAIRMAN OF THE BOARD, PRESIDENT &
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Matthew Sanders and Henry Evans, or
either of them, as his attorney-in-fact, each with full power of substitution
for him in any and all capacities, to sign any and all amendments to this
registration statement, including, but not limited to, post-effective
amendments and any and all new registration statements filed pursuant to Rule
462 under the Securities Act of 1933 in connection with or related to the
offering contemplated by this registration statement, as amended, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each said attorney-in-fact or his substitute or substitutes may 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 on November 26, 1997 by the
following persons in the capacities indicated.
SIGNATURE TITLE
/s/ Matthew Sanders Chairman of the Board, President and
- ------------------------------------- Chief Executive Officer (Principal
(MATTHEW SANDERS) Executive Officer)
/s/ Henry Evans Vice-President--Finance, Chief
- ------------------------------------- Financial Officer (Principal
(HENRY EVANS) Financial and Accounting Officer)
/s/ Chris Tacklind Director
- -------------------------------------
(CHRIS TACKLIND)
/s/ Gilbert S. Mott Director
- -------------------------------------
(GILBERT S. MOTT)
/s/ Wayne Wager Director
- -------------------------------------
(WAYNE WAGER)
/s/ A. Crawford Cooley Director
- -------------------------------------
(A. CRAWFORD COOLEY)
/s/ Ernest Mario Director
- -------------------------------------
(ERNEST MARIO)
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated March 27,
1997 (except for Note 8, as to which the date is November 25, 1997), in the
Registration Statement (Form S-1) and related Prospectus of ENACT Health
Management Systems for the registration of 3,450,000 shares of its common
stock.
Our audits also included the financial statement schedule of ENACT Health
Management Systems listed in Item 16(b). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Palo Alto, California
November 26, 1997
II-6
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT THE CHARGED TO BALANCE AT THE
BEGINNING OF COSTS AND END OF THE
DESCRIPTION THE PERIOD EXPENSES WRITE-OFFS PERIOD
- ----------- -------------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31,
1994................... $ -- $ -- $ -- $ --
Year ended December 31,
1995................... $ -- $ 2 $ -- $ 2
Year ended December 31,
1996................... $ 2 $ 77 $ -- $ 79
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger between ENACT Health Management
Systems, a California corporation, and ENACT Health Management
Systems, a Delaware Corporation.
3.1 Amended and Restated Articles of Incorporation of ENACT Health
Management Systems, a California Corporation.
3.2* Certificate of Incorporation of ENACT Health Management Systems, a
Delaware corporation.
3.3 Bylaws of ENACT Health Management Systems, a California corporation.
3.4* Bylaws of ENACT Health Management Systems, a Delaware corporation.
4.1* Form of certificate for Common Stock.
5.1 Legal Opinion of Gray Cary Ware & Freidenrich, A Professional
Corporation, with respect to the Common Stock being registered.
10.1* Form of Indemnity Agreement for officers and directors.
10.2 The Registrant's 1995 Stock Option Plan, form of Incentive Stock
Option Agreement and form of Nonstatutory Stock Option Agreement
thereunder.
10.3 The Registrant's 1997 Stock Option Plan form of Nonstatutory Stock
Option Agreement and form of Incentive Stock Option Agreement
thereunder.
10.4* The Registrant's 1997 Directors' Stock Option Plan.
10.5* The Registrant's 1997 Employee Stock Purchase Plan and form of
Subscription Agreement thereunder.
10.6 Amended and Restated Rights Agreement dated August 29, 1996, as
amended.
10.7 Convertible Note issued by ENACT Health Management Systems to R.D.
Merrill Associates II dated October 17, 1996.
10.8 Convertible Note issued by ENACT Health Management Systems Health
Management Systems to ALZA Corporation dated August 30, 1996.
10.9 Convertible Note issued by ENACT Health Management Systems to Nippon
Enterprise Development Corp. dated October 21, 1996.
10.10 Form of Warrant to Purchase Common Stock (the "Form") issued by ENACT
Health Management Systems (see Schedule A in Exhibit 10.10 for a list
of other documents omitted from this Index and a statement of the
material details in which such documents differ from the Form).
10.11 Warrant to Purchase Series C Preferred Stock issued by ENACT Health
Management Systems to ALZA Corporation dated August 30, 1996.
10.12* Form of Warrant to Purchase Series C Preferred Stock ("Form of
Warrant") issued by ENACT Health Management Systems (see Schedule A in
Exhibit 10.12 for a list of other documents omitted from this Index to
Exhibits and a statement of the material details in which such
documents differ from the Form of Warrant).
10.13 Employment Agreement by and between ENACT Health Management Systems
and Gilbert S. Mott dated March 1, 1995.
10.14 Offer Letter by ENACT Health Management Systems to Henry Evans dated
September 8, 1995.
10.15 Consulting Agreement by and between ENACT Health Management Systems
and Wayne Wager Cascadia Ventures dated December 1, 1996.
10.16* Memorandum by and between ENACT Health Management Systems and Teijin
Ltd. dated September 21, 1995.
10.17* Agreement by and between ENACT Health Management Systems and Teijin
Ltd. dated November 21, 1995.
10.18* Operating Agreement by and between ENACT Health Management Systems and
ALZA dated August 29, 1995.
10.19* Development and Marketing Agreement by and between ENACT Health
Management Systems and LifeScan, Inc. dated July 25, 1997.
10.20 Lease Agreement between ENACT Health Management Systems and El Camino
Office Investments dated September 19, 1995.
10.21 Lease Agreement between ENACT Health Management Systems and North
Hills Property, Inc.
11.1 Statement of Computation of Net Loss Per Share.
21.1 List of Subsidiaries of ENACT Health Management Systems (none).
23.1 Consent of Ernst & Young LLP, Independent Auditors (See page II-6).
23.2 Consent of Gray Cary Ware & Freidenrich, A Professional Corporation,
(included in Exhibit 5.1).
24.1 Power of Attorney (See page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
ENACT HEALTH MANAGEMENT SYSTEMS
A California Corporation
The undersigned, Matt Sanders and Chris Tacklind, hereby certify that:
1. They are the President and Secretary, respectively, of Enact Health
Management Systems, a California corporation (the "Corporation").
2. The articles of incorporation of the Corporation are amended and
restated to read as follows:
ARTICLE I
The name of the Corporation is Enact Health Management Systems.
ARTICLE II
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
The Corporation is authorized to issue two classes of shares to be
designated respectively Preferred Stock and Common Stock. The total number of
shares of all series of Preferred Stock that the Corporation shall have
authority to issue is 10,000,000 and the total number of shares of Common Stock
that the Corporation shall have authority to issue is 20,000,000. All the
authorized shares shall have a par value of $0.001.
The shares of Preferred Stock authorized by these Articles may be divided
into such number of series as the Board of Directors may determine. The Board of
Directors is authorized to determine and alter the rights, preferences,
privileges and restrictions granted to and imposed upon the Preferred Stock or
any series thereof with respect to any wholly unissued series of Preferred
Stock, and to fix the number of shares of any such series of Preferred Stock.
The Board of Directors, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares of such series then outstanding) the number of shares of any
series subsequent to the issue of shares of that series.
<PAGE>
3. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the Board of Directors of the
Corporation.
4. The foregoing amendment and restatement of the Articles of
Incorporation has been duly approved by the required vote of the shareholders of
the Corporation in accordance with sections 902 and 903 of the California
Corporations Code.
The total number of outstanding shares of the Corporation entitled to vote
with respect to the foregoing amendment and restatement was 2,315,000 shares of
Common Stock, 2,325,960 shares of Series A Preferred Stock, and 220,385 shares
of Series B Preferred Stock and 381,024 shares of Series C Preferred Stock. The
number of shares voting in favor of the amendment equalled or exceeded the vote
required, such required vote being more than a majority of the outstanding
shares of Common Stock, voting as a separate class, a majority of the
outstanding shares of Series A Preferred Stock, a majority of Series B
Preferred Stock, and a majority of Series C Preferred Stock, and at least
two-thirds of the outstanding Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock, voting together as a single class.
Executed at Palo Alto, California on the 17 day of July, 1997.
--------
/s/ Matthew Sanders
----------------------------------
Matt Sanders, President
/s/ Chris Tacklind
-----------------------------------
Chris Tacklind, Secretary
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
ENACT HEALTH MANAGEMENT SYSTEMS
<PAGE>
<TABLE>
<S> <C>
ARTICLE I OFFICES..................................................... 1
1.1 Principal Executive Office.................................. 1
1.2 Other Offices............................................... 1
ARTICLE II MEETINGS OF SHAREHOLDERS................................... 1
2.1 Place of Meetings........................................... 1
2.2 Annual Meetings............................................. 1
2.3 Special Meetings............................................ 2
2.4 Notice of Meetings or Reports............................... 2
2.5 Adjourned Meetings and Notice Thereof....................... 3
2.6 Voting...................................................... 3
2.7 Quorum...................................................... 4
2.8 Consent of Absentees........................................ 4
2.9 Action Without Meeting...................................... 4
2.10 Proxies..................................................... 5
ARTICLE III DIRECTORS................................................. 5
3.1 Powers...................................................... 5
3.2 Number of Directors......................................... 6
3.3 Election and Term of Office................................. 6
3.4 Resignation................................................. 6
3.5 Removal..................................................... 6
3.6 Vacancies................................................... 6
3.7 Organization Meeting........................................ 7
3.8 Other Regular Meetings...................................... 7
3.9 Calling Meetings............................................ 7
3.10 Place of Meetings........................................... 7
3.11 Telephonic Meetings......................................... 7
3.12 Notice of Special Meetings.................................. 7
3.13 Waiver of Notice............................................ 8
3.14 Action Without Meeting...................................... 8
3.15 Quorum...................................................... 8
3.16 Adjournment................................................. 9
3.17 Inspection Rights........................................... 9
3.18 Fees and Compensation....................................... 9
ARTICLE IV EXECUTIVE COMMITTEE AND OTHER COMMITTEES................... 9
4.1 Executive Committee......................................... 9
4.2 Other Committees............................................ 9
4.3 Minutes and Reports......................................... 10
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.4 Meetings.................................................... 10
4.5 Term of Office of Committee Members......................... 10
ARTICLE V OFFICERS.................................................... 10
5.1 Officers.................................................... 10
5.2 Election.................................................... 10
5.3 Subordinate Officers, etc................................... 11
5.4 Removal and Resignation..................................... 11
5.5 Vacancies................................................... 11
5.6 Chairman of the Board....................................... 11
5.7 President................................................... 11
5.8 Vice President.............................................. 12
5.9 Secretary................................................... 12
5.10 Treasurer and Chief Financial Officer....................... 12
5.11 Assistant Secretary......................................... 13
5.12 Compensation................................................ 13
ARTICLE VI MISCELLANEOUS.............................................. 13
6.1 Record Date................................................. 13
6.2 Inspection of Corporate Records............................. 13
6.3 Execution of Corporate Instruments.......................... 14
6.4 Ratification by Shareholders................................ 14
6.5 Annual Report............................................... 14
6.6 Representation of Shares of Other Corporations.............. 15
6.7 Inspection of Bylaws........................................ 15
ARTICLE VII SHARES OF STOCK........................................... 15
7.1 Form of Certificates........................................ 15
7.2 Transfer of Shares.......................................... 15
7.3 Lost Certificates........................................... 16
ARTICLE VIII INDEMNIFICATION.......................................... 16
8.1 Indemnification by Corporation.............................. 16
8.2 Right of Claimant to Bring Suit............................. 17
8.3 Indemnification of Employees and Agents of the Corporation.. 17
8.4 Rights Not Exclusive........................................ 17
8.5 Indemnity Agreements........................................ 17
8.6 Insurance................................................... 18
8.7 Amendment, Repeal or Modification........................... 18
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX AMENDMENTS................................................. 18
9.1 Power of Shareholders....................................... 18
9.2 Power of Directors.......................................... 18
</TABLE>
iii
<PAGE>
BYLAWS
OF
ENACT HEALTH MANAGEMENT SYSTEMS
ARTICLE I
OFFICES
-------
Section 1.1 Principal Executive Office.
----------- --------------------------
The principal executive office for the transaction of the business of
the corporation is hereby fixed and located at 421 Jacaranda, Palo Alto, County
of Santa Clara, State of California. The Board of Directors is hereby granted
full power and authority to change said principal office from one location to
another.
Section 1.2 Other Offices.
----------- -------------
Branch or subordinate offices may at any time be established by the
Board of Directors at any place or places where the corporation is qualified to
do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
Section 2.1 Place of Meetings.
----------- -----------------
All meetings of shareholders shall be held either at the principal
executive office or at any other place within or without the State of California
which may be designated either by the Board of Directors or by the written
consent of a majority of the shareholders entitled to vote thereat as determined
pursuant to Section 6.1 of these Bylaws given either before or after the
meeting.
Section 2.2 Annual Meetings.
----------- ---------------
The annual meetings of shareholders shall be held on such day and at
such hour as may be fixed by the Board of Directors. At such meeting, Directors
shall be elected, and any other proper business may be transacted.
1
<PAGE>
Section 2.3 Special Meetings.
----------- ----------------
Special meetings of the shareholders may be called at any time by the
Board of Directors, the Chairman of the Board, the President, or by the holders
of shares entitled to cast not less than ten percent (10%) of the votes at the
meeting. Notice of such special meeting shall be given in the same manner as
for the annual meeting of shareholders. Notices of any special meetings shall
specify in addition to the place, date and hour of such meeting, the general
nature of the business to be transacted thereat.
Section 2.4 Notice of Meetings or Reports.
----------- -----------------------------
Written notice of each meeting of shareholders shall be given not less
than ten (10) days nor more than sixty (60) days before the date of the meeting
to each shareholder entitled to vote thereat. Such notice shall be given either
personally or by mail or other means of written communication, addressed or
delivered to each shareholder entitled to vote at such meeting at the address of
such shareholder appearing on the books of the corporation or given by him to
the corporation for the purpose of such notice. If no such address appears or
is given, notice shall be given either personally or by mail or other means of
written communication addressed to the shareholder at the place where the
principal executive office of the corporation is located, or by publication at
least once in a newspaper of general circulation in the county in which said
office is located. The notice shall be deemed to have been given at the time
when delivered personally or deposited in the mail or sent by other means of
written communication.
The same procedure for the giving of notice shall apply to the giving
of any report to shareholders.
All such notices shall state the place, the date and the hour of such
meeting, and shall state such matters, if any, as may be expressly required by
the California Corporations Code.
Upon request by any person or persons entitled to call a special
meeting, the Chairman of the Board, President, Vice President or Secretary shall
within twenty (20) days after receipt of the request cause notice to be given to
the shareholders entitled to vote that a special meeting will be held at a time
requested by the person or persons calling the meeting, but not less than
thirty-five (35) nor more than sixty (60) days after receipt of the request.
All other notices shall be sent by the Secretary or an Assistant
Secretary, or if there be no such officer, or in the case of his neglect or
refusal to act, by any other officer, or by persons calling the meeting.
Section 2.5 Adjourned Meetings and Notice Thereof.
----------- -------------------------------------
Any shareholders' meeting, annual or special, whether or not a quorum
is present, may be adjourned from time to time by the vote of a majority of the
shares, represented either in person or by proxy, but in the absence of a
quorum, no other business
2
<PAGE>
may be transacted at such meeting, except as provided in Section 2.7 of these
Bylaws.
When a shareholders' meeting is adjourned to another time or place,
notice of the adjourned meeting need not be given if the time and place thereof
are announced at the meeting at which the adjournment is taken; except that if
the adjournment is for more than forty-five (45) days or if after the
adjournment a new record date is fixed for the adjourned meeting, notice of the
adjourned meeting shall be given to each shareholder of record entitled to vote
thereat.
At the adjourned meeting, the corporation may transact any business
which might have been transacted at the original meeting.
Section 2.6 Voting.
----------- ------
Except as otherwise provided in the Articles of Incorporation and
subject to Section 6.1 of these Bylaws, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote of
shareholders. Vote may be viva voce or by ballot; provided, however, that
elections for directors must be by ballot upon demand made by a shareholder at
the meeting and before the voting begins.
Every shareholder entitled to vote at any election for Directors may
cumulate his votes and give one candidate a number of votes equal to the number
of directors to be elected, multiplied by the number of votes to which his
shares are entitled, or to distribute his votes on the same principle among as
many candidates as he thinks fit, provided that no shareholder shall be entitled
to cumulate votes unless such candidate or candidates names have been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting, prior to the voting, of the shareholder's intention to cumulate the
shareholder's votes. If any one shareholder has given such notice, all
shareholders may cumulate their votes for candidates in nomination. The
candidates receiving the highest number of votes of the shares entitled to be
voted for them, up to the number of directors to be elected by such shares,
shall be elected.
Any holder of shares entitled to vote on any matter may vote part of
the shares in favor of the proposal and refrain from voting the remaining shares
or vote them against the proposal, other than elections to office, but, if the
shareholder fails to specify the number of shares such shareholder is voting
affirmatively, it shall be conclusively presumed that the shareholder's
approving vote is with respect to all shares said shareholder is entitled to
vote.
Section 2.7 Quorum.
----------- ------
A majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is
present, the affirmative vote of a majority of the shares represented at the
meeting and entitled to vote on any matter shall be the act of the shareholders,
unless otherwise required by the Articles of Incorporation.
3
<PAGE>
The shareholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
the withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
Section 2.8 Consent of Absentees.
----------- --------------------
The transactions of any meeting of shareholders, if not duly called
and noticed, and wherever held, shall be as valid as though had at a meeting
duly held after regular call and notice, if a quorum is present either in person
or by proxy, and if, either before or after the meeting, each of the
shareholders entitled to vote, not present in person or by proxy, signs a
written waiver of notice, or a consent to the holding of such meeting, or an
approval of the minutes thereof. All such waivers, consents, or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when a person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened; provided, that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law or these
Bylaws to be included in the notice but not so included if such objection is
expressly made at the meeting.
Section 2.9 Action Without Meeting.
----------- ----------------------
Any action which may be taken at any meeting of shareholders may be
taken without a meeting and without prior notice, if a consent in writing,
setting forth the actions so taken, shall be signed by the holders of
outstanding shares having not less than the minimum number of votes which would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted; provided, that except to fill a
vacancy as provided in Section 3.6 of these Bylaws, Directors may not be elected
by written consent except by unanimous written consent of all shares entitled to
vote for the election of Directors.
Unless the consents of all shareholders entitled to vote have been
solicited in writing, notice of the following actions approved by shareholders
without a meeting by less than unanimous written consent shall be given to those
shareholders entitled to vote who have not consented in writing at least ten
(10) days before the consummation of the action authorized by such approval:
1. Approval of a contract or other transaction between the
corporation and one or more of its Directors, or between the corporation and any
corporation, firm or association in which one or more of its Directors has a
material financial interest.
2. Approval of any indemnification to be made by the corporation of
a person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that such person was or is an agent of the
corporation.
4
<PAGE>
3. Approval of the principal terms of a reorganization.
4. Approval of a plan of distribution of the shares, obligations or
securities of any other corporation, or assets other than money, which is not in
accordance with the liquidation rights of the preferred shares as specified in
the Articles of Incorporation or a Certificate of Determination.
Unless the consents of all shareholders entitled to vote have been
solicited in writing, prompt notice of the taking of any corporate action not
listed above which is approved by shareholders without a meeting by less than
unanimous written consent, shall be given to those shareholders entitled to vote
who have not consented in writing.
Such notice shall be given as provided in Section 2.4 of these Bylaws.
Section 2.10 Proxies.
------------ -------
Every person entitled to vote shares may authorize another person or
persons to act by proxy with respect to such shares. No proxy shall be valid
after the expiration of eleven (11) months from the date thereof unless
otherwise provided in the proxy.
ARTICLE III
DIRECTORS
---------
Section 3.1 Powers.
----------- ------
Subject to the limitations stated in the Articles of Incorporation,
these Bylaws, and the California Corporations Code as to actions which shall be
approved by the shareholders or by the affirmative vote of a majority of the
outstanding shares entitled to vote, and subject to the duties of Directors as
prescribed by the California Corporations Code, all corporate powers shall be
exercised by, or under the direction of, and the business and affairs of the
corporation shall be managed by, the Board of Directors.
Section 3.2 Number of Directors.
----------- -------------------
The authorized number of Directors of the corporation shall not be
less than five (5) nor more than seven (7) and the exact number of Directors
authorized shall be six (6). The exact number of Directors may be fixed within
the limits specified in this Section 3.2 by a Bylaw duly adopted by the
shareholders or by resolution of the Board of Directors. The minimum or maximum
number of Directors provided in this Section 3.2 may be changed, or a definite
number fixed without provision for an indefinite number, by a Bylaw duly adopted
by the affirmative vote of a majority of the outstanding shares entitled to
vote.
Section 3.3 Election and Term of Office.
----------- ---------------------------
The Directors shall be elected at each annual meeting of shareholders,
but if
5
<PAGE>
any such annual meeting is not held, or the Directors are not elected thereat,
the Directors may be elected at any special meeting of the shareholders held for
that purpose. All Directors shall hold office until the expiration of the term
for which elected and until their respective successors are elected, except in
the case of the death, resignation or removal of any Director. A Director need
not be a shareholder.
Section 3.4 Resignation.
----------- -----------
Any Director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board of Directors of
the corporation, unless the notice specifies a later time for the effectiveness
of such resignation. If the resignation is effective at a future time, a
successor may be elected to take office when the resignation becomes effective.
Section 3.5 Removal.
----------- -------
The entire Board of Directors or any individual Director may be
removed from office, prior to the expiration of their or his term of office only
in the manner and within the limitations provided by the California Corporations
Code.
No reduction of the authorized number of Directors shall have the
effect of removing any Director prior to the expiration of such Director's term
of office.
Section 3.6 Vacancies.
----------- ---------
A vacancy in the Board of Directors shall be deemed to exist in case
of the death, resignation or removal of any Director, or if the authorized
number of Directors be increased, or if the shareholders fail at any annual or
special meeting of shareholders at which any Director or Directors are elected
to elect the full authorized number of Directors to be voted for at that
meeting.
Vacancies in the Board of Directors may be filled by a majority of the
Directors then in office, whether or not less than a quorum, or by a sole
remaining Director. Each Director so elected shall hold office until the
expiration of the term for which he was elected and until his successor is
elected at an annual or a special meeting of the shareholders, or until his
death, resignation or removal.
The shareholders may elect a Director or Directors at any time to fill
any vacancy or vacancies not filled by the Directors. Any such election by
written consent other than to fill a vacancy created by removal requires the
consent of a majority of the outstanding shares entitled to vote. A Director
may not be elected by written consent to fill a vacancy created by removal
except by unanimous written consent of all shares entitled to vote for the
election of directors.
Section 3.7 Organization Meeting.
----------- --------------------
Immediately after each annual meeting of shareholders, the Board of
Directors
6
<PAGE>
shall hold a regular meeting for the purpose of organization, the election of
officers and the transaction of other business. No notice of such meeting need
be given.
Section 3.8 Other Regular Meetings.
----------- ----------------------
The Board of Directors may provide by resolution the time and place
for the holding of regular meetings of the Board; provided, however, that if the
date so designated falls upon a legal holiday, then the meeting shall be held at
the same time and place on the next succeeding day which is not a legal holiday.
No notice of such regular meetings of the Board need be given.
Section 3.9 Calling Meetings.
----------- ----------------
Meetings of the Board of Directors for any purpose or purposes shall
be held whenever called by the Chairman of the Board, the President or the
Secretary or any two Directors of the corporation.
Section 3.10 Place of Meetings.
------------ -----------------
Meetings of the Board of Directors shall be held at any place within
or without the State of California which may be designated in the notice of the
meeting, or, if not stated in the notice or there is no notice, designated by
resolution of the Board. In the absence of such designation, meetings of the
Board of Directors shall be held at the principal executive office of the
corporation.
Section 3.11 Telephonic Meetings.
------------ -------------------
Members of the Board may participate in a regular or special meeting
through use of conference telephone or similar communications equipment, so long
as all members participating in such meeting can hear one another.
Participation in a meeting pursuant to this Section 3.11 constitutes presence in
person at such meeting.
Section 3.12 Notice of Special Meetings.
------------ --------------------------
Written notice of the time and place of special meetings of the Board
of Directors shall be delivered personally to each Director, or sent to each
Director by mail, telephone, facsimile or telegraph. Notices to Directors
residing outside of the United States shall be sent by international courier
rather than United States mail. In case such notice is sent by mail or by
international courier, it shall be deposited in the United States mail or
delivered to the international courier service at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, or by telephone, facsimile or telegraph, it shall be so delivered at
least forty-eight (48) hours prior to the time of the holding of the meeting.
Such notice may be given by the Secretary of the corporation or by the persons
who called said meeting. Such notice need not specify the purpose of the
meeting, and notice shall not be necessary if appropriate waivers, consents
and/or approvals are filed in accordance with Section 3.13 of these Bylaws.
7
<PAGE>
Section 3.13 Waiver of Notice.
------------ ----------------
Notice of a meeting need not be given to any Director who signs a
waiver of notice, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such Director.
The transactions of any meeting of the Board of Directors, however
called and noticed or wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice if a quorum is present and if,
either before or after the meeting, each of the Directors not present signs a
written waiver of notice, a consent to holding the meeting or an approval of the
minutes thereof. All such waivers, consents and approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Section 3.14 Action Without Meeting.
------------ ----------------------
Any action required or permitted to be taken by the Board of Directors
may be taken without a meeting, if all members of the Board shall individually
or collectively consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board. Such
action by written consent shall have the same force and effect as a unanimous
vote of such Directors.
Section 3.15 Quorum.
------------ ------
A majority of the authorized number of Directors shall constitute a
quorum for the transaction of business. Every act or decision done or made by a
majority of the Directors present at a meeting duly held at which a quorum is
present shall be the act of the Board of Directors, unless the Articles of
Incorporation, or the California Corporations Code, specifically requires a
greater number. In the absence of a quorum at any meeting of the Board of
Directors, a majority of the Directors present may adjourn the meeting as
provided in Section 3.16 of these Bylaws. A meeting at which a quorum is
initially present may continue to transact business, notwithstanding the
withdrawal of enough Directors to leave less than a quorum, if any action taken
is approved by at least a majority of the required quorum for such meeting.
Section 3.16 Adjournment.
------------ -----------
Any meeting of the Board of Directors, whether or not a quorum is
present, may be adjourned to another time and place by the vote of a majority of
the Directors present. Notice of the time and place of the adjourned meeting
need not be given to absent Directors if said time and place are fixed at the
meeting adjourned.
Section 3.17 Inspection Rights.
------------ -----------------
Every Director shall have the absolute right at any time to inspect,
copy and make extra copies of, in person or by agent or attorney, all books,
records and documents of every kind and to inspect the physical properties of
the corporation.
8
<PAGE>
Section 3.18 Fees and Compensation.
------------ ---------------------
Directors shall not receive any stated salary for their services as
directors, but, by resolution of the Board, a fixed fee, with or without
expenses of attendance, may be allowed for attendance at each meeting. Nothing
herein contained shall be construed to preclude any Director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation therefor.
ARTICLE IV
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
----------------------------------------
Section 4.1 Executive Committee.
----------- -------------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of Directors, appoint an executive committee, consisting of
two or more Directors. The Board may designate one or more Directors as an
alternate member of such committee, who may replace any absent member of any
meeting of the committee. The executive committee, subject to any limitations
imposed by the California Corporations Code, or by resolution adopted by the
affirmative vote of a majority of the authorized number of Directors, or imposed
by the Articles of Incorporation or by these Bylaws, shall have and may exercise
all of the powers of the Board of Directors.
Section 4.2 Other Committees.
----------- ----------------
The Board of Directors may, by resolution adopted by a majority of the
authorized number of Directors, designate such other committees, each consisting
of two or more Directors, as it may from time to time deem advisable to perform
such general or special duties as may from time to time be delegated to any such
committee by the Board of Directors, subject to the limitations contained in the
California Corporations Code, or imposed by the Articles of Incorporation or by
these Bylaws. The Board may designate one or more Directors as alternate
members of any committee, who may replace any absent member at any meeting of
the committee.
Section 4.3 Minutes and Reports.
----------- -------------------
Each committee shall keep regular minutes of its proceedings, which
shall be filed with the Secretary. All action by any committee shall be
reported to the Board of Directors at the next meeting thereof, and, insofar as
rights of third parties shall not be affected thereby, shall be subject to
revision and alteration by the Board of Directors.
Section 4.4 Meetings.
----------- --------
Except as otherwise provided in these Bylaws or by resolution of the
Board of Directors, each committee shall adopt its own rules governing the time
and place of holding and the method of calling its meetings and the conduct of
its proceedings and shall
9
<PAGE>
meet as provided by such rules, and it shall also meet at the call of any member
of the committee. Unless otherwise provided by such rules or by resolution of
the Board of Directors, committee meetings shall be governed by Sections 3.11,
3.12 and 3.13 of these Bylaws.
Section 4.5 Term of Office of Committee Members.
----------- -----------------------------------
The term of office of any committee member shall be as provided in the
resolution of the Board of Directors designating him but shall not exceed his
term as a Director. Any member of a committee may be removed at any time by
resolution adopted by Directors holding a majority of the directorships, either
present at a meeting of the Board or by written approval thereof.
ARTICLE V
OFFICERS
--------
Section 5.1 Officers.
----------- --------
The officers of the corporation shall be a President, a Secretary, and
a Treasurer, who shall be the Chief Financial Officer of the corporation. The
corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board, one or more Vice Presidents, one or more Assistant
Treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 5.3. One person may hold two or more offices.
Section 5.2 Election.
----------- --------
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 and 5.5, shall be
chosen annually by the Board of Directors and each shall hold his office until
he shall resign or shall be removed or otherwise disqualified to serve, or his
successor shall be elected and qualified.
Section 5.3 Subordinate Officers, etc.
----------- -------------------------
The Board of Directors may appoint such other officers as the business
of the corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in these Bylaws or
as the Board of Directors may from time to time determine.
Section 5.4 Removal and Resignation.
----------- -----------------------
Any officer may be removed, either with or without cause, by a
majority of the Directors at the time in office, at any regular or special
meeting of the Board, or, except in case of an officer chosen by the Board of
Directors, by an officer upon whom such power of removal may be conferred by the
Board of Directors.
10
<PAGE>
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the receipt
of such notice or at any later time specified therein; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 5.5 Vacancies.
----------- ---------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular appointments to such office.
Section 5.6 Chairman of the Board.
----------- ---------------------
The Chairman of the Board, if there shall be such an officer, shall,
if present, preside at all meetings of the Board of Directors, and exercise and
perform such other powers and duties as may be from time to time assigned to him
by the Board of Directors or prescribed by these Bylaws.
Section 5.7 President.
----------- ---------
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
the President shall be the general manager and chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction, and control of the business and officers of the
corporation. He shall preside at all meetings of the shareholders. He shall be
ex officio a member of all the standing committees, including the executive
committee, if any, and shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or by
these Bylaws.
Section 5.8 Vice President.
----------- --------------
In the absence or disability of the President, the Vice Presidents in
order of their rank as fixed by the Board of Directors, or if not ranked, the
Vice President designated by the Board of Directors, shall perform the duties of
the President, and when so acting shall have all the powers of, and be subject
to all the restrictions upon, the President. The Vice Presidents shall have
such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors or these Bylaws.
Section 5.9 Secretary.
----------- ---------
The Secretary shall keep, or cause to be kept, a book of minutes in
written form of the proceedings of the Board of Directors, committees of the
Board, and shareholders. Such minutes shall include all waivers of notice,
consents to the holding of meetings, or approvals of the minutes of meetings
executed pursuant to these Bylaws or the California Corporations Code. The
Secretary shall keep, or cause to be kept at the principal executive office or
at the office of the corporation's transfer agent or registrar, a record of
11
<PAGE>
its shareholders, giving the names and addresses of all shareholders and the
number and class of shares held by each.
The Secretary shall give or cause to be given, notice of all meetings
of the shareholders and of the Board of Directors required by these Bylaws or by
law to be given, and shall keep the seal of the corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors or these Bylaws.
Section 5.10 Treasurer and Chief Financial Officer.
------------ -------------------------------------
The Treasurer and Chief Financial Officer shall keep and maintain, or
cause to be kept and maintained, adequate and correct books and records of
account in written form or any other form capable of being converted into
written form.
The Treasurer and Chief Financial Officer shall deposit all monies and
other valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board of Directors. He shall disburse
all funds of the corporation as may be ordered by the Board of Directors, shall
render to the President and Directors, whenever they request it, an account of
all of his transactions as Treasurer and Chief Financial Officer and of the
financial condition of the corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or by
these Bylaws.
Section 5.11 Assistant Secretary.
------------ -------------------
The Assistant Secretary shall have all the powers, and perform all the
duties of, the Secretary in the absence or inability of the Secretary to act.
Section 5.12 Compensation.
------------ ------------
The compensation of the officers shall be fixed from time to time by
the Board of Directors, and no officer shall be prevented from receiving such
compensation by reason of the fact that he is also a Director of the
corporation.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1 Record Date.
----------- -----------
The Board of Directors may fix, in advance, a time in the future as
the record date for the determination of shareholders entitled to notice of any
meeting or to vote or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any other lawful action. Shareholders on the record date are
entitled to notice and to vote or receive the dividend, distribution or
12
<PAGE>
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares in the books of the corporation after
the record date, except as otherwise provided by law. Said record date shall
not be more than sixty (60) or less than ten (10) days prior to the date of such
meeting, nor more than sixty (60) days prior to any other action.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board fixes a new record date for the adjourned meeting, but the
Board shall fix a new record date if the meeting is adjourned for more than
forty-five (45) days from the date set for the original meeting.
If no record date is fixed by the Board of Directors, the record date
shall be fixed pursuant to the California Corporations Code.
Section 6.2 Inspection of Corporate Records.
----------- -------------------------------
The accounting books and records, and minutes of proceedings of the
shareholders and the Board of Directors and committees of the Board shall be
open to inspection upon written demand made upon the corporation by any
shareholder or the holder of a voting trust certificate, at any reasonable time
during usual business hours, for a purpose reasonably related to his interest as
a shareholder, or as the holder of such voting trust certificate. The record of
shareholders shall also be open to inspection by any shareholder or holder of a
voting trust certificate at any time during usual business hours upon written
demand on the corporation, for a purpose reasonably related to such holder's
interest as a shareholder or holder of a voting trust certificate. Such
inspection may be made in person or by an agent or attorney, and shall include
the right to copy and to make extracts.
Section 6.3 Execution of Corporate Instruments.
----------- ----------------------------------
The Board of Directors may, in its discretion, determine the method
and designate the statutory officer or officers, or other person or persons, to
execute any corporate instrument or document, or to sign the corporate name
without limitation, except where otherwise provided by law, and such execution
or signature shall be binding upon the corporation. Unless otherwise
specifically determined by the Board of Directors, formal contracts of the
corporation, promissory notes, mortgages, evidences of indebtedness, conveyances
or other instruments in writing, and any assignment or endorsement thereof,
executed or entered into between the corporation and any person, may be signed
by the Chairman of the Board, the President, any Vice President, the Secretary
or the Treasurer of the corporation.
Section 6.4 Ratification by Shareholders.
----------- ----------------------------
The Board of Directors may, subject to applicable notice requirements,
in its discretion, submit any contract or act for approval or ratification of
the shareholders at any annual meeting of shareholders, or at any special
meeting of shareholders called for that
13
<PAGE>
purpose; and any contract or act which shall be approved or ratified by the
affirmative vote of a majority of the shares entitled to vote represented at a
duly held meeting at which a quorum is present, or by the written consent of
shareholders, shall be as valid and binding upon the corporation and upon the
shareholders thereof as though approved or ratified by each and every
shareholder of the corporation, unless a greater vote is required by law for
such purpose.
Section 6.5 Annual Report.
----------- -------------
For so long as the corporation has less than 100 holders of record of
its shares, the mandatory requirement of an annual report is hereby expressly
waived. The Board of Directors may, in its discretion, cause an annual report
to be sent to the shareholders. Such reports shall contain at least a balance
sheet as of the close of such fiscal year and an income statement and statement
of changes in financial position for such fiscal year, and shall be accompanied
by any report thereon of independent accountants, or if there is no such report,
the certificate of an authorized officer of the corporation that such statements
were prepared without audit in the books and records of the corporation.
A shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of the corporation may make a written
request to the corporation for an income statement and/or a balance sheet of the
corporation for the three-month, six-month or nine-month period of the current
fiscal year ended more than thirty (30) days prior to the date of the request,
and such statement shall be delivered or mailed to the person making the request
within thirty (30) days thereafter. Such statements shall be accompanied by the
report thereon, if any, of any independent accountants engaged by the
corporation or the certificates of an authorized officer of the corporation that
such financial statements were prepared without audit from the books and records
of the corporation.
Section 6.6 Representation of Shares of Other Corporations.
----------- ----------------------------------------------
The President and Vice President of this corporation are authorized to
vote, represent and exercise on behalf of the corporation all rights incident to
any and all shares of any other corporation or corporations standing in the name
of this corporation. The authority herein granted to said officers to vote or
represent on behalf of this corporation any and all shares held by this
corporation and any other corporation or corporations may be exercised either by
such officers in person or by any person authorized so to do by proxy or power
of attorney and duly executed by said officers.
Section 6.7 Inspection of Bylaws.
----------- --------------------
The corporation shall keep in its principal executive office in this
State the original or a copy of the Bylaws as amended or otherwise altered to
date, which shall be open to inspection by the shareholders at all reasonable
times during office hours.
14
<PAGE>
ARTICLE VII
SHARES OF STOCK
---------------
Section 7.1 Form of Certificates.
----------- --------------------
Certificates for shares of stock of the corporation shall be in such
form and design as the Board of Directors shall determine and shall be signed in
the name of the corporation by the Chairman of the Board, or the President or
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or any Assistant Secretary. Each certificate shall state the certificate
number, the date of issuance, the number, class or series and the name of the
record holder of the shares represented thereby, the name of the corporation,
and, if the shares of the corporation are classified or if any class of shares
has two or more series, there shall appear the statement required by the
California Corporations Code.
Section 7.2 Transfer of Shares.
----------- ------------------
Shares of stock may be transferred in any manner permitted or provided
by law. Before any transfer of stock is entered upon the books of the
corporation, or any new certificate issued therefor, the older certificate,
properly endorsed, shall be surrendered and canceled, except when a certificate
has been lost, stolen or destroyed.
Section 7.3 Lost Certificates.
----------- -----------------
The Board of Directors may order a new certificate for shares of stock
to be issued in the place of any certificate alleged to have been lost, stolen
or destroyed, but in every such case, the owner or the legal representative of
the owner of the lost, stolen or destroyed certificates may be required to give
the corporation a bond (or other adequate security) in such form and amount as
the Board may deem sufficient to indemnify it against any claim that may be made
against the corporation (including any expense or liability) on account of the
alleged loss, theft or destruction of any such certificate or issuance of such
new certificate.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 8.1 Indemnification by Corporation.
----------- ------------------------------
Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("Proceeding"), by reason of the fact
that he or she, or a person of whom he or she is the legal representative, is or
was a director or officer of the corporation or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, or was a director,
officer, employee or agent
15
<PAGE>
of a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation, whether the
basis of such Proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the fullest extent authorized by the California General
Corporation Law against all expenses, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided, however,
-------- -------
that, except as provided in Section 8.2 of this Article VIII, the corporation
shall indemnify any such person seeking indemnity in connection with a
Proceeding (or part thereof) initiated by such person only if such Proceeding
(or part thereof) was authorized by the board of directors of the corporation.
The right to indemnification conferred by this Section shall include the right
to be paid by the corporation expenses incurred in defending any such Proceeding
in advance of its final disposition to the fullest extent authorized by the
California General Corporation Law; provided, however, that, if required by the
-------- -------
California General Corporation Law, the payment of such expenses incurred by
such person in advance of the final disposition of such Proceeding shall be made
only upon delivery to the corporation of an undertaking, by or on behalf of such
person, to repay all amounts so advanced if it should be determined ultimately
that such person is not entitled to be indemnified under this Section or
otherwise.
Section 8.2 Right of Claimant to Bring Suit.
----------- -------------------------------
If a claim under Section 8.1 of this Article VIII is not paid in full
by the corporation within ninety (90) days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any Proceeding in advance of its final disposition where the required
undertaking, if any, has been tendered to the corporation) that the claimant has
not met the standards of conduct which make it permissible under the California
General Corporation Law for the corporation to indemnify the claimant for the
amount claimed. Neither the failure of the corporation (including its board of
directors, independent legal counsel, or it shareholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the California General Corporation
Law, nor an actual determination by the corporation (including its board of
directors, independent legal counsel, or its shareholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that claimant has not met the applicable standard of
conduct.
16
<PAGE>
Section 8.3 Indemnification of Employees and Agents of the Corporation.
----------- ----------------------------------------------------------
The corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification, and to the advancement of
expenses to any employee or agent of the corporation to the fullest extent of
the provisions of this Article with respect to the indemnification of and
advancement of expenses to directors and officers of the corporation.
Section 8.4 Rights Not Exclusive.
----------- --------------------
The rights conferred on any person by this Article VIII above shall
not be exclusive of any other right which such person may have or hereafter
acquire under any statute, provision of the Articles of Incorporation, By-Law,
agreement, vote of shareholders or disinterested directors or otherwise.
Section 8.5 Indemnity Agreements.
----------- --------------------
The Board of Directors is authorized to enter into a contract with any
Director, officer, employee or agent of the corporation, or any person who is or
was serving at the request of the corporation as a Director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, including employee benefit plans, or any person who was a director,
officer, employee or agent of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation, providing for indemnification rights equivalent to or, if the Board
of Directors so determines, greater than, those provided for in this Article
VIII.
Section 8.6 Insurance.
----------- ---------
The corporation may purchase and maintain insurance, at its expense,
to protect itself and any Director, officer, employee or agent of the
corporation or another corporation (including a predecessor corporation),
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the corporation would have the power to
indemnify such person against such expense, liability or loss under the
California Corporations Code.
Section 8.7 Amendment, Repeal or Modification.
----------- ---------------------------------
Any amendment, repeal or modification of any provision of this Article
VIII by the shareholders or the Directors of the corporation shall not adversely
affect any right or protection of a Director or officer of the corporation
existing at the time of such amendment, repeal or modification.
17
<PAGE>
ARTICLE IX
AMENDMENTS
----------
Section 9.1 Power of Shareholders.
----------- ---------------------
New Bylaws may be adopted or these Bylaws may be amended or repealed
by the affirmative vote of a majority of the outstanding shares entitled to vote
or by the written consent thereof, except as otherwise provided by law or by the
Articles of Incorporation.
Section 9.2 Power of Directors.
----------- ------------------
Subject to the right of shareholders as provided in Section 9.1 of
these Bylaws, Bylaws other than a Bylaw or amendment thereof specifying or
changing the authorized number of Directors, or the minimum or maximum number of
a variable Board of Directors, or changing from a fixed to a variable Board of
Directors or vice versa, may be adopted, amended or repealed by the approval of
the Board of Directors.
18
<PAGE>
CERTIFICATE OF SECRETARY
------------------------
I, Chris Tacklind, hereby certify:
1. That I am the duly elected and acting Secretary of Enact Products, a
California corporation (the "Corporation"); and
2. That the foregoing Bylaws comprising eighteen (18) pages, constitute
the original Bylaws of the Corporation as duly adopted by the sole incorporator
of the Corporation.
IN WITNESS WHEREOF, I have hereunder subscribed my name this ________ day
of ______________, 1993.
/s/ Chris Tacklind
__________________________________________
Chris Tacklind, Secretary
<PAGE>
EXHIBIT 5.1
OUR FILE NO:
1050295-901100
November 26, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, DC 20549
Re: ENACT Health Management Systems
Registration Statement on Form S-1
Ladies and Gentlemen:
As counsel to ENACT Health Management Systems (the "Company"), we are
rendering this opinion in connection with a proposed sale of those certain
shares of the Company's newly-issued Common Stock as set forth in the
Registration Statement on Form S-1 to which this opinion is being filed as
Exhibit 5.1 (the "Shares"). We have examined all instruments, documents and
records which we deemed relevant and necessary for the basis of our opinion
hereinafter expressed. In such examination, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to us
as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares identified
in the above-referenced Registration Statement will be, upon effectiveness of
the Registration Statement and receipt by the Company of the Payment therefor,
validly authorized, legally issued, fully paid, and nonassessable.
<PAGE>
GRAY CARY WARE & FREIDENRICH
Securities and Exchange Commission
November 26, 1997
Page Two
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement and to the use of our name wherever it
appears in said Registration Statement, including the Prospectus constituting a
part thereof, as originally filed or as subsequently amended,
Respectfully submitted,
Gray, Cary, Ware & Freidenrich
A Professional Corporation
<PAGE>
EXHIBIT 10.2
ENACT HEALTH MANAGEMENT SYSTEMS
1995 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The ENACT Health Management Systems 1995 Stock
Option Plan (the "PLAN") is hereby established effective as of March 1, 1995
(the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Options shall be granted, if at
all, within ten (10) years from the Effective Date. Notwithstanding the
foregoing, if the maximum number of shares of Stock issuable pursuant to the
Plan as provided in Section 4.1 has been increased at any time, all Options
shall be granted, if at all, no later than the last day preceding the tenth
(10th) anniversary of the earlier of (a) the date on which the latest such
increase in the maximum number of shares of Stock issuable under the Plan was
approved by the shareholders of the Company or (b) the date such amendment was
adopted by the Board.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation,
<PAGE>
the power to amend or terminate the Plan at any time, subject to the terms of
the Plan and any applicable limitations imposed by law.
(d) "COMPANY" means ENACT Health Management Systems, a
California corporation, or any successor corporation thereto.
(e) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(i) "FAIR MARKET VALUE" means, as of any date, the value of a
share of stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein.
(j) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(k) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(l) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(m) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
<PAGE>
(n) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(o) "OPTIONEE" means a person who has been granted one or more
Options.
(p) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(q) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(r) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(s) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(t) "STOCK" means the common stock, without par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.
(u) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(v) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is allocated to the Company herein, provided the officer has
apparent authority with respect to such matter, right, obligation, determination
or election.
<PAGE>
3.2 POWERS OF THE BOARD. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of employment or service
with the Participating Company Group on any of the foregoing, and (vii) all
other terms, conditions and restrictions applicable to the Option or such shares
not inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to amend the exercisability of any Option or the vesting of
any shares acquired upon the exercise thereof, including with respect to the
period following an Optionee's termination of employment or service with the
Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of,
the Plan, including, without limitation, as the Board deems necessary or
desirable to comply with the laws of, or to accommodate the tax policy or custom
of, foreign jurisdictions whose citizens may be granted Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law .
<PAGE>
3.3 DISINTERESTED ADMINISTRATION. With respect to participation by
Insiders in the Plan, at any time that any class of equity security of the
Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall
be administered in compliance with the "disinterested administration"
requirements of Rule 16b-3.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be eight hundred thousand (800,000) and shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan and to any outstanding Options and in the exercise price per share
of outstanding Options. If a majority of the shares which are of the same class
as the shares that are subject to outstanding Options are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event, as defined in Section 8.1) shares of another corporation (the "NEW
SHARES"), the Board may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the exercise price per share of,
the outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded up or down to the nearest whole number, as determined by the
Board, and in no event may the exercise price of any Option be decreased to an
amount less than the par value, if any, of the stock subject to the Option. The
adjustments determined by the Board pursuant to this Section 4.2 shall be final,
binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees" shall include prospective Employees to whom Options are granted in
connection with written offers of employment with the Participating Company
Group, and "Consultants" shall include prospective Consultants to whom Options
are granted in connection with written offers of engagement with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option.
5.2 DIRECTORS SERVING ON COMMITTEE. At any time that any class of
equity security of the Company is registered pursuant to Section 12 of the
Exchange Act, no member of a Committee established to administer the Plan in
compliance with the "disinterested
<PAGE>
administration" requirements of Rule 16b-3, while a member, shall be eligible to
be granted an Option.
5.3 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.4 FAIR MARKET VALUE LIMITATION. To the extent that the aggregate
Fair Market Value of stock with respect to which options designated as Incentive
Stock Options are exercisable by an Optionee for the first time during any
calendar year (under all stock option plans of the Participating Company Group,
including the Plan) exceeds One Hundred Thousand Dollars ($100,000), the portion
of such options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.4, options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of stock shall be determined as of the time the option
with respect to such stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.4, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.4, the Optionee may designate which portion of such Option the
Optionee is exercising and may request that separate certificates representing
each such portion be issued upon the exercise of the Option. In the absence of
such designation, the Optionee shall be deemed to have exercised the Incentive
Stock Option portion of the Option first.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
<PAGE>
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
and (c) no Option granted to a prospective Employee or prospective Consultant
may become exercisable prior to the date on which such person commences service
with a Participating Company.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated from
time to time by the Board of Governors of the Federal Reserve System) (a
"CASHLESS EXERCISE"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure
<PAGE>
any promissory note used to exercise an Option with the shares of Stock acquired
upon the exercise of the Option or with other collateral acceptable to the
Company. Unless otherwise provided by the Board, if the Company at any time is
subject to the regulations promulgated by the Board of Governors of the Federal
Reserve System or any other governmental entity affecting the extension of
credit in connection with the Company's securities, any promissory note shall
comply with such applicable regulations, and the Optionee shall pay the unpaid
principal and accrued interest, if any, to the extent necessary to comply with
such applicable regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to
a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
7. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Incentive Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as a "Nonstatutory
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Nonstatutory Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
<PAGE>
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in Section
6.2 or by the Board in the grant of an Option, any Option granted hereunder
shall have a term of ten (10) years from the effective date of grant of the
Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan. Such authority shall include, but not by
way of limitation, the authority to grant Options which are immediately
exercisable subject to the Company's right to repurchase any unvested shares of
Stock acquired by an Optionee upon the exercise of an Option in the event such
Optionee's employment or service with the Participating Company Group is
terminated for any reason, with or without cause.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to
<PAGE>
determine whether multiple sales or exchanges of the voting stock of the Company
or multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. Any Options which are
neither assumed or substituted for by the Acquiring Corporation in connection
with the Transfer of Control nor exercised as of the date of the Transfer of
Control shall terminate and cease to be outstanding effective as of the date of
the Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of an Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of the Option Agreement
evidencing such Option except as otherwise provided in such Option Agreement.
Furthermore, notwithstanding the foregoing, if the corporation the stock of
which is subject to the outstanding Options immediately prior to an Ownership
Change Event described in Section 8.1(a)(i) constituting a Transfer of Control
is the surviving or continuing corporation and immediately after such Ownership
Change Event less than fifty percent (50%) of the total combined voting power of
its voting stock is held by another corporation or by other corporations that
are members of an affiliated group within the meaning of Section 1504(a) of the
Code without regard to the provisions of Section 1504(b) of the Code, the
outstanding Options shall not terminate unless the Board otherwise provides in
its sole discretion.
9. PROVISION OF INFORMATION. At least annually, copies of the Company's
------------------------
balance sheet and income statement for the just completed fiscal year shall be
made available to each Optionee and purchaser of shares of Stock upon the
exercise of an Option. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assure them
access to equivalent information.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, an
-----------------------------
Option shall be exercisable only by the Optionee or the Optionee's guardian or
legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. TRANSFER OF COMPANY'S RIGHTS. In the event any Participating Company
----------------------------
assigns, other than by operation of law, to a third person, other than another
Participating Company, any of the Participating Company's rights to repurchase
any shares of Stock acquired upon the exercise of an Option, the assignee shall
pay to the assigning Participating Company the value of such right as determined
by the Company in the Company's sole discretion. Such consideration shall be
paid in cash. In the event such repurchase right is exercisable at the time of
such assignment, the value of such right shall be not less than the Fair Market
Value of the shares of Stock which may be repurchased under such right (as
determined by the Company) minus the repurchase price of such shares. The
requirements of this Section 11 regarding the minimum consideration to be
received by the assigning Participating Company shall not inure to the benefit
of the Optionee whose shares of Stock are being repurchased. Failure of a
Participating Company
<PAGE>
to comply with the provisions of this Section 11 shall not constitute a defense
or otherwise prevent the exercise of the repurchase right by the assignee of
such right.
12. INDEMNIFICATION. In addition to such other rights of indemnification
---------------
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend the
--------------------------------
Plan at any time. However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no expansion in the class of persons
eligible to receive Nonstatutory Stock Options. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option or any
unexercised portion thereof, without the consent of the Optionee, unless such
termination or amendment is required to enable an Option designated as an
Incentive Stock Option to qualify as an Incentive Stock Option or is necessary
to comply with any applicable law or government regulation.
14. SHAREHOLDER APPROVAL. The Plan or any increase in the maximum number
--------------------
of shares of Stock issuable thereunder as provided in Section 4.1 (the "MAXIMUM
SHARES") shall be approved by the shareholders of the Company within twelve (12)
months of the date of adoption thereof by the Board. Options granted prior to
shareholder approval of the Plan or in excess of the Maximum Shares previously
approved by the shareholders shall become exercisable no earlier than the date
of shareholder approval of the Plan or such increase in the Maximum Shares, as
the case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing ENACT Health Management Systems 1995 Stock Option Plan was duly
adopted by the Board on March 1, 1995.
/s/ Matthew Sanders
---------------------------
<PAGE>
PLAN HISTORY
------------
March 1, 1995 Board adopts Plan, with an initial reserve of 600,000
shares.
___________, 199_ Shareholders approve Plan, with an initial reserve of
600,000 shares.
<PAGE>
STANDARD FORM OF
ENACT HEALTH MANAGEMENT SYSTEMS
INCENTIVE STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT 10.02
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
ENACT HEALTH MANAGEMENT SYSTEMS
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made and
entered into as of ___________, 199_, by and between ENACT Health Management
Systems and ___________________________ (the "OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock upon the terms and conditions set forth in this Option Agreement
(the "OPTION"). The Option shall in all respects be subject to the terms and
conditions of the ENACT Health Management Systems 1995 Stock Option Plan (the
"PLAN"), the provisions of which are incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means ________________________ , 199_.
1
<PAGE>
(b) "NUMBER OF OPTION SHARES" means ___________________ shares of
Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Initial Vesting Date.
(e) "INITIAL VESTING DATE" means the date occurring one (1) month
after (check one):
__ the Date of Option Grant.
__ __________________ , 199_, the date the Optionee's
Service commenced.
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/36
provided the Optionee's Service
is continuous from the Date of
Option Grant until the Initial
Vesting Date
Plus
----
For each full month of the 1/36
Optionee's continuous Service
from the Initial Vesting Date
until the Vested Ratio equals
1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "COMPANY" means ENACT Health Management Systems, a California
corporation, or any successor corporation thereto.
(i) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
2
<PAGE>
(j) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(k) "SERVICE" means the Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be
deemed to have terminated either upon an actual termination of Service or upon
the corporation for which the Optionee performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its sole
discretion, shall determine whether the Optionee's Service has terminated and
the effective date of such termination. (NOTE: If the Option is exercised more
than three (3) months after the date on which the Optionee ceased to be an
Employee (other than by reason of death or a permanent and total disability as
defined in Section 22(e)(3) of the Code), the Option will be treated as a
Nonstatutory Stock Option and not as an Incentive Stock Option to the extent
required by Section 422 of the Code.)
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
----------------
2.1 TAX STATUS OF OPTION. This Option is intended to be an Incentive
Stock Option within the meaning of Section 422(b) of the Code, but the Company
does not represent or warrant that this Option qualifies as such. The Optionee
should consult with the Optionee's own tax advisor regarding the tax effects of
this Option and the requirements necessary to obtain favorable income tax
treatment under Section 422 of the Code, including, but not limited to, holding
period requirements. (NOTE: If the aggregate Exercise Price of the Option (that
is, the Exercise Price multiplied by the Number of Option Shares) plus the
aggregate exercise price of any other Incentive Stock Options held by the
Optionee (whether granted pursuant to the Plan or any other stock option plan of
the Participating Company Group) is greater than One Hundred Thousand Dollars
($100,000), the Optionee should contact the Chief Financial Officer of the
Company to ascertain whether the entire Option qualifies as an Incentive Stock
Option.)
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be
3
<PAGE>
filed no later than thirty (30) days after the date on which the Optionee
exercises the Option. Shares acquired upon exercise of the Option are
nontransferable and subject to a substantial risk of forfeiture if, for example,
(a) they are unvested and are subject to a right of the Company to repurchase
such shares at the Optionee's original purchase price if the Optionee's Service
terminates, (b) the Optionee is an Insider and exercises the Option within six
(6) months of the Date of Option Grant (if a class of equity security of the
Company is registered under Section 12 of the Exchange Act), or (c) the Optionee
is subject to a restriction on transfer to comply with "Pooling-of-Interests
Accounting" rules. Failure to file an election under Section 83(b), if
appropriate, may result in adverse tax consequences to the Optionee. The
Optionee acknowledges that the Optionee has been advised to consult with a tax
advisor prior to the exercise of the Option regarding the tax consequences to
the Optionee of the exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST
BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES SHARES.
THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY
FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S SOLE RESPONSIBILITY, EVEN
IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION
ON HIS OR HER BEHALF.
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares multiplied by the Vested Ratio less the
number of shares previously acquired upon exercise of the Option, subject to the
Optionee's agreement that any shares purchased upon exercise are subject to the
Company's repurchase rights set forth in Section 11. In no event shall the
Option be exercisable for more shares than the Number of Option Shares.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by
4
<PAGE>
confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and
(ii) an executed copy, if required herein, of the then current form of escrow
agreement referenced below. The Option shall be deemed to be exercised upon
receipt by the Company of such written notice, the aggregate Exercise Price,
and, if required by the Company, such executed agreement.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment
in a form acceptable to the Company of the proceeds of a sale or loan with
respect to some or all of the shares of Stock acquired upon the exercise of the
Option pursuant to a program or procedure approved by the Company (including,
without limitation, through an exercise complying with the provisions of
Regulation T as promulgated from time to time by the Board of Governors of the
Federal Reserve System). The Company reserves, at any and all times, the right,
in the Company's sole and absolute discretion, to decline to approve or
terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option,
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including, without limitation, obligations arising upon (i) the exercise, in
whole or in part, of the Option, (ii) the transfer, in whole or in part, of any
shares acquired upon exercise of the Option, (iii) the operation of any law or
regulation providing for the imputation of interest, or (iv) the lapsing of any
restriction with respect to any shares acquired upon exercise of the Option.
The Optionee is cautioned that the Option is not exercisable unless the tax
withholding obligations of the Participating Company Group are satisfied.
Accordingly, the Optionee may not be able to exercise the Option when desired
even though the Option is vested, and the Company shall have no obligation to
issue a certificate for such shares or release such shares from any escrow
provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should
be directed to the Chief Financial Officer of the Company. The inability of the
Company to obtain from any regulatory body having jurisdiction the authority, if
any, deemed by the Company's legal counsel to be necessary to the lawful
issuance and sale of any shares subject to the Option shall relieve the Company
of any liability in respect of the failure to issue or sell such shares as to
which such requisite authority shall not have been obtained. As a condition to
the exercise of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
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5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(a) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date. (NOTE: If the Option
is exercised more than three (3) months after the date on which the Optionee's
Service as an Employee terminated as a result of a Disability other than a
permanent and total disability as defined in Section 22(e)(3) of the Code, the
Option will be treated as a Nonstatutory Stock Option and not as an Incentive
Stock Option to the extent required by Section 422 of the Code.)
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of twelve
(12) months after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date. The Optionee's Service shall
be deemed to have terminated on account of death if the Optionee dies within
three (3) months after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the
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Board, in its sole discretion) after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.
7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as
to the tax consequences of any such delayed exercise. The Optionee should
consult with the Optionee's own tax advisor as to the tax consequences to the
Optionee of any such delayed exercise.
7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date. The Company makes no representation as to the tax consequences of any
such delayed exercise. The Optionee should consult with the Optionee's own tax
advisors as to the tax consequences to the Optionee of any such delayed
exercise.
7.4 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of absence in excess of ninety (90) days, the Optionee's Service shall be
deemed to terminate on the ninety-first (91st) day of such leave unless the
Optionee's right to reemployment with the Participating Company Group remains
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company (or required by law), a leave of absence
shall not be treated as Service for purposes of determining the Optionee's
Vested Ratio.
8. TRANSFER OF CONTROL.
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8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
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(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. The Option shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate unless
the Board otherwise provides in its sole discretion.
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9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
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stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Exercise Price be decreased to an amount less than the
par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall
-----------------------------------------------
have no rights as a shareholder with respect to any shares covered by the Option
until the date of the issuance of a certificate for the shares for which the
Option has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 9. Nothing in this Option Agreement shall confer upon the
Optionee any right to continue in the Service of a Participating Company or
interfere in any way with any right of the Participating Company Group to
terminate the Optionee's Service as an Employee or Consultant, as the case may
be, at any time.
11. RIGHT OF FIRST REFUSAL.
----------------------
11.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
11.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any shares acquired upon
exercise of the Option (the "TRANSFER SHARES") to any person or entity,
including, without limitation, any shareholder of the Participating Company
Group, the Company shall have the right to repurchase the Transfer Shares under
the terms and subject to the conditions set forth in this Section 11 (the "RIGHT
OF FIRST REFUSAL").
11.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall give a written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the
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event of a bona fide gift or involuntary transfer, the proposed transfer price
shall be deemed to be the Fair Market Value of the Transfer Shares, as
determined by the Board in good faith. If the Optionee proposes to transfer any
Transfer Shares to more than one Proposed Transferee, the Optionee shall provide
a separate Transfer Notice for the proposed transfer to each Proposed
Transferee. The Transfer Notice shall be signed by both the Optionee and the
Proposed Transferee and must constitute a binding commitment of the Optionee and
the Proposed Transferee for the transfer of the Transfer Shares to the Proposed
Transferee subject only to the Right of First Refusal.
11.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 11, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 11. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
11.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer Notice by delivery to the Optionee of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Optionee or issued by a person other than the Optionee
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Optionee shall
thereupon consummate the sale of the Transfer Shares to the Company on the terms
set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company (unless a longer period is offered
by the Proposed Transferee); provided, however, that in the event the Transfer
Notice provides for the payment for the Transfer Shares other than in cash, the
Company shall have the option of paying for the Transfer Shares by the present
value cash equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Company. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
11.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails
to exercise the Right of First Refusal in full (or to such lesser extent as the
Company and the Optionee otherwise agree) within the period specified in Section
11.4 above,
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the Optionee may conclude a transfer to the Proposed Transferee of the Transfer
Shares on the terms and conditions described in the Transfer Notice, provided
such transfer occurs not later than ninety (90) days following delivery to the
Company of the Transfer Notice. The Company shall have the right to demand
further assurances from the Optionee and the Proposed Transferee (in a form
satisfactory to the Company) that the transfer of the Transfer Shares was
actually carried out on the terms and conditions described in the Transfer
Notice. No Transfer Shares shall be transferred on the books of the Company
until the Company has received such assurances, if so demanded, and has approved
the proposed transfer as bona fide. Any proposed transfer on terms and
conditions different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this Section 11.
11.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Option
Agreement, including this Section 11 providing for the Right of First Refusal
with respect to any subsequent transfer. Any sale or transfer of any shares
acquired upon exercise of the Option shall be void unless the provisions of this
Section 11 are met.
11.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall remain subject to the Right of First Refusal unless the
provisions of Section 11.9 below result in a termination of the Right of First
Refusal.
11.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the
right to assign the Right of First Refusal at any time, whether or not there has
been an attempted transfer, to one or more persons as may be selected by the
Company.
11.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
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12. ESCROW.
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12.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Right of First Refusal will be available for repurchase, the Company may require
the Optionee to deposit the certificate evidencing the shares which the Optionee
purchases upon exercise of the Option with an escrow agent designated by the
Company under the terms and conditions of an escrow agreement approved by the
Company. If the Company does not require such deposit as a condition of
exercise of the Option, the Company reserves the right at any time to require
the Optionee to so deposit the certificate in escrow. Upon the occurrence of an
Ownership Change Event or a change, as described in Section 9, in the character
or amount of any of the outstanding stock of the corporation the stock of which
is subject to the provisions of this Option Agreement, any and all new,
substituted or additional securities or other property to which the Optionee is
entitled by reason of the Optionee's ownership of shares of Stock acquired upon
exercise of the Option that remain, following such Ownership Change Event or
change described in Section 9, subject to the Right of First Refusal shall be
immediately subject to the escrow to the same extent as such shares of Stock
immediately before such event. The Company shall bear the expenses of the
escrow.
12.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the
expiration of the Right of First Refusal, but not more frequently than twice
each calendar year, the escrow agent shall deliver to the Optionee the shares
and any other property no longer subject to such restriction.
12.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Right of
First Refusal, the notices required to be given to the Optionee shall be given
to the escrow agent, and any payment required to be given to the Optionee shall
be given to the escrow agent. Within thirty (30) days after payment by the
Company, the escrow agent shall deliver the shares and any other property which
the Company has purchased to the Company and shall deliver the payment received
from the Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to
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time, there is any stock dividend, stock split or other change, as described in
Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option
Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionee's
ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Right of First Refusal with the same force and effect
as the shares subject to the Right of First Refusal immediately before such
event.
14. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall
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dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify
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the Chief Financial Officer of the Company if the Optionee disposes of any of
the shares acquired pursuant to the Option within one (1) year after the date
the Optionee exercises all or part of the Option or within two (2) years after
the Date of Option Grant. Until such time as the Optionee disposes of such
shares in a manner consistent with the provisions of this Option Agreement,
unless otherwise expressly authorized by the Company, the Optionee shall hold
all shares acquired pursuant to the Option in the Optionee's name (and not in
the name of any nominee) for the one-year period immediately after the exercise
of the Option and the two-year period immediately after Date of Option Grant.
At any time during the one-year or two-year periods set forth above, the Company
may place a legend on any certificate representing shares acquired pursuant to
the Option requesting the transfer agent for the Company's stock to notify the
Company of any such transfers. The obligation of the Optionee to notify the
Company of any such transfer shall continue notwithstanding that a legend has
been placed on the certificate pursuant to the preceding sentence.
15. RULES OF THE COMMISSIONER OF CORPORATIONS. The Optionee is hereby
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delivered a copy of Section 260.141.11 of the Rules of the Commissioner of
Corporations of the State of California, adopted pursuant to the California
Corporate Securities Act of 1968. References to the "Code" in the following
text are references to the California Corporations Code.
260.141.11. Restriction on Transfer.
(a) The issuer of any security upon which a restriction on transfer
has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall
cause a copy of this section to be delivered to each issuee or transferee of
such security at the time the certificate evidencing the security is delivered
to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate
a sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in subdivision (i) of Section 25102
of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants, or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants, or
spouse;
(5) to holders of securities of the same class of the same
issuer;
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(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code
(either acting as such or as a finder) to a resident of a foreign state,
territory or country who is neither domiciled in this state to the knowledge of
the broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other
lien given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112,
25113, or 25121 of the Code, of the securities to be transferred, provided that
no order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112
or 25113 of the Code, provided that no order under Section 25140 or subdivision
(a) of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or
countries who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property
Law or to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property
Law or by the administrator of the unclaimed property law of another state if,
in either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does
not involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102 ;
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provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend prominently stamped or printed
thereon in capital letters of not less than 10-point size reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
16. LEGENDS. The Company may at any time place legends referencing the
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Right of First Refusal and any applicable federal, state or foreign securities
law restrictions on all certificates representing shares of stock subject to the
provisions of this Option Agreement. The Optionee shall, at the request of the
Company, promptly present to the Company any and all certificates representing
shares acquired pursuant to the Option in the possession of the Optionee in
order to carry out the provisions of this Section. Unless otherwise specified
by the Company, legends placed on such certificates may include, but shall not
be limited to, the following:
16.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
16.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
16.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
16.4 "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION
AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
("ISO"). IN ORDER TO
16
<PAGE>
OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE
TRANSFERRED PRIOR TO ______________. SHOULD THE REGISTERED HOLDER ELECT TO
TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE
TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE
REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK
OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE)
PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE."
17. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any
---------------
underwritten public offering of stock, including an initial public offering of
stock, made by the Company pursuant to an effective registration statement filed
under the Securities Act, the Optionee shall not offer, sell, contract to sell,
pledge, hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
public offering; provided, however, that such period of time shall not exceed
one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act. The Optionee shall be subject to this Section provided and only
if the officers and directors of the Company are also subject to similar
arrangements.
18. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
19. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that except as provided in Section
8.2 in connection with a Transfer of Control, no such termination or amendment
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee unless such termination or amendment is necessary to
comply with any applicable law or government regulation or is required to enable
the Option to qualify as an Incentive Stock Option. No amendment or addition to
this Option Agreement shall be effective unless in writing.
20. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute
--------------------
the entire understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein or therein,
and there are no agreements, understandings, restrictions, representations, or
warranties among the Optionee and the Participating Company Group with respect
to such subject matter other than those as set forth or provided for herein or
therein. To the extent contemplated herein or therein, the provisions of this
Option Agreement shall survive any exercise of the Option and shall remain in
full force and effect.
17
<PAGE>
21. APPLICABLE LAW. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
ENACT HEALTH MANAGEMENT SYSTEMS
By:_______________________________
Title:____________________________
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Right of First Refusal set
forth in Section 11, and hereby accepts the Option subject to all of the terms
and provisions thereof. The Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Option Agreement.
The undersigned acknowledges receipt of a copy of the Plan and a copy of
Section 260.141.11 of the Rules of the Commissioner of Corporations of the State
of California regarding restriction on transfer.
OPTIONEE
Date:________________________ ________________________________
18
<PAGE>
STANDARD FORM OF
ENACT HEALTH MANAGEMENT SYSTEMS
NONSTATUTORY STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT 10.02
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST
THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
ENACT PRODUCTS
NONSTATUTORY STOCK OPTION AGREEMENT
THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made
and entered into as of ___________, 199_, by and between Enact Products and
___________________________ (the "OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock upon the terms and conditions set forth in this Option Agreement
(the "OPTION"). The Option shall in all respects be subject to the terms and
conditions of the Enact Products 1995 Stock Option Plan (the "PLAN"), the
provisions of which are incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means ________________________ , 199_.
(b) "NUMBER OF OPTION SHARES" means ___________________ shares of
Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
1
<PAGE>
(d) "INITIAL EXERCISE DATE" means the Initial Vesting Date.
(e) "INITIAL VESTING DATE" means the date occurring one (1) year
after (check one):
__ the Date of Option Grant.
__ __________________ , 199_, the date the Optionee's
Service commenced.
(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to Initial Vesting Date 0
On Initial Vesting Date, 1/4
provided the Optionee's Service
is continuous from the later of
the Date of Option Grant or the
Optionee's Service
commencement date until the
Initial Vesting Date
Plus
----
For each full month of the 1/48
Optionee's continuous Service
from the Initial Vesting Date
until the Vested Ratio equals
1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "COMPANY" means Enact Products, a California corporation, or
any successor corporation thereto.
(i) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
(j) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
2
<PAGE>
(k) "SERVICE" means the Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be
deemed to have terminated either upon an actual termination of Service or upon
the corporation for which the Optionee performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its sole
discretion, shall determine whether the Optionee's Service has terminated and
the effective date of such termination.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.
2. TAX CONSEQUENCES.
----------------
2.1 TAX STATUS OF OPTION. This Option is intended to be a
Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option
within the meaning of Section 422(b) of the Code.
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee
exercises this Option to purchase shares of Stock that are both nontransferable
and subject to a substantial risk of forfeiture, the Optionee understands that
the Optionee should consult with the Optionee's tax advisor regarding the
advisability of filing with the Internal Revenue Service an election under
Section 83(b) of the Code, which must be filed no later than thirty (30) days
after the date on which the Optionee exercises the Option. Shares acquired upon
exercise of the Option are nontransferable and subject to a substantial risk of
forfeiture if, for example, (a) they are unvested and are subject to a right of
the Company to repurchase such shares at the Optionee's original purchase price
if the Optionee's Service terminates, (b) the Optionee is an Insider and
exercises the Option within six (6) months of the Date of Option Grant (if a
class of equity security of the Company is registered under Section 12 of the
Exchange Act), or (c) the Optionee is subject to a restriction on transfer to
comply with "Pooling-of-Interests Accounting" rules. Failure to file an
election under Section 83(b), if appropriate, may result in adverse tax
consequences to the Optionee. The Optionee acknowledges that the Optionee has
been advised to consult with a tax advisor prior to the exercise of the Option
regarding the tax consequences to the Optionee of the exercise of the Option.
AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON
WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE
OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE
OPTIONEE'S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS
3
<PAGE>
THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION. All questions of interpretation concerning this
--------------
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board. All determinations by the Board shall be final and
binding upon all persons having an interest in the Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option Shares multiplied by the Vested Ratio less the
number of shares previously acquired upon exercise of the Option, subject to the
Optionee's agreement that any shares purchased upon exercise are subject to the
Company's repurchase rights set forth in Section 11. In no event shall the
Option be exercisable for more shares than the Number of Option Shares.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by (i) full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased and
(ii) an executed copy, if required herein, of the then current form of escrow
agreement referenced below. The Option shall be deemed to be exercised upon
receipt by the Company of such written notice, the aggregate Exercise Price,
and, if required by the Company, such executed agreement.
4.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without
4
<PAGE>
regard to any restrictions on transferability applicable to such stock by reason
of federal or state securities laws or agreements with an underwriter for the
Company) not less than the aggregate Exercise Price, (iii) by means of a
Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of
the foregoing.
(b) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(c) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the assignment
in a form acceptable to the Company of the proceeds of a sale or loan with
respect to some or all of the shares of Stock acquired upon the exercise of the
Option pursuant to a program or procedure approved by the Company (including,
without limitation, through an exercise complying with the provisions of
Regulation T as promulgated from time to time by the Board of Governors of the
Federal Reserve System). The Company reserves, at any and all times, the right,
in the Company's sole and absolute discretion, to decline to approve or
terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company shall have
no obligation to issue a certificate for such shares or release such shares from
any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
5
<PAGE>
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. Questions concerning this restriction should
be directed to the Chief Financial Officer of the Company. The inability of the
Company to obtain from any regulatory body having jurisdiction the authority, if
any, deemed by the Company's legal counsel to be necessary to the lawful
issuance and sale of any shares subject to the Option shall relieve the Company
of any liability in respect of the failure to issue or sell such shares as to
which such requisite authority shall not have been obtained. As a condition to
the exercise of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
6
<PAGE>
(a) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
(b) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee (or the Optionee's legal
representative or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of twelve
(12) months after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date. The Optionee's Service shall
be deemed to have terminated on account of death if the Optionee dies within
three (3) months after the Optionee's termination of Service.
(c) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.3 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7.4 LEAVE OF ABSENCE. For purposes of Section 7.1, the Optionee's
Service with the Participating Company Group shall not be deemed to terminate if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company of ninety (90) days or less. In the event of a
leave of
7
<PAGE>
absence in excess of ninety (90) days, the Optionee's Service shall be deemed to
terminate on the ninety-first (91st) day of such leave unless the Optionee's
right to reemployment with the Participating Company Group remains guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company (or required by law), a leave of absence shall not be treated as
Service for purposes of determining the Optionee's Vested Ratio.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the
8
<PAGE>
Option a substantially equivalent option for the Acquiring Corporation's stock.
The Option shall terminate and cease to be outstanding effective as of the date
of the Transfer of Control to the extent that the Option is neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of the Option prior
to the Transfer of Control and any consideration received pursuant to the
Transfer of Control with respect to such shares shall continue to be subject to
all applicable provisions of this Option Agreement except as otherwise provided
herein. Furthermore, notwithstanding the foregoing, if the corporation the
stock of which is subject to the Option immediately prior to an Ownership Change
Event described in Section 8.1(a)(i) constituting a Transfer of Control is the
surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are
members of an affiliated group within the meaning of Section 1504(a) of the Code
without regard to the provisions of Section 1504(b) of the Code, the Option
shall not terminate unless the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Exercise Price be decreased to an amount less than the
par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall
-----------------------------------------------
have no rights as a shareholder with respect to any shares covered by the Option
until the date of the issuance of a certificate for the shares for which the
Option has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 9. Nothing in this Option Agreement shall confer upon the
Optionee any right to continue in the Service of a Participating Company or
interfere in any way with any right of the Participating Company Group to
terminate the Optionee's Service as an Employee or Consultant, as the case may
be, at any time.
9
<PAGE>
11. RIGHT OF FIRST REFUSAL.
----------------------
11.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
11.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any shares acquired upon
exercise of the Option (the "TRANSFER SHARES") to any person or entity,
including, without limitation, any shareholder of the Participating Company
Group, the Company shall have the right to repurchase the Transfer Shares under
the terms and subject to the conditions set forth in this Section 11 (the "RIGHT
OF FIRST REFUSAL").
11.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall give a written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event of a bona fide gift or involuntary
transfer, the proposed transfer price shall be deemed to be the Fair Market
Value of the Transfer Shares, as determined by the Board in good faith. If the
Optionee proposes to transfer any Transfer Shares to more than one Proposed
Transferee, the Optionee shall provide a separate Transfer Notice for the
proposed transfer to each Proposed Transferee. The Transfer Notice shall be
signed by both the Optionee and the Proposed Transferee and must constitute a
binding commitment of the Optionee and the Proposed Transferee for the transfer
of the Transfer Shares to the Proposed Transferee subject only to the Right of
First Refusal.
11.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 11, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 11. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
11.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer Notice by delivery to the Optionee of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other
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<PAGE>
Transfer Notice is issued by the Optionee or issued by a person other than the
Optionee with respect to a proposed transfer to the same Proposed Transferee.
If the Company exercises the Right of First Refusal, the Company and the
Optionee shall thereupon consummate the sale of the Transfer Shares to the
Company on the terms set forth in the Transfer Notice within sixty (60) days
after the date the Transfer Notice is delivered to the Company (unless a longer
period is offered by the Proposed Transferee); provided, however, that in the
event the Transfer Notice provides for the payment for the Transfer Shares other
than in cash, the Company shall have the option of paying for the Transfer
Shares by the present value cash equivalent of the consideration described in
the Transfer Notice as reasonably determined by the Company. For purposes of
the foregoing, cancellation of any indebtedness of the Optionee to any
Participating Company shall be treated as payment to the Optionee in cash to the
extent of the unpaid principal and any accrued interest canceled.
11.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails
to exercise the Right of First Refusal in full (or to such lesser extent as the
Company and the Optionee otherwise agree) within the period specified in Section
11.4 above, the Optionee may conclude a transfer to the Proposed Transferee of
the Transfer Shares on the terms and conditions described in the Transfer
Notice, provided such transfer occurs not later than ninety (90) days following
delivery to the Company of the Transfer Notice. The Company shall have the
right to demand further assurances from the Optionee and the Proposed Transferee
(in a form satisfactory to the Company) that the transfer of the Transfer Shares
was actually carried out on the terms and conditions described in the Transfer
Notice. No Transfer Shares shall be transferred on the books of the Company
until the Company has received such assurances, if so demanded, and has approved
the proposed transfer as bona fide. Any proposed transfer on terms and
conditions different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this Section 11.
11.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to agree in writing (in a form satisfactory to the
Company) that such transferee shall receive and hold such Transfer Shares or
interest therein subject to all of the terms and conditions of this Option
Agreement, including this Section 11 providing for the Right of First Refusal
with respect to any subsequent transfer. Any sale or transfer of any shares
acquired upon exercise of the Option shall be void unless the provisions of this
Section 11 are met.
11.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall
11
<PAGE>
remain subject to the Right of First Refusal unless the provisions of Section
11.9 below result in a termination of the Right of First Refusal.
11.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the
right to assign the Right of First Refusal at any time, whether or not there has
been an attempted transfer, to one or more persons as may be selected by the
Company.
11.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
12. ESCROW.
------
12.1 ESTABLISHMENT OF ESCROW. To ensure that shares subject to the
Right of First Refusal will be available for repurchase, the Company may require
the Optionee to deposit the certificate evidencing the shares which the Optionee
purchases upon exercise of the Option with an escrow agent designated by the
Company under the terms and conditions of an escrow agreement approved by the
Company. If the Company does not require such deposit as a condition of
exercise of the Option, the Company reserves the right at any time to require
the Optionee to so deposit the certificate in escrow. Upon the occurrence of an
Ownership Change Event or a change, as described in Section 9, in the character
or amount of any of the outstanding stock of the corporation the stock of which
is subject to the provisions of this Option Agreement, any and all new,
substituted or additional securities or other property to which the Optionee is
entitled by reason of the Optionee's ownership of shares of Stock acquired upon
exercise of the Option that remain, following such Ownership Change Event or
change described in Section 9, subject to the Right of First Refusal shall be
immediately subject to the escrow to the same extent as such shares of Stock
immediately before such event. The Company shall bear the expenses of the
escrow.
12.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after the
expiration of the Right of First Refusal, but not more frequently than twice
each calendar year, the escrow agent shall deliver to the Optionee the shares
and any other property no longer subject to such restriction.
12.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Right of
First Refusal, the notices required to be given to the Optionee shall be given
to the escrow
12
<PAGE>
agent, and any payment required to be given to the Optionee shall be given to
the escrow agent. Within thirty (30) days after payment by the Company, the
escrow agent shall deliver the shares and any other property which the Company
has purchased to the Company and shall deliver the payment received from the
Company to the Optionee.
13. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to
-----------------------------------------------
time, there is any stock dividend, stock split or other change, as described in
Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option
Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionee's
ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Right of First Refusal with the same force and effect
as the shares subject to the Right of First Refusal immediately before such
event.
14. RULES OF THE COMMISSIONER OF CORPORATIONS. The Optionee is hereby
-----------------------------------------
delivered a copy of Section 260.141.11 of the Rules of the Commissioner of
Corporations of the State of California, adopted pursuant to the California
Corporate Securities Act of 1968. References to the "Code" in the following
text are references to the California Corporations Code.
260.141.11. Restriction on Transfer.
(a) The issuer of any security upon which a restriction on transfer
has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall
cause a copy of this section to be delivered to each issuee or transferee of
such security at the time the certificate evidencing the security is delivered
to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate
a sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in subdivision (i) of Section 25102
of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants, or spouse, or
any custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants, or
spouse;
(5) to holders of securities of the same class of the same
issuer;
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<PAGE>
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code
(either acting as such or as a finder) to a resident of a foreign state,
territory or country who is neither domiciled in this state to the knowledge of
the broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other
lien given by the purchaser to the seller upon a sale of the security for which
the Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Sections 25111, 25112,
25113, or 25121 of the Code, of the securities to be transferred, provided that
no order under Section 25140 or subdivision (a) of Section 25143 is in effect
with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such
corporation, or by a wholly owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111, 25112
or 25113 of the Code, provided that no order under Section 25140 or subdivision
(a) of Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or
countries who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property
Law or to the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property
Law or by the administrator of the unclaimed property law of another state if,
in either such case, such person (i) discloses to potential purchasers at the
sale that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does
not involve a change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an
issuer transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by subdivision
(f) of Section 25102;
14
<PAGE>
provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such
a restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend prominently stamped or printed
thereon in capital letters of not less than 10-point size reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
15. LEGENDS. The Company may at any time place legends referencing the
-------
Right of First Refusal and any applicable federal, state or foreign securities
law restrictions on all certificates representing shares of stock subject to the
provisions of this Option Agreement. The Optionee shall, at the request of the
Company, promptly present to the Company any and all certificates representing
shares acquired pursuant to the Option in the possession of the Optionee in
order to carry out the provisions of this Section. Unless otherwise specified
by the Company, legends placed on such certificates may include, but shall not
be limited to, the following:
15.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
15.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
15.3 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
16. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any
---------------
underwritten public offering of stock, including an initial public offering of
stock, made by the Company pursuant to an effective registration statement filed
under the Securities Act, the Optionee shall not offer, sell, contract to sell,
pledge, hypothecate,
15
<PAGE>
grant any option to purchase or make any short sale of, or otherwise dispose of
any shares of stock of the Company or any rights to acquire stock of the Company
for such period of time from and after the effective date of such registration
statement as may be established by the underwriter for such public offering;
provided, however, that such period of time shall not exceed one hundred eighty
(180) days from the effective date of the registration statement to be filed in
connection with such public offering. The foregoing limitation shall not apply
to shares registered in the public offering under the Securities Act. The
Optionee shall be subject to this Section provided and only if the officers and
directors of the Company are also subject to similar arrangements.
17. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
18. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that except as provided in Section
8.2 in connection with a Transfer of Control, no such termination or amendment
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee unless such termination or amendment is necessary to
comply with any applicable law or government regulation. No amendment or
addition to this Option Agreement shall be effective unless in writing.
19. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute
--------------------
the entire understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein or therein,
and there are no agreements, understandings, restrictions, representations, or
warranties among the Optionee and the Participating Company Group with respect
to such subject matter other than those as set forth or provided for herein or
therein. To the extent contemplated herein or therein, the provisions of this
Option Agreement shall survive any exercise of the Option and shall remain in
full force and effect.
20. APPLICABLE LAW. This Option Agreement shall be governed by the laws
--------------
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
ENACT PRODUCTS
By:__________________________
Title:_______________________
16
<PAGE>
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Right of First Refusal set
forth in Section 11, and hereby accepts the Option subject to all of the terms
and provisions thereof. The Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Option Agreement.
The undersigned acknowledges receipt of a copy of the Plan and a copy of
Section 260.141.11 of the Rules of the Commissioner of Corporations of the State
of California regarding restriction on transfer.
OPTIONEE
Date:_____________________ ___________________________
17
<PAGE>
EXHIBIT 10.3
ENACT HEALTH MANAGEMENT SYSTEMS
1997 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The ENACT Health Management Systems 1997 Stock
Option Plan (the "Plan") is hereby established effective as of March 3, 1997
(the "Effective Date").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
shareholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means ENACT Health Management Systems, a
California corporation, or any successor corporation thereto.
<PAGE>
EXHIBIT 10.03
(e) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
(h) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(j) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its sole
discretion, or by the Company, in its sole discretion, if such determination is
expressly allocated to the Company herein, subject to the following:
(i) If, on such date, there is a public market for the
Stock, the Fair Market Value of a share of Stock shall be the closing sale price
of a share of Stock (or the mean of the closing bid and asked prices of a share
of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National
Market, the Nasdaq Small-Cap Market or such other national or regional
securities exchange or market system constituting the primary market for the
Stock, as reported in the Wall Street Journal or such other source as the
-------------------
Company deems reliable. If the relevant date does not fall on a day on which the
Stock has traded on such securities exchange or market system, the date on which
the Fair Market Value shall be established shall be the last day on which the
Stock was so traded prior to the relevant date, or such other appropriate day as
shall be determined by the Board, in its sole discretion.
(ii) If, on such date, there is no public market for the
Stock, the Fair Market Value of a share of Stock shall be as determined by the
Board without regard to any restriction other than a restriction which, by its
terms, will never lapse.
(k) "INCENTIVE STOCK OPTION" means an Option intended to be (as
set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(l) "INSIDER" means an officer or a Director of the Company or
any other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
<PAGE>
EXHIBIT 10.03
(n) "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan. An Option may be either an Incentive Stock Option or a Nonstatutory
Stock Option.
(o) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof.
(p) "OPTIONEE" means a person who has been granted one or more
Options.
(q) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(r) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(s) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(t) "RULE 16B-3" means Rule 16b 3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(u) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(v) "SERVICE" means an Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. Furthermore, an Optionee's Service
with the Participating Company Group shall not be deemed to have terminated if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the
Optionee's Service shall be deemed to have terminated unless the Optionee's
right to return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company or required by law, a leave of absence shall not be treated as
Service for purposes of determining vesting under the Optionee's Option
Agreement. The Optionee's Service shall be deemed to have terminated either upon
an actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.
(w) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
<PAGE>
EXHIBIT 10.03
(x) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(y) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
--------------
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by
the Board. All questions of interpretation of the Plan or of any Option shall be
determined by the Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan or such Option. Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, determination or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, determination or election.
3.2 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b 3.
3.3 POWERS OF THE BOARD. In addition to any other powers set forth
in the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its sole discretion:
(a) to determine the persons to who m, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the
<PAGE>
EXHIBIT 10.03
withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, or renew, or grant a new Option in
substitution for, any Option or to waive any restrictions or conditions
applicable to any Option or any shares acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the exercisability
of any Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
Service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of,
the Plan, including, without limitation, as the Board deems necessary or
desirable to comply with the laws of, or to accommodate the tax policy or custom
of, foreign jurisdictions whose citizens may be granted Options; and
(i) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent consistent with the Plan
and applicable law.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be four hundred thousand (400,000) and shall
consist of authorized but unissued or reacquired shares of Stock or any
combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or shares of Stock acquired, subject to repurchase, upon
the exercise of an Option are repurchased by the Company, the shares of Stock
allocable to the unexercised portion of such Option, or such repurchased shares
of Stock, shall again be available for issuance under the Plan. Notwithstanding
the foregoing, at any such time as the offer and sale of securities pursuant to
the Plan is subject to compliance with Section 260.140.45 of Title 10 of the
California Code of Regulations ("Section 260.140.45"), the total number of
shares of Stock issuable upon the exercise of all outstanding Options (together
with options outstanding under any other stock option plan of the Company) and
the total number of shares provided for under any stock bonus or similar plan of
the Company shall not exceed thirty percent (30%) (or such other higher
percentage limitation as may be approved by the shareholders of the Company
pursuant to Section 260.140.45) of the then outstanding shares of the Company as
calculated in accordance with the conditions and exclusions of Section
260.140.45.
<PAGE>
EXHIBIT 10.03
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options and in the exercise price per
share of any outstanding Options. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Options are exchanged
for, converted into, or otherwise become (whether or not pursuant to an
Ownership Change Event, as defined in Section 8.1) shares of another corporation
(the "New Shares"), the Board may unilaterally amend the outstanding Options to
provide that such Options are exercisable for New Shares. In the event of any
such amendment, the number of shares subject to, and the exercise price per
share of, the outstanding Options shall be adjusted in a fair and equitable
manner as determined by the Board, in its sole discretion. Notwithstanding the
foregoing, any fractional share resulting from an adjustment pursuant to this
Section 4.2 shall be rounded up or down to the nearest whole number, as
determined by the Board, and in no event may the exercise price of any Option be
decreased to an amount less than the par value, if any, of the stock subject to
the Option. The adjustments determined by the Board pursuant to this Section 4.2
shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
----------------------------------
5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees," "Consultants" and "Directors" shall include prospective Employees,
prospective Consultants and prospective Directors to whom Options are granted in
connection with written offers of an employment or other service relationship
with the Participating Company Group. Eligible persons may be granted more than
one (1) Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee on
the effective date of the grant of an Option to such person may be granted only
a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective
Employee upon the condition that such person become an Employee shall be deemed
granted effective on the date such person commences service with a Participating
Company, with an exercise price determined as of such date in accordance with
Section 6.1.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that Options
designated as Incentive Stock Options (granted under all stock option plans of
the Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for Stock having a Fair
Market Value greater than One Hundred Thousand Dollars ($100,000), the portion
of such Options which exceeds such amount shall be treated as Nonstatutory Stock
Options. For purposes of this Section 5.3, Options designated as Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of Stock shall be determined as of the time the Option
with respect to such Stock is granted. If the Code is amended to provide for a
different limitation from that set forth in this Section 5.3, such different
limitation shall be deemed incorporated herein effective as of the date and with
respect to such Options as required or permitted by such amendment to the Code.
If an Option is treated as an Incentive Stock Option in part and as a
Nonstatutory Stock Option in part by reason of the limitation set forth in this
Section 5.3, the Optionee may designate which portion
<PAGE>
EXHIBIT 10.03
of such Option the Optionee is exercising. In the absence of such designation,
the Optionee shall be deemed to have exercised the Incentive Stock Option
portion of the Option first. Separate certificates representing each such
portion shall be issued upon the exercise of the Option.
6. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by Option
-------------------------------
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish. Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the sole discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
6.2 EXERCISE PERIOD. Options shall be exercisable at such time or
times, or upon such event or events, and subject to such terms, conditions,
performance criteria, and restrictions as shall be determined by the Board and
set forth in the Option Agreement evidencing such Option; provided, however,
that (a) no Option shall be exercisable after the expiration of ten (10) years
after the effective date of grant of such Option, (b) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the effective date of grant of such Option,
(c) no Option granted to a prospective Employee, prospective Consultant or
prospective Director may become exercisable prior to the date on which such
person commences service with a Participating Company, and (d) with the
exception of an Option granted to an officer, Director or Consultant, no Option
shall become exercisable at a rate less than twenty percent (20%) per year over
a period of five (5) years from the effective date of grant of such Option,
subject to the Optionee's continued Service.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value (as determined by the Company without regard
to any restrictions on transferability applicable to such stock by reason of
federal or state securities laws or agreements with an underwriter for the
Company) not less than the exercise price, (iii) by the assignment of the
proceeds of a sale or loan with respect to some or all of the shares being
acquired upon the exercise of the Option (including, without limitation, through
an exercise complying with the provisions of Regulation T as promulgated
<PAGE>
EXHIBIT 10.03
from time to time by the Board of Governors of the Federal Reserve System) (a
"Cashless Exercise"), (iv) by the Optionee's promissory note in a form approved
by the Company, (v) by such other consideration as may be approved by the Board
from time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by adoption
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.
(c) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.
(d) PAYMENT BY PROMISSORY NOTE. No promissory note shall be
permitted if the exercise of an Option using a promissory note would be a
violation of any law. Any permitted promissory note shall be on such terms as
the Board shall determine at the time the Option is granted. The Board shall
have the authority to permit or require the Optionee to secure any promissory
note used to exercise an Option with the shares of Stock acquired upon the
exercise of the Option or with other collateral acceptable to the Company.
Unless otherwise provided by the Board, if the Company at any time is subject to
the regulations promulgated by the Board of Governors of the Federal Reserve
System or any other governmental entity affecting the extension of credit in
connection with the Company's securities, any promissory note shall comply with
such applicable regulations, and the Optionee shall pay the unpaid principal and
accrued interest, if any, to the extent necessary to comply with such applicable
regulations.
6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its sole discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, including
by means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Company
shall have no obligation to deliver shares of Stock or to release shares of
Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
<PAGE>
EXHIBIT 10.03
6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject
to a right of first refusal, one or more repurchase options, or other conditions
and restrictions as determined by the Board in its sole discretion at the time
the Option is granted. The Company shall have the right to assign at any time
any repurchase right it may have, whether or not such right is then exercisable,
to one or more persons as may be selected by the Company. Upon request by the
Company, each Optionee shall execute any agreement evidencing such transfer
restrictions prior to the receipt of shares of Stock hereunder and shall
promptly present to the Company any and all certificates representing shares of
Stock acquired hereunder for the placement on such certificates of appropriate
legends evidencing any such transfer restrictions.
6.6 EFFECT OF TERMINATION OF SERVICE.
--------------------------------
(a) OPTION EXERCISABILITY. Subject to earlier termination of
the Option as otherwise provided herein, an Option shall be exercisable after an
Optionee's termination of Service as follows:
(i) Disability. If the Optionee's Service with the
----------
Participating Company Group is terminated because of the Disability of the
Optionee, the Option, to the extent unexercised and exercisable on the date on
which the Optionee's Service terminated, may be exercised by the Optionee (or
the Optionee's guardian or legal representative) at any time prior to the
expiration of twelve (12) months (or such longer or shorter period of time (not
less than six (6) months) as determined by the Board, in its sole discretion)
after the date on which the Optionee's Service terminated, but in any event no
later than the date of expiration of the Option's term as set forth in the
Option Agreement evidencing such Option (the "Option Expiration Date").
(ii) Death. If the Optionee's Service with the
-----
Participating Company Group is terminated because of the death of the Optionee,
the Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee's legal
representative or other person who acquired the right to exercise the Option by
reason of the Optionee's death at any time prior to the expiration of twelve
(12) months (or such longer or shorter period of time (not less than six (6)
months) as determined by the Board, in its sole discretion) after the date on
which the Optionee's Service terminated, but in any event no later than the
Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(iii) Other Termination of Service. If the Optionee's
----------------------------
Service with the Participating Company Group terminates for any reason, except
Disability or death, the Option, to the extent unexercised and exercisable by
the Optionee on the date on which the Optionee's Service terminated, may be
exercised by the Optionee within three (3) months (or such longer or shorter
period of time (not less than thirty (30) days) as determined by the Board, in
its sole discretion) after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of an Option within the applicable time periods set
forth in Section
<PAGE>
EXHIBIT 10.03
6.6(a) is prevented by the provisions of Section 11 below, the Option shall
remain exercisable until thirty (30) days after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.6(a) of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
7. STANDARD FORMS OF OPTION AGREEMENT.
----------------------------------
7.1 INCENTIVE STOCK OPTIONS. Unless otherwise provided by the Board
at the time the Option is granted, an Option designated as an "Incentive Stock
Option" shall comply with and be subject to the terms and conditions set forth
in the form of Incentive Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.2 NONSTATUTORY STOCK OPTIONS. Unless otherwise provided by the
Board at the time the Option is granted, an Option designated as a "Nonstatutory
Stock Option" shall comply with and be subject to the terms and conditions set
forth in the form of Nonstatutory Stock Option Agreement adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.
7.3 STANDARD TERM OF OPTIONS. Except as otherwise provided in
Section 6.2 or by the Board in the grant of an Option, any Option granted
hereunder shall have a term of ten (10) years from the effective date of grant
of the Option.
7.4 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any of the standard forms of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement shall be in
accordance with the terms of the Plan. Such authority shall include, but not by
way of limitation, the authority to grant Options which are immediately
exercisable subject to the Company's right to repurchase any unvested shares of
Stock acquired by an Optionee upon the exercise of an Option in the event such
Optionee's Service with the Participating Company Group is terminated for any
reason, with or without cause.
<PAGE>
EXHIBIT 10.03
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the shareholders of the Company of more
than fifty percent (50%) of the voting stock of the Company;
(iii) a merger or consolidation in which the Company is a
party; (iii) the sale, exchange, or transfer of all or substantially all of the
assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTIONS. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under
outstanding Options or substitute for outstanding Options substantially
equivalent options for the Acquiring Corporation's stock. For purposes of this
Section 8.2, an Option shall be deemed assumed if, following the Transfer of
Control, the Option confers the right to purchase, for each share of Stock
subject to the Option immediately prior to the Transfer of Control, the
consideration (whether stock, cash or other securities or property) to which a
holder of a share of Stock on the effective date of the Transfer of Control was
entitled. Any Options which are neither assumed or substituted for by the
Acquiring Corporation in connection with the Transfer of Control nor exercised
as of the date of the Transfer of Control shall terminate and cease to be
outstanding effective as of the date of the Transfer of Control. Notwithstanding
the foregoing, shares acquired upon exercise of an Option prior to the Transfer
<PAGE>
EXHIBIT 10.03
of Control and any consideration received pursuant to the Transfer of Control
with respect to such shares shall continue to be subject to all applicable
provisions of the Option Agreement evidencing such Option except as otherwise
provided in such Option Agreement. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the outstanding Options
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its sole discretion.
9. PROVISION OF INFORMATION. At least annually, copies of the Company's
------------------------
balance sheet and income statement for the just completed fiscal year shall be
made available to each Optionee and purchaser of shares of Stock upon the
exercise of an Option. The Company shall not be required to provide such
information to persons whose duties in connection with the Company assure them
access to equivalent information.
10. NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
-----------------------------
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
11. COMPLIANCE WITH SECURITIES LAW. The grant of Options and the
------------------------------
issuance of shares of Stock upon exercise of Options shall be subject to
compliance with all applicable requirements of federal, state or foreign law
with respect to such securities. Options may not be exercised if the issuance of
shares of Stock upon exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any stock exchange or market system upon which the Stock may
then be listed. In addition, no Option may be exercised unless (a) a
registration statement under the Securities Act shall at the time of exercise of
the Option be in effect with respect to the shares issuable upon exercise of the
Option or (b) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Option may be issued in accordance with the terms
of an applicable exemption from the registration requirements of the Securities
Act. The inability of the Company to obtain from any regulatory body having
jurisdiction the authority, if any, deemed by the Company's legal counsel to be
necessary to the lawful issuance and sale of any shares hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell such
shares as to which such requisite authority shall not have been obtained. As a
condition to the exercise of any Option, the Company may require the Optionee to
satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.
12. INDEMNIFICATION. In addition to such other rights of indemnification
---------------
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the
<PAGE>
EXHIBIT 10.03
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
13. TERMINATION OR AMENDMENT OF PLAN. The Board may terminate or amend
--------------------------------
the Plan at any time. However, subject to changes in applicable law, regulations
or rules that would permit otherwise, without the approval of the Company's
shareholders, there shall be (a) no increase in the maximum aggregate number of
shares of Stock that may be issued under the Plan (except by operation of the
provisions of Section 4.2), (b) no change in the class of persons eligible to
receive Incentive Stock Options, and (c) no other amendment of the Plan that
would require approval of the Company's shareholders under any applicable law,
regulation or rule. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option or any unexercised portion thereof,
without the consent of the Optionee, unless such termination or amendment is
required to enable an Option designated as an Incentive Stock Option to qualify
as an Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
14. STOCKHOLDER APPROVAL. The Plan or any increase in the maximum number
--------------------
of shares of Stock issuable thereunder as provided in Section 4.1 (the "Maximum
Shares") shall be approved by the shareholders of the Company within twelve (12)
months of the date of adoption thereof by the Board. Options granted prior to
stockholder approval of the Plan or in excess of the Maximum Shares previously
approved by the shareholders shall become exercisable no earlier than the date
of stockholder approval of the Plan or such increase in the Maximum Shares, as
the case may be.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing ENACT Health Management Systems 1997 Stock Option Plan was duly
adopted by the Board on March 3, 1997.
________________________________________
Secretary
<PAGE>
PLAN HISTORY
March 3, 1997 Board adopts Plan, with an initial reserve of
254,000 shares and an automatic 200,000 share
reserve increase effective on December 31,
1997.
__________, 1997 Shareholders approve Plan, with an initial
reserve 254,000 shares and an automatic
200,000 share reserve increase effective on
December 31, 1997.
<PAGE>
STANDARD FORM OF
ENACT HEALTH MANAGEMENT SYSTEMS
INCENTIVE STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT 10.03
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
ENACT HEALTH MANAGEMENT SYSTEMS
IMMEDIATELY EXERCISABLE
INCENTIVE STOCK OPTION AGREEMENT
THIS IMMEDIATELY EXERCISABLE INCENTIVE STOCK OPTION AGREEMENT (the "OPTION
AGREEMENT") is made and entered into as of March 24, 1997, by and between ENACT
Health Management Systems and John Hyle (the "OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION"). The Option shall in all respects be subject to the
terms and conditions of the ENACT Health Management Systems 1997 Stock Option
Plan (the "PLAN"), the provisions of which are incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means March 24, 1997.
1
<PAGE>
(b) "NUMBER OF OPTION SHARES" means 75,000 shares of Stock, as
adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ 5.00 per share of Stock, as adjusted
from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the Date of Option Grant.
(e) "INITIAL VESTING DATE" means the date occurring one (1) month
after (check one):
the Date of Option Grant.
----
X March 24, 1997, the date the Optionee's Service
----
commenced.
(f) "VESTED RATIO" means, on any relevant date, except as otherwise
provided herein, the ratio determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to the Initial Vesting Date 0
On Initial Vesting Date, provided the Optionee's 1/36
Service has not terminated prior to such date
Plus
----
For each full month of the Optionee's continuous 1/36
Service from the Initial Vesting Date until the
Vested Ratio equals 1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "COMPANY" means ENACT Health Management Systems , a California
corporation, or any successor corporation thereto.
(i) "SERVICE" means the Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. Furthermore, the Optionee's Service
with the Participating Company Group shall not be deemed to have terminated if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the
2
<PAGE>
Company; provided, however, that if any such leave exceeds ninety (90) days, on
the ninety-first (91st) day of such leave the Optionee's Service shall be deemed
to have terminated unless the Optionee's right to return to Service with the
Participating Company Group is guaranteed by statute or contract.
Notwithstanding the foregoing, unless otherwise designated by the Company or
required by law, a leave of absence shall not be treated as Service for purposes
of determining the Optionee's Vested Ratio. The Optionee's Service shall be
deemed to have terminated either upon an actual termination of Service or upon
the corporation for which the Optionee performs Service ceasing to be a
Participating Company. Subject to the foregoing, the Company, in its sole
discretion, shall determine whether the Optionee's Service has terminated and
the effective date of such termination. (NOTE: If the Option is exercised more
than three (3) months after the date on which the Optionee ceased to be an
Employee (other than by reason of death or a permanent and total disability as
defined in Section 22(e)(3) of the Code), the Option will be treated as a
Nonstatutory Stock Option and not as an Incentive Stock Option to the extent
required by Section 422 of the Code.)
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include the
singular. Use of the term "or" is not intended to be exclusive, unless the
context clearly requires otherwise.
2. TAX CONSEQUENCES.
----------------
2.1 TAX STATUS OF THE OPTION. This Option is intended to be an
Incentive Stock Option within the meaning of Section 422(b) of the Code, but the
Company does not represent or warrant that this Option qualifies as such. The
Optionee should consult with the Optionee's own tax advisor regarding the tax
effects of this Option and the requirements necessary to obtain favorable income
tax treatment under Section 422 of the Code, including, but not limited to,
holding period requirements. (NOTE: If the aggregate Exercise Price of the
Option (that is, the Exercise Price multiplied by the Number of Option Shares)
plus the aggregate exercise price of any other Incentive Stock Options held by
the Optionee (whether granted pursuant to the Plan or any other stock option
plan of the Participating Company Group) is greater than One Hundred Thousand
Dollars ($100,000), the Optionee should contact the Chief Financial Officer of
the Company to ascertain whether the entire Option qualifies as an Incentive
Stock Option.).
2.2 ELECTION UNDER SECTION 83(B) OF THE CODE. If the Optionee
exercises this Option to purchase the share of Stock that are both
nontransferable and subject to a substantial risk of forfeiture, the Optionee
understands that the Optionee should consult with the Optionee's tax advisor
regarding the advisability of filing with the Internal Revenue Service an
election under Section 83(b) of the Code, which must be filed no later than
thirty (30) days after the date in which the Optionee exercises the Option.
Shares acquired upon the exercise of the Option are nontransferable and subject
to a substantial risk of forfeiture if, for example, (a) they are unvested and
are subject to a right of the Company to repurchase such shares at the
Optionee's original purchase price if the Optionee's Service terminated, (b) the
Optionee is an Insider and exercises the Option within six (6) months of the
Date of Option Grant (if a class of
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equity security of the Company is registered under Section 12 of the Exchange
Act), or (c) the Optionee is subject to s restriction on transfer to comply with
the "Pooling-of-Interest Accounting" rules. Failure to file an election under
Section 83(b), if appropriate, may result in adverse tax consequences to the
Optionee. The Optionee acknowledges that the Optionee has been advised to
consult with a tax advisor prior to the exercise of the Option regarding the tax
consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER
SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE
PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE
ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE'S
SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS
REPRESENTATIVES TO FILE SUCH ELECTION ON HIS OR HER BEHALF.
3. ADMINISTRATION. All questions of interpretation concerning this Option
--------------
Agreement shall be determined by the Board All determinations by the Board shall
be final and binding upon all persons having an interest in the Option. Any
officer of a Participating Company shall have the authority to act on behalf of
the Company with respect to any matter, right, obligation, or election which is
the responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.
4. EXERCISE OF THE OPTION.
-----------------------
4.1 RIGHT TO EXERCISE.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares less the number of shares previously acquired upon exercise of
the Option, subject to the Optionee's agreement that any shares purchased upon
exercise are subject to the Company's repurchase rights set forth in Section 11
and Section 12. Notwithstanding the foregoing, except as provided in Section
4.1(b), the aggregate Fair Market Value of the shares of Stock with respect to
which the Optionee may exercise the Option for the first time in during any
calendar year, when added to the aggregate Fair Market Value of the shares
subject to any other options designated as Incentive Stock Options granted to
the Optionee under all stock option plans of the Participating Company Group
prior to the Date of Option Grant with respect to which such options are
exercisable for the first time during the same calendar year, shall not exceed
One Hundred Thousand Dollars ($100,000). For purposes of the preceding sentence,
options designated as Incentive Stock Options shall be taken into account in
order in which they were granted, and the Fair Market Value of shares of stock
shall be determined as of the time the option with respect to such shares is
granted. Such limitation shall be referred to in this Option Agreement as the
"ISO EXERCISE LIMITATION". If Section 422 of the Code is amended to provide for
a different limitation from that set forth in this Section 4.1(a), the ISO
Exercise Limitation shall be deemed amended effective as of the date required or
permitted by such amendment to the Code. The ISO Exercise Limitation shall
terminated upon the earlier of (i) the Optionee's termination of Service, (ii)
the day immediately prior to the effective date of a Transfer of Control in
which the Option is not
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<PAGE>
assumed or substituted for by the Acquiring Corporation as provided in Section
8, or (iii) the day ten (10) days prior to the Option Expiration Date. Upon such
termination of the ISO Exercise Limitation, the Option shall be deemed a
Nonstatutory Stock Option to the extent of the number of shares subject to the
Option which would otherwise exceed the ISO Exercise Limitation.
(b) Notwithstanding any other provision of this Option Agreement, if
compliance with the ISO Exercise Limitation as set forth in Section 4.1(a) will
result in the exercisability of any Vested Shares (as defined in Section 11.2)
being delayed more than thirty (30) days beyond the date such share become
Vested Shares (the "VESTING DATE"), the Option shall be deemed to be two (2)
options. The first option shall be for the maximum portion of the Number of
Option Shares that can comply with the ISO Exercise Limitation without causing
the Option to be unexercisable in the aggregate as to Vested Shares on the
Vesting Date for such shares. The second option, which shall not be treated as
an Incentive Stock Option as described in Section 422(b) of the Code, shall be
for the balance of the Number of Option Shares; that is, those shares which, on
the respective Vesting Date for such shares, would be unexercisable if included
in the first option and thereby made subject to the ISO Exercise Limitation.
Shares treated as subject to the second option shall be exercisable on the same
terms and at the same time as set forth in this Option Agreement; provided,
however, that (i) the second sentence of Section 4.1(a) shall not apply to the
second option and (ii) each such shares shall become Vested Shares upon the
Vesting Date on which such share must first be allocated to the second option
pursuant to the preceding sentence. Unless the Optionee specifically elects to
the contrary in the Optionee's written notice of exercise, the first option
shall be deemed to be exercised first to the maximum possible extent and then
the second option shall be deemed to be exercised.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares being purchased. The Option
shall be deemed to be exercised upon receipt by the Company of such written
notice and the aggregate Exercise Price.
4.3 PAYMENT OF EXERCISE PRICE.
(a) Forms of Consideration Authorized. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
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<PAGE>
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
(B) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(C) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or in
part, or at any time thereafter as requested by the Company, the Optionee hereby
authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations of the Participating Company
Group are satisfied. Accordingly, the Optionee may not be able to exercise the
Option when desired even though the Option is vested, and the Company shall have
no obligation to issue a certificate for such shares or release such shares from
any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price is
paid by means of a Cashless Exercise, the certificate for the shares as to which
the Option is exercised shall be registered in the name of the Optionee, or, if
applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The grant
of the Option and the issuance of shares of Stock upon exercise of the Option
shall be subject to compliance with all applicable requirements of federal,
state or foreign law with respect to such securities. The Option may not be
exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
law or regulations or the requirements of any stock exchange or market system
upon which the Stock
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<PAGE>
may then be listed. In addition, the Option may not be exercised unless (i) a
registration statement under the Securities Act shall at the time of exercise of
the Option be in effect with respect to the shares issuable upon exercise of the
Option or (ii) in the opinion of legal counsel to the Company, the shares
issuable upon exercise of the Option may be issued in accordance with the terms
of an applicable exemption from the registration requirements of the Securities
Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE
FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE
TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The
inability of the Company to obtain from any regulatory body having jurisdiction
the authority, if any, deemed by the Company's legal counsel to be necessary to
the lawful issuance and sale of any shares subject to the Option shall relieve
the Company of any liability in respect of the failure to issue or sell such
shares as to which such requisite authority shall not have been obtained. As a
condition to the exercise of the Option, the Company may require the Optionee to
satisfy any qualifications that may be necessary or appropriate, to evidence
compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
---------------------------------
7.1 OPTION EXERCISABILITY.
(A) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, (i) the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date, and (ii) solely for
purposes of computing the Vested Ratio, the Optionee shall be given credit for
an additional twelve (12) months of continuous Service; provided, however, that
in no event shall the Vested Ratio exceed 1/1. NOTE: If the Option is exercised
more than three (3) months after the date on which the Optionee's Service as an
Employee terminated as a result of a Disability other than permanent and
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<PAGE>
total disability as defined in Section 22(e)(3) of the Code, the Option will be
treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to
the extent required by Section 422 of the Code.
(B) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(C) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except for Disability
or death, the Option, to the extent unexercised and exercisable by the Optionee
on the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 ADDITIONAL LIMITATION ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11.
7.3 TERMINATION AFTER A TRANSFER OF CONTROL. In the event that the
Optionee's Service is terminated within six (6) months after a Transfer of
Control (as defined in Section 8.1(b) below), the Optionee shall be given credit
for an (solely for purposes of computing the Vested Ratio) additional fourteen
(14) months of Service; provided, however, that in no event shall the Vested
Ratio exceed 1/1.
7.4 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until thirty (30) days after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date. The Company makes no representation as to
the tax consequences of any such delayed exercise. The Optionee should consult
with the Optionee's own tax advisor as to the tax consequences of any such
delayed exercise.
7.5 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of
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<PAGE>
Service, or (iii) the Option Expiration Date. The Company makes no
representation as to the tax consequences of any such delayed exercise. The
Optionee should consult with the Optionee's own tax advisor as to the tax
consequences of any such delayed exercise.
8. TRANSFER OF CONTROL.
--------------------
8.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single
or series of related transactions by the shareholders of the Company of
more than fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or the parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under the Option or substitute for the Option a substantially equivalent option
for the Acquiring Corporation's stock. For purposes of this Section 8.2, the
Option shall be deemed assumed if, following the Transfer of Control, the Option
confers the right to purchase in accordance with its terms and conditions, for
each share of Stock subject to the Option immediately prior to the Transfer of
Control, the consideration (whether stock, cash, or other securities or
property) to which a holder of a share of Stock on the effective date of the
Transfer of Control was entitled. The Option shall terminate and cease to be
outstanding effective as of
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<PAGE>
the Transfer of Control to the extent that the Option is neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control. Notwithstanding
the foregoing, shares acquired upon the exercise of the Option prior to the
Transfer of Control and any consideration received pursuant to the Transfer of
Control with respect to such shares shall continue to be subject to all
applicable provisions of this Option Agreement except as otherwise provided
herein. Furthermore, notwithstanding the foregoing, if the corporation the stock
which is subject to the Option immediately prior to an Ownership Change Event as
described in Section 8.1(a) constituting a Transfer of Control is the surviving
or continuing corporation and immediately after such Ownership Change Event is
less that fifty percent (50%) of the total combined voting power of its voting
stock is held by another corporation or by other corporations that are members
of an affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the Option shall not
terminate unless the Board otherwise provides in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Exercise Price be decreased to an amount less than the
par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive .
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall
-----------------------------------------------
have no rights as a shareholder with respect to any shares covered by the Option
until the date of the issuance of a certificate for the shares for which the
Option has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 9. If the Optionee is an Employee, the Optionee understands
and acknowledges that, except as otherwise provided in a separate, written
employment agreement between a Participating Company and the Optionee, the
Optionee's employment is "at will" and is for no specified term. Nothing in this
Option Agreement shall confer upon the Optionee any right to continue in the
Service of a Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's Service as an Employee
or Consultant, as the case may be, at any time.
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<PAGE>
11. UNVESTED SHARE REPURCHASE OPTION.
---------------------------------
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Company Group is terminated for any
reason or no reason, with or without cause, or if the Optionee, the Optionee's
legal representative, or other holder of shares acquired upon the exercise of
the Option attempts to sell, exchange, transfer, pledge or otherwise dispose of
(other than pursuant to an Ownership Change Event) any shares acquired upon the
exercise of the Option which exceed the Vested Shares as defined in Section 11.2
below (the "UNVESTED SHARES"), the Company shall have the right to repurchase
the Unvested Shares under the terms and subject to the conditions set forth in
this Section 11 (the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "VESTED SHARES"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon the exercise of
the Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF THE UNVESTED SHARE REPURCHASE OPTION. The Company
may exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the Option,
if later) or (b) the Company has received notice of the attempted disposition of
Unvested Shares. If the Company fails to give notice within such sixty (60) day
period, the Unvested Share Repurchase Option shall terminate unless the Company
and the Optionee have extended the time for the Unvested Share Repurchase
Option. The Unvested Share Repurchase Option must be exercised, if at all, for
all of the Unvested Shares, except as the Company and the Optionee otherwise
agree.
11.4 PAYMENT FOR SHARES AND RETURNED SHARES TO THE COMPANY. The
purchase price per share being repurchase by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase
Price to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation
of any indebtedness of the Optionee to any Participating Company shall be
treated as payment to the Optionee in cash to the extent the unpaid principal
and any accrued interest canceled. The shares being repurchased shall be
delivered to the Company by the Optionee at the same time as the delivery of the
Repurchase Price to the Optionee.
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<PAGE>
11.5 ASSIGNMENT OF UNVESTED SHARE REPURCHASE OPTION. In the event
the Company is unable to exercise the Unvested Share Repurchase Option pursuant
to the provisions of any law, regulation, or agreement restricting the Company's
redemption of the Stock, the Company shall have the right to assign the Unvested
Share Repurchase Option at any time, whether or not such option is then
exercisable, to one or more persons as may be selected by the Company.
11.6 OWNERSHIP CHANGE EVENT. Except as otherwise provided herein,
upon occurrence of an Ownership Change Event, any and all new, substituted or
additional securities or other property to which the Optionee is entitled by
reason of the Optionee's ownership of Unvested Shares shall be immediately
subject to the Unvested Share Repurchase Option and included in the terms
"Stock" and "Unvested Shares" for purposes of the Unvested Share Repurchase
Option with the same force and effect as the Unvested Shares immediately prior
to the Ownership Change Event. While the aggregate Repurchase Price shall
remain the same after the Ownership Change Event, the Repurchase Price per
Unvested Share upon the exercise of the Unvested Share Repurchase Option
following such Ownership Change Event shall be adjusted as appropriate. For
purposes of determining the Vested Ratio following an Ownership Change Event,
credited Service shall include all Service with any corporation which is a
Participating Company at the time the Service is rendered, whether or not such
corporation is a Participating Company both before or after the Ownership Change
Event.
12. RIGHT OF FIRST REFUSAL.
-----------------------
12.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in Section
12.7 below, in the event the Optionee, the Optionee's legal representative, or
other holder of shares acquired upon exercise of the Option proposes to sell,
exchange, transfer, pledge, or otherwise dispose of any Vested Shares (the
"TRANSFER SHARES") to any person or entity, including, without limitation, any
shareholder of the Participating Company Group, the Company shall have the right
to repurchase the Transfer Shares under the terms and subject to the conditions
set forth in this Section 12 (the "RIGHT OF FIRST REFUSAL").
12.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer of
the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event of a bona fide gift or involuntary transfer,
the proposed transfer price shall be deemed to be the Fair Market Value of the
Transfer Shares, as determined by the Board in good faith. If the Optionee
proposes to transfer any Transfer Shares to more than one Proposed Transferee,
the Optionee shall provide a separate Transfer Notice for the proposed transfer
to each Proposed Transferee. The Transfer Notice shall be signed by both the
Optionee and the Proposed Transferee and must constitute a binding commitment of
the Optionee and the Proposed Transferee for the transfer of the Transfer Shares
to the Proposed Transferee subject only to the Right of First Refusal.
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<PAGE>
12.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 12, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 12. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
12.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company determines
the proposed transfer to be bona fide, the Company shall have the right to
purchase all, but not less than all, of the Transfer Shares (except as the
Company and the Optionee otherwise agree) at the purchase price and on the terms
set forth in the Transfer Notice by delivery to the Optionee of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Optionee or issued by a person other than the Optionee
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Optionee shall
thereupon consummate the sale of the Transfer Shares to the Company on the terms
set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company (unless a longer period is offered
by the Proposed Transferee); provided, however, that in the event the Transfer
Notice provides for the payment for the Transfer Shares other than in cash, the
Company shall have the option of paying for the Transfer Shares by the present
value cash equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Company. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
12.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company fails
to exercise the Right of First Refusal in full (or to such lesser extent as the
Company and the Optionee otherwise agree) within the period specified in Section
12.4 above, the Optionee may conclude a transfer to the Proposed Transferee of
the Transfer Shares on the terms and conditions described in the Transfer
Notice, provided such transfer occurs not later than ninety (90) days following
delivery to the Company of the Transfer Notice. The Company shall have the right
to demand further assurances from the Optionee and the Proposed Transferee (in a
form satisfactory to the Company) that the transfer of the Transfer Shares was
actually carried out on the terms and conditions described in the Transfer
Notice. No Transfer Shares shall be transferred on the books of the Company
until the Company has received such assurances, if so demanded, and has approved
the proposed transfer as bona fide. Any proposed transfer on terms and
conditions different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this Section 12.
12.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the Transfer
Shares or any interest therein, other than the Company, shall be required as a
condition of such transfer to
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<PAGE>
agree in writing (in a form satisfactory to the Company) that such transferee
shall receive and hold such Transfer Shares or interest therein subject to all
of the terms and conditions of this Option Agreement, including this Section 12
providing for the Right of First Refusal with respect to any subsequent
transfer. Any sale or transfer of any shares acquired upon exercise of the
Option shall be void unless the provisions of this Section 12 are met.
12.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right of
First Refusal shall not apply to any transfer or exchange of the shares acquired
upon exercise of the Option if such transfer or exchange is in connection with
an Ownership Change Event. If the consideration received pursuant to such
transfer or exchange consists of stock of a Participating Company, such
consideration shall remain subject to the Right of First Refusal unless the
provisions of Section 12.9 below result in a termination of the Right of First
Refusal.
12.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have the
right to assign the Right of First Refusal at any time, whether or not there has
been an attempted transfer, to one or more persons as may be selected by the
Company.
12.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
13. ESCROW
------
13.1 ESTABLISHMENT OF ESCROW. To ensure that the shares subject to
the Unvested Share Repurchase Option or the Right of First Refusal will be
available for repurchase, the Company may require the Optionee to deposit the
certificate evidencing shares which the Optionee purchase upon the exercise of
the Option with an escrow agent designated by the Company under the terms and
conditions of an escrow agreement approved by the Company. If the Company does
not require such deposit as a condition of exercise of the Option, the Company
reserves the right at any time to require the Optionee to so deposit the
certificate in escrow. Upon the occurrence of an Ownership Change Event or a
change, as described in Section 9, in the character amount of any of the
outstanding stock of the corporation the stock of which is subject to the
provisions of this Option Agreement, any and all new, substituted or additional
securities or other property to which the Optionee is entitled by reason of the
Optionee's ownership of shares of Stock acquired upon the exercise of the Option
that remain, following such Ownership Change Event or change event described in
Section 9, subject to the Unvested Share Repurchase Option or the Right of First
Refusal Option shall be immediately subject to the escrow to the same extent as
such shares of Stock immediately before such event. The Company shall bear the
expense of escrow.
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<PAGE>
13.2 DELIVERY OF SHARES TO OPTIONEE. As soon as practicable after
the expiration of the Unvested Share Repurchase Option and the Right of First
Refusal, but not more frequently than twice per calendar year, the escrow agent
shall deliver to the Optionee the shares and any other property no longer
subject to such restrictions.
13.3 NOTICES AND PAYMENTS. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase Option or the Right of First Refusal, the notices required to
be given to the Optionee shall be given to the escrow agent, and any payment
required to be given to the Optionee shall be given to the escrow agent. Within
thirty (30) days after payment by the Company, the escrow agent shall deliver
the shares and any other property which the Company has purchased to the Company
and shall deliver the payment received from the Company to the Optionee.
14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to
-----------------------------------------------
time, there is any stock dividend, stock split or other change, as described in
Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option
Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionee's
ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Unvested Share Repurchase Option and the Right of
First Refusal with the same force and effect as the shares subject to the
Unvested Share Repurchase Option and the Right of First Refusal immediately
before such event.
15. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION. The Optionee shall
----------------------------------------------
dispose of the shares acquired pursuant to the Option only in accordance with
the provisions of this Option Agreement. In addition, the Optionee shall
promptly notify the Chief Financial Officer of the Company if the Optionee
disposes of any of the shares acquired pursuant to the Option within one (1)
year after the date of the Optionee exercises all or part of the Option or
within two (2) years after the Date of Option Grant. Until such time as the
Optionee disposes of such shares in a manner consistent with the provisions of
this Option Agreement, unless otherwise expressly authorized by the Company, the
Optionee shall hold all shares acquired pursuant to the Option in the Optionee's
name (and not in the name of any nominee) for the one-year period immediately
after the exercise of the Option and the two-year period immediately after the
Date of Option Grant. At any time during the one-year or two-year periods set
forth above, the Company may place a legend on any certificate representing
shares acquired pursuant to the Option requesting the transfer agent for the
Company's stock to notify the Company of any such transfers. The obligation of
the Optionee to notify the Company of any such transfer shall continue
notwithstanding that a legend has been placed on the certificate pursuant to the
preceding sentence.
16. LEGENDS. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option, Right of First Refusal and any applicable
federal, state or foreign securities law restrictions on all certificates
representing shares of stock subject to the provisions of this Option Agreement.
The Optionee shall, at the request of the Company, promptly present
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<PAGE>
to the Company any and all certificates representing shares acquired pursuant to
the Option in the possession of the Optionee in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include, but shall not be limited to, the
following:
16.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
16.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
16.3 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION .
16.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
16.5 "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION
AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
("ISO"). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE
SHARES SHOULD NOT BE TRANSFERRED PRIOR TO ____________________________. SHOULD
THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND
FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE
CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE
NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED
ABOVE."
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<PAGE>
17. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any
---------------
underwritten public offering of stock, including an initial public offering of
stock, made by the Company pursuant to an effective registration statement filed
under the Securities Act, the Optionee shall not offer, sell, contract to sell,
pledge, hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
initial public offering; provided, however, that such period of time shall not
exceed one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act. The Optionee shall be subject to this Section provided and only
if the officers and directors of the Company are also subject to similar
arrangements.
18. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
19. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or
the Option at any time; provided, however, that except as provided in Section
8.2 in connection with a Transfer of Control, no such termination or amendment
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee unless such termination or amendment is necessary to
comply with any applicable law or government regulation or is required to enable
the Option to qualify as an Incentive Stock Option. No amendment or addition to
this Option Agreement shall be effective unless in writing.
20. NOTICES. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given (except to the extent that this
Option Agreement provides for effectiveness only upon actual receipt of such
notice) upon personal delivery or upon deposit in the United States Post Office,
by registered or certified mail, with postage and fees prepaid, addressed to the
other party at the address shown below that party's signature or at such other
address as such party may designate in writing from time to time to the other
party.
21. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute
--------------------
the entire understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein or therein,
and there are no agreements, understandings, restrictions, representations, or
warranties among the Optionee and the Participating Company Group with respect
to such subject matter other than those as set forth or provided for herein or
therein. To the extent contemplated herein or therein, the provisions of this
Option Agreement shall survive any exercise of the Option and shall remain in
full force and effect.
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<PAGE>
22. APPLICABLE LAW. This Option Agreement shall be governed by the
--------------
laws of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
ENACT HEALTH MANAGEMENT
SYSTEMS
By:__________________________
Title:_______________________
Address: 1975 W. El Camino Real, No. 306
Mountain View, CA 94040
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option as set forth in Section 11 and the Right of First Refusal as set forth in
Section 12, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement. The undersigned acknowledges receipt of a
copy of the Plan.
OPTIONEE
Date:___________________________ _________________________________________
John Hyle
Optionee Address:
____________________________________
____________________________________
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<PAGE>
STANDARD FORM OF
ENACT HEALTH MANAGEMENT SYSTEMS
NONSTATUTORY STOCK OPTION AGREEMENT
<PAGE>
EXHIBIT 10.03
THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAVE NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF
THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE
SALE IS SO EXEMPT.
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
ENACT HEALTH MANAGEMENT SYSTEMS
IMMEDIATELY EXERCISABLE
NONSTATUTORY STOCK OPTION AGREEMENT
THIS NONSTATUTORY STOCK OPTION AGREEMENT (the "OPTION AGREEMENT") is made
and entered into as of _________________, 199____, by and between ENACT Health
Management Systems and ____________________________ (the "OPTIONEE").
The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION"). The Option shall in all respects be subject to the
terms and conditions of the ENACT Health Management Systems 1997 Stock Option
Plan (the "PLAN"), the provisions of which are incorporated herein by reference.
1. DEFINITIONS AND CONSTRUCTION.
-----------------------------
1.1 DEFINITIONS. Unless otherwise defined herein, capitalized terms
shall have the meanings assigned to such terms in the Plan. Whenever used
herein, the following terms shall have their respective meanings set forth
below:
(a) "DATE OF OPTION GRANT" means ________________________ ,
199__.
<PAGE>
(b) "NUMBER OF OPTION SHARES" means ___________________ shares of
Stock, as adjusted from time to time pursuant to Section 9.
(c) "EXERCISE PRICE" means $ ____________ per share of Stock, as
adjusted from time to time pursuant to Section 9.
(d) "INITIAL EXERCISE DATE" means the later of the Date of Option
Grant or the Date the Optionee's Service Commenced..
(e) "INITIAL VESTING DATE" means the date occurring one (1) month
after (check one):
___ the Date of Option Grant.
___ __________________ , 199__, the date the Optionee's
Service commenced.
(f) "VESTED RATIO" means, on any relevant date, except as
otherwise provided herein, the ratio determined as follows:
<TABLE>
<CAPTION>
Vested Ratio
------------
<S> <C>
Prior to the Initial Vesting Date 0
On Initial Vesting Date, provided the 1/36
Optionee's Service has not terminated
prior to such date
Plus
----
For each full month of the Optionee's 1/36
continuous Service from the Initial
Vesting Date until the Vested Ratio
equals 1/1, an additional
</TABLE>
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "COMPANY" means ENACT Health Management Systems, a California
corporation, or any successor corporation thereto.
(i) "SERVICE" means the Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. Furthermore, the Optionee's
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<PAGE>
Service with the Participating Company Group shall not be deemed to have
terminated if the Optionee takes any military leave, sick leave, or other bona
fide leave of absence approved by the Company; provided, however, that if any
such leave exceeds ninety (90) days, on the ninety-first (91st) day of such
leave the Optionee's Service shall be deemed to have terminated unless the
Optionee's right to return to Service with the Participating Company Group is
guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, a leave of absence shall
not be treated as Service for purposes of determining the Optionee's Vested
Ratio. The Optionee's Service shall be deemed to have terminated either upon an
actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its sole discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.
1.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural and the plural shall include the
singular. Use of the term "or" is not intended to be exclusive, unless the
context clearly requires otherwise.
2. TAX STATUS OF OPTION. This Option is intended to be a Nonstatutory
--------------------
Stock Option and shall not be treated as an Incentive Stock Option within the
meaning of Section 422(b) of the Code.
3. ADMINISTRATION. All questions of interpretation concerning this Option
--------------
Agreement shall be determined by the Board. All determinations by the Board
shall be final and binding upon all persons having an interest in the Option.
Any officer of a Participating Company shall have the authority to act on behalf
of the Company with respect to any matter, right, obligation, or election which
is the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, or election.
4. EXERCISE OF THE OPTION.
----------------------
4.1 Right to Exercise.
(a) Except as otherwise provided herein, the Option shall be
exercisable on and after the Initial Exercise Date and prior to the termination
of the Option (as provided in Section 6) in an amount not to exceed the Number
of Option Shares less the number of shares previously acquired upon exercise of
the Option, subject to the Optionee's agreement that any shares purchased upon
exercise are subject to the Company's repurchase rights set forth in Section 11
and Section 12.
4.2 METHOD OF EXERCISE. Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement. The written notice must be signed by the Optionee and
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<PAGE>
must be delivered in person, by certified or registered mail, return receipt
requested, by confirmed facsimile transmission, or by such other means as the
Company may permit, to the Chief Financial Officer of the Company, or other
authorized representative of the Participating Company Group, prior to the
termination of the Option as set forth in Section 6, accompanied by full
payment of the aggregate Exercise Price for the number of shares of Stock being
purchased. The Option shall be deemed to be exercised upon receipt by the
Company of such written notice and the aggregate Exercise Price.
4.3 PAYMENT OF EXERCISE PRICE.
(A) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the aggregate Exercise Price for the number of shares
of Stock for which the Option is being exercised shall be made (i) in cash, by
check, or cash equivalent, (ii) by tender to the Company of whole shares of
Stock owned by the Optionee having a Fair Market Value (as determined by the
Company without regard to any restrictions on transferability applicable to such
stock by reason of federal or state securities laws or agreements with an
underwriter for the Company) not less than the aggregate Exercise Price, (iii)
by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any
combination of the foregoing.
(B) TENDER OF STOCK. Notwithstanding the foregoing, the Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock. The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.
(C) CASHLESS EXERCISE. A "CASHLESS EXERCISE" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the shares of Stock acquired upon the exercise of
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
4.4 TAX WITHHOLDING. At the time the Option is exercised, in whole or
in part, or at any time thereafter as requested by the Company, the Optionee
hereby authorizes withholding from payroll and any other amounts payable to the
Optionee, and otherwise agrees to make adequate provision for (including by
means of a Cashless Exercise to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Participating Company Group, if any, which arise in
connection with the Option, including, without limitation, obligations arising
upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in
whole or in part, of any shares acquired upon exercise of the Option, (iii) the
operation of any law or regulation providing for the imputation of interest, or
(iv) the lapsing of any restriction with respect to any shares acquired upon
exercise of the Option. The Optionee is cautioned that the Option is not
exercisable unless the tax withholding obligations
-4-
<PAGE>
of the Participating Company Group are satisfied. Accordingly, the Optionee may
not be able to exercise the Option when desired even though the Option is
vested, and the Company shall have no obligation to issue a certificate for such
shares or release such shares from any escrow provided for herein.
4.5 CERTIFICATE REGISTRATION. Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, in the names of the heirs of the Optionee.
4.6 RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES. The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities. The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed. In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications that
may be necessary or appropriate, to evidence compliance with any applicable law
or regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.
4.7 FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of the Option.
5. NONTRANSFERABILITY OF THE OPTION. The Option may be exercised during
--------------------------------
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution. Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.
6. TERMINATION OF THE OPTION. The Option shall terminate and may no
-------------------------
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising
-5-
<PAGE>
the Option following termination of the Optionee's Service as described in
Section 7, or (c) a Transfer of Control to the extent provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
--------------------------------
7.1 OPTION EXERCISABILITY.
(A) DISABILITY. If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.
(B) DEATH. If the Optionee's Service with the Participating
Company Group is terminated because of the death of the Optionee, the Option, to
the extent unexercised and exercisable on the date on which the Optionee's
Service terminated, may be exercised by the Optionee's legal representative or
other person who acquired the right to exercise the Option by reason of the
Optionee's death at any time prior to the expiration of twelve (12) months after
the date on which the Optionee's Service terminated, but in any event no later
than the Option Expiration Date. The Optionee's Service shall be deemed to have
terminated on account of death if the Optionee dies within three (3) months
after the Optionee's termination of Service.
(C) OTHER TERMINATION OF SERVICE. If the Optionee's Service with
the Participating Company Group terminates for any reason, except for Disability
or death, the Option, to the extent unexercised and exercisable by the Optionee
on the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months (or such other longer period of time as
determined by the Board, in its sole discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
7.2 ADDITIONAL LIMITATION ON OPTION EXERCISE. Notwithstanding the
provisions of Section 7.1, the Option may not be exercised after the Optionee's
termination of Service to the extent that the shares to be acquired upon
exercise of the Option would be subject to the Unvested Share Repurchase Option
as provided in Section 11.
7.3 EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until thirty (30) days after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.
7.4 EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B). Notwithstanding
the foregoing, if a sale within the applicable time periods set forth in Section
7.1 of shares acquired upon the exercise of the Option would subject the
Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th)
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<PAGE>
day following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
8. TRANSFER OF CONTROL.
-------------------
8.1 DEFINITIONS.
(A) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company:
(i) the direct or indirect sale or exchange in a single or
series of related transactions by the shareholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;
(ii) a merger or consolidation in which the Company is a
party;
(iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(B) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
8.2 EFFECT OF TRANSFER OF CONTROL ON OPTION. In the event of a
Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may either assume the Company's rights and obligations under the
Option or substitute for the Option a substantially equivalent option for the
Acquiring Corporation's stock. For purposes of this Section 8.2, the Option
shall be deemed assumed if, following the Transfer of Control, the Option
confers the right to purchase in accordance with its terms and conditions, for
each share of Stock subject to the Option immediately prior to the Transfer of
Control, the consideration (whether stock, cash or other securities or property)
to which a holder of a share of Stock on the effective date of the Transfer
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<PAGE>
of Control was entitled. The Option shall terminate and cease to be outstanding
effective as of the date of the Transfer of Control to the extent that the
Option is neither assumed or substituted for by the Acquiring Corporation in
connection with the Transfer of Control nor exercised as of the date of the
Transfer of Control. Notwithstanding the foregoing, shares acquired upon
exercise of the Option prior to the Transfer of Control and any consideration
received pursuant to the Transfer of Control with respect to such shares shall
continue to be subject to all applicable provisions of this Option Agreement
except as otherwise provided herein. Furthermore, notwithstanding the foregoing,
if the corporation the stock of which is subject to the Option immediately prior
to an Ownership Change Event described in Section 8.1(a)(i) constituting a
Transfer of Control is the surviving or continuing corporation and immediately
after such Ownership Change Event less than fifty percent (50%) of the total
combined voting power of its voting stock is held by another corporation or by
other corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the Option shall not terminate unless the Board otherwise provides
in its sole discretion.
9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
--------------------------------------------
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option. If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares. In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded up or down to the nearest whole number, as determined by the Board,
and in no event may the Exercise Price be decreased to an amount less than the
par value, if any, of the stock subject to the Option. The adjustments
determined by the Board pursuant to this Section 9 shall be final, binding and
conclusive.
10. RIGHTS AS A SHAREHOLDER, EMPLOYEE OR CONSULTANT. The Optionee shall
-----------------------------------------------
have no rights as a shareholder with respect to any shares covered by the Option
until the date of the issuance of a certificate for the shares for which the
Option has been exercised (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 9. If the Optionee is an Employee, the Optionee understands
and acknowledges that, except as otherwise provided in a separate, written
employment agreement between a Participating Company and the Optionee, the
Optionee's employment is "at will" and is for no specified term. Nothing in this
Option Agreement shall confer upon the Optionee any right to continue in the
Service of a Participating Company or interfere in any way with any right of the
Participating Company Group to terminate the Optionee's Service as an Employee
or Consultant, as the case may be, at any time.
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<PAGE>
11. UNVESTED SHARE REPURCHASE OPTION.
---------------------------------
11.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Service with the Participating Group is terminated for any reason or
no reason, with or without cause, or if the Optionee's legal representative, or
other holder of shares acquired upon the exercise of the Option attempts to
sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant
to an Ownership Change Event) any shares acquired upon the exercise of the
Option which exceed the Vested Shares as defined in Section 11.2 below (the
"UNVESTED SHARES"), the Company shall have the right to repurchase the Unvested
Shares under the terms and subject to the conditions set forth in Section 11
(the "UNVESTED SHARE REPURCHASE OPTION").
11.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "Vested Shares"
shall mean, on any given date, a number of shares of Stock equal to the Number
of Option Shares multiplied by the Vested Ratio determined as of such date and
rounded down to the nearest whole share. On such given date, the "UNVESTED
SHARES" shall mean the number of shares of Stock acquired upon exercise of the
Option which exceed the Vested Shares determined as of such date.
11.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice delivered
personally or forwarded by first class mail to the Optionee within sixty (60)
days after (a) termination of the Optionee's Service (or exercise of the
Options, if later) or (b) the Company has received notice of the attempted
disposition of Unvested Shares. If the Company fails to give notice within such
sixty (60) days period, the Unvested Share Repurchase Option shall terminate
unless the Company and the Optionee have extended the time for the exercise of
the Unvested Share Repurchase Option. The Unvested Share Repurchase Option must
be exercised, if at all., for all of the Unvested Shares, except as the Company
and the Optionee otherwise agree.
11.4 PAYMENT FOR SHARES AND RETURNED SHARES TO THE COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share, as adjusted pursuant to Section
9 (the "REPURCHASE PRICE"). The Company shall pay the aggregate Repurchase Price
to the Optionee in cash within thirty (30) days after the date of personal
delivery or mailing of the written notice of the Company's exercise of the
Unvested Share Repurchase Option. For purposes of the foregoing, cancellation of
any indebtedness of the Optionee to any Participating Group shall be treated as
payment to the Optionee in cash to the extent of the unpaid principal any
accrued interest canceled. The shares being repurchase shall be delivered to the
Company by the Optionee at the same time as the delivery of the Repurchase Price
to the Optionee.
11.5 ASSIGNMENT OF THE UNVESTED SHARE REPURCHASE OPTION. In the event
the Company is unable to exercise the Unvested Share Repurchase Option pursuant
to the provisions of any law, or agreement restricting the Company's redemption
of the Stock, the Company shall have the right to assign the Unvested Share
Repurchase Option at any time, whether or not such option is then exercisable,
to one or more persons as may be selected by the Company.
-9-
<PAGE>
11.6 OWNERSHIP CHANGE EVENT. Except as otherwise provided herein, upon
the occurrence of and Ownership Change Event, any and all new, substituted or
additional securities or other property to which the Optionee is entitled by
reason of the Optionee's ownership of Unvested Shares shall be immediately
subject to the Unvested Share Repurchase Option and included in the terms
"Stock" and "Unvested Shares") for all purposes of the Unvested Share Repurchase
Option with the same force and effect as the Unvested Shares immediately prior
to the Ownership Change Event. While the aggregate Repurchase Price shall remain
the same after such Ownership Change Event, the Repurchase Price per Unvested
Share upon the exercise of the Unvested Share Repurchase Option following such
Ownership Change Event shall be adjusted as appropriate. For purposes of
determining the Vested Ratio following an Ownership Change Event, credited
Service shall include all Service with any corporation which is a Participating
Company at the time the Service is rendered, whether or not such corporation is
a Participating Company before and after the Ownership Change Event.
12. RIGHT OF FIRST REFUSAL
----------------------
12.1 GRANT OF RIGHT OF FIRST REFUSAL. Except as provided in
Section 12.7 below, in the event the Optionee, the Optionee's legal
representative, or other holder of shares acquired upon exercise of the Option
proposes to sell, exchange, transfer, pledge, or otherwise dispose of any shares
acquired upon the exercise of the Option (the "TRANSFER SHARES") to any person
or entity, including, without limitation, any shareholder of the Participating
Company Group, the Company shall have the right to repurchase the Transfer
Shares under the terms and subject to the conditions set forth in this Section
12 (the "RIGHT OF FIRST REFUSAL").
12.2 NOTICE OF PROPOSED TRANSFER. Prior to any proposed transfer
of the Transfer Shares, the Optionee shall deliver written notice (the "TRANSFER
NOTICE") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"PROPOSED TRANSFEREE") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event of a bona fide gift or involuntary transfer,
the proposed transfer price shall be deemed to be the Fair Market Value of the
Transfer Shares, as determined by the Board in good faith. If the Optionee
proposes to transfer any Transfer Shares to more than one Proposed Transferee,
the Optionee shall provide a separate Transfer Notice for the proposed transfer
to each Proposed Transferee. The Transfer Notice shall be signed by both the
Optionee and the Proposed Transferee and must constitute a binding commitment of
the Optionee and the Proposed Transferee for the transfer of the Transfer Shares
to the Proposed Transferee subject only to the Right of First Refusal.
12.3 BONA FIDE TRANSFER. If the Company determines that the
information provided by the Optionee in the Transfer Notice is insufficient to
establish the bona fide nature of a proposed voluntary transfer, the Company
shall give the Optionee written notice of the Optionee's failure to comply with
the procedure described in this Section 12, and the Optionee shall have no right
to transfer the Transfer Shares without first complying with the procedure
described in this Section 12. The Optionee shall not be permitted to transfer
the Transfer Shares if the proposed transfer is not bona fide.
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<PAGE>
12.4 EXERCISE OF RIGHT OF FIRST REFUSAL. If the Company
determines the proposed transfer to be bona fide, the Company shall have the
right to purchase all, but not less than all, of the Transfer Shares (except as
the Company and the Optionee otherwise agree) at the purchase price and on the
terms set forth in the Transfer Notice by delivery to the Optionee of a notice
of exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's right to
exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Optionee or issued by a person other than the Optionee
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Optionee shall
thereupon consummate the sale of the Transfer Shares to the Company on the terms
set forth in the Transfer Notice within sixty (60) days after the date the
Transfer Notice is delivered to the Company (unless a longer period is offered
by the Proposed Transferee); provided, however, that in the event the Transfer
Notice provides for the payment for the Transfer Shares other than in cash, the
Company shall have the option of paying for the Transfer Shares by the present
value cash equivalent of the consideration described in the Transfer Notice as
reasonably determined by the Company. For purposes of the foregoing,
cancellation of any indebtedness of the Optionee to any Participating Company
shall be treated as payment to the Optionee in cash to the extent of the unpaid
principal and any accrued interest canceled.
12.5 FAILURE TO EXERCISE RIGHT OF FIRST REFUSAL. If the Company
fails to exercise the Right of First Refusal in full (or to such lesser extent
as the Company and the Optionee otherwise agree) within the period specified in
Section 12.4 above, the Optionee may conclude a transfer to the Proposed
Transferee of the Transfer Shares on the terms and conditions described in the
Transfer Notice, provided such transfer occurs not later than ninety (90) days
following delivery to the Company of the Transfer Notice. The Company shall have
the right to demand further assurances from the Optionee and the Proposed
Transferee (in a form satisfactory to the Company) that the transfer of the
Transfer Shares was actually carried out on the terms and conditions described
in the Transfer Notice. No Transfer Shares shall be transferred on the books of
the Company until the Company has received such assurances, if so demanded, and
has approved the proposed transfer as bona fide. Any proposed transfer on terms
and conditions different from those described in the Transfer Notice, as well as
any subsequent proposed transfer by the Optionee, shall again be subject to the
Right of First Refusal and shall require compliance by the Optionee with the
procedure described in this Section 12.
12.6 TRANSFEREES OF TRANSFER SHARES. All transferees of the
Transfer Shares or any interest therein, other than the Company, shall be
required as a condition of such transfer to agree in writing (in a form
satisfactory to the Company) that such transferee shall receive and hold such
Transfer Shares or interest therein subject to all of the terms and conditions
of this Option Agreement, including this Section 12 providing for the Right of
First Refusal with respect to any subsequent transfer. Any sale or transfer of
any shares acquired upon exercise of the Option shall be void unless the
provisions of this Section 12 are met.
12.7 TRANSFERS NOT SUBJECT TO RIGHT OF FIRST REFUSAL. The Right
of First Refusal shall not apply to any transfer or exchange of the shares
acquired upon exercise of
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<PAGE>
the Option if such transfer or exchange is in connection with an Ownership
Change Event. If the consideration received pursuant to such transfer or
exchange consists of stock of a Participating Company, such consideration shall
remain subject to the Right of First Refusal unless the provisions of Section
12.9 below result in a termination of the Right of First Refusal.
12.8 ASSIGNMENT OF RIGHT OF FIRST REFUSAL. The Company shall have
the right to assign the Right of First Refusal at any time, whether or not there
has been an attempted transfer, to one or more persons as may be selected by the
Company.
12.9 EARLY TERMINATION OF RIGHT OF FIRST REFUSAL. The other
provisions of this Option Agreement notwithstanding, the Right of First Refusal
shall terminate and be of no further force and effect upon (a) the occurrence of
a Transfer of Control, unless the Acquiring Corporation assumes the Company's
rights and obligations under the Option or substitutes a substantially
equivalent option for the Acquiring Corporation's stock for the Option, or (b)
the existence of a public market for the class of shares subject to the Right of
First Refusal. A "PUBLIC MARKET" shall be deemed to exist if (i) such stock is
listed on a national securities exchange (as that term is used in the Exchange
Act) or (ii) such stock is traded on the over-the-counter market and prices
therefor are published daily on business days in a recognized financial journal.
13. ESCROW
------
13.1 ESTABLISHMENT OF ESCROW. To ensure the share subject to the
Unvested Share Repurchase Option or the Right of First Refusal or securing any
promissory note will be available for repurchase, the Company may require the
Optionee to deposit the certificates evidencing the shares which the Optionee
purchases upon the exercise of the Option with an escrow agent designated by the
Company under the terms and conditions of the escrow agreement approved by the
Company. If the Company does not require such deposit as a condition of exercise
of the Option, the Company reserves the right to at any time to require the
Optionee to so deposit the certificate in escrow. Upon the occurrence of an
Ownership Change Event or a change, as described in Section 9, in the character
or the amount of any of the outstanding stock of the corporation the stock of
which is subject to the provisions of this Option Agreement, any and all new,
substituted or additional securities or other property to which the Optionee is
entitled by reason of the Optionee's ownership of shares of Stock acquired upon
the exercise of the Option that remain following such Ownership Change event or
change described in Section 9, subject to the Unvested Share Repurchase Option,
or the Right of First Refusal shall be immediately subject to the escrow to the
same extent as such shares of Stock immediately before such event. The Company
shall bear the expense of escrow.
13.2 DELIVERY OF SHARES TO THE OPTIONEE. As soon as practicable
after the expiration of the Unvested Share Repurchase Option or the Right of
First Refusal, but not more frequently than twice each calendar year, the escrow
agent shall deliver to the Optionee the shares and any other property no longer
subject to such restrictions.
13.3 Notices and Payments. In the event the shares and any other
property held in escrow are subject to the Company's exercise of the Unvested
Share Repurchase
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<PAGE>
Option or the Right of First Refusal, the notices required to be given to the
Optionee shall be given to the escrow agent, and any payment required to be
given to the Optionee shall be given to the escrow agent. Within thirty (30)
days after payment to the Company, the escrow agent shall deliver the shares and
any other property which the Company has purchase to the Company and shall
deliver the payment received from the Company to the Optionee.
14. STOCK DISTRIBUTIONS SUBJECT TO OPTION AGREEMENT. If, from time to
-----------------------------------------------
time, there is any stock dividend, stock split or other change, as described in
Section 9, in the character or amount of any of the outstanding stock of the
corporation the stock of which is subject to the provisions of this Option
Agreement, then in such event any and all new, substituted or additional
securities to which the Optionee is entitled by reason of the Optionee's
ownership of the shares acquired upon exercise of the Option shall be
immediately subject to the Unvested Share Repurchase Option and the Right of
First Refusal with the same force and effect as the shares subject to the
Unvested Share Repurchase Option and the Right of First Refusal.
15. LEGENDS. The Company may at any time place legends referencing the
-------
Unvested Share Repurchase Option and the Right of First Refusal and any
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement. The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out
the provisions of this Section. Unless otherwise specified by the Company,
legends placed on such certificates may include, but shall not be limited to,
the following:
15.1 "THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN
ACCORDANCE WITH RULE 144 OR RULE 701 UNDER THE ACT, OR THE COMPANY RECEIVES AN
OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
15.2 Any legend required to be placed thereon by the Commissioner of
Corporations of the State of California.
15.3 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AN
UNVESTED SHARE REPURCHASE OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICER OF THIS CORPORATION.
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<PAGE>
15.4 "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION OR ITS ASSIGNEE SET
FORTH IN AN AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THIS CORPORATION."
16. PUBLIC OFFERING. The Optionee hereby agrees that in the event of any
---------------
underwritten public offering of stock, including an initial public offering of
stock, made by the Company pursuant to an effective registration statement filed
under the Securities Act, the Optionee shall not offer, sell, contract to sell,
pledge, hypothecate, grant any option to purchase or make any short sale of, or
otherwise dispose of any shares of stock of the Company or any rights to acquire
stock of the Company for such period of time from and after the effective date
of such registration statement as may be established by the underwriter for such
initial public offering; provided, however, that such period of time shall not
exceed one hundred eighty (180) days from the effective date of the registration
statement to be filed in connection with such public offering. The foregoing
limitation shall not apply to shares registered in the public offering under the
Securities Act. The Optionee shall be subject to this Section provided and only
if the officers and directors of the Company are also subject to similar
arrangements.
17. BINDING EFFECT. Subject to the restrictions on transfer set forth
--------------
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
18. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan or
------------------------
the Option at any time; provided, however, that except as provided in Section
8.2 in connection with a Transfer of Control, no such termination or amendment
may adversely affect the Option or any unexercised portion hereof without the
consent of the Optionee unless such termination or amendment is necessary to
comply with any applicable law or government regulation. No amendment or
addition to this Option Agreement shall be effective unless in writing.
19. NOTICES. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given (except to the extent that this
Option Agreement provides for effectiveness only upon actual receipt of such
notice) upon personal delivery or upon deposit in the United States Post Office,
by registered or certified mail, with postage and fees prepaid, addressed to the
other party at the address shown below that party's signature or at such other
address as such party may designate in writing from time to time to the other
party.
20. INTEGRATED AGREEMENT. This Option Agreement and the Plan constitute
--------------------
the entire understanding and agreement of the Optionee and the Participating
Company Group with respect to the subject matter contained herein or therein,
and there are no agreements, understandings, restrictions, representations, or
warranties among the Optionee and the Participating Company Group with respect
to such subject matter other than those as set forth or provided for herein or
therein. To the extent contemplated herein or therein, the provisions of this
Option Agreement shall survive any exercise of the Option and shall remain in
full force and effect.
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<PAGE>
21. APPLICABLE LAW. This Option Agreement shall be governed by the laws of
--------------
the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.
ENACT HEALTH MANAGEMENT
SYSTEMS
By: /s/ Matthew Sanders
______________________________________
Title: President
___________________________________
Address: 1975 W. El Camino Real, No. 306
Mountain View, CA 94040
The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement, including the Unvested Share Repurchase
Option as set forth in Section 11 and the Right of First Refusal set forth in
Section 12, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board upon any questions
arising under this Option Agreement. The undersigned acknowledges receipt of a
copy of the Plan.
OPTIONEE
Date: March 1, 1995
____________________ ______________________________________
Optionee Address:
______________________________
______________________________
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EXHIBIT 10.6
AMENDED AND RESTATED RIGHTS AGREEMENT
-------------------------------------
THIS AMENDED AND RESTATED RIGHTS AGREEMENT (the "Agreement") is entered into
effective as of the 29th day of August, 1995, by and among Enact Health
Management Systems, a California corporation (the "Company"), the undersigned
existing holders of Series A and Series B Preferred Stock of the Company (the
"Existing Preferred Shareholders"), the undersigned new holders of Series C
Preferred Stock (the "New Preferred Shareholders") and the undersigned holders
of Common Stock of the Company (the "Founders").
RECITALS
--------
A. Between April, 1993 and September, 1994 the Company entered into
Preferred Stock Purchase Agreements with the Existing Preferred Shareholders
which contained certain registration rights.
B. The Company, the Existing Preferred Shareholders and the Founders have
previously entered into an Amended and Restated Rights Agreement, dated
September 9, 1994 which granted certain registration and co-sale rights.
C. It is intended that the Company will grant the rights set forth below to
the New Preferred Shareholders.
D. It is further intended that the Existing Preferred Shareholders and the
Founders be granted the rights set forth below, and that the registration and
co-sale rights previously granted to the Existing Preferred Shareholders and the
Founders be replaced and superseded by the registration and co-sale rights set
forth below.
NOW, THEREFORE, in consideration of the foregoing and of the mutual promises
and covenants herein contained, the parties hereby agree as follows:
1. Registration Rights.
-------------------
1.1 Definitions. As used in this Section 1, the following terms shall
-----------
have the following respective meanings:
(a) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the "Securities Act"),
and the declaration or ordering of the effectiveness of such registration
statement.
<PAGE>
(b) The term "Registrable Securities" means (i) any and all of the
common stock issuable upon conversion of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock and the Convertible Note (the "Convertible Note") executed by the Company
in favor of ALZA Corporation dated August 30, 1996 (hereafter, the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and
the Series D Preferred Stock shall be referred to as the "Preferred Shares"),
and common stock held by the Founders, (ii) common stock issued in lieu of the
stock referred to in (i) above in any reorganization which has not been sold to
the public, or (iii) common stock issued with respect to the stock referred to
in (i) above as a result of a stock split, stock dividend, recapitalization or
the like, which has not been sold to the public.
(c) The terms "Holder" or "Holders" means any person or persons to
whom Registrable Securities were originally issued or qualifying transferees
under Section 1.11 hereof who hold Registrable Securities.
(d) The term "SEC" means the Securities and Exchange Commission.
1.2 Request for Registration.
------------------------
(a) If the Company shall receive no earlier than the first to occur
of six (6) months after the effective date of the Company's initial public
offering or three (3) years from August 29, 1995, the closing date of the Series
C Preferred Stock financing a written request from the Holders of a majority of
the Registrable Securities then outstanding, not including shares held by the
Founders, that the Company file a registration statement under the Securities
Act covering the registration of at least fifty percent (50%) of the Registrable
Securities then outstanding, then the Company shall, within ten (10) days of the
receipt thereof, give written notice of such request to all Holders and shall,
subject to the limitations of subsection 1.2(b), effect as soon as practicable,
and in any event within 90 days of the receipt of such request, the registration
under the Securities Act of all Registrable Securities which the Holders request
to be registered within twenty (20) days of the mailing of such notice by the
Company in accordance with Section 7 hereof.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 1.2 and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by a majority in interest of the
Initiating Holders and shall be reasonably acceptable to the Company. In such
event, the right of any Holder to include his Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be
<PAGE>
underwritten pursuant hereto, and the number of shares of Registrable Securities
that may be included in the underwriting shall be allocated among all Holders
thereof, including the Initiating Holders, in proportion (as nearly as
practicable) to the amount of Registrable Securities of the Company owned by
each Holder, provided that in the event of such a cutback, the number of
Registrable Securities held by the Founders shall be included based on the
assumption that each Founder holds only one half the number of Registrable
Securities actually held by such Founder.
(c) The Company is obligated to effect only two (2) such
registrations pursuant to this Section 1.2.
(d) Notwithstanding the foregoing, if the Company shall furnish to
Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the President of the Company stating that, in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than 120 days after receipt of the request of the
Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any twelve month period.
1.3 Company Registration.
--------------------
(a) Participation in Company Registration. If at any time or from
-------------------------------------
time to time, the Company shall determine to register any of its securities, for
its own account or the account of any of its shareholders (other than a
registration relating solely to employee stock option or purchase plans, or a
registration on SEC Form S-4 relating solely to an SEC Rule 145 transaction, or
any successor to such forms, which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities) the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within fifteen (15) days after receipt of such written notice
from the Company, by any Holder or Holders, except as set forth in subsection
1.3(b) below.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.3(a)(i). In such event the right of any Holder to
registration pursuant to subsection 1.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other Holders distributing their securities
through such underwriting) enter into an underwriting agreement in
<PAGE>
customary form with the underwriter or underwriters selected for such
underwriting by the Company. Notwithstanding any other provision of this Section
1.3, the underwriter may limit the number of Registrable Securities to be
included in the registration and underwriting, or may exclude Registrable
Securities entirely from such registration and underwriting, provided that the
Common Stock that is not Registrable Securities (other than the Common Stock to
be sold by the Company) shall first be excluded from such registration and
underwriting. The Company shall so advise all Holders of Registrable Securities
which would otherwise be registered and underwritten pursuant hereto, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among Holders requesting
registration in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by each of such Holders as of the date of the
notice pursuant to subsection 1.3(a)(i) above. If any Holder disapproves of the
terms of any such underwriting, he may elect to withdraw therefrom by written
notice to the Company and the underwriter. Any Registrable Securities excluded
or withdrawn from such underwriting shall be withdrawn from such registration.
1.4 Form S-3. The Company shall use its best efforts to qualify for
--------
registration on SEC Form S-3 or its successor form. After the Company has
qualified for the use of Form S-3, Holders of Registrable Securities shall have
the right to request an unlimited number of registrations on Form S-3 (such
requests shall be in writing and shall state the number of shares of Registrable
Securities to be disposed of and the intended method of disposition of Shares by
such Holders), subject only to the following:
(a) The Company shall not be required to effect a registration
pursuant to this Section 1.4 within one hundred eighty (180) days of the
effective date of any other registration of the Company's securities.
(b) The Company shall not be required to effect a registration
pursuant to this Section 1.4 unless the Holder or Holders requesting
registration propose to dispose of shares of Registrable Securities having an
aggregate disposition price (before deduction of underwriting discounts and
expenses of sale) of at least One Million Dollars ($1,000,000).
(c) If the Company shall furnish to the Holders a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors of the Company it would be seriously detrimental to
the Company and its shareholders for such Form S-3 registration to be effected
at such time, the Company shall have the right to defer the filing of the Form
S-3 registration statement for a period of not more than 120 days after receipt
of the request of the Holders under this Section 1.4; provided, however, that
the Company shall not utilize this right more than once in any twelve (12) month
period.
The Company shall give written notice to all Holders of Registrable Securities
of the receipt of a request for registration pursuant to this Section 1.4 and
shall provide a reasonable opportunity for other Holders to participate in the
registration, provided that if the registration is for an underwritten offering,
the terms of subsection 1.2(b) shall apply to all participants in such offering.
Subject to the foregoing, the Company will use its best efforts to effect
promptly the
<PAGE>
registration of all shares of Registrable Securities on Form S-3 to the extent
requested by the Holder or Holders thereof for purposes of disposition.
1.5 Lock-Up Provision. Upon receipt of a written request by the
-----------------
Company or by its underwriters, the Holders agree not to sell, sell short, grant
an option to buy, or otherwise dispose of their shares of common stock issued or
issuable upon conversion of the Preferred Shares (except for any such shares
included in the registration) for the period from the date of receipt of such
request but not prior to the filing of the initial registration statement for
the Company's securities to one hundred eighty (180) days after the date of its
effectiveness, provided that the Company's officers, directors and key employees
enter into similar agreements not to dispose of their shares during the same
time period. Notwithstanding the foregoing, nothing herein shall prevent any
Holder that is a partnership from making a distribution of Registrable
Securities to the partners thereof that is otherwise in compliance with
applicable securities laws. The restriction of this Section 1.5 shall not apply
after the second public offering of the Company's securities and shall lapse
after the initial public offering as to any Holder at the time such Holder holds
less than 1% of the outstanding shares of the Company.
1.6 Expenses of Registration. All expenses incurred in connection
------------------------
with any registration, qualification or compliance pursuant to this Section 1,
including without limitation, all registration, filing and qualification fees,
printing expenses, fees and disbursements of counsel for the Company and
expenses of any special audits incidental to or required by such registration,
shall be borne by the Company except as follows:
(a) The Company shall not be required to pay fees or
disbursements of legal counsel of the Holders other than one special counsel to
represent all Holders to be selected by a majority of the Holders participating
in the registration .
(b) The Company shall not be required to pay underwriters' fees,
discounts or commissions relating to Registrable Securities.
1.7 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder participating therein advised in writing as to
the initiation of each registration, qualification and compliance and as to the
completion thereof. At its expense the Company will:
(a) Keep such registration, qualification or compliance pursuant
to Sections 1.2, 1.3 or 1.4 effective for a period of one hundred twenty (120)
days or until the Holder or Holders have completed the distribution described in
the registration statement relating thereto, whichever first occurs.
(b) Furnish such number of prospectuses, including a preliminary
prospectus, in conformity with the Securities Act, and other documents incident
thereto as a Holder from time to time may reasonably request.
<PAGE>
(c) Prepare and file with the SEC such amendments and supplements
to the registration statement, and the prospectus used in connection with such
registration statement, as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(d) Use its best efforts to register and qualify the securities
covered by the registration statement under such other securities or blue sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligation under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration.
<PAGE>
1.8 Indemnification.
---------------
(a) The Company will indemnify each Holder of Registrable
Securities, each of its officers, directors and partners, and each person
controlling or under common control with such Holder, with respect to which such
registration, qualification or compliance has been effected pursuant to this
Section 1, and each underwriter, if any, and each person who controls any
underwriter of the Registrable Securities held by or issuable to such Holder,
against all claims, losses, expenses, damages and liabilities (or actions in
respect thereto) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act or any state securities law
applicable to the Company and relating to action or inaction required of the
Company in connection with any such registration, qualification or compliance,
and will reimburse each such Holder, each of its officers, directors and
partners, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any reasonable legal and any
other expenses incurred in connection with investigating, defending or settling
any such claim, loss, damage, liability or action, provided that the Company
will not be liable in any such case to the extent that any such claim, loss,
damage or liability arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by an
instrument duly executed by such Holder or underwriter specifically for use
therein.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company within the meaning of the Securities Act, and each other
such Holder, each of its officers, directors and partners and each person
controlling such Holder, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Holders, such directors,
officers, partners, persons or underwriters for any reasonable legal or any
other expenses incurred in connection with investigating, defending or settling
any such claim, loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder specifically for use therein; provided, however,
the total amount for which any Holder shall be liable under this subsection
1.8(b) shall not in any event exceed the aggregate proceeds received by such
Holder from the sale of Registrable Securities held by such Holder in such
registration.
<PAGE>
(c) Each party entitled to indemnification under this Section 1.8
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations hereunder, unless such failure resulted in actual detriment to
the Indemnifying Party. No Indemnifying Party, in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
(d) If the indemnification provided for in this Section 1.8 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any claim, loss, expense, damage or liability referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such claim, loss, expense, damage or liability
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions that resulted in such claim, loss,
expense, damage or liability as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
1.9 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may reasonably request in writing and
as shall be required in connection with any registration, qualification or
compliance referred to herein.
1.10 Limitations on Registration Rights Granted to Other Securities.
--------------------------------------------------------------
From and after the date of this Agreement, the Company shall not enter into any
agreement with any holder or prospective holder of any securities of the Company
providing for the granting to such holder of any registration or co-sale rights,
except that, with the consent of the Holders of 66 2/3% of the Registrable
Securities then outstanding, additional holders may be added as parties to this
Agreement with regard to any or all securities of the Company held by them. Any
such additional parties shall execute a counterpart of this Agreement, and upon
execution by such additional parties and by the Company, shall be considered a
Holder for all purposes of this Agreement.
<PAGE>
1.11 Rule 144 Reporting. With a view to making available to Holders
------------------
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees at all times after ninety (90) days after the effective date of
the first registration filed by the Company for an offering of its securities to
the general public to:
(a) Make and keep public information available, as those terms
are understood and defined in SEC Rule 144;
(b) Use its best efforts to file with the SEC in a timely manner
all reports and other documents required of the Company under the Securities Act
and the Securities Exchange Act of 1934 as amended (the "Exchange Act"); and
(c) So long as a Holder owns any Registrable Securities, to
furnish to such Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as the Holder may reasonably request in complying with
any rule or regulation of the SEC allowing the Holder to sell any such
securities without registration.
1.12 Transfer of Registration Rights. Holders' rights to cause the
-------------------------------
Company to register their securities and keep information available, granted to
them by the Company under Sections 1.2, 1.3, 1.4 and 1.10, may be assigned to a
transferee or assignee of not less than 50,000 shares of a Holder's Registrable
Securities not sold to the public, provided that the Company is given written
notice by such Holder at the time of or within a reasonable time after said
transfer, stating the name and address of said transferee or assignee and
identifying the securities with respect to which such registration rights are
being assigned, and such transferee has agreed to comply with the obligations of
this Section 1.
1.13 Waivers and Amendments. With the written consent of the record
----------------------
or beneficial holders of more than 66 2/3% of the Registrable Securities, the
obligations of the Company and the rights of the holders of the Registrable
Securities under Section 1 (other than Subsection 1.4) may be waived (either
generally or in a particular instance, either retroactively or prospectively,
and either for a specified period of time or indefinitely), and with the same
consent the Company, when authorized by resolution of its Board of Directors,
may enter into a supplementary agreement for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
Section 1; provided, however, that no such modification, amendment or waiver
shall reduce the aforesaid percentage of Registrable Securities without the
consent of all of the Holders of the Registrable Securities. Upon the
effectuation of each such waiver, consent, agreement of amendment or
modification, the Company shall promptly give written notice thereof to the
record holders of the Registrable Securities who have not previously consented
thereto in writing. Except to the extent provided in this Section 1.13, Section
1 may be
<PAGE>
changed, waived, discharged or terminated only by a statement in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
1.14 Termination. The rights granted in this Section 1 shall not
-----------
apply as to each Holder, on a Holder by Holder basis, in any period in which a
Holder may sell all Registrable Securities then owned by the Holder pursuant to
the provisions of Rule 144, other than Rule 144(k).
2. Co-Sale Rights. None of the Holders will sell, transfer or exchange
--------------
("transfer") any shares of the Company's stock for consideration to any person
who such Holder knows (based on a written notice provided to such Holder by the
Company) will hold, after such sale, 5% or more of the outstanding stock of the
Company (calculated on a fully-diluted basis) without first complying with this
Section 2. In the event of any such transfer, the Holder proposing to make such
transfer shall give the other Holders (the "Other Holders") the opportunity to
participate pro rata in such transfer based on such Holder's and the Other
Holders' relative total percentage ownership of the Company. A Holder desiring
to sell shares shall give written notice to each Holder of the terms of the
proposed transfer. Each Other Holder shall give written notice to such Holder of
the Other Holder's election to participate in such transfer in accordance with
the proposed terms within twenty-one (21) days after receipt of the notice. If
no other Holders elect to participate, such Holder shall be entitled to sell the
shares specified in, and according to the terms of, the notice within ninety
(90) days from the date of the sending of the notice. The right of co-sale set
forth in this Section 2 shall terminate immediately prior to the first sale of
the Company's common stock in a public offering transaction that, along with any
prior public offerings of the Company's common stock, results in aggregate
proceeds to the Company and/or any selling shareholders of at least $5,000,000.
In the event of any conflict between the rights set forth herein and any rights
of first refusal held by the Company, the Company's right shall take precedence
over the rights herein, and the rights shall apply only to the extent the
Company does not exercise its rights.
3. Amendment. Except as provided in Section 1.12, any modification,
---------
amendment, or waiver of this Agreement or any provision hereof shall be in
writing and executed by Holders (as defined in Section 1.1 hereof) of not less
than 66 2/3% of the Registrable Securities (as defined in Section 1.1 hereof);
provided, however, that no such modification, amendment or waiver shall reduce
the aforesaid percentage of Registrable Securities without the consent of all of
the Holders of the Registrable Securities.
4. Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
5. Successors and Assigns. Except as otherwise expressly provided herein,
----------------------
the provisions hereof shall inure to the benefit of, and be binding upon the
successors, assigns, heirs, executors and administrators of the parties hereto.
<PAGE>
6. Entire Agreement; Termination of Prior Rights Agreement. This
-------------------------------------------------------
Agreement constitutes the full and entire understanding and agreement between
the parties with regard to the subject matter hereof. The registration rights
previously granted to the Existing Preferred Shareholders and the Founders
pursuant to the Amended and Restated Rights Agreement dated September 9, 1994
are hereby terminated and shall be of no further force and effect.
7. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall either be delivered personally
or by telegram or be mailed first class mail, postage prepaid, addressed (a) if
to a Holder, at such person's address set forth in the records of the Company or
at such other address as such person shall have furnished to the Company in
writing, or (b) if to the Company: Enact Health Management Systems, 421
Jacaranda Lane, Palo Alto, California 94306, Attention: Mr. Matt Sanders or at
such other address as the Company shall have furnished to the parties in
writing. All notices shall be deemed effective (a) when received, if personally
delivered or sent by telegram, or (b) three days after deposit in the mail, if
mailed as set forth above.
8. Separability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
9. Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
THE FOUNDERS THE COMPANY
Matt Sanders By /s/ Matt Sanders
------------------------
Matt Sanders, President
Chris Tacklind
Geoffrey Walne
<PAGE>
EXISTING PREFERRED NEW PREFERRED SHAREHOLDERS
SHAREHOLDERS
Print Name Print Name
Signature Signature
Address Address
<PAGE>
EXHIBIT 10.7
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE
ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
CONVERTIBLE NOTE
----------------
$1,500,000.00 October 17, 1996
--
ENACT Health Management Systems, a California corporation (the "Company"), for
value received, hereby promises to pay to R.D. Merrill Associates II or its
registered assigns ("Holder"), the principal sum of One Million Five Hundred
Thousand Dollars ($1,500,000.00), or so much thereof as may have been advanced
by the Holder, with interest (computed on the basis of a 365-day year) on the
unpaid amount thereof at the rate of Prime Rate (which shall mean the "Prime
Rate" as that term is used and quoted from time to time by The Wall Street
Journal) per annum, compounded annually, from the date hereof (the "Rate"). The
initial Rate shall be subject to change during the term of the Convertible Note
as the Prime Rate changes.
Notwithstanding the foregoing, if during any period the Rate exceeds the
maximum lawful nonusurious rate of interest permitted under applicable law (the
"Maximum Rate"), the rate of interest in effect on this note shall be limited to
the Maximum Rate during each such period, but at all times thereafter the rate
of interest in effect on this Convertible Note shall be the Maximum Rate until
the total amount of the interest accrued on this Convertible Note equals the
total amount of interest which would have accrued hereon if the Rate had at all
times been in effect for the applicable period.
Subject to the terms and limitations of this Convertible Note, the Company may
borrow under this Convertible Note, and the term of this Convertible Note shall
be, from the date hereof until December 31, 1997, at which time all unpaid
principal and interest shall be due and payable in full. During the term of
this Convertible Note, the Holder shall advance any sum in increments of
$500,000 that the Company from time to time may request so long as the sum
requested by the Company shall not cause the outstanding principal balance under
this Convertible Note to exceed $1,500,000.00. On the date hereof, the Holder
shall advance to the Company a sum equal to $500,000, which shall be the initial
outstanding balance of this Convertible Note. Payments
<PAGE>
hereunder shall be made by the Company to the Holder, at the address as provided
to the Company by the Holder in writing, in lawful money of the United States of
America.
If any payment on this Convertible Note shall become due on a Saturday,
Sunday, or a public holiday under the laws of the State of California, such
payment shall be made on the next succeeding business day and such extension of
time shall be included in computing interest in connection with such payment.
1. Definitions. As used in this Convertible Note, the following terms shall
------------
have the definitions ascribed to them below:
1.1 "Equity Financing" shall mean the Company's first stock financing
after the date hereof which results in gross proceeds to the Company, in cash or
conversion of debt, in any ninety (90) day period of Ten Million Dollars
($10,000,000.00) or more, including but not limited to an initial public
offering of the Company's common stock.
1.2 "Securities" shall mean the securities of the Company sold in the
Equity Financing. The securities purchasable upon conversion of this Convertible
Note shall be authorized in conjunction with such Equity Financing.
1.3 "Conversion Share Price" shall mean the product of (X) price at which
a share of the Securities is sold in the Equity Financing multiplied by (Y) 0.8.
1.4 "Conversion Stock" shall mean shares of the Securities purchasable
upon conversion of this Convertible Note; the total number of shares to be
determined by dividing (A) the amount of the outstanding principal under this
Convertible Note which Holder elects to convert at the time of conversion by (B)
the Conversion Share Price.
2. Conversion.
----------
2.1 At any time after the date hereof, at Holder's option, the Holder may
convert all or any portion of the then outstanding principal under this
Convertible Note into that number of shares of Conversion Stock equal to the
amount of principal which Holder elects to convert divided by the Conversion
Share Price.
2.2 This Convertible Note may be converted in whole or part by the Holder,
at any time after the date hereof prior to the date on which all principal
hereunder is repaid, by the surrender of this Convertible Note, together with
the Notice of Conversion and Investment Representation Statement in the forms
attached hereto as Attachments 1 and 2, respectively, duly completed and
-------------------
executed at the principal office of the Company, specifying the portion of the
Convertible Note to be converted. This Convertible Note shall be deemed to have
been converted immediately prior to the close of business on the date of its
surrender for conversion as provided above, and the person entitled to receive
the shares of Conversion Stock issuable upon such conversion shall be treated
for all purposes as Holder of such shares of record as of the close of
<PAGE>
business on such date. As promptly as practicable after such date, the Company
shall issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of full shares of Conversion Stock
issuable upon such conversion. If a conversion is effected for less than the
total number of shares of Conversion Stock then issuable upon conversion,
promptly after surrender of the Convertible Note upon such conversion, the
Company will execute and deliver a new Convertible Note, dated the date hereof,
evidencing the right of the Holder to the balance of the Conversion Stock
available hereunder upon the same terms and conditions set forth herein. All
notices and other communications from the Company to the Holder of this
Convertible Note shall be delivered personally or mailed by first class mail,
postage prepaid, to the address furnished to the Company in writing by the last
Holder of this Convertible Note who shall have furnished an address to the
Company in writing, and if mailed shall be deemed given three days after deposit
in the United States mail.
3. Adjustments and Notices of Record Date. The Conversion Share Price and
--------------------------------------
the number of shares of Conversion Stock shall be subject to adjustment from
time to time in accordance with the following provisions:
3.1 Subdivision or Combinations. In case the Company shall at any time
---------------------------
subdivide the outstanding shares of the Securities, the Conversion Share Price
in effect immediately prior to such subdivision shall be proportionately
decreased, and in case the Company shall at any time combine the outstanding
shares of the Securities, the Conversion Share Price in effect immediately prior
to such combination shall be proportionately increased, effective at the close
of business on the date of such subdivision or combination, as the case may be.
3.2 Stock Dividends. In the case the Company shall at any time pay a
---------------
dividend with respect to the Securities payable in the Securities, then the
Conversion Share Price in effect immediately prior to the record date for
distribution of such dividend shall be adjusted to that price determined by
multiplying the Conversion Share Price in effect immediately prior to such
record date by a fraction (i) the numerator of which shall be the total number
of shares of the Securities outstanding immediately prior to such dividend and
(ii) the denominator of which shall be the total number of shares of the
Securities outstanding immediately after such dividend.
3.3 Number of Shares. Upon each adjustment pursuant to subdivisions (a)
----------------
or (b) of this Section 3, the registered holder of this Convertible Note shall
thereafter (until another such adjustment) be entitled to purchase, at the
adjusted Conversion Share Price, the number of shares of the Securities,
calculated to the nearest full share, obtained by recalculating the number of
shares Conversion Stock pursuant to Section 1.4 hereof.
3.4 Reclassification or Merger. In case of any reclassification, change
--------------------------
or conversion of securities of the class or series issuable upon conversion of
this Convertible Note (other than as a result of a subdivision or combination
described above), the Company, or such successor or purchasing corporation, as
the case may be, shall duly execute and delivery to the holder hereof a new
convertible note so that the holder shall have the right to receive, in lieu of
the shares of the Securities theretofore issuable upon conversion of this
Convertible Note, the
<PAGE>
kind and amount of shares of stock, other securities, money and property
receivable upon such reclassification, change or merger by the holder of the
number of shares of Securities then purchasable under this Convertible Note.
Such new convertible note shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
3. The provisions of this subsection 3.4 shall similarly apply to successive
reclassifications, changes, and mergers.
3.5 Upon any adjustment of the Conversion Share Price and any increase or
decrease in the number of shares of the Securities upon the conversion of this
Convertible Note, then, and in each such case, the Company, within thirty (30)
days thereafter, shall give written notice thereof to the registered holder of
this Convertible Note at the address of such holder as shown on the books of the
Company which notice shall state the Conversion Share Price as adjusted and the
increased or decreased number of shares of Securities purchasable upon the
conversion of this Convertible Note, setting forth in reasonable detail the
method of calculation of each.
4. Subordination. All monies subject to this Convertible Note (the
-------------
"Subordinated Debt") is subordinated in right of payment to all obligations of
the Company to ALZA Corporation, a Delaware corporation ("ALZA") now existing or
hereafter arising, together with all costs of collecting such obligations
(including attorneys' fees), including, without limitation, all interest
accruing after the commencement by or against the Company of any bankruptcy,
reorganization or similar proceeding, and all obligations under that certain
Loan Agreement (the "Loan Agreement") by and between the Company and ALZA dated
August 29, 1995, as amended (the "Senior Debt").
-----------
4.1 Holder will not demand or receive from the Company (and the Company
will not pay to Holder) all or any part of the Subordinated Debt, by way of
payment, prepayment, setoff, lawsuit or otherwise, nor will Holder commence, or
cause to commence, prosecute or participate in any administrative, legal or
equitable action against the Company, for so long as any portion of the Senior
Debt remains outstanding.
4.2 Holder shall promptly deliver to ALZA in the form received (except for
endorsement or assignment by Holder where required by ALZA) for application to
the Senior Debt any payment, distribution, security or proceeds received by
Holder with respect to the Subordinated Debt other than in accordance with this
Convertible Note.
4.3 In the event of the Company's insolvency, reorganization or any case
or proceeding under any bankruptcy or insolvency law or laws relating to the
relief of debtors, these provisions shall remain in full force and effect, and
ALZA's claims against the Company and the estate of the Company shall be paid in
full before any payment is made to Holder.
4.4 No amendment of the documents evidencing or relating to the
Subordinated Debt shall directly or indirectly modify the provisions of this in
any manner which might terminate or impair the subordination of the Subordinated
Debt. By way of example, such
<PAGE>
instruments shall not be amended to (i) increase the rate of interest with
respect to the Subordinated Debt, or (ii) accelerate the payment of the
principal or interest or any other portion of the Subordinated Debt.
4.5 The provisions of this Section 4 shall remain effective for so long as
the Company owes any amounts to ALZA under the Loan Agreement or otherwise. If,
at any time after payment in full of the Senior Debt any payments of the Senior
Debt must be disgorged by ALZA for any reason (including, without limitation,
the bankruptcy of the Company), this Section 4 and the relative rights and
priorities set forth herein shall be reinstated as to all such disgorged
payments as though such payments had not been made and Holder shall immediately
pay over to ALZA all payments received with respect to the Subordinated Debt to
the extent that such payments would have been prohibited hereunder.
4.6 The provisions of this Section 4 shall bind any successors or
assignees of Holder and shall benefit any successors or assigns of ALZA. This
Agreement is solely for the benefit of Holder and ALZA and not for the benefit
of the Company or any other party. Holder further agrees that if the Company is
in the process of refinancing a portion of the Senior Debt with a new lender,
and if ALZA makes a request of Holder, Holder shall agree to enter into a new
subordination agreement with the new lender on substantially the terms and
conditions of this Agreement.
5. Events of Default. If any of the following events shall occur (herein
-----------------
individually referred to as an "Event of Default"), the Holder may declare the
entire unpaid principal on the Convertible Note, together with accrued interest,
immediately due and payable, without presentment, demand, protest or notice of
protest of any kind, all of which are hereby expressly waived:
5.1 If the principal and interest due hereunder is not paid within twenty-
one (21) days of when due and payable.
5.2 If the Company:
(a) shall commence any proceeding or any other action relating to it
in bankruptcy or seek reorganization, arrangement, readjustment of its debts,
dissolution, liquidation, winding-up, composition or any other relief under the
United States Bankruptcy Act, as amended, or under any other insolvency,
reorganization, liquidation, dissolution, arrangement, composition, readjustment
or debt or any other similar act or law, of any jurisdiction, domestic or
foreign, now or hereafter existing;
(b) shall apply for, or consent to or acquiesce in, an appointment of
a receiver, conservator, trustee or similar officer for it or for all or a
substantial part of its property; or
(c) shall make a general assignment for the benefit of creditors.
<PAGE>
(d) shall admit in writing its inability to pay its debts as they
mature in the ordinary course of business or that the amount of its total
liabilities exceed the amount of it total assets.
5.3 If any proceedings are commenced or any other action is taken against
the Company in bankruptcy or seeking reorganization, arrangement, readjustment
of its debts, liquidation, dissolution, winding-up, composition or any other
relief under the United States Bankruptcy Act, as amended, or under any other
insolvency, reorganization, liquidation, dissolution, arrangement, composition,
readjustment of debt or any other similar act or law of any jurisdiction,
domestic, or foreign, now or hereafter existing; or a receiver, conservator,
trustee or similar officer for the Company of for all or a substantial part of
its property is appointed; and, in each such case, such event continues for
forty-five (45) days undismissed or undischarged.
6. Exchange and Transfer. This Convertible Note is subject to the
---------------------
restrictions on transfer set forth herein. Upon surrender for transfer of this
Convertible Note and compliance with said restrictions on transfer, the Company
shall execute and deliver in the name of the transferee or transferees a new
Convertible Note or Notes for a like principal amount.
This Convertible Note shall not be assigned, transferred or otherwise
conveyed, in whole or in part, by the Holder except with the prior written
consent of the Company. This Convertible Note, if presented for a transfer or
exchange to which the Company has consented, shall (if so required by the
Company) be duly endorsed by, or be accompanied by, or be accompanied by
instruments of transfer in form satisfactory to the Company duly executed by,
the registered Holder or its authorized attorney.
Any such exchange or transfer shall be without charge, except that the Company
may require payment of the sum sufficient to cover any tax or governmental
charge that may be imposed in relation thereto by a government other than the
federal government of the United States or the government of any of its States.
The Company may deem and treat the registered Holder hereof as the absolute
owner hereof (whether or not this Convertible Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon by anyone
other than the Company), for the purpose of receiving payment of or on account
of the principal hereof, for the conversion hereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
7. Prepayment. The Company may prepay this Convertible Note in full or in
----------
part before December 31, 1997 provided that it delivers thirty (30) days prior
written notice of its intention to prepay this Convertible Note and that during
such 30 day period the Holder shall retain its right to convert the outstanding
principal under this Convertible Note as provided in Section 2.
<PAGE>
8. Reservation of Stock. On and after the date of the Equity Financing, the
--------------------
Company will reserve from its authorized and unissued Securities a sufficient
number of shares to provide for the issuance of Conversion Stock upon the
conversion of this Convertible Note. Issuance of this Convertible Note shall
constitute full authority to the Company's officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Conversion Stock issuable upon the conversion of this
Convertible Note.
9. Representation of Holder. By acceptance of this Convertible Note, Holder
------------------------
represents to the Company that he is (a) an "accredited investor" as defined by
Rule 501 of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, and (b) an "excluded purchaser" as defined by
the regulations promulgated under the California Corporate Securities Act of
1968. Holder also represents that by reason of its business and financial
experience it has the capacity to protect its own interests in this transaction
and is accepting this Convertible Note for its own account and not with a view
to its resale or distribution.
10. Notices. Any notice required by any provision of this Convertible Note
-------
to be given to the Holder shall be in writing and may be delivered by personal
service, sent by facsimile with confirmation of receipt or sent by registered or
certified mail, return receipt requested, with postage thereon fully prepaid.
All such communications shall be addressed to the Holder of record at its
address appearing on the books of the Company.
11. No Rights as Shareholder. This Convertible Note, as such, shall not
------------------------
entitle the Holder to any rights as a shareholder of the Company, except as
otherwise specified herein.
<PAGE>
12. Legal Fees. In the event of any legal action to enforce the rights of
----------
any party named in this Convertible Note, the party prevailing in such action
shall be entitled, in addition to such other relief as may be granted, all
reasonable costs and expenses, including reasonable attorneys' fees, incurred in
such action.
13. Headings and Governing Law. The descriptive headings in this Convertible
--------------------------
Note are inserted for convenience only and do not constitute a part of this
Convertible Note. The validity, meaning and effect of this Convertible Note
shall be determined in accordance with the laws of the State of California,
without regard to principles of conflicts of law.
IN WITNESS WHEREOF, ENACT Health Management Systems has duly caused this
Convertible Note to be signed in its name and on its behalf by its duly
authorized officer as of the date hereinabove written.
ENACT HEALTH MANAGEMENT SYSTEMS
By: /s/ Matthew Sanders
--------------------------------
Matthew Sanders, President
<PAGE>
Attachment 1
NOTICE OF CONVERSION
TO: ENACT HEALTH MANAGEMENT SYSTEMS
1. The undersigned hereby elects to convert the right to receive
$____________________________ pursuant to the terms of the attached Convertible
Note, into the right to receive _______________ shares of Conversion Stock of
ENACT Health Management Systems without further payment.
2. Please issue a certificate or certificates representing said shares of
Conversion Stock in the name of the undersigned or in such other name as is
specified below:
_________________________
(Name)
_________________________
(Address)
___________________________ __________________________________________________
(Date) (Name of Convertible Note Holder)
By:_________________________________________
Title:______________________________________
<PAGE>
Attachment 2
INVESTMENT REPRESENTATION STATEMENT
Shares of Conversion Stock
(as defined in the attached Convertible Note) of
ENACT HEALTH MANAGEMENT SYSTEMS
In connection with the purchase of the above-listed securities, the
undersigned hereby represents to ENACT Health Management Systems (the "Company")
as follows:
1. The securities to be received upon the conversion of the Convertible
Note (the "Securities") will be acquired for investment for its own account, not
as a nominee or agent, and not with a view to the sale or distribution of any
part thereof, and the undersigned has no present intention of selling, granting
participation in or otherwise distributing the same, but subject, nevertheless,
to any requirement of law that the disposition of its property shall at all
times be within its control. By executing this Statement, the undersigned
further represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations to such
person or to any third person, with respect to any Securities issuable upon
conversion of the Convertible Note.
(b) The undersigned understands that the Securities issuable upon
conversion of the Convertible Note at the time of issuance may not be registered
under the Securities Act of 1933, as amended (the "Act"), and applicable state
securities laws, on the ground that the issuance of such securities is exempt
pursuant to Section 4(2) of the Act and state law exemptions relating to offers
and sales not by means of a public offering, and that the Company's reliance on
such exemptions is predicated on the undersigned's representations set forth
herein.
(c) The undersigned agrees that in no event will it make a disposition of
any Securities acquired upon the conversion of the Convertible Note unless and
until (i) it shall have notified the Company of the proposed disposition and
shall have furnished the Company with a statement of the circumstances
surrounding the proposed disposition, and (ii) it shall have furnished the
Company with an opinion of counsel satisfactory to the Company and Company's
counsel to the effect that (A) appropriate action necessary for compliance with
the Act and any applicable state securities laws has been taken or an exemption
from the registration requirements of the Act and such laws is available, and
(B) the proposed transfer will not violate any of said laws.
(d) The undersigned acknowledges that an investment in the Company is
highly speculative and represents that it is able to fend for itself in the
transactions contemplated by this Statement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of its investments, and has the ability to bear the economic risks
(including the risk of a total loss) of its investment. The undersigned
represents that it has had the opportunity to ask questions of the Company
concerning the Company's business and assets and to obtain any additional
information which it considered necessary to verify the accuracy of or to
<PAGE>
amplify the Company's disclosures, and has had all questions which have been
asked by it satisfactorily answered by the Company.
(e) The undersigned acknowledges that the Securities issuable upon
conversion of the Convertible Note must be held indefinitely unless subsequently
registered under the Act or an exemption from such registration is available.
The undersigned is aware of the provisions of Rule 144 promulgated under the Act
which permit limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than two
years after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market makers" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
Dated:___________________
____________________________________________
(Typed or Printed Name)
By:_________________________________________
(Signature)
____________________________________________
(Title)
<PAGE>
EXHIBIT 10.8
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN
QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND
THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS
THE SALE IS SO EXEMPT.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE
ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
CONVERTIBLE NOTE
----------------
$1,000,000 August 30, 1996
ENACT Health Management Systems, a California corporation (the "Company"),
for value received, hereby promises to pay to ALZA Corporation, a Delaware
corporation, or its assigns ("Holder"), the principal sum of One Million Dollars
($1,000,000) or such lesser amount as shall then equal the outstanding principal
amount hereof, together with interest (computed on the basis of a 365-day year)
on the unpaid amount thereof at the Prime Rate (which shall mean the "Prime
Rate" as that term is used and quoted from time to time by the Wall Street
Journal) per annum, from the date hereof (the "Initial Rate"). Commencing on
June 30, 1997, the Initial Rate shall be changed to the Prime Rate plus 175
basis points (the "Adjusted Rate") unless the Company has (i) closed an equity
financing that yields gross cash proceeds in excess of Five Million Dollars
($5,000,000) to Company in a single transaction (which may have multiple
closings, provided that all such closings are completed within a single ninety
(90) day period) in which each investor participates on the same terms (a
"Qualified Equity Financing") and (ii) the Company has repaid in full ALZA
Corporation's loan of One Million Dollars ($1,000,000) to the Company evidenced
by the note dated September 28, 1995. The Initial Rate and the Adjusted Rate
(each, a "Rate") shall be subject to change during the term of this Convertible
Note as the Prime Rate changes. Company acknowledges that Holder makes no
representation that the applicable Rate is the lowest or best rate of interest
offered by Holder or other lenders.
<PAGE>
Notwithstanding the foregoing, if during any period the applicable Rate
exceeds the maximum lawful rate of interest permitted under applicable law (the
"Maximum Rate"), the rate of interest in effect on this Convertible Note shall
be limited to the Maximum Rate during each such period, but at all times
thereafter the rate of interest in effect on this Convertible Note shall be the
Maximum Rate until the total amount of the interest accrued on this Convertible
Note equals the total amount of interest which would have accrued hereon if the
applicable Rate had at all times been in effect for the applicable period.
1. Payment. All unpaid principal and interest shall be due and payable
-------
in full on June 30, 2000. Interest on the outstanding principal under this
Convertible Note shall be due and payable quarterly, on the last day of each
calendar quarter, commencing with the third calendar quarter in 1996. If any
interest payment hereunder is not received by Holder on or before fifteen
calendar days after the date such interest payment becomes due, Company shall
pay, at Holder's option, a late or collection charge equal to four percent (4%)
of the amount of such unpaid interest payment.
Payments hereunder shall be made by the Company to the Holder, at the
address as provided to the Company by the Holder in writing, in lawful money of
the United States of America, in immediately available funds. If any payment on
this Convertible Note shall become due on a Saturday, Sunday, or a public
holiday under the laws of the State of California, such payment shall be made on
the next succeeding business day and such extension of time shall be included in
computing interest in connection with such payment.
2. Conversion.
----------
(a) The Holder, at its option, may convert the principal hereunder
into Series C Preferred Stock (or as provided in paragraph (iii) below, into
Common Stock) as follows:
(i) At any time after the date hereof, at Holder's option, the
Holder may convert all or any portion of Two Hundred Fifty Thousand Dollars
($250,000) of the principal of this Note into 36,164 shares of Series C
Preferred Stock at an effective conversion price of $6.913 per share (as
adjusted for recapitalizations, stock splits, stock dividends and the like).
(ii) From and after the earlier of (a) June 30, 1997 or (b) the
closing of the first Qualified Equity Financing by Company after the date
hereof, at the Holder's option, the Holder may convert all or any portion or
portions of Seven Hundred and Fifty Thousand Dollars ($750,000) of the principal
of this Convertible Note into that number of shares of Series C Preferred Stock
equal to the converted portion of Seven Hundred Fifty Thousand Dollars
($750,000) divided by a conversion price. The conversion price shall equal
$5.53 unless a Qualified Equity Financing is completed by June 30, 1997 in which
case the conversion price shall be equal to 80% of the price per share paid for
the securities issued in such Qualified Equity Financing. The conversion price
shall not be adjusted for financings after the first Qualified Equity Financing.
In any case, the conversion price shall be equitably adjusted for
recapitalizations, stock splits, stock dividends and the like. If there is an
adjustment made to the
<PAGE>
conversion price under this paragraph as a result of a Qualified Equity
Financing completed by June 30, 1997, the adjustment made under this paragraph
shall not be considered the issuance or sale of Equity Securities for purposes
of Section 4(e)(2) of the Articles of Incorporation of the Company. If the
price per share in the Qualified Equity Financing is such that the Company shall
be required under Section 4(e)(2) of the Articles of Incorporation to adjust the
conversion price of one or more series of Preferred Stock as well as to adjust
the conversion price under this paragraph, then the Company shall first adjust
the conversion price of all affected series of the Preferred Stock and shall
then adjust the conversion rate under this paragraph.
(iii) Notwithstanding paragraph (i) and (ii) above, from and
after the completion of an initial public offering that yields at least Ten
Million Dollars ($10,000,000) in proceeds to the Company at a price of at least
$10 per share (as adjusted for recapitalizations, stock splits, stock dividends
and the like) in which all then outstanding shares of Series C Preferred Stock
are converted into Common Stock (a "Qualified IPO"), the principal hereunder
shall be convertible into Common Stock in lieu of Series C Preferred Stock. The
number of shares of Common Stock into which the principal shall be convertible
shall be calculated as if the principal had been converted into Series C
Preferred Stock immediately prior to the Qualified IPO and then into Common
Stock at the conversion rate for Series C Preferred Stock in effect immediately
prior to the closing of the Qualified IPO.
(iv) The Series C Preferred Stock or Common Stock, as
applicable, into which the principal may convert shall be known as "Conversion
Stock."
(b) This Convertible Note may be converted in whole or part by the
Holder, at any time after the date hereof prior to the date on which all
principal hereunder is repaid, by the surrender of this Convertible Note,
together with the Notice of Conversion and Investment Representation Statement
in the forms attached hereto as Attachments 1 and 2, respectively, duly
-------------------
completed and executed at the principal office of the Company, specifying the
portion of the Convertible Note to be converted. This Convertible Note shall be
deemed to have been converted immediately prior to the close of business on the
date of its surrender for conversion as provided above, and the person entitled
to receive the shares of Conversion Stock issuable upon such conversion shall be
treated for all purposes as Holder of such shares of record as of the close of
business on such date. As promptly as practicable after such date, the Company
shall issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of full shares of Conversion Stock
issuable upon such conversion. If a conversion is effected for less than the
total number of shares of Conversion Stock then issuable upon conversion,
promptly after surrender of the Convertible Note upon such conversion, the
Company will execute and deliver a new Convertible Note, dated the date hereof,
evidencing the right of the Holder to the balance of the Conversion Stock
available hereunder upon the same terms and conditions set forth herein. All
notices and other communications from the Company to the Holder of this
Convertible Note shall be delivered personally or mailed by first class mail,
postage prepaid, to the address furnished to the Company in writing by the last
Holder of this Convertible Note who shall have furnished an address to the
Company in writing, and if mailed shall be deemed given three days after deposit
in the United States mail.
<PAGE>
(c) In case the Company shall at any time subdivide the outstanding
shares of Series C Preferred Stock or Common Stock or shall issue a stock
dividend with respect to the Series C Preferred Stock or Common Stock, the
conversion price in effect immediately prior to such subdivision or the issuance
of such dividend shall be proportionately decreased, and in case the Company
shall at any time combine the outstanding shares of the Series C Preferred Stock
or Common Stock, the conversion price(s) in effect immediately prior to such
combination shall be proportionately increased, effective at the close of
business on the date of such subdivision, dividend or combination, as the case
may be.
Upon each adjustment pursuant to this subsection, the Holder of this
Convertible Note shall thereafter (until another such adjustment) be entitled to
purchase, at the adjusted conversion price(s), the number of shares of the
Conversion Stock, calculated to the nearest full share, obtained by multiplying
the number of shares of the Convertible Note purchasable hereunder immediately
prior to such adjustment by the conversion price(s) in effect prior to such
adjustment and dividing the product so obtained by the adjusted conversion
price(s).
(d) No fractional shares of Conversion Stock shall be issued upon
conversion of this Convertible Note. In lieu of any fractional shares to which
the Holder would otherwise be entitled, the Company shall pay cash equal to the
product of such fraction multiplied by the applicable conversion price.
3. Prepayment. The Company may not prepay this Convertible Note in
----------
full or in part before July 1, 1998 unless and until either (i) the Company
completes a Qualified IPO and the closing price per share of such stock is at
least 150% of the greater of the applicable conversion prices (as determined in
accordance with Section 2 (a)(i) and (ii) hereof) for 20 of any 30 consecutive
trading days, or (ii) the interest rate is increased on June 30, 1997 to the
Adjusted Rate as described in the preamble hereof. At any time after the
earlier of July 1, 1998 or the occurrence of either of the two events described
in clauses (i) and (ii) above, the Company may prepay this Convertible Note in
full, but not in part, provided that it delivers thirty (30) days prior written
notice of its intention to prepay this Convertible Note and that during such 30
day period the Holder shall retain its right to convert the outstanding
principal under this Convertible Note as provided in Section 2.
4. Exchange and Transfer. This Convertible Note is subject to the
---------------------
restrictions on transfer set forth herein. Upon surrender for transfer of this
Convertible Note and compliance with said restrictions on transfer, the Company
shall execute and deliver in the name of the transferee or transferees a new
Convertible Note or Convertible Notes for a like principal amount.
This Convertible Note shall not be assigned, transferred or otherwise
conveyed, in whole or in part, by the Holder except by operation of law or with
the prior written consent of the Company. Notwithstanding the foregoing, the
Company's consent is not required in the event of an assignment, transfer or
other conveyance of this Convertible Note to an entity which controls, is
controlled by or is under common control with ALZA Corporation. This
Convertible Note, if presented for an assignment, transfer or exchange permitted
hereunder, shall (if so required by
<PAGE>
the Company) be duly endorsed by, or be accompanied by instruments of transfer
in form satisfactory to the Company duly executed by, the Holder or its
authorized attorney.
Any such exchange or transfer shall be without charge.
The Company may deem and treat the Holder hereof as the absolute owner
hereof (whether or not this Convertible Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon by anyone
other than the Company), for the purpose of receiving payment of or on account
of the principal hereof and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
5. Loan Agreement. This Convertible Note is made in connection with that
--------------
certain Loan Agreement, by and between ENACT Health Management Systems, a
California corporation, and ALZA Corporation, a Delaware corporation, dated
August 29, 1995 and amended November 15, 1995 and August 30, 1996 (the "Loan
Agreement"), and is subject to all of the terms and conditions set forth therein
which are incorporated herein by this reference.
6. No Rights as Shareholder. This Convertible Note, as such, shall not
------------------------
entitle the Holder to any rights as a shareholder of the Company, except as
otherwise specified herein.
7. Reservation of Stock. On and after the date of this Convertible Note,
--------------------
the Company will reserve from its authorized and unissued Series C Preferred
Stock and Common Stock a sufficient number of shares to provide for the issuance
of Conversion Stock upon the conversion of this Convertible Note and shall
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the conversion of the
Conversion Stock. Issuance of this Convertible Note shall constitute full
authority to the Company's officers who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for shares of
Conversion Stock issuable upon the conversion of this Convertible Note.
8. Registration Rights. The Holder shall have registration rights as set
-------------------
forth in the Amended and Restated Rights Agreement by and among the Company,
ALZA Corporation and others dated August 29, 1995, as amended July 17, 1996.
9. Acceleration of Payment. The Company agrees to give Holder fifteen
-----------------------
(15) days prior written notice ("Notice Period") in the event of any (i) merger
or consolidation of the Company into or with another corporation in which the
shareholders of the Company shall own less than 50% of the voting securities of
the surviving corporation, (ii) sale, transfer or lease (but not including a
transfer or lease by pledge or mortgage to a bona fide lender) of all or
substantially all of the assets of the Company, or (iii) sale by the Company's
shareholders of 50% or more of the Company's outstanding securities in one or
more related transactions, (collectively, such events hereinafter shall be
referred to as the "Merger"). During the Notice Period, the Holder shall have
the right to (a) exercise any conversion rights Holder has hereunder or (b)
accelerate the outstanding principal and interest due under this Note so that
all amounts owning under the
<PAGE>
Note as of the date on which the Merger closes shall become due and payable
simultaneous with the closing of the Merger.
10. Headings and Governing Law. The descriptive headings in this
--------------------------
Convertible Note are inserted for convenience only and do not constitute a part
of this Convertible Note. The validity, meaning and effect of this Convertible
Note shall be determined in accordance with the laws of the State of California,
without regard to principles of conflicts of law.
11. Default, Waiver and Costs. In the event of a default in the payment
-------------------------
of any interest when due hereunder and continuation of such default for a period
of 10 days after receipt of written notice from Holder of such default or any
other event of default under the terms of the Loan Agreement, Holder may declare
the entire unpaid principal and all accrued but unpaid interest immediately due
and payable. Company hereby waives demand, presentment, protest, notice of
nonpayment, notice of protest, and any and all lack of diligence or delays which
may occur in the collection of this Convertible Note. Company promises to pay
to Holder reasonable attorneys' fees and costs and expenses of suit or other
means of collection in the event that suit or other means of collection be
instituted with respect to this Convertible Note after demand is made.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, ENACT Health Management Systems has duly caused this
Convertible Note to be signed in its name and on its behalf by its duly
authorized officer as of the date hereinabove written.
ENACT HEALTH MANAGEMENT
SYSTEMS
By: /s/ Matthew Sanders
-----------------------------------
Matthew Sanders, President
<PAGE>
Attachment 1
NOTICE OF CONVERSION
TO: ENACT HEALTH MANAGEMENT SYSTEMS
1. The undersigned hereby elects to convert the right to receive
$____________________________ pursuant to the terms of the attached Convertible
Note, into the right to receive _______________ shares of ENACT Health
Management Systems Series C Preferred Stock/Common Stock, as applicable, without
further payment.
2. Please issue a certificate or certificates representing said shares of
Conversion Stock in the name of the undersigned or in such other name as is
specified below:
_______________________
(Name)
_______________________
(Address)
___________________________ __________________________________________________
(Date) (Name of Convertible Note Holder)
By:_________________________________________
Title:______________________________________
<PAGE>
Attachment 2
INVESTMENT REPRESENTATION STATEMENT
Shares of Conversion Stock
(as defined in the attached Convertible Note) of
ENACT HEALTH MANAGEMENT SYSTEMS
In connection with the purchase of the above-listed securities, the
undersigned hereby represents to ENACT Health Management Systems (the "Company")
as follows:
1. The securities to be received upon the conversion of the Convertible
Note (the "Securities") will be acquired for investment for its own account, not
as a nominee or agent, and not with a view to the sale or distribution of any
part thereof, and the undersigned has no present intention of selling, granting
participation in or otherwise distributing the same, but subject, nevertheless,
to any requirement of law that the disposition of its property shall at all
times be within its control. By executing this Statement, the undersigned
further represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations to such
person or to any third person, with respect to any Securities issuable upon
conversion of the Convertible Note.
(b) The undersigned understands that the Securities issuable upon exercise
of the Convertible Note at the time of issuance may not be registered under the
Securities Act of 1933, as amended (the "Act"), and applicable state securities
laws, on the ground that the issuance of such securities is exempt pursuant to
Section 4 (2) of the Act and state law exemptions relating to offers and sales
not by means of a public offering, and that the Company's reliance on such
exemptions is predicated on the undersigned's representations set forth herein.
(c) The undersigned agrees that in no event will it make a disposition of
any Securities acquired upon the conversion of the Convertible Note unless and
until (i) it shall have notified the Company of the proposed disposition and
shall have furnished the Company with a statement of the circumstances
surrounding the proposed disposition, and (ii) it shall have furnished the
Company with an opinion of counsel satisfactory to the Company and Company's
counsel to the effect that (A) appropriate action necessary for compliance with
the Act and any applicable state securities laws has been taken or an exemption
from the registration requirements of the Act and such laws is available, and
(B) the proposed transfer will not violate any of said laws.
(d) The undersigned acknowledges that an investment in the Company is
highly speculative and represents that it is able to fend for itself in the
transactions contemplated by this Statement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of its investments, and has the ability to bear the economic risks
(including the risk of a total loss) of its investment. The undersigned
represents that it has had the opportunity to ask questions of the Company
concerning the Company's business and assets and to obtain any additional
information which it considered necessary to verify the accuracy of or to
<PAGE>
amplify the Company's disclosures, and has had all questions which have been
asked by it satisfactorily answered by the Company.
(e) The undersigned acknowledges that the Securities issuable upon
exercise of the Convertible Note must be held indefinitely unless subsequently
registered under the Act or an exemption from such registration is available.
The undersigned is aware of the provisions of Rule 144 promulgated under the Act
which permit limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than two
years after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market makers" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
Dated:__________________
____________________________________________
(Typed or Printed Name)
By:_________________________________________
(Signature)
____________________________________________
(Title)
<PAGE>
FROM: Jan Fagan
TO: NOCAL.PA2 (PGallo), SOCAL.SD3 (LMerrill), NOCAL.PA1(...
DATE: 11/20/97 9:42 am
SUBJECT: LLP Conversion -Reply
Marvin: We are permitted to defer the audit (but not the return).
Under DOL regulations, we still have to do a return and an audit for the short
period of Nov/Dec. 1998. However, it is permitted to file the return and
unaudited financials for the short period initially (by 10/15/99 with extension)
without the accountant's report/audit and then have the audit for the short
period prepared and filed with the DOL at the same time as the return and audit
for calendar year 1999 (by 10/15/2000). We would then need to disclose any
differences between the initial short year (unaudited return) and the
information in the audit/accountant's report. Jan.
((( Marvin Meisel 11/19/97 10:48am )))
Terry O. has confirmed that we will not have any stub periods in 1997, but will
have stub periods for both the PC and the LLP in Nov./Dec., 1998. One question
he had was whether we will need audits of the plans for that stub period.
CC: NOCAL.PA1 (HGoodwin), SOCAL.GT (DRein),
<PAGE>
EXHIBIT 10.9
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE
ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
CONVERTIBLE NOTE
----------------
$500,000.00 October 21, 1996
ENACT Health Management Systems, a California corporation (the "Company"), for
value received, hereby promises to pay to Nippon Enterprise Development Corp. or
its registered assigns ("Holder"), the principal sum of Five Hundred Thousand
Dollars ($500,000.00), or so much thereof as may have been advanced by the
Holder, with interest (computed on the basis of a 365-day year) on the unpaid
amount thereof at the rate of Prime Rate (which shall mean the "Prime Rate" as
that term is used and quoted from time to time by The Wall Street Journal) per
annum, compounded annually, from the date hereof (the "Rate"). The initial Rate
shall be subject to change during the term of the Convertible Note as the Prime
Rate changes.
Notwithstanding the foregoing, if during any period the Rate exceeds the
maximum lawful nonusurious rate of interest permitted under applicable law (the
"Maximum Rate"), the rate of interest in effect on this note shall be limited to
the Maximum Rate during each such period, but at all times thereafter the rate
of interest in effect on this Convertible Note shall be the Maximum Rate until
the total amount of the interest accrued on this Convertible Note equals the
total amount of interest which would have accrued hereon if the Rate had at all
times been in effect for the applicable period.
Subject to the terms and limitations of this Convertible Note, the Company may
borrow under this Convertible Note, and the term of this Convertible Note shall
be, from the date hereof until December 31, 1997, at which time all unpaid
principal and interest shall be due and payable in full. As of the date of this
Note, the Holder shall advance a single lump sum of $500,000 at the request of
the Company. Payments hereunder shall be made by the Company to the Holder, at
the address as provided to the Company by the Holder in writing, in lawful money
of the United States of America.
<PAGE>
If any payment on this Convertible Note shall become due on a Saturday,
Sunday, or a public holiday under the laws of the State of California, such
payment shall be made on the next succeeding business day and such extension of
time shall be included in computing interest in connection with such payment.
1. Definitions. As used in this Convertible Note, the following terms shall
------------
have the definitions ascribed to them below:
1.1 "Equity Financing" shall mean the Company's first stock financing
after the date hereof which results in gross proceeds to the Company, in cash or
conversion of debt, in any ninety (90) day period of Ten Million Dollars
($10,000,000.00) or more, including but not limited to an initial public
offering of the Company's common stock.
1.2 "Securities" shall mean the securities of the Company sold in the
Equity Financing. The securities purchasable upon conversion of this Convertible
Note shall be authorized in conjunction with such Equity Financing.
1.3 "Conversion Share Price" shall mean the product of (X) price at which
a share of the Securities is sold in the Equity Financing multiplied by (Y) 0.8.
1.4 "Conversion Stock" shall mean shares of the Securities purchasable
upon conversion of this Convertible Note; the total number of shares to be
determined by dividing (A) the amount of the outstanding principal under this
Convertible Note which Holder elects to convert at the time of conversion by (B)
the Conversion Share Price.
2. Conversion.
----------
2.1 At any time after the date hereof, at Holder's option, the Holder may
convert all or any portion of the then outstanding principal under this
Convertible Note into that number of shares of Conversion Stock equal to the
amount of principal which Holder elects to convert divided by the Conversion
Share Price.
2.2 This Convertible Note may be converted in whole or part by the
Holder, at any time after the date hereof prior to the date on which all
principal hereunder is repaid, by the surrender of this Convertible Note,
together with the Notice of Conversion and Investment Representation Statement
in the forms attached hereto as Attachments 1 and 2, respectively, duly
-------------------
completed and executed at the principal office of the Company, specifying the
portion of the Convertible Note to be converted. This Convertible Note shall be
deemed to have been converted immediately prior to the close of business on the
date of its surrender for conversion as provided above, and the person entitled
to receive the shares of Conversion Stock issuable upon such conversion shall be
treated for all purposes as Holder of such shares of record as of the close of
business on such date. As promptly as practicable after such date, the Company
shall issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of full shares of Conversion Stock
issuable upon such conversion. If a conversion is
<PAGE>
effected for less than the total number of shares of Conversion Stock then
issuable upon conversion, promptly after surrender of the Convertible Note upon
such conversion, the Company will execute and deliver a new Convertible Note,
dated the date hereof, evidencing the right of the Holder to the balance of the
Conversion Stock available hereunder upon the same terms and conditions set
forth herein. All notices and other communications from the Company to the
Holder of this Convertible Note shall be delivered personally or mailed by first
class mail, postage prepaid, to the address furnished to the Company in writing
by the last Holder of this Convertible Note who shall have furnished an address
to the Company in writing, and if mailed shall be deemed given three days after
deposit in the United States mail.
3. Adjustments and Notices of Record Date. The Conversion Share Price and
--------------------------------------
the number of shares of Conversion Stock shall be subject to adjustment from
time to time in accordance with the following provisions:
3.1 Subdivision or Combinations. In case the Company shall at any time
---------------------------
subdivide the outstanding shares of the Securities, the Conversion Share Price
in effect immediately prior to such subdivision shall be proportionately
decreased, and in case the Company shall at any time combine the outstanding
shares of the Securities, the Conversion Share Price in effect immediately prior
to such combination shall be proportionately increased, effective at the close
of business on the date of such subdivision or combination, as the case may be.
3.2 Stock Dividends. In the case the Company shall at any time pay a
---------------
dividend with respect to the Securities payable in the Securities, then the
Conversion Share Price in effect immediately prior to the record date for
distribution of such dividend shall be adjusted to that price determined by
multiplying the Conversion Share Price in effect immediately prior to such
record date by a fraction (i) the numerator of which shall be the total number
of shares of the Securities outstanding immediately prior to such dividend and
(ii) the denominator of which shall be the total number of shares of the
Securities outstanding immediately after such dividend.
3.3 Number of Shares. Upon each adjustment pursuant to subdivisions (a)
----------------
or (b) of this Section 3, the registered holder of this Convertible Note shall
thereafter (until another such adjustment) be entitled to purchase, at the
adjusted Conversion Share Price, the number of shares of the Securities,
calculated to the nearest full share, obtained by recalculating the number of
shares Conversion Stock pursuant to Section 1.4 hereof.
3.4 Reclassification or Merger. In case of any reclassification, change
--------------------------
or conversion of securities of the class or series issuable upon conversion of
this Convertible Note (other than as a result of a subdivision or combination
described above), the Company, or such successor or purchasing corporation, as
the case may be, shall duly execute and delivery to the holder hereof a new
convertible note so that the holder shall have the right to receive, in lieu of
the shares of the Securities theretofore issuable upon conversion of this
Convertible Note, the kind and amount of shares of stock, other securities,
money and property receivable upon such reclassification, change or merger by
the holder of the number of shares of Securities then purchasable under this
Convertible Note. Such new convertible note shall provide for adjustments
<PAGE>
that shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 3. The provisions of this subsection 3.4 shall
similarly apply to successive reclassifications, changes, and mergers.
3.5 Upon any adjustment of the Conversion Share Price and any increase or
decrease in the number of shares of the Securities upon the conversion of this
Convertible Note, then, and in each such case, the Company, within thirty (30)
days thereafter, shall give written notice thereof to the registered holder of
this Convertible Note at the address of such holder as shown on the books of the
Company which notice shall state the Conversion Share Price as adjusted and the
increased or decreased number of shares of Securities purchasable upon the
conversion of this Convertible Note, setting forth in reasonable detail the
method of calculation of each.
4. Subordination. All monies subject to this Convertible Note (the
-------------
"Subordinated Debt") is subordinated in right of payment to all obligations of
the Company to ALZA Corporation, a Delaware corporation ("ALZA") now existing or
hereafter arising, together with all costs of collecting such obligations
(including attorneys' fees), including, without limitation, all interest
accruing after the commencement by or against the Company of any bankruptcy,
reorganization or similar proceeding, and all obligations under that certain
Loan Agreement (the "Loan Agreement") by and between the Company and ALZA dated
August 29, 1995, as amended (the "Senior Debt").
-----------
4.1 Holder will not demand or receive from the Company (and the Company
will not pay to Holder) all or any part of the Subordinated Debt, by way of
payment, prepayment, setoff, lawsuit or otherwise, nor will Holder commence, or
cause to commence, prosecute or participate in any administrative, legal or
equitable action against the Company, for so long as any portion of the Senior
Debt remains outstanding.
4.2 Holder shall promptly deliver to ALZA in the form received (except
for endorsement or assignment by Holder where required by ALZA) for application
to the Senior Debt any payment, distribution, security or proceeds received by
Holder with respect to the Subordinated Debt other than in accordance with this
Convertible Note.
4.3 In the event of the Company's insolvency, reorganization or any case
or proceeding under any bankruptcy or insolvency law or laws relating to the
relief of debtors, these provisions shall remain in full force and effect, and
ALZA's claims against the Company and the estate of the Company shall be paid in
full before any payment is made to Holder.
4.4 No amendment of the documents evidencing or relating to the
Subordinated Debt shall directly or indirectly modify the provisions of this in
any manner which might terminate or impair the subordination of the Subordinated
Debt. By way of example, such instruments shall not be amended to (i) increase
the rate of interest with respect to the Subordinated Debt, or (ii) accelerate
the payment of the principal or interest or any other portion of the
Subordinated Debt.
<PAGE>
4.5 The provisions of this Section 4 shall remain effective for so long
as the Company owes any amounts to ALZA under the Loan Agreement or otherwise.
If, at any time after payment in full of the Senior Debt any payments of the
Senior Debt must be disgorged by ALZA for any reason (including, without
limitation, the bankruptcy of the Company), this Section 4 and the relative
rights and priorities set forth herein shall be reinstated as to all such
disgorged payments as though such payments had not been made and Holder shall
immediately pay over to ALZA all payments received with respect to the
Subordinated Debt to the extent that such payments would have been prohibited
hereunder.
4.6 The provisions of this Section 4 shall bind any successors or
assignees of Holder and shall benefit any successors or assigns of ALZA. This
Agreement is solely for the benefit of Holder and ALZA and not for the benefit
of the Company or any other party. Holder further agrees that if the Company is
in the process of refinancing a portion of the Senior Debt with a new lender,
and if ALZA makes a request of Holder, Holder shall agree to enter into a new
subordination agreement with the new lender on substantially the terms and
conditions of this Agreement.
5. Events of Default. If any of the following events shall occur (herein
-----------------
individually referred to as an "Event of Default"), the Holder may declare the
entire unpaid principal on the Convertible Note, together with accrued interest,
immediately due and payable, without presentment, demand, protest or notice of
protest of any kind, all of which are hereby expressly waived:
5.1 If the principal and interest due hereunder is not paid within
twenty-one (21) days of when due and payable.
5.2 If the Company:
(a) shall commence any proceeding or any other action relating to it
in bankruptcy or seek reorganization, arrangement, readjustment of its debts,
dissolution, liquidation, winding-up, composition or any other relief under the
United States Bankruptcy Act, as amended, or under any other insolvency,
reorganization, liquidation, dissolution, arrangement, composition, readjustment
or debt or any other similar act or law, of any jurisdiction, domestic or
foreign, now or hereafter existing;
(b) shall apply for, or consent to or acquiesce in, an appointment
of a receiver, conservator, trustee or similar officer for it or for all or a
substantial part of its property; or
(c) shall make a general assignment for the benefit of creditors.
<PAGE>
(d) shall admit in writing its inability to pay its debts as they
mature in the ordinary course of business or that the amount of its total
liabilities exceed the amount of it total assets.
5.3 If any proceedings are commenced or any other action is taken against
the Company in bankruptcy or seeking reorganization, arrangement, readjustment
of its debts, liquidation, dissolution, winding-up, composition or any other
relief under the United States Bankruptcy Act, as amended, or under any other
insolvency, reorganization, liquidation, dissolution, arrangement, composition,
readjustment of debt or any other similar act or law of any jurisdiction,
domestic, or foreign, now or hereafter existing; or a receiver, conservator,
trustee or similar officer for the Company of for all or a substantial part of
its property is appointed; and, in each such case, such event continues for
forty-five (45) days undismissed or undischarged.
6. Exchange and Transfer. This Convertible Note is subject to the
---------------------
restrictions on transfer set forth herein. Upon surrender for transfer of this
Convertible Note and compliance with said restrictions on transfer, the Company
shall execute and deliver in the name of the transferee or transferees a new
Convertible Note or Notes for a like principal amount.
This Convertible Note shall not be assigned, transferred or otherwise
conveyed, in whole or in part, by the Holder except with the prior written
consent of the Company. This Convertible Note, if presented for a transfer or
exchange to which the Company has consented, shall (if so required by the
Company) be duly endorsed by, or be accompanied by, or be accompanied by
instruments of transfer in form satisfactory to the Company duly executed by,
the registered Holder or its authorized attorney.
Any such exchange or transfer shall be without charge, except that the Company
may require payment of the sum sufficient to cover any tax or governmental
charge that may be imposed in relation thereto by a government other than the
federal government of the United States or the government of any of its States.
The Company may deem and treat the registered Holder hereof as the absolute
owner hereof (whether or not this Convertible Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon by anyone
other than the Company), for the purpose of receiving payment of or on account
of the principal hereof, for the conversion hereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
7. Prepayment. The Company may prepay this Convertible Note in full or in
----------
part before December 31, 1997 provided that it delivers thirty (30) days prior
written notice of its intention to prepay this Convertible Note and that during
such 30 day period the Holder shall retain its right to convert the outstanding
principal under this Convertible Note as provided in Section 2.
8. Reservation of Stock. On and after the date of the Equity Financing, the
--------------------
Company will reserve from its authorized and unissued Securities a sufficient
number of shares to provide
<PAGE>
for the issuance of Conversion Stock upon the conversion of this Convertible
Note. Issuance of this Convertible Note shall constitute full authority to the
Company's officers who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for shares of Conversion Stock
issuable upon the conversion of this Convertible Note.
9. Representation of Holder. By acceptance of this Convertible Note, Holder
------------------------
represents to the Company that he (a) is an "accredited investor" as defined by
Rule 501 of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act of 1933 (the "Act"), (b) is an "excluded purchaser" as
defined by the regulations promulgated under the California Corporate Securities
Act of 1968 and (c) is not a U.S. Person as that term is defined in Rule 901 of
Regulation S of the Act. Holder also represents that by reason of its business
and financial experience it has the capacity to protect its own interests in
this transaction and is accepting this Convertible Note for its own account and
not with a view to its resale or distribution.
10. Reg. S Covenants. Holder will not sell, transfer or otherwise dispose of
----------------
this Convertible Note or the Conversion Stock issuable hereunder to a U.S.
Person for a period of one (1) year after the date hereof, and will not
thereafter sell, transfer or otherwise dispose of such shares to a U.S. Person
unless it has complied with one of the following conditions: (i) there is in
effect a registration statement under the Securities Act covering the proposed
transfer; or (ii) such proposed transfer is within the limitations of an in
compliance with the terms and provisions of Rule 144 under the Securities Act.
In each case, any transfer will be in accordance with any applicable securities
laws of any State of the United States or any other applicable jurisdiction,
including the provisions of Reg. S, and in accordance with the legends set forth
on the stock. Holder further agrees to provide any person purchasing any
portion of this Convertible Note or the Conversion Stock issuable hereunder from
Holder a notice advising such purchaser that resales of such securities are
restricted as stated herein. Holder understands that the registrar and transfer
agent for the Conversion Stock will not be required to accept for registration
of transfer any shares of the Conversion Stock, except upon presentation of
evidence satisfactory to the Company that the foregoing restrictions on transfer
have been complied with.
11. Notices. Any notice required by any provision of this Convertible Note
-------
to be given to the Holder shall be in writing and may be delivered by personal
service, sent by facsimile with confirmation of receipt or sent by registered or
certified mail, return receipt requested, with postage thereon fully prepaid.
All such communications shall be addressed to the Holder of record at its
address appearing on the books of the Company.
12. No Rights as Shareholder. This Convertible Note, as such, shall not
------------------------
entitle the Holder to any rights as a shareholder of the Company, except as
otherwise specified herein.
<PAGE>
13. Legal Fees. In the event of any legal action to enforce the rights of
----------
any party named in this Convertible Note, the party prevailing in such action
shall be entitled, in addition to such other relief as may be granted, all
reasonable costs and expenses, including reasonable attorneys' fees, incurred in
such action.
14. Headings and Governing Law. The descriptive headings in this Convertible
--------------------------
Note are inserted for convenience only and do not constitute a part of this
Convertible Note. The validity, meaning and effect of this Convertible Note
shall be determined in accordance with the laws of the State of California,
without regard to principles of conflicts of law.
IN WITNESS WHEREOF, ENACT Health Management Systems has duly caused this
Convertible Note to be signed in its name and on its behalf by its duly
authorized officer as of the date hereinabove written.
ENACT HEALTH MANAGEMENT SYSTEMS
By: /s/ Matthew Sanders
------------------------------------
Matthew Sanders, President
<PAGE>
Attachment 1
NOTICE OF CONVERSION
TO: ENACT HEALTH MANAGEMENT SYSTEMS
1. The undersigned hereby elects to convert the right to receive
$____________________________ pursuant to the terms of the attached Convertible
Note, into the right to receive _______________ shares of Conversion Stock of
ENACT Health Management Systems without further payment.
2. Please issue a certificate or certificates representing said shares of
Conversion Stock in the name of the undersigned or in such other name as is
specified below:
____________________
(Name)
____________________
(Address)
___________________________ __________________________________________________
(Date) (Name of Convertible Note Holder)
By:_________________________________________
Title:______________________________________
<PAGE>
Attachment 2
INVESTMENT REPRESENTATION STATEMENT
Shares of Conversion Stock
(as defined in the attached Convertible Note) of
ENACT HEALTH MANAGEMENT SYSTEMS
In connection with the purchase of the above-listed securities, the
undersigned hereby represents to ENACT Health Management Systems (the "Company")
as follows:
1. The securities to be received upon the conversion of the Convertible Note
(the "Securities") will be acquired for investment for its own account, not as a
nominee or agent, and not with a view to the sale or distribution of any part
thereof, and the undersigned has no present intention of selling, granting
participation in or otherwise distributing the same, but subject, nevertheless,
to any requirement of law that the disposition of its property shall at all
times be within its control. By executing this Statement, the undersigned
further represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations to such
person or to any third person, with respect to any Securities issuable upon
conversion of the Convertible Note.
(b) The undersigned understands that the Securities issuable upon conversion
of the Convertible Note at the time of issuance may not be registered under the
Securities Act of 1933, as amended (the "Act"), and applicable state securities
laws, on the ground that the issuance of such securities is exempt pursuant to
Section 4(2) of the Act and state law exemptions relating to offers and sales
not by means of a public offering, and that the Company's reliance on such
exemptions is predicated on the undersigned's representations set forth herein.
(c) The undersigned agrees that in no event will it make a disposition of any
Securities acquired upon the conversion of the Convertible Note unless and until
(i) it shall have notified the Company of the proposed disposition and shall
have furnished the Company with a statement of the circumstances surrounding the
proposed disposition, and (ii) it shall have furnished the Company with an
opinion of counsel satisfactory to the Company and Company's counsel to the
effect that (A) appropriate action necessary for compliance with the Act and any
applicable state securities laws has been taken or an exemption from the
registration requirements of the Act and such laws is available, and (B) the
proposed transfer will not violate any of said laws.
(d) The undersigned acknowledges that an investment in the Company is highly
speculative and represents that it is able to fend for itself in the
transactions contemplated by this Statement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of its investments, and has the ability to bear the economic risks
(including the risk of a total loss) of its investment. The undersigned
represents that it has had the opportunity to ask questions of the Company
concerning the Company's business and assets and to obtain any additional
information which it considered necessary to verify the accuracy of or to
<PAGE>
amplify the Company's disclosures, and has had all questions which have been
asked by it satisfactorily answered by the Company.
(e) The undersigned acknowledges that the Securities issuable upon conversion
of the Convertible Note must be held indefinitely unless subsequently registered
under the Act or an exemption from such registration is available. The
undersigned is aware of the provisions of Rule 144 promulgated under the Act
which permit limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than two
years after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market makers" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
Dated:____________
____________________________________________
(Typed or Printed Name)
By:_________________________________________
(Signature)
____________________________________________
(Title)
<PAGE>
EXHIBIT 10.10
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO ENACT HEALTH MANAGEMENT SYSTEMS, SUCH OFFER, SALE
OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
No. 1996-CS002 Warrant to Purchase 20,000 Shares
of Common Stock (subject to adjustment)
WARRANT TO PURCHASE COMMON STOCK
of
ENACT HEALTH MANAGEMENT SYSTEMS
Void after April 1, 2001
In consideration for certain consulting services rendered, National Jewish
Center for Immunology and Respiratory Medicine (the "Warrantholder") is hereby
entitled to subscribe for and purchase from ENACT Health Management Systems, a
California corporation (the "Company"), at a price of $0.50 per share (such
price or such other price as may result from the adjustments specified herein
being referred to herein as the "Warrant Price"), payable by cash or check, at
any time or from time to time from the date hereof to the earlier of (i) April
1, 2001, or (ii) the closing date of a merger, acquisition or consolidation of
the Company into or with another corporation in which the shareholders of the
Company shall own less than fifty percent (50%) of the voting securities of the
surviving corporation (the "Acquisition"), 20,000 fully paid and nonassessable
shares of the Company's Common Stock (the "Shares"), such price and such number
of shares being subject to adjustment upon the occurrence of the contingencies
set forth in this Warrant.
Upon delivery of this Warrant, together with executed Notice of Exercise in
the form attached hereto as Addendum A and payment of the Warrant Price of the
----------
Shares thereby purchased, at the principal office of the Company or at such
other office or agency as the Company may designate by notice in writing to the
holder hereof, the Warrantholder shall be entitled to receive a certificate or
certificates for the Shares so purchased.
1
<PAGE>
1. Exercise of Warrant.
-------------------
(a) This Warrant may be exercised, in whole or in part, at any time on
or before the earlier of (i) April 1, 2001, or (ii) the closing date of the
Acquisition, by the surrender of this Warrant (with the Notice of Exercise in
the form attached hereto as Addendum A duly executed) at the principal office of
----------
the Company and through payment to the Company, by cash or check, of the Warrant
Price multiplied by the number of Shares then being purchased. The Company
shall, within 10 days after such delivery, prepare a certificate for the Shares
purchased in the name of the holder of this Warrant, or as such holder may
direct (subject to the restrictions upon transfer contained herein and upon
payment by such holder hereof any applicable transfer taxes). In the event of
any exercise of the rights represented by this Warrant, certificates for the
shares of stock so purchased shall be delivered to the holder hereof within a
reasonable time and, unless this Warrant has been fully exercised or expired, a
new Warrant representing the portion of the shares, if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof within such reasonable time.
(b) Net Exercise Rights. Notwithstanding the payment provisions set
-------------------
forth in subsection (a) above, the Warrantholder may elect to receive Shares
equal to the value (as determined below) of this Warrant by surrender of this
Warrant at the principal office of the Company together with notice of such
election, in which event the Company shall issue to the holder the number of
Shares determined by use of the following formula:
X = Y(A-B)
------
A
Where: X = the number of Shares to be issued to the Warrantholder.
Y = the number of Shares subject to this Warrant.
A = the Fair Market Value (as defined below) of one (1) Share.
B = the Exercise Price per Share (as adjusted to the date of
such calculation).
For purposes of this Section 1(b), fair market value of a Share as of a
particular date shall mean:
2
<PAGE>
(i) If the Company's registration statement under the Securities
Act of 1933, as amended (the "Act"), covering its initial underwritten public
offering of stock has been declared effective by the Securities and Exchange
Commission, then the fair market value of a share shall be the closing price
(the last reported sales price, or if not so reported, the average of the last
reported bid and asked prices) of the Company's stock as of the last business
day immediately prior to the exercise of this Warrant.
(ii) If such a registration statement has not been declared
effective, or if it has been declared effective but the offering is not
consummated in accordance with the terms of the underwriting agreement between
the Company and its underwriters relating to such registration statement, then
as determined in good faith by the Company's Board of Directors upon a review of
relevant factors.
2. Stock Fully Paid; Reservation of Shares. All Shares which may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable, and free from all preemptive rights,
rights of first refusal, taxes, liens and charges with respect to the issue
thereof. During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized, and reserved
for the purpose of the issue upon exercise of the purchase rights evidenced by
this Warrant, a sufficient number of shares of its Common Stock to provide for
the exercise of the rights represented by this Warrant.
3. Limitation on Transfer and Exercise.
-----------------------------------
(a) The Company need not register a transfer of this Warrant unless
the conditions specified in the legend on the front page hereof are satisfied.
Subject to the satisfaction of such conditions, any transfer of this Warrant and
all rights hereunder, in whole or in part, shall be registered on the books of
the Company to be maintained for such purpose, upon surrender of this Warrant at
the principal office of the Company, or the office or agency designated by the
Company, together with a written assignment of this Warrant substantially in the
form of Addendum B hereto duly executed by the Warrantholder or its agent or
----------
attorney and funds sufficient to pay any transfer taxes payable upon the making
of such transfer. Upon such surrender and, if required, such payment, the
Company shall, subject to the conditions set forth in the legend, execute and
deliver a new Warrant or Warrants in the name of the assignee or assignees and
in the denomination specified in such instrument of assignment, and shall issue
to the assignor a new Warrant evidencing the portion of this Warrant not so
assigned, and this Warrant shall promptly be canceled. A Warrant, if properly
assigned, may be exercised by a new holder for the purchase of the Shares
without having a new Warrant issued.
(b) Subject to the conditions set forth in the legend, this Warrant
may be divided or combined with other Warrants upon presentation hereof at the
aforesaid office or agency of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the
3
<PAGE>
Warrantholder or its agent or attorney. Subject to compliance with this Section
3 as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
(c) The Company shall prepare, issue and deliver at its own expense
(other than transfer taxes) the new Warrant or Warrants under this Section 3.
(d) The Company agrees to maintain, at its aforesaid office or agency,
books for the registration and the registration of transfer of the warrants.
4. Rights, Preferences, Privileges and Restrictions of the Common Stock.
--------------------------------------------------------------------
The Shares of Common Stock shall have the rights, preferences, privileges and
restrictions set forth in the Company's Articles of Incorporation (the
"Articles"), as such Articles may be amended from time to time in accordance
with their provisions. In the event of a stock split, stock dividend,
recapitalization or other event which impacts the outstanding Common Stock, the
number of Shares and the Warrant Price shall be adjusted to give effect to such
event.
5. Notices.
-------
(a) Upon any adjustment of the Warrant Price and increase or decrease
in the number of Shares purchasable upon the exercise of this Warrant, then, and
in each such case, the Company, within thirty (30) days thereafter, shall give
written notice thereof to the Warrantholder at the address of such holder as
shown on the books of the Company, which notice shall state the Warrant Price as
adjusted and the increased or decreased number of Shares purchasable upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation of each.
(b) In the event that the Company shall propose at any time to effect
an Acquisition, the Company shall send to the Warrantholder at least twenty (20)
days prior to such Acquisition written notice of the date when the same shall
take place. Each such written notice shall be given by first class mail,
postage prepaid, addressed to the Warrantholder at the address as shown on the
books of the Company for the Warrantholder.
6. Miscellaneous.
-------------
(a) The Company covenants that it will at all times reserve and keep
available, solely for the purpose of issue upon the exercise hereof, a
sufficient number of shares of Common Stock to permit the exercise hereof in
full. Such shares when issued in compliance with the provisions of this Warrant
and the Company's Articles, as amended, will be duly authorized, validly issued,
fully paid and nonassessable.
(b) The terms of this Warrant shall be binding upon and shall inure to
the benefit of any successors or assigns of the Company and of the
Warrantholder.
4
<PAGE>
(c) No Warrantholder, as such, shall be entitled to vote or receive
dividends or be deemed to be a shareholder of the Company for any purpose, nor
shall anything contained in this Warrant be construed to confer upon the holder
of this Warrant, as such, any rights of a shareholder of the Company or any
right to vote, give or withhold consent to any corporate action, receive notice
of meetings, receive dividends or subscription rights, or otherwise.
(d) Receipt of this Warrant by the Warrantholder shall constitute
acceptance of and agreement to the foregoing terms and conditions.
(e) The Company will not, by amendment of its Articles or through any
other means, avoid or seek to avoid the observance or performance of any of the
terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant against impairment.
(f) Upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, upon surrender and cancellation of such Warrant, the Company at
its expense will execute and deliver, in lieu thereof, a new Warrant of like
date and tenor.
(g) This Warrant shall be governed by the laws of the State of
California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.
Dated: July 18, 1996 ENACT HEALTH MANAGEMENT SYSTEMS
By: /s/ Matthew Sanders
----------------------------------------
Matthew Sanders, President
5
<PAGE>
ADDENDUM A
----------
NOTICE OF EXERCISE
[To be signed upon exercise of Warrant]
The undersigned holder of the Warrant, hereby irrevocably elects to
exercise the purchase rights represented by such Warrant for, and to purchase
thereunder, ______________ shares of Common Stock, of ENACT HEALTH MANAGEMENT
SYSTEMS, and herewith makes payment of $______________ therefor, and requests
that the certificates for such shares be issued in the name of, and delivered to
______________________________ whose address is ______________________________.
Dated:
____________________________________________
(Signature)
____________________________________________
(Name)
____________________________________________
(Address)
6
<PAGE>
ADDENDUM B
----------
FORM OF TRANSFER
----------------
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________________________________ the right
represented by the attached Warrant to purchase ______________________* shares
of Common Stock of ENACT HEALTH MANAGEMENT SYSTEMS to which the attached Warrant
relates, and appoints ______________________ Attorney to transfer such right on
the books of ENACT HEALTH MANAGEMENT SYSTEMS with full power of substitution in
the premises.
Dated: ______________________
____________________________________________
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
___________________________________________
(Address)
Signed in the presence of:
__________________________________
*Insert here the number of shares without making any adjustment for additional
shares of Common Stock or any other stock or other securities or property or
cash which, pursuant to the adjustment provisions of the Warrant, may be
deliverable upon exercise.
7
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
WarrantHolder Amount of Common Stock Effective Date of Warrant
- ------------- ---------------------- -------------------------
<S> <C> <C>
Flex International Marketing, Ltd; 20,000 March 5, 1996
Charles B. Wright, III; 2,250 September 6, 1996
Williams D. Pettit, Jr.; 4,500 September 6, 1996
R.D. Merrill Company; 9,000 September 6, 1996
</TABLE>
<PAGE>
EXHIBIT 10.11
THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN
QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND
THE ISSUANCE OF THE SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE
OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105
OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS
AGREEMENT ARE EXPRESSLY CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS
THE SALE IS SO EXEMPT.
THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED
OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER
THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF SUCH
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
ENACT HEALTH MANAGEMENT SYSTEMS
WARRANT
1. Number of Shares Subject to Warrant. FOR VALUE RECEIVED, on and after
------------------------------------
the date of this Warrant, and subject to the terms and conditions herein set
forth, ALZA Corporation, a Delaware corporation, is entitled to purchase from
ENACT HEALTH MANAGEMENT SYSTEMS, a California Corporation (the "Company"), at
any time before 5:00 p.m. California time on December 31, 2003 ("Termination
Date"), at a price per share equal to the Warrant Price (as defined below), the
Warrant Stock (as defined below and subject to adjustments as described below)
upon exercise of this Warrant pursuant to Section 7 hereof.
2. Definitions. As used in this Warrant, the following terms shall have
------------
the definitions ascribed to them below:
(a) "Holder" shall mean ALZA Corporation or its assigns.
<PAGE>
(b) "Note" shall mean the note issued to ALZA Corporation on
September 28, 1995 in connection with the Loan Agreement (as defined below).
(c) "Loan Agreement" shall mean that certain Loan Agreement by and
between Enact Health Management Systems and ALZA Corporation dated August 29,
1995 and amended November 15, 1995 and August 30, 1996 entered into in
connection with the issuance of the Note and this Warrant.
(d) "Securities" shall mean the shares of Series C Preferred Stock of
the Company purchasable upon exercise of this Warrant.
(e) "Warrant Price" shall be $ 6.913 for each share of Warrant Stock,
subject to adjustment as described in Section 3 below.
(f) "Warrant Stock" shall mean shares of the Securities purchasable
upon exercise of this Warrant or issuable upon conversion of this Warrant. The
total number of shares to be issued initially shall be 36,164.
3. Adjustments and Notices. The Warrant Price and the number of shares
-----------------------
of Warrant Stock shall be subject to adjustment from time to time in accordance
with the following provisions:
(a) Subdivision, Stock Dividends or Combinations. In case the
--------------------------------------------
Company shall at any time subdivide the outstanding shares of the Securities or
shall issue a stock dividend with respect to the Securities, the Warrant Price
in effect immediately prior to such subdivision or the issuance of such dividend
shall be proportionately decreased, and in case the Company shall at any time
combine the outstanding shares of the Securities, the Warrant Price in effect
immediately prior to such combination shall be proportionately increased,
effective at the close of business on the date of such subdivision, dividend or
combination, as the case may be.
(b) Issuance or Sale of Additional Shares. In case the Company shall
-------------------------------------
at any time issue or sell any Equity Securities (as defined in the Company's
Amended and Restated Articles of Incorporation) at a consideration per share
less than the Conversion Price (as defined in the Company's Amended and Restated
Articles of Incorporation) for any series of the Company's Preferred Stock in
effect immediately prior to the time of such issue or sale, then forthwith upon
such issue or sale, the Warrant Price shall be adjusted to a price (calculated
to the nearest cent) equal to 133% of the Conversion Price for the Securities in
effect immediately after the time of such issue or sale.
(c) Number of Shares. Upon each adjustment pursuant to subdivision
----------------
(a) of this Section 3, the Holder of this Warrant shall thereafter (until
another such adjustment) be entitled to purchase, at the adjusted Warrant Price,
the
<PAGE>
number of shares of the Securities, calculated to the nearest full share,
obtained by multiplying the number of shares of the Securities purchasable
hereunder immediately prior to such adjustment by the Warrant Price in effect
prior to such adjustment and dividing the product so obtained by the adjusted
Warrant Price.
(d) Reorganization, Merger etc. Upon the closing of any (i) merger
--------------------------
or consolidation of the Company into or with another corporation in which the
shareholders of the Company shall own less than 50% of the voting securities of
the surviving corporation, (ii) sale, transfer or lease (but not including a
transfer or lease by pledge or mortgage to a bona fide lender) of all or
substantially all of the assets of the Company, or (iii) sale by the Company's
shareholders of 50% or more of the Company's outstanding securities in one or
more related transactions, this Warrant shall terminate. In the event of any
other merger, reorganization or consolidation or any reclassification, change or
conversion of the class or series of securities issuable upon exercise of this
Warrant, the Company, or such successor or purchasing corporation, as the case
may be, shall, as a condition to closing such merger, reorganization or
consolidation or reclassification, change or conversion duly execute and deliver
to the Holder hereof a new warrant so that the Holder shall have the right to
receive, at a total purchase price not to exceed that payable upon the exercise
of the unexercised portion of this Warrant, and in lieu of the shares of the
Securities theretofore issuable upon exercise of this Warrant, the kind and
amount of shares of stock, other securities, money and property receivable upon
such merger, reorganization or consolidation or reclassification, change or
conversion by the Holder of the number of shares of Securities then purchasable
under this Warrant. Such new warrant shall provide for adjustments that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 3. The provisions of this subparagraph (d) shall similarly apply to
successive mergers, reorganizations or consolidations or reclassifications,
changes or conversions.
(e) Notice. Upon any adjustment of the Warrant Price and any increase
------
or decrease in the number of shares of the Securities purchasable upon the
exercise or conversion of this Warrant, then, and in each such case, the
Company, within thirty (30) days thereafter, shall give written notice thereof
to the Holder of this Warrant at the address of such Holder as shown on the
books of the Company which notice shall state the Warrant Price as adjusted and
the increased or decreased number of shares purchasable upon the exercise or
conversion of this Warrant, setting forth in reasonable detail the method of
calculation of each. The Company further agrees to notify the Holder of this
Warrant in writing of a reorganization, merger or sale in accordance with
Section 3(d) hereof at least twenty (20) days prior to the effective date
thereof.
4. No Shareholder Rights. This Warrant, by itself, as distinguished from
----------------------
any shares purchased hereunder, shall not entitle its Holder to any of the
rights of a shareholder of the Company.
<PAGE>
5. Reservation of Stock. On and after the date of this Warrant, the
--------------------
Company will reserve from its authorized and unissued Securities a sufficient
number of shares to provide for the issuance of Warrant Stock upon the exercise
or conversion of this Warrant and shall reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of Common
Stock upon the conversion of the Warrant Stock. Issuance of this Warrant shall
constitute full authority to the Company's officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Warrant Stock issuable upon the exercise or
conversion of this Warrant.
6. Conversion. In lieu of exercising this Warrant or any portion hereof,
----------
the Holder hereof shall have the right to convert this Warrant or any portion
hereof into Warrant Stock. The number of shares of Warrant Stock to be issued
to Holder upon such conversion shall be computed using the following formula:
X = (P)(Y)(A-B)/A
where X = the number of shares of Securities to be issued to the
Holder for the portion of the Warrant being converted.
P = the portion of the Warrant being converted expressed as a
decimal fraction.
Y = the total number of shares of Securities issuable upon
exercise of the Warrant in full.
A = the fair market value of one share of Warrant Stock which
shall mean (i) the fair market value of the Company's stock
issuable upon conversion of such share as of the last
business day immediately prior to the date the notice of
conversion is received by the Company, as determined in good
faith by the Company's Board of Directors, or (ii) if this
Warrant is being converted in conjunction with a public
offering of stock the price to the public per share pursuant
to the offering.
B = the Warrant Price on the date of conversion.
Any portion of this Warrant that is converted shall be immediately canceled.
7. Exercise or Conversion of Warrant; Automatic Conversion. This Warrant
-------------------------------------------------------
may be exercised or converted in whole or part by the Holder, at any time after
the date hereof prior to the termination of this Warrant, by the surrender of
this
<PAGE>
Warrant, together with the Notice of Exercise or Notice of Conversion (as the
case may be) and Investment Representation Statement in the forms attached
hereto as Attachments 1, 2 and 3, respectively, duly completed and executed at
----------------------
the principal office of the Company, specifying the portion of the Warrant to be
exercised or converted and, in the case of exercise, accompanied by payment in
full of the Warrant Price in cash or by check with respect to the shares of
Warrant Stock being purchased. This Warrant shall be deemed to have been
exercised or converted immediately prior to the close of business on the date
of its surrender for exercise or conversion as provided above, and the person
entitled to receive the shares of Warrant Stock issuable upon such exercise or
conversion shall be treated for all purposes as Holder of such shares of record
as of the close of business on such date. As promptly as practicable after such
date, the Company shall issue and deliver to the person or persons entitled to
receive the same a certificate or certificates for the number of full shares of
Warrant Stock issuable upon such exercise or conversion. If the Warrant shall
be exercised or a conversion is effected for less than the total number of
shares of Warrant Stock then issuable upon exercise, promptly after surrender of
the Warrant upon such exercise or conversion, the Company will execute and
deliver a new Warrant, dated the date hereof, evidencing the right of the Holder
to the balance of the Warrant Stock purchasable hereunder upon the same terms
and conditions set forth herein.
In the event of any transaction which would cause the termination of this
Warrant under Section 3(d) hereof, and if (i) the Holder has not exercised or
converted this Warrant in full prior to such transaction and (ii) the fair
market value of the shares of unexercised and unconverted Warrant Stock exceeds
the total of (x) the number of shares of unexercised and unconverted Warrant
Stock multiplied by (y) the Warrant Price, then this Warrant shall be deemed to
have been converted in full immediately prior to the closing of such transaction
merger, acquisition and the Company shall take all actions necessary to cause
such conversion to occur and to be issued to Holder the kind and amount of
consideration that would have been received upon an election to convert under
Section 6 and Section 7 of this Warrant.
8. Transfer of Warrant.
-------------------
(a) This Warrant may be transferred or assigned by the Holder hereof
in whole or in part, provided that (i) the transferor provides, at the Company's
request, an opinion of counsel satisfactory to the Company that such transfer
does not require registration under the Act and the securities law applicable
with respect to any other applicable jurisdiction, and (ii) the Company, in its
sole discretion, consents to such assignment or transfer; provided, however,
that the Company's consent is not required in the event of a transfer of this
Warrant to an entity which controls, is controlled by or is under common control
with ALZA Corporation.
<PAGE>
(b) Subject to the foregoing subparagraph (a), if this Warrant is
transferred in part as a result of a transfer of all or part of the Holder's
rights and obligations under the Loan Agreement and the Note, then, at the
Holder's discretion, this Warrant shall also be assigned and transferred to the
extent such that the transferee of the Note receives such portion of this
Warrant as is equal to proportional amount of the maximum loan obligation
transferred by such Holder to the transferee.
9. Registration Rights. The Holder shall have registration rights as set
-------------------
forth in the Amended and Restated Rights Agreement by and among the Company,
ALZA Corporation and others dated August 29, 1995 as amended July 17, 1996.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
10. Termination. This Warrant shall terminate on the first to occur of
-----------
(a) 5:00 p.m. California time on the Termination Date, (b) any of the events
described in clauses (i), (ii) or (iii) of Section 3(d), and (c) the
consummation of an underwritten public offering of the common stock of the
Company on the terms set forth in Article III, Section 4(b)(iii) of the
Company's Amended and Restated Articles of Incorporation.
11. Miscellaneous. This Warrant shall be governed by the laws of the
-------------
State of California, as such laws are applied to contracts to be entered into
and performed entirely in California by California residents. The headings in
this Warrant are for purposes of convenience and reference only, and shall not
be deemed to constitute a part hereof. Neither this Warrant nor any term hereof
may be changed or waived orally, but only by an instrument in writing signed by
the Company and the Holder of this Warrant. All notices and other
communications from the Company to the Holder of this Warrant shall be delivered
personally or mailed by first class mail, postage prepaid, to the address
furnished to the Company in writing by the last Holder of this Warrant who shall
have furnished an address to the Company in writing, and if mailed shall be
deemed given three days after deposit in the United States mail.
ISSUED: August 30, 1996
ENACT HEALTH MANAGEMENT SYSTEMS
By: /s/ Matthew Sanders
----------------------------------------
Matthew Sanders, President
<PAGE>
Attachment 1
NOTICE OF EXERCISE
TO: ENACT HEALTH MANAGEMENT SYSTEMS
1. The undersigned hereby elects to purchase ____________________________
shares of the Warrant Stock of ENACT Health Management Systems pursuant to the
terms of the attached Warrant, and tenders herewith payment of the purchase
price in full, together with all applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Warrant Stock in the name of the undersigned or in such other name as is
specified below:
____________________
(Name)
____________________
(Address)
______________________________ ____________________________________________
(Date) (Name of Warrant Holder)
<PAGE>
Attachment 2
NOTICE OF CONVERSION
TO: ENACT HEALTH MANAGEMENT SYSTEMS
1. The undersigned hereby elects to convert the right to acquire
____________________________ shares of the Warrant Stock of ENACT Health
Management Systems pursuant to the terms of the attached Warrant, into the right
to receive _______________ shares of ENACT Common Stock without further payment.
The fair market value used for purposes of this calculation was__________which
amount includes applicable transfer taxes, if any.
2. Please issue a certificate or certificates representing said shares of
Warrant Stock in the name of the undersigned or in such other name as is
specified below:
____________________
(Name)
____________________
(Address)
____________________________ ____________________________________________
(Date) (Name of Warrant Holder)
By:_________________________________________
Title:______________________________________
<PAGE>
Attachment 3
INVESTMENT REPRESENTATION STATEMENT
Shares of the Securities
(as defined in the attached Warrant) of
ENACT HEALTH MANAGEMENT SYSTEMS
In connection with the purchase of the above-listed securities, the
undersigned hereby represents to ENACT Health Management Systems (the "Company")
as follows:
(a) The securities to be received upon the exercise of the Warrant (the
"Securities") will be acquired for investment for its own account, not as a
nominee or agent, and not with a view to the sale or distribution of any part
thereof, and the undersigned has no present intention of selling, granting
participation in or otherwise distributing the same, but subject, nevertheless,
to any requirement of law that the disposition of its property shall at all
times be within its control. By executing this Statement, the undersigned
further represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations to such
person or to any third person, with respect to any Securities issuable upon
exercise of the Warrant.
(b) The undersigned understands that the Securities issuable upon exercise
of the Warrant at the time of issuance may not be registered under the
Securities Act of 1933, as amended (the "Act"), and applicable state securities
laws, on the ground that the issuance of such securities is exempt pursuant to
Section 4 (2) of the Act and state law exemptions relating to offers and sales
not by means of a public offering, and that the Company's reliance on such
exemptions is predicated on the undersigned's representations set forth herein.
(c) The undersigned agrees that in no event will it make a disposition of
any Securities acquired upon the exercise of the Warrant unless and until (i) it
shall have notified the Company of the proposed disposition and shall have
furnished the Company with a statement of the circumstances surrounding the
proposed disposition, and (ii) it shall have furnished the Company with an
opinion of counsel satisfactory to the Company and Company's counsel to the
effect that (A) appropriate action necessary for compliance with the Act and any
applicable state securities laws has been taken or an exemption from the
registration requirements of the Act and such laws is available, and (B) the
proposed transfer will not violate any of said laws.
(d) The undersigned acknowledges that an investment in the Company is
highly speculative and represents that it is able to fend for itself in the
transactions contemplated by this Statement, has such knowledge and experience
in financial and
<PAGE>
business matters as to be capable of evaluating the merits and risks of its
investments, and has the ability to bear the economic risks (including the risk
of a total loss) of its investment. The undersigned represents that it has had
the opportunity to ask questions of the Company concerning the Company's
business and assets and to obtain any additional information which it considered
necessary to verify the accuracy of or to amplify the Company's disclosures, and
has had all questions which have been asked by it satisfactorily answered by the
Company.
(e) The undersigned acknowledges that the Securities issuable upon
exercise of the Warrant must be held indefinitely unless subsequently registered
under the Act or an exemption from such registration is available. The
undersigned is aware of the provisions of Rule 144 promulgated under the Act
which permit limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than two
years after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market makers" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
Dated: August 30, 1996
____________________________________________
(Typed or Printed Name)
By:_________________________________________
(Signature)
____________________________________________
(Title)
<PAGE>
[LOGO OF ENACT APPEARS HERE]
EXHIBIT 10.13
Mr. Gil Mott
203U Foliage Circle
Cary, North Carolina 27511
Re: Employment Agreement
--------------------
Dear Gil:
ENACT Products is pleased to offer to you the position of Senior Vice President,
Sales and Marketing, subject to the terms and conditions of this letter
agreement. In consideration of the agreements set forth below, you and ENACT
agree to the following:
1.0 Term of Employment: Your employment will begin on March 1, 1995 and will
------------------
last for a period of three years. You and ENACT may negotiate a future agreement
at any time. Nothing in this section will change the "at will" nature of your
employment.
2.0 Officer and Director: As Senior Vice President, Sales and Marketing, you
--------------------
will be an officer of the company. You will also be nominated to join ENACT's
Board of Directors. All ENACT directors are nominated and elected annually by
the shareholders.
3.0 Indemnification: Per ENACT's by-laws, ENACT officers and directors are
---------------
indemnified to the fullest extent provided by California law.
4.0 Salary: Your starting salary will be $238,000.00 per year, paid monthly in
------
accordance with ENACT's normal payroll practices. Your salary will be reviewed
annually, and you will be entitled to participate in future bonus programs that
the company may institute. You will also be paid a $1,000.00 per month auto
allowance.
5.0 Benefits: You are entitled to participate in ENACT's employee benefit
--------
plans. Currently ENACT has a medical and dental insurance program that provides
coverage for you and your dependents. ENACT also has life insurance and long
term disability coverage for you. The company recognizes major holidays, plus
combined vacation/sick time for all employees.
6.0 Stock Option: As part of this agreement, ENACT will grant you an option to
------------
purchase 400,000 shares of ENACT common stock, vesting monthly over a three year
period, so long as you are employed by the company. The option price will be
confirmed by the Board of Directors, and is likely to be in the range of $0.15
per share.
7.0 Salary protection prior to financing: Between the starting date of your
------------------------------------
employment and such time as ENACT closes on additional financing of a minimum of
$4 million, ENACT will offer you a salary guarantee as follows:
(a) Upon your instruction, and within 10 business days, ENACT will place
$250,000.00 in a bank account granting you a security interest.
(b) If for any reason ENACT fails to pay your monthly salary, you may
elect to terminate your employment, and each month you will be entitled to
draw an amount equal to one month's salary ($20,833.33), from the security
account.
(c) You may draw on the account each successive month until you have
secured other employment satisfactory to you, but not for more than 12
months.
<PAGE>
(d) In the event your new employment is at a lower compensation level than
$250,000.00, you may draw an amount equal to the difference between your
ENACT salary and new compensation, during each remaining month of the 12
month period.
(e) The salary guarantee will end, and the security account will be
returned to ENACT's control, as soon as ENACT closes additional financing
of $4 million or greater.
8.0 Termination/Severance: During the term of this agreement there may be
---------------------
circumstances whereby you are terminated by ENACT or choose to resign:
(1) You are terminated "Without Cause" by ENACT- All officers of ENACT
-------------------------------------------
serve at the pleasure of the Board and may be removed by a majority vote.
(2) You resign for "Good Reason"- (a) If ENACT significantly reduces your
---------------------------
duties or compensation (other than as provided in Section 7.0 above)
without your agreement, or, (b) there is a change in control of the Company
by merger where ENACT is not the surviving party, or via acquisition by a
third party such that they hold greater than 50% of the voting stock of the
company.
(3) You resign without "Good Reason"- You decide to resign for your own
-------------------------------
reasons.
(4) Termination "For Cause" by ENACT- Any of the following: (a) conviction
--------------------------------
of a felony; (b) commission of any act of theft, fraud, or dishonesty
against ENACT; (c) intentional acts of gross negligence that have a
material, detrimental effect on ENACT; (d) continual and uncured failure to
perform reasonable duties asked of you; (e) wrongful disclosure of
confidential information or trade secrets.
If your employment is terminated for case (1) or (2) above:
(a) You will be paid any unpaid salary, expenses, benefits and bonus earned
up to the date of your termination.
(b) You will be paid a one-time, lump sum severance payment of $250,000.00.
(c) You will cooperate fully with ENACT to transfer your work, duties and
responsibilities.
(d) You will promptly return all company property and confidential and
proprietary information in your possession, and will continue maintain the
company's confidentiality agreement.
(e) You will resign from ENACT's Board if asked by the Board.
If your employment is terminated for case (3) or (4) above:
(a) You will be paid any unpaid salary, expenses, and benefits earned up to
the date of your termination
(b) You will cooperate fully with ENACT to transfer your work, duties and
responsibilities.
(c) You will promptly return all company property and confidential and
proprietary information in your possession, and will continue maintain the
company's confidentiality agreement.
<PAGE>
(d) You will resign from ENACT's Board if asked by the Board.
9.0 Stock Option Vesting Upon Termination or Change of Control- If, as in
----------------------------------------------------------
Section 8.0, (1); you are "Terminated Without Cause": You will be entitled to
exercise stock that has vested, and you will be entitled to an additional one
year accellerated vesting on remaining options per Section 6.0.
If, as in Section 8.0, (2); you resign "For Good Reason": If the cause is for
reduced duties or compensation as in Section 8.0, (2), (a): You will be entitled
to exercise stock that has vested, and you will be entitled to an additional one
year accellerated vesting on remaining options per Section 6.0.
If you resign due to Change of Control where a new owner controls greater than
51% of the voting stock: You will be entitled to exercise stock that has vested,
and you will be entitled to an additional one year accellerated vesting on
remaining options per Section 6.0.
If, as in Section 8.0, (3) you resign "Without Good Reason": You will be
entitled to exercise stock that has vested, and as of the date of your
termination, vesting will terminate immediately.
If, as in Section 8.0, (4), you are terminated "For Cause": You will be
entitled to exercise stock that has vested, and as of the date of your
termination, vesting will terminate immediately.
If there is a merger where ENACT is not the surviving entity, or if there is a
sale of substantially all of the assets of the company: You will be entitled to
exercise stock that has vested, and 100% of your remaining options per Section
6.0 will vest automatically.
10.0 Trade Secrets, Proprietary and Confidential Information/No Solicitation:
-----------------------------------------------------------------------
During the term of your employment with ENACT, you agree to execute and maintain
ENACT's standard employee confidentiality agreement, and you agree to protect
ENACT trade secrets and proprietary information. Upon termination of your
employment for any reason, you agree to maintain the provisions of the
confidentiality agreement. Upon termination, for a period of one year you agree
not to solicit for employment any of ENACT's then current employees.
11.0 Damages/Arbitration: This agreement spells out the entire compensation due
-------------------
you during your employment and upon termination. Neither you nor ENACT will be
entitled to damages, including without limitation special, consequential,
general, liquidated, or punitive damages arising out of this agreement or your
employment with ENACT. Any dispute, or claim arising from this agreement will be
subject to binding arbitration in accordance with the Commercial rules of the
American Arbitration Association then in effect.
If this letter agreement sets forth our entire agreement, please sign below and
return the original to me. You may keep the enclosed copy.
ENACT Products, Inc.
By: /s/ Matthew Sanders Employee: /s/ Gilbert Mott
--------------------- ----------------------
Title: President
------------------
Date: March 1, 1995 Date: 3/1/95
------------------- ---------------------
<PAGE>
EXHIBIT 10.14
[LETTERHEAD OF ENACT APPEARS HERE]
Mr. Henry Evans
26120 W. Fremont Ave. September 8, 1995
Los Altos Hills, CA 94022
Dear Henry:
On behalf on ENACT, I am very pleased to offer you the position of Vice
President-Finance and Chief Financial Officer, reporting to me. I am delighted
to have the opportunity to work with you, Henry, and have every expectation that
you will make an important difference to the future of ENACT. As we have
discussed, you will be responsible for developing the company's financial
policies, management and controls. You will also work with the ENACT board and
investors, ENACT's operating partners, and external financial community.
Your starting salary will be $96,000.00 per year, paid monthly, and reviewed
annually. The company will also offer you a joining bonus of $10,000.00, net of
withholding taxes. ENACT will also grant you an option to purchase 65,000 shares
of ENACT common stock, vesting monthly over a three year period. The option
price will be confirmed by the Board of Directors, and is likely to be in the
range of $0.50 per share.
In the event of a merger where ENACT is not the surviving entity, or if there is
a sale of substantially all of the assets of the company, 100% of your unvested
option will vest automatically.
ENACT has an insurance program that covers medical and dental care for you and
your dependents, plus long term disability, and life insurance for you. Our
vacation and holiday policy has been informal to this stage.
Since all officers of ENACT serve at the pleasure of the board, in the event you
are terminated "without cause", we ask that you agree to cooperate to transfer
your duties and responsibilities, to promptly return all company property and
proprietary information, and to continue maintain the company's confidentiality
agreements. In return, ENACT will pay you a one-time, lump sum severance payment
of $50,000.00.
As you know, we are rapidly approaching the market launch of AirWatch(TM), and
we hope to have you at the financial helm as we go into the market. Please let
me know of your decision and your planned starting date by signing and returning
a copy of this letter to me at your earliest convenience.
<PAGE>
Henry, I am sure you will play an important part in building a fine company. We
are committed to making this a worthy undertaking for you, Jane and the
children, and we look forward to having all of you as part of our team.
Sincerely yours,
/s/ Matthew Sanders
Matt Sanders
President and CEO
Agreed:
Henry Evans: /s/ Henry Evans
--------------------------
Starting Date: 9/25/95
------------------------
<PAGE>
EXHIBIT 10.15
CONSULTING AGREEMENT
This consulting agreement (the "Agreement") is entered into and is
effective as of 12/1/96 (the "Effective Date") by and between ENACT Health
Management Systems ("Company") and WAYNE WAGER CASCADIA VENTURES ("Consultant").
The Company desires to retain the Consultant as an independent contractor
to perform consulting services for the Company from time to time and the
Consultant is willing to perform such services, on the basis set forth more
fully below.
In consideration of the mutual promises contained herein, the Company and
the Consultant mutually agree as follows:
1. SERVICES. The Consultant agrees to perform the Services described in
--------
any Project assignment pursuant hereto in a workmanlike manner according to the
schedule of work set forth therein. A copy of the form of Project Assignment is
attached hereto as Exhibit A. The Consultant agrees not to perform similar
---------
services during the term of this Agreement for any other manufacturer or seller
of products or services directly competitive with products or services
manufactured or sold by the Company unless the Company gives prior written
consent.
2. PAYMENT FOR SERVICES. The Company shall pay the Consultant the fee set
--------------------
forth in the Project Assignment for the performance of the Services, together
with reimbursement for the Consultant's direct costs, as provided therein.
3. RELATIONSHIP OF PARTIES. The Consultant shall perform the Services
-----------------------
under the general direction of the Company, but the Consultant shall determine,
in the Consultant's sole discretion, the manner and means by which the Services
are accomplished, subject to the express condition that the Consultant shall at
all times comply with applicable law. The Consultant is an independent
contractor and the Consultant is not an agent or employee of the Company, and
has no authority whatsoever to bind the Company by contract or otherwise.
4. THE COMPANY RULES. The Consultant shall observe the working hours,
-----------------
working rules and holiday schedules of the Company while working on the
Company's premises.
5. EMPLOYMENT TAXES AND BENEFITS. The Consultant acknowledges and agrees
-----------------------------
that it shall be the obligation of the Consultant to report as income all
compensation received by the Consultant pursuant to this Agreement and the
Consultant agrees to indemnify the Company and hold it harmless to the extent of
any obligation imposed on the Company to pay any withholding taxes, social
security, unemployment or disability insurance or similar items, including the
interest and penalties thereon, in connection with any payments made to the
Consultant by the Company pursuant to this Agreement.
6. INVENTIONS. All designs, artwork software programs, brochures, manuals,
----------
products, procedures, drawings, notes, documents, information, materials,
discoveries and inventions (hereafter "Designs and Inventions") made, conceived
or developed by the Consultant alone or with others which result from or relate
to the Services, or which the Consultant may receive from the Company while
performing the Services, shall be the sole property of the Company. The Company
shall have the sole right to determine the method of protection for any such
Designs and Inventions, including the right to keep the same as trade secrets,
to file and execute patent applications thereon, to use and disclose the same
without prior patent application, to file registrations for copyright or
trademark thereon in its own name, or to follow any other procedure that the
Company deems appropriate. The Consultant agrees (a) to disclose promptly in
writing to the Company all such Designs and Inventions, (b) that the Company has
a power of attorney to apply for the Consultant's name, and to execute any
<PAGE>
applications and/or assignments reasonably necessary to obtain any patent,
copyright, trademark or other statutory protection for such Designs and
Inventions in the Company's name as the Company deems appropriate. These
obligations to disclose, assist, and execute shall survive termination of this
Agreement. At the Company's option, it shall be entitled to use the name of the
Consultant in advertising and other materials.
7. CONFIDENTIALITY. The Consultant agrees to hold the Company's
---------------
Confidential Information in strict confidence and not to disclose such
Confidential Information to any third parties. For purposes hereof,
"Confidential Information" shall include all confidential and proprietary
information disclosed by the Company including but not limited to technical and
business information relating to the Company's current and proposed products,
research and development, production, manufacturing and engineering processes,
costs, profit or margin information, finances, customers, suppliers, marketing
and production, personnel and future business plans. "Confidential Information"
also includes propriety or confidential information of any third party who may
disclose such information to the Company or the Consultant in the course of the
Company's business. The above obligations shall not apply to Confidential
Information which is already known to the Consultant at the time it is
disclosed, or which before being divulged either (a) has become publicly known
through no wrongful act of the Consultant; (b) has been rightfully received from
a third party without restriction on disclosure and without breach of this
Agreement; (c) has been independently developed by the Consultant; (d) has been
approved for release by written authorization of the Company; (e) has been
disclosed pursuant to a requirement of a government agency or of law.
8. TERMINATION. This Agreement shall commence on the date first written
-----------
below and shall continue until terminated as follows:
(a) Either party may terminate the Agreement in the event of a breach
by the other of any of its obligations contained herein if such breach continues
uncured for a period of ten (10) days after written notice of such breach to the
other party;
(b) Either party may terminate this Agreement upon written notice to
the other party if either party is adjudicated bankrupt, files a voluntary
petition of bankruptcy, makes a general assignment for the benefit of creditors,
is unable to meet its obligations in the normal course of business as they fall
due or if a receiver is appointed on account of insolvency;
(c) Either party may terminate this Agreement for its convenience upon
ten (10) day's written notice to the other if there is no outstanding Project
Assignment.
Upon the termination of this Agreement for any reason, each party shall be
released from all obligations and liabilities to the other or arising after the
date of such termination, except that any termination shall not relieve the
Consultant or the Company of their obligations under Paragraphs 5, 6, 7, and 9,
nor shall any such termination relieve the Consultant or the Company from any
liability arising from any breach of this Agreement.
9. GENERAL
-------
(a) PRE-EXISTING OBLIGATIONS. The Consultant represents and warrants
------------------------
that the Consultant is not under any pre-existing obligation or obligations
inconsistent with the provisions of this Agreement.
(b) ASSIGNMENT. The rights and liabilities of the parties hereto shall
----------
bind an inure to the benefit of their respective successors, executors and
administrators, as the case may be, provided that, as the Company has contracted
for the Consultant's services, the Consultant may not assign or delegate its
obligations under this Agreement either in whole or in part without the prior
written consent of the Company.
<PAGE>
(c) EQUITABLE RELIEF. Because the Services are personal and unique
----------------
and because the Consultant shall have access to and become acquainted with the
confidential information of the Company, the Consultant agrees that the Company
shall have the right to enforce this Agreement and any of its provisions by
injunction, specific performance or any other equitable relief with prejudice to
any other rights and remedies that the Company may have for the breach of this
Agreement.
(d) ATTORNEY'S FEES. If any action at law or in equity is necessary
---------------
to enforce the terms of this Agreement, the prevailing party shall be entitled
to reasonable attorney's fees, costs and expenses in addition to any other
relief to which such prevailing party may be entitled.
(e) GOVERNING LAW: SEVERABILITY. This Agreement shall be governed by
---------------------------
and construed in accordance with the laws of the State of California. If any
provision of this Agreement is for any reason found by a court of competent
jurisdiction to be unenforceable, the remainder of this Agreement shall continue
in full force and effect.
(f) COMPLETE UNDERSTANDING MODIFICATION. This Agreement constitutes
-----------------------------------
the full and complete understanding and agreement of the parties hereto and
supersedes all prior understandings and agreements. Any waiver, modification or
amendment of any provision of this Agreement shall be effective only if in
writing and signed by the parties thereto.
(g) NOTICES. Any notices required or permitted hereunder shall be
-------
given to the appropriate party at the address specified below or at such other
address as the party shall specify in writing. Such notice shall be deemed given
upon personal delivery to the appropriate address or sent by certified or
registered mail, three days after the date of mailing.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date
written below.
ENACT HEALTH MANAGEMENT SYSTEMS CASCADIA VENTURES
----------------------------------
Consultant's Business Name
/s/ Matt Sanders 12/1/96 /s/ Wayne Wager 1/10/97
_____________________________________ ----------------------------------
By (Signature) Date By (Signature) Date
Matt Sanders, Chief Executive Officer WAYNE WAGER
_____________________________________ ----------------------------------
Printed Name and Title Printed Name and Title
<PAGE>
EXHIBIT A
- ---------
Project Assignment #____
under Consulting Agreement dated 1/10/97
Project:
The Consultant shall render such services as the Company may from time to time
request in connection with Business Development, including, without limiting the
generality of the foregoing:
Schedule of Work:
The work will commence on 12/1/96, and end on 5/1/97.
Fees and Reimbursement:
- -----------------------
A. Fee: $10,000 per month.
B. Reimbursement for the following, as approved in advance by the Company:
1. Outside services at cost:
2. Direct charges at cost:
3. Travel and subsistence at cost:
The Consultant shall invoice the Company semi-monthly for services and
expenses and shall provide such reasonable receipts or other
documentation of expenses as the Company might request, including copies
of time records.
Payment Terms: net 30 days from receipt of invoice. The Company will be
invoiced on the 15th and last day of the month.
C. Maximum chargeable on this contract, including all items in paragraphs A
and B above, is $60,000 and $10,000 ?????.
Signed,
Company: /s/
Consultant: /s/ Wayne Wager
-------------------
<PAGE>
EXHIBIT 10.20
LEASE AGREEMENT
between
EL CAMINO OFFICE INVESTMENTS
for
1975 El Camino Real West, Suite 306
Mountain View, CA 94040
Dated: September 19, 1995
<PAGE>
EL CAMINO OFFICE INVESTMENTS LEASE
1. PARTIES. This Lease dated, for reference purposes only, September 19, 1995,
by and between EL CAMINO OFFICE INVESTMENTS ("Landlord") and ENACT ("Tenant"),
who agree as follows:
2. PREMISES. Landlord leases to Tenant, and Tenant leases from Landlord the
office space located in Mountain View, California, 94040, described as 1975 E1
Camino Real West, Suite 306, outlined in Exhibit "A" ("Premises). Premises have
an agreed area of 4,352.
3. TERM. The term of this Lease shall be for three (3) years, commencement
date to be October 15, 1995, but no later than November 1, 1995 and ending on
October 31, 1998.
4. RENT AND TENANT IMPROVEMENT COST REIMBURSEMENT.
4.1. Tenant shall pay to Landlord as rent for the Premises, without demand,
deduction, or off-set, the sum of Seven Thousand Six Hundred Sixteen Dollars
($7,616.00) on or before the first day of each and every month of the term of
this Lease, the first monthly payment to be made concurrently with the execution
hereof. If the commencement date is not the first day of a month or if the Lease
termination date is not the last day of a month, the rent payable hereunder
shall be prorated, based upon a thirty day month, at the current rate for the
fractional month during which this Lease commences and/or terminates. Any rent
payable for a partial month directly following the commencement date shall be
payable on the first day of the first full calendar month of the term. Rent
shall be paid to El Camino Office Investments, at 2093 Landings Drive, Mountain
View, CA 94043.
4.2. In place of an operating expense pass-through, the base rent provided for
in 4.1. above shall increase three percent (3%) per year on the anniversary date
of the commencement of the term of the Lease stated in 3. above.
4.3 Late Charges. Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Landlord by
terms of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of rent or of a sum due from Tenant shall not be received by
Landlord or Landlord's designees by 12:00 noon on the fifth (5th) day of each
month of the term hereof, then Tenant shall pay to Landlord a late charge equal
to five percent (5%) of such overdue amount. The parties hereby agree that such
late charges represent a fair and reasonable estimate of the cost that Landlord
will incur by reason of the late payment by Tenant. Acceptance of such late
charges by the Landlord shall in no event constitute a waiver of Tenant's
default with respect to such overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies granted hereunder.
5. SECURITY DEPOSIT. On execution of this Lease, Tenant shall deposit with
Landlord $7,616.00 as a security deposit for the performance by Tenant of the
provisions of this Lease. If Tenant is in default, Landlord can use the security
deposit, or any portion of it,
<PAGE>
to cure the default or to compensate Landlord for all damage sustained by
Landlord resulting from Tenant's default. Tenant shall immediately on demand pay
to Landlord a sum equal to the portion of the security deposit expended or
applied by Landlord as provided in this paragraph so as to maintain the security
deposit in the sum initially deposited with Landlord. If Tenant is not in
default at the expiration or termination of this Lease, Landlord shall, no later
than fourteen (14) days after lease expiration or termination, return to Tenant
(or at Landlord's option, to the last assignee of Tenant's interest hereunder),
the balance of the security deposit. Landlord shall not be required to keep this
security deposit separate from its general funds, and Tenant shall not be
entitled to interest on such deposit.
6. POSSESSION.
6.1 If Landlord, for any reason cannot deliver possession of the Premises to
Tenant at the commencement of the term hereof, this Lease shall not be void or
voidable nor shall Landlord be liable to Tenant for any loss or damage resulting
therefrom, nor shall the expiration date of the above term be extended, but, in
that event, all rent shall be abated during the period between the commencement
of said term and the time when Landlord delivers possession.
6.2 In the event that Landlord shall permit Tenant to occupy the Premises
prior to the commencement date of the term, such occupancy shall be subject to
all of the provisions of this Lease and said early possession shall not advance
the termination date herein above provided. Rent shall be prorated and prepaid
for early occupancy at the current rate.
7. USE.
7.1 Use. The Premises shall be used and occupied by Tenant for general office
purposes and for no other purpose without the prior written consent of the
Landlord.
7.2 Uses Prohibited:
a. Tenant shall not do or permit anything to be done in or about the Premises
nor bring or keep anything therein which will increase the existing rate or
affect any fire or other insurance upon the building or any of its contents, or
cause a cancellation of any insurance policy covering said building or any part
thereof or any of its contents, nor shall Tenant sell or permit to be kept used
or sold in or about said Premises any articles or substances, inflammable or
otherwise, which may be prohibited by a standard form policy of fire insurance.
b. Tenant shall not do or permit anything to be done in or about the Premises
which will in any way obstruct or interfere with the rights of other tenants of
the building or injure or annoy them or use or allow the Premises to be used for
any unlawful or objectionable purpose.
c. Tenant shall not use the Premises or permit anything to be done in or about
the Premises which will in any way conflict with any law now in force or which
may hereafter be enacted. Tenant shall at its cost promptly comply with all laws
now in force or which may hereafter be in force and with the requirements of any
board of fire underwriters or other similar body relating to Tenant's
improvements or acts.
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8. ALTERATIONS AND ADDITIONS. Tenant shall not make or allow any alterations,
additions or improvements of or to the Premises without Landlord's prior written
consent. Any such alterations, additions or improvements, including, but not
limited to, wallcovering, paneling and built-in cabinet work, but excepting
movable furniture and trade fixtures, shall become a part of the realty, shall
belong to the Landlord and shall be surrendered with the Premises at expiration
or termination of the Lease. If Landlord consents to any such alterations,
additions or improvements by Tenant, they shall be made by Tenant at Tenant's
cost, and any contractor or person selected by Tenant to perform the work shall
first be approved of, in writing, by Landlord. Upon expiration, or sooner
termination of the term hereof, Tenant shall, upon written demand by Landlord
promptly remove any alterations, additions or improvements made by Tenant and
designated by Landlord to be removed. Such removal and repair of any damage to
the premises caused by such removal shall be at Tenant's cost.
9. LIENS. Tenant shall keep the Premises and the property in which the
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. Landlord may require
Tenant to provide Landlord, at Tenant's cost, a lien and completion bond in an
amount equal to one and one-half (1-1/2) times the estimated cost of any
improvements, additions, or alterations by Tenant, to insure Landlord against
liability for mechanic's and materialmen's liens and to insure completion for
the work,
10. REPAIRS AND MAINTENANCE. By taking possession of the Premises, Tenant shall
be deemed to have accepted the Premises as being in good sanitary order,
condition and repair. Tenant shall at Tenant's cost, keep the premises and every
part thereof in good condition and repair except for damages from causes beyond
the control of Tenant and ordinary wear and tear. Tenant shall upon the
expiration or sooner termination of this Lease surrender the Premises to the
Landlord in good condition, ordinary wear and tear and damage from causes beyond
the reasonable control of the Tenant excepted. Unless specifically provided in
an addendum to this Lease, Landlord shall have no obligation to alter, remodel,
improve, repair, decorate or paint the Premises or any part thereof and the
parties hereto affirm that Landlord has made no representations to Tenant
respecting the condition of the premises or the building except as specifically
herein set forth. Notwithstanding the above provisions, Landlord shall repair
and maintain the structural portions of the building, including the standard
plumbing, air conditioning, heating and electrical systems furnished by
Landlord, unless such maintenance and repairs are caused in part or in whole by
the act, neglect, fault or omission of any duty by the Tenant, its agents,
employees or invitees, in which case Tenant shall pay to Landlord the reasonable
cost of such maintenance and repairs. Tenant shall give Landlord written notice
of any required repairs or maintenance. Landlord shall not be liable for any
failure to repair or to perform any maintenance unless such failure shall
persist for an unreasonable time after written notice. Any repairs or
maintenance to supplemental cooling equipment required for Tenant's special
needs are the responsibility of Tenant. Except as specifically herein set forth,
there shall be no abatement of rent and no liability of Landlord by reason of
any injury to or interference with Tenant's business arising from the making of
any repairs, alterations or improvements to any portion of the building or the
Premises or to fixtures, appurtenances and equipment therein. Tenant waives the
right to make repairs at Landlord's expense under any law, statute or ordinance
now or hereafter in effect.
11. ASSIGNMENTS AND SUBLETTING. Tenant shall not, voluntarily or by operation
of law, assign, transfer, or encumber its interest under this Lease or in the
Premises nor
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sublease all or any part of the premises or allow any other person or entity
(except Tenant's employees, agents and invitees) to occupy or use all or any
part of the premises without the prior written consent of Landlord. Landlord's
consent shall not be unreasonably withheld. Any such consent shall not release
Tenant from liability hereunder, and a consent to one assignment, subletting,
occupation or use shall not be deemed a consent to any subsequent assignment,
subletting, occupation or use. Any such purported assignment, subletting, or
permission to occupy or use without such consent from Landlord shall be void and
shall, at the option of Landlord, constitute a default under this Lease. Tenant
immediately and irrevocably assigns to Landlord, as security for Tenant's
obligations under this Lease, all rent from any subletting of all or a part of
the Premises as permitted by this Lease, and Landlord, as assignee and as
attorney-in-fact for Tenant, or a receiver for Tenant appointed on Landlord's
application, may collect such rent and apply it toward Tenant's obligations
under this Lease; except that, until the occurrence of an act of default by
Tenant, Tenant shall have the right to collect such rent.
12. HOLD HARMLESS. Except as to claims based on the sole negligence or willful
misconduct of Landlord, its agents or employees, Tenant shall hold Landlord
harmless from any claims arising from Tenant's use of the premises or from any
activity permitted by Tenant in or about the Premises, and any claims arising
from any breach or default in Tenant's performance of any obligation under the
terms of this Lease. If any action or proceeding is brought by reason of any
such claim in which Landlord is named as a party, Tenant shall defend Landlord
therein at Tenant's expense by counsel reasonably satisfactory to Landlord.
Landlord and its agents shall not be liable for any damage to property entrusted
to employees of the building, nor for loss or damage to any property by theft or
otherwise, nor from any injury to or damage to persons or property resulting
from any cause whatsoever, unless caused by or due to the sole negligence or
willful misconduct of Landlord, its agents, or employees. Landlord shall not be
liable for any latent defect in the Premises or in the building of which they
are a part. Tenant shall give prompt notice to Landlord in case of fire or
accidents in the Premises or in the building or of alleged defects in the
building, fixtures or equipment.
13. INSURANCE.
13.1 Coverage. Tenant shall assume the risk of damage to any fixtures, goods,
inventory, merchandise, equipment, furniture and leasehold improvements, and
Landlord shall not be liable for injury to Tenant' B business or any loss of
income therefrom relative to such damage. Tenant shall, at all times during the
term of this Lease, and at its own cost, procure and continue in force the
following insurance coverage.
a. Comprehensive public liability insurance, insuring Landlord and Tenant
against any liability arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto.
13.2 Insurance Policies. The limits of said insurance policies shall not,
however, limit the liability of the Tenant hereunder. Tenant may carry said
insurance under a blanket policy, providing, however, said insurance by Tenant
shall name Landlord as an additional insured. If Tenant shall fail to procure
and maintain said insurance, Landlord may, but shall not be required to, procure
and maintain same, but at the expense of Tenant. Insurance required hereunder
shall be in companies that rate B+ or better in "Best's Insurance Guide. Tenant
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shall deliver to Landlord prior to occupancy of the premises copies of policies
of insurance required herein or certificates evidencing the existence and
amounts of such insurance with loss payable clauses, satisfactory to Landlord.
No policy shall be cancelable or subject to reduction of coverage except after
fifteen (15) days prior written notice to Landlord. The minimum acceptable
amount of comprehensive liability insurance is $1,000,000 against claims in any
occurrence, and property damage insurance in an amount of not less than $100,000
per occurrence, or combined single limit of $1,000,000 comprehensive liability
and property damage insurance.
13.3 Waiver of Subrogation. As long as their respective insurers so permit,
Landlord and Tenant each hereby waive any and all rights of recovery against the
other for any loss or damage occasioned to such waiving party or its property of
others under its control to the extent that such loss or damage is insured
against under any fire or extended coverage insurance policy which either may
have in force at the time of such loss or damage. Each party shall obtain any
special endorsement, if required by their insurer, to evidence compliance with
the aforementioned waiver.
14. SERVICE AND UTILITIES.
14.1 Landlord's Obligations. Landlord agrees to furnish to the Premises during
reasonable hours of generally recognized business days to be determined by
Landlord, and subject to the Rules and Regulations of the building, electricity
for normal lighting and fractional horsepower office machines, heat and air
conditioning required in Landlord's judgment for the comfortable use and
occupancy of the Premises, janitorial, window washing and elevator service.
Landlord shall also maintain and keep lighted the common stairs, galleries,
entries and toilet rooms in the building. Landlord shall not be liable for and
Tenant shall not be entitled to any reduction of rental by reason of Landlord's
failure to furnish any of the foregoing when such failure is caused by accident,
breakage, repairs, strikes, lockouts or other labor disturbances or labor
disputes of any character, or by any other cause, similar or dissimilar, beyond
the reasonable control of Landlord.
14.2 Tenant's Obligation. Tenant shall pay for, prior to delinquency, all
telephone and all other materials and services, not expressly required to be
paid by Landlord, which may be furnished to or used in, on or about the Premises
during the term of this Lease. Tenant will not, without the prior written
consent of Landlord and subject to any conditions which Landlord may impose, use
any apparatus or device in the Premises which will in any way increase the
amount of electricity or water usually furnished for use of the Premises as
general office space. If Tenant shall require water or electric current in
excess of that usually furnished or supplied for use of the Premises as general
office space, Tenant shall first procure the consent of Landlord. Wherever heat
generating machines or equipment are used in the Premises which affect the
temperature otherwise maintained by the air conditioning system, Landlord
reserves the right to install supplementary air conditioning units in the
Premises and the cost thereof, including the cost of installation, operation and
maintenance thereof, shall be paid by Tenant to Landlord upon demand by
Landlord. Landlord shall not be liable for Landlord's failure to furnish any of
the foregoing when such failure is caused by any cause beyond the reasonable
control of Landlord. Landlord shall not be liable under any circumstances for
loss of or injury to property, however occurring, in connection with failure to
furnish any of the foregoing.
<PAGE>
15. PROPERTY TAXES. Tenant shall pay before delinquency, all taxes levied or
assessed and which become payable during the term hereof upon all Tenant's
leasehold improvements, equipment, furniture, fixtures and personal property
located in the Premises, except that which has been paid for by Landlord and is
the standard of that building. Should the California Constitution be changed in
a way that results in a higher or lower tax on the Premises than the annual
increases now a matter of law, any such increase or decrease shall be passed
through to tenant on a prorated basis as an item separate from any CPI
adjustments. Tenant shall pay to Landlord its share of such taxes, if any,
within thirty days after delivery to Tenant by Landlord of a statement in
writing setting forth the amount of such taxes.
16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the
rules and regulations attached as Exhibit "B" to this Lease, as well as such
rules and regulations that Landlord shall from time to time promulgate. Landlord
reserves the right from time to time to make all reasonable modifications to
those rules which shall be binding to Tenant upon delivery of a copy of them to
Tenant. Landlord shall not be responsible to Tenant for the nonperformance of
any of said rules by any other tenant.
17. HOLDING OVER. If Tenant remains in possession without Landlord's consent,
after termination of the Lease, by lapse of time or otherwise, Tenant shall pay
Landlord for each day of such retention one-fifteenth (1/15th) of the amount of
the monthly rental for the last month prior to such termination and Tenant shall
also pay all costs, expenses and damages sustained by Landlord by reason of such
retention, including, without limitation, claims made by a succeeding tenant
resulting from Tenant's failure to surrender the Premises.
18. ENTRY BY LANDLORD. Landlord reserves the right to enter the premises at any
time to inspect the Premises, to provide any service for which Landlord is
obligated hereunder, to submit the Premises to prospective purchasers or
tenants, to post notices of nonresponsibility, and to alter, improve, maintain
or repair the Premises or any portion of the building of which the Premises are
a part that Landlord deems necessary or desirable, all without abatement of
rent. Landlord may erect scaffolding and other necessary structures where
reasonably required by the character of the work to be performed, but shall not
block entrance to the Premises and not interfere with Tenant's business, except
as reasonably required for the particular activity by Landlord. Landlord shall
not be liable in any manner for any inconvenience, disturbance, loss of
business, nuisance, interference with quiet enjoyment, or other damage arising
out of Landlord's entry on the Premises as provided in this paragraph, except
damage, if any, resulting from the sole negligence or willful misconduct of
Landlord or its authorized representative. Landlord shall retain a key with
which to unlock all doors into, within and about the Premises, excluding
Tenant's vaults, safes and files. In an emergency, Landlord shall have the right
to use any means which Landlord deems reasonably necessary to obtain entry to
the Premises, without liability to Tenant, except for any failure to exercise
due care for Tenant's property. Any such entry to the Premises by Landlord shall
not be construed or deemed to be forcible or unlawful entry into or a detainer
of the Premises or an eviction of Tenant from the Premises or any portion
thereof.
19. RECONSTRUCTION. If the Premises or the building of which the Premises are a
part are damaged by fire or other peril covered by extended coverage insurance,
Landlord agrees to make repairs and restorations to the extent and in the manner
possible at a cost not exceeding the proceeds of the insurance received by
Landlord. If the cost of repair and
<PAGE>
restoration exceeds the amount of proceeds received from insurance, Landlord may
elect to terminate this Lease by giving notice to Tenant within twenty (20) days
after determining that the cost will exceed such proceeds. If Landlord proceeds
with repair and restoration, this Lease shall remain in full force and effect,
except that Tenant shall be entitled to a proportionate reduction of rent while
such repairs are being made. The rent reduction shall be based upon the extent
to which repair and restoration activity materially interferes with Tenant's
business at the Premises, provided, however, that if the damage was occasioned
by the fault or neglect of Tenant, its agents or employees, there shall not be
an abatement of rent.
20. DEFAULT; REMEDIES.
20.1 Default. The occurrence of any of the following shall constitute a
default by Tenant:
a. Failure by Tenant to pay the rent or other monies when due, where such
failure continues for three (3) business days after written notice by Landlord
to Tenant.
b. Abandonment of the Premises by Tenant.
c. Failure by Tenant to perform any other provision of this Lease where such
failure to perform is not cured within thirty (30) days after notice has been
given to Tenant; provided, however, that if the nature of the default is such
that the same cannot reasonably be cured within said thirty (30) day period,
Tenant shall not be deemed to be in default if Tenant shall within such period
commence such cure and thereafter diligently prosecute the same to completion.
d. The making by Tenant of any general assignment or general arrangement for
the benefit of creditors; the filing by or against Tenant of a petition to have
Tenant adjudged a bankrupt or of a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, same is dismissed within sixty (60) days; the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where possession
is not restored to Tenant within thirty (30) days; or the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where such seizure is not
discharged within thirty (30) days.
20.2 Remedies. In the event of any such default Landlord may:
Maintain this Lease in full force and effect and recover the rent and other
monetary charges as they become due, without terminating Tenant's right to
possession irrespective of whether Tenant shall have abandoned the Premises. In
the event Landlord elects not to terminate the Lease, Landlord shall have the
right to attempt to re-let the Premises at such rent and upon such conditions
and for such a term, and to do all acts necessary to maintain or preserve the
Premises as Landlord deems reasonable and necessary without being deemed to have
elected to terminate the Lease, including removal of all persons and property
from the Premises. Such property may be removed and stored in a public warehouse
or elsewhere at the cost of and for the account of Tenant. In the event any such
reletting occurs, this Lease shall terminate automatically upon the new tenant
taking possession of the Premises. Notwithstanding that Landlord fails to elect
to terminate the Lease initially, Landlord at any
<PAGE>
time during the term of this Lease may elect to terminate this Lease by virtue
of such previous default of Tenant.
Terminate Tenant's right to possession by any lawful means, in which case this
Lease shall terminate and Tenant shall immediately surrender possession of the
Premises to Landlord. In such event Landlord shall be entitled to recover from
Tenant all damages incurred by Landlord by reason of Tenant's default, including
without limitation thereto, the following: (1) the worth at the time of award of
any unpaid rent which would have been earned at the time of such termination;
plus (2) the worth at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the time of award exceeds
the amount of such rental loss that is proved could have been reasonably
avoided; plus (3) the worth at the time of award of the amount by which unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that is proved could be reasonably avoided; plus (4) any other
amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform his obligations under this Lease or which in the
ordinary course of events would be likely to result therefrom; plus (5) at
Landlord's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law. Upon any such
re-entry Landlord shall have the right to make any reasonable repairs,
alterations or modifications to the Premises, which Landlord in its sole
discretion deems reasonable and necessary. As used in (1) above, the "worth at
the time of award" is computed by allowing interest at the rate of ten percent
(10%) per annum from the date of default. As used in (2) and (3) above, the
"worth at the time of award'' is computed by discounting such amount at the
discount rate of the U.S. Federal Reserve Bank at the time of award plus one
percent (1%).
Remedies of Landlord contained in this Lease shall be construed and held to be
cumulative, and Landlord shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided by law. No waiver
of any default of Tenant hereunder shall be implied from any acceptance by
Landlord of any rent or other payments due hereunder or any omission by Landlord
to take any action on account of such default if such default persists or is
repeated, and no express waiver shall affect defaults other than as specified in
said waiver. The consent or approval of Landlord to or of any act by Tenant
requiring Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent or approval to or of any subsequent similar acts
by Tenant.
21. EMINENT DOMAIN. If more than twenty-five percent (25%) of the Premises is
taken or appropriated by any public or quasi-public authority under powers of
eminent domain, either party hereto shall have the right at its option, to
terminate this Lease. If less than twenty-five percent (25%) of the Premises is
taken (or neither party elects to terminate as above, provided if more than
twenty-five percent (25%) is taken), the Lease shall continue, but the rental
thereafter to be paid shall be equitably reduced. If any part of the building of
which the Premises are a part is so taken or appropriated, whether or not any
part of the Premises is involved, Landlord shall be entitled to the entire award
and compensation for the taking which is paid or made by the public or quasi-
public agency, and Tenant shall have no claim against said award.
22. STATEMENT TO LENDER. Tenant shall at any time and from time to time, upon
not less than ten (10) days prior written notice from Landlord, execute,
acknowledge, and
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deliver to Landlord a statement in writing, (a) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modifications and certifying that this Lease as so modified, is in full
force and effect), and the date to which the rental and other charges are paid
in advance, if any, and (b) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of the Landlord hereunder, or
specifying such defaults if any are claimed. Any such statement may be relied
upon by any prospective purchaser or encumbrancer of all or any portion of the
real property of which the Premises are a part.
23. PARKING. Tenant shall be assigned one covered parking space, Reserved #2.
The other covered parking spaces are assigned to the other tenants in the
building. Landlord and Tenant agree not to hassle, tow, write notes to or in any
way bother anyone who improperly parks in these assigned spaces. All other
spaces shall not be assigned and Tenant shall have use of the open spaces in
common with other tenants, visitors and occupants of the building subject to the
rules and regulations established by Landlord. Said parking shall be at no
expense to the Tenant unless a tax, fee or levy is imposed directly or
indirectly by a Federal, State or local agency or jurisdiction for parking. If
such tax, fee or levy is imposed tenant agrees to pay its portion of said fee as
reasonably determined by the Landlord.
24. AUTHORITY OF PARTIES.
24.1 Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation,in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the by-laws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
24.2 Limited Partnerships. Landlord herein is a limited partnership. It is
understood and agreed that any claims by Tenant on Landlord shall be limited to
the assets of the limited partnership. And furthermore, Tenant expressly waives
any and all rights to proceed against the individual partners or the officers,
directors or shareholders of any corporate partner, except to the extent of
their interest in said limited partnership.
25. GENERAL, PROVISIONS.
25.1 Exhibits. Exhibits attached hereto, and addendums initialed by the
parties, are deemed to constitute a part hereof.
25.2 Waiver. The waiver by Landlord of any provision of this Lease shall not
be deemed to be a waiver of any subsequent breach of the same or any other
provisions of this Lease herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any provision of this Lease, other than the failure of the Tenant
to pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of the acceptance of such rent.
25.3 Notices. All notices and demands which may or are required to be given by
either party to the other hereunder shall be in writing. All notices and demands
by the Landlord to
<PAGE>
the Tenant shall be sufficient if delivered in person or sent by first class
mail, postage prepaid, addressed to the Tenant at the Premises or to such other
place as Tenant may from time to time designate in a written notice to the
Landlord. All written notices and demands by the Tenant to the Landlord shall be
sufficient if delivered in person or sent by first class mail, postage prepaid,
addressed to the Landlord at the office of the building or to such other person
or place as the Landlord may from time to time designate in a notice to the
Tenant. Any such notice is effective at the time of delivery or 48 hours after
mailing.
25.4 Rentable Area. Rentable square footage, as herein used, is the actual
square footage of the office suite plus a load factor for galleries, restrooms,
hallways and other common areas. The stated rentable area will not be used as a
basis for either party making any claim against the other.
25.5 Joint and Several Obligations. If there be more than one Tenant, the
obligations hereunder imposed upon tenants shall be joint and several.
25.6 Captions. The captions of the paragraphs of this Lease are not a part of
this Lease and shall have no effect upon the construction or interpretation of
any part hereof.
25.7 Time. Time is of the essence hereof.
25.8 Successors and Assigns. The provisions of this Lease, subject to the
provisions as to assignment, apply to and bind the successors and assigns of the
parties hereto.
25.9 Recording. Neither Landlord nor Tenant shall record this Lease or a short
form memorandum hereof without the prior written consent of the other party.
25.10 Scope and Amendments. This Lease is and shall be considered to be the
only agreement between the parties hereto. All negotiations and oral agreements
acceptable to both parties are included herein. No amendment or other
modification of this Lease shall be effective unless in a writing signed by
Landlord and by Tenant.
25.11 Legal Fees. In the event of any action brought by either party against
the other under this Lease, the prevailing party shall be entitled to recover
all costs including the fees of its attorneys as the court may adjudge
reasonable.
25.12 Sale. In the event of any sale of the building, Landlord shall be
released of any liability under this Lease, and the purchaser of the Premises
shall be deemed to have assumed and agreed to carry out all of the obligations
of the Landlord under this Lease.
25.13 Lender Requirements. Upon request of the Landlord, Tenant will, in
writing, subordinate its rights hereunder to the lien of any mortgagee, or deed
of trust to any bank, insurance company or other lending institution, now or
hereafter in force against the land and building of which the Premises are a
part, and to all advances made or hereafter to be made upon the security
thereof. If any proceedings are brought for foreclosure, or in the event of the
exercise of the power of sale under any mortgage or deed of trust made by the
Landlord covering the Premises, the Tenant shall recognize such purchaser as the
Landlord under this Lease.
<PAGE>
25.14 Name. Tenant shall not use the name of the development in which the
Premises are situated for any purpose other than as an address of the business
to be conducted by the Tenant in the Premises, unless written authorization is
obtained from Landlord.
25.15 Severability. Any provision of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof.
25.16 Applicable Law. This Lease shall be governed by the laws of the State of
California.
25.17 Toxics. Landlord and Tenant acknowledge that they have been advised that
numerous federal, state, and/or local laws, ordinances and regulations ("law")
affect the existence and removal, storage, disposal, leakage of contamination by
materials designated as hazardous or toxic ("Toxics"). Many materials, some
utilized in everyday business activities and property maintenance, are
designated as hazardous or toxic. Some of the Laws require that Toxics be
removed or cleaned up without regard to whether the party required to pay for
the "clean up" caused the contamination, owned the property at the time the
contamination occurred or even knew about the contamination. Some items, such as
asbestos or PCB's, which were legal when installed, now are classified as
Toxics, and are subject to removal requirements. Civil lawsuits for damages
resulting from Toxics may be filed by third parties in certain circumstances.
Tenant and Landlord agree to hold the other harmless from any responsibility for
any Toxics which are brought on to the Premises or the project by themselves,
their agents, employees or contractors.
26. ELECTRICAL, COMMUNICATIONS AND ALARM WIRING.
26.1 Tenant shall contact the Landlord prior to installing or relocating any
electrical, telephone, network, LAN, intercom, doorbell, or alarm wiring system
at the Atrium Business Center.
26.2 All electrical wiring shall be installed by a licensed contractor in
expanded metal tubing in accordance with the most current electrical code.
26.3 All communication cabling shall be installed by a licensed contractor and
shall be plenum rated and shall not be installed as to "lay'' on ceiling tile or
t-bar grid systems. All electrical and communication cabling shall be installed
in the chases in the hallway and connected to the connection plates in each
office per the existing conduit.
A certificate of compliance shall be provided by contractor to Landlord at time
of completion.
26.4 Landlord shall not be financially responsible for any repair or
replacement of any communication cables, telephone lines, telephone feeders, or
trunk lines beyond the M.P.O. (minimum point of entry) established by Pacific
Bell. If one or more of these lines serve several tenants, the cost of
installation and repair shall be divided among tenants currently being served by
said cable.
26.5 Not all existing telephone rooms/punchdown boards are permanent. Tenant
and his contractor must verify location of termination points with the Landlord
prior to installation.
<PAGE>
26.6 No audible alarm systems will be permitted. Landlord will not assume any
financial responsibility for any alarms attributable to its employees,
contractors, including janitors, guards, or service personnel.
26.7 Any work requiring access to adjoining tenants spaces shall be
prearranged so that Landlord can obtain permission for the
intrusion/interruption of the space. Tenant shall reasonably cooperate in
arranging access to contractors for adjoining tenant when requested by Landlord.
26.8 Upon request of Landlord, Tenant shall remove all communication cable
which they have installed in the Premises upon expiration of this Lease and
repair all damage caused by said removal.
27. AMERICANS WITH DISABILITIES ACT. Landlord believes the Premises complies
with the Americans With Disabilities Act" (ADA), but no independent
investigation has been made to ensure compliance with the "Americans With
Disabilities Act" (ADA). This Act may require a variety of changes to a
facility, including potential removal of barriers to access by disabled persons
and provision of auxiliary aids and services for hearing, vision or speech
impaired persons, some of which would be the Landlord's responsibility and some
of which be the Tenant's responsibility. Landlord urges all parties to obtain
independent legal and technical advice with respect to the physical and
environmental conditions and ADA compliance of the Property. The Parties agree
that it will rely solely on their own investigations and/or that of a licensed
professional specializing in these areas, and not on the investigation,
assurances or opinion of Landlord or Broker, if any.
28. BROKERS. Tenant warrants that it has had no dealing with any real estate
broker or agent in connection with the negotiation of this Lease excepting only,
Elizabeth Lewis and Rod Scherba, and it knows of no other real estate broker or
agent who is entitled to a commission in connection with this Lease. Commissions
shall be paid to Broker(s) by Landlord on the following schedule: 6%, 5%, 4%,
3%, 2%. No commissions shall be paid on Tenant Improvement Amortizations, CPI
Increases or any other Rent Adjustment covered in section 4.2 herein.
29. TENANT IMPROVEMENTS. Landlord is willing to improve the Premises at a later
date as per work orders and plans to be mutually agreed upon. The cost for said
improvements shall be paid by Tenant in one lump sum, or amortized with an 8 1/2
interest rate over the duration of the lease.
30. OPTION TO EXTEND TERM. Provided Tenant is not in default hereunder at the
expiration of the initial term herein provided for and has fully and faithfully
performed all of Tenant's obligations under the Lease during said term, then
Tenant shall have the option to extend the term for three (3) additional years,
commencing immediately upon expiration of the initial term. Tenant shall give
Landlord written notice of exercise of the option at least 180 days before the
expiration of the initial term. Lease payments for said extension period shall
be at a rate to be negotiated between Tenant and Landlord at the time the lease
extension notice is given. If a lease modification extending the term and
including a new lease rate is not agreed to in writing within 30 days of the
extension notice being given, this option to extend shall become void.
<PAGE>
31. EXPANSION SPACE. Landlord will use its best efforts to provide expansion
space for Tenant when and if Tenant needs additional space. Tenant should inform
Landlord of its desire to commit to additional space as far in advance as
possible. Lease terms for expansion space will be negotiated in good faith by
both parties at the time the new lease is needed and no preconceived terms have
been agreed to at this time.
32. TO LEASE. Landlord and Tenant agree to amend the foregoing as follows.
Page 2. 6.1. Add the following to the end of the paragraph: "Notwithstanding
the above statement, Tenant shall have the right to terminate this Lease, upon
written notice, on November 15, 1995 if possession cannot be delivered. Landlord
shall complete tenant improvements in a reasonable time, Landlord's failure to
complete tenant improvements shall not be grounds to delay occupancy. Tenant
shall cooperate with Landlord in order for the improvements to be done in a
timely manner.
Page 2. 7.1. Line 2 insert "engineering" between "purposes" and "and".
Page 3. 8. Add the following to the end of the paragraph: "If requested by
Tenant, at the time of installation Landlord shall stipulate which improvements
are to be removed at the time the Lease expires."
Page 5. 12. Line 1 Delete the following: "based on the" replace it with the
following: "to the extent caused by the"
Page 5. 12. Lines 18 & 19 Delete the following: "Landlord shall not be liable
for any latent defect in the Premises or in the building of which they are a
part."
Page 5. 13.1. Line 1 Add the following after "Coverage." : "Except to the
extent caused by Landlord's sole negligence or willful misconduct,"
Page 6. 14.1. Line 3 Insert "reasonably" between "be" and "determined"
Page 6. 14.1. Line 6 Insert "reasonable" between Landlord's and "judgement"
Page 8. 18. Insert the following after the first sentence: "Landlord will
attempt to notify Tenant prior to entry into the Premises during business hours
and shall not show the Premises to perspective tenants until the last six months
of the term."
Page 13. 25.12. Add the following to the end of the last sentence of the
paragraph: "even though those obligations predated the purchase."
The parties hereto have executed this Lease on the dates specified immediately
adjacent to their respective signatures.
LANDLORD: EL CAMINO OFFICE INVESTMENTS
By: THRUST IV, INC., General Partner
/s/ Hugh P. Bickle
By:_______________________________________
Hugh P. Bickle, President
<PAGE>
September 19, 1995
Date:_____________________________________
TENANT: ENACT
/s/ Matthew Sanders
By:_______________________________________
Matthew Sanders, President/C.E.O.
September 19, 1995
Date:_____________________________________
Tax I.D. #077 0326 649
--------------
<PAGE>
EXHIBIT B
Rules and Regulations
---------------------
1. Keys are issued, in a reasonable number, by Landlord to Tenant at no
charge.
2. Access cards, used to open the electronic lock of the front entry door of a
particular building after normal business hours, are assigned to individual
people pursuant to a list submitted by Tenant to Landlord. A deposit for
security access card is not currently being charged upon issuance, however this
policy is subject to change at Landlords sole discretion. When a card holder is
no longer entitled to a card (left employment, etc.) Tenant shall notify
Landlord of a new holder, or if the card has been taken or lost. By so notifying
Landlord, a particular card code can be removed from the authorized list, so
that it no longer will activate the lock.
3. No sign or notice shall be displayed by Tenant outside of its office space
without written consent of Landlord. If approval is not given, Landlord shall
have the right to remove such sign or notice without notice to and at expense of
the Tenant. All signs on access doors to the Premises shall be approved by
Landlord. The original standard company sign on the main door to the Premises
will be installed at Landlord's expense. Tenant may, at its expense, install a
different sign, after written design approval by Landlord. Design criteria
should be obtained from Landlord in advance.
Tenant shall not place anything within the Premises which may appear unsightly
from outside of the Premises.
Tenant shall not install any curtains, blinds, shades, or screens on any
windows or doors of the Premises without Landlord's consent.
4. Sidewalks, halls, passages, exits, entrances, elevators, and stairways
shall not be obstructed by any of the tenants, or used by them for any purpose
other than for ingress or egress from their respected offices.
5. Tenant shall not alter any lock or install any new or additional locks or
bolts on any doors or windows without the written consent of Landlord.
6. The toilet rooms, urinals, wash bowls and other apparatus shall not be used
for any purpose other than for which they were installed.
7. Tenant shall not overload the floor of the office complex. Tenant shall not
mark, drive nails, screw or drill into the partitions, woodwork, or plaster or
in any way deface the Premises, except for hanging of small items such as
pictures with nail type of hangers, without Landlord's approval. If Tenant hangs
any other furniture, equipment, whiteboards etc. Tenant shall be responsible for
the removal and repair of all damages to the Premises.
<PAGE>
8. No unusually large or heavy equipment shall be brought into the complex
without prior notice to Landlord and all moving of the same into or out of the
office complex shall be done at such time and such a manner as Landlord shall
designate.
All damage done to the office complex by moving or maintaining any such
equipment shall be repaired at the expense of Tenant.
9. Tenant shall not use the office complex in a manner offensive or
objectionable to the Landlord or other occupants by reason of noise, odors,
and/or vibrations, or interfere in any way with other tenants or those having
business herein, nor shall any animals or birds be brought in or about the
office complex.
10. No lodging, washing clothes, cooking, excluding use of coffee makers and
microwave ovens, shall be done or permitted by any Tenant on the Premises.
11. Tenant shall not use or keep on the Premises any foul or noxious gas,
kerosene, gasoline or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Landlord.
12. Landlord will direct electricians as to where and how telephone wires are
to be installed. No changing of wires will be allowed without the consent of the
Landlord. The location of the telephones, call boxes and other office equipment
affixed to the office complex shall be subject to the approval of Landlord.
13. No aerial satellite dish or other item shall be erected on the roof or
exterior walls of the complex, or on the grounds, without in each instance, the
written consent of the Landlord. Any such item so installed without such written
consent shall be subject to removal without notice at any time.
14. No loud speakers, televisions, radios or other devices shall be used in a
manner so as to be heard or seen outside of the Premises without prior written
consent of the Landlord.
15. On Saturdays, Sundays, legal holidays, and on other days between the hours
of 7:00 P.M. and 7:00 A.M. the following day, access to the office complex, or
to the Premises may be refused unless the person seeking is known to the person
or employee of the office complex in charge or is properly identified. The
Landlord shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the office complex of any person.
16. Any person whose presence on the Premises may in the judgment of the
Landlord be prejudicial to the safety, character, reputation and interest of the
office complex or of its tenants may be denied access to the office complex or
may be ejected therefrom.
17. No vending machine or machines of any description shall be installed,
maintained or operated upon the Premises without the written consent of the
Landlord.
18. Tenant shall not disturb, solicit, or canvass any occupant of the office
complex and shall cooperate to prevent the same.
<PAGE>
19. Landlord shall control and operate the public portions of the office
complex, in such manner as it deems best for the benefit of the tenants
generally.
20. All windows and entrance doors in the office complex shall be left locked
when the Premises are not in use, and all doors opening to public corridors
shall be kept closed except for normal ingress and egress from the office
complex.
21. In case of invasions, mob riot, public excitement, or other emergency, the
Landlord reserves the right to prevent access to the office complex during the
continuance of the same by closing of the doors or otherwise, for the safety of
the tenants and protection of property in the office complex. Landlord will also
direct tenants as necessary in an emergency and will not assume any liability
for damages suffered by tenants as the result of such directions.
<PAGE>
EXHIBIT 10.21
LEASE AGREEMENT
between
NORTH HILLS PROPERTIES, INC.
Landlord
And
ENACT HEALTH MANAGEMENT SYSTEMS
Tenant
MacGregor Village
107 Edinburgh South, Suite 203
Cary, North Carolina 27511
Dated:
<PAGE>
STATE OF NORTH CAROLINA LEASE AGREEMENT
COUNTY OF WAKE
THIS LEASE AGREEMENT is made, entered into and effective as of October
23, 1995 by and between NORTH HILLS PROPERTIES, INC., a North Carolina
corporation ("Landlord"), and ENACT Health Management Systems, a California
corporation, ("Tenant").
WITNESETH:
1. PREMISES. The Landlord hereby leases to Tenant and Tenant hereby
hires and takes from Landlord that space shown on the floor plan attached to
this Lease as Exhibit A (hereinafter called the "premises"), consisting of
approximately 1935 square feet of net rentable area on the second floor of the
building Suite 203 constructed or to be constructed by the Landlord (hereinafter
called the "building") on the parcel of land described on attached Exhibit B
(hereinafter called the "land"), located in the City of Cary, state of North
Carolina, together with the right to the use of and benefit from, in common with
others, the areas of the building intended for the general common use and
benefit of all tenants of the building (hereinafter called the "common area").
2. USE. The premises shall be used and occupied by Tenant solely for the
purpose of general office use and all other uses incidental and related thereto.
Tenant shall occupy the premises and conduct its business in a lawful manner and
will not create any nuisance or otherwise interfere with, annoy or disturb any
other Tenant in its normal business operations or the Landlord in its management
of the building. Tenant shall not use the building in any manner which could
cause an increase in the insurance cost on the building. Tenant shall abide by
and observe all rules and regulations promulgated from time to time by Landlord
for the operation, safety, security and maintenance of the building.
3. LEASE TERM. The term of this Lease shall be three (3) years, and
shall commence on the date ("commencement date") which shall be the earlier of
(i) the date the premises are ready for occupancy as determined under paragraph
4 of this Lease or (ii) the date upon which Tenant or anyone claiming under or
through the Tenant first occupies any part of the premises for any purpose other
than preparing the premises for Tenant's initial occupancy.
4. PREPARATION FOR OCCUPANCY. Prior to commencement of the term
Landlord, at its own cost and expense, shall prepare the premises for occupancy
by Tenant by performing the work described on attached Exhibit C (hereinafter
called "Landlord's Work"). Landlord's Work shall be completed in a good and
workmanlike manner and shall comply with federal, state and local laws. Upon
substantial completion of Landlord's Work (or delivery of a certificate of
occupancy), Tenant agrees to accept the premises and execute an appropriate
amendment to this Lease setting forth the commencement date of the term hereof.
Landlord will use its best efforts to make premises available for occupancy on
November 1, 1995.
<PAGE>
5. RENT.
(a) Basic Rent. Tenant shall pay to Landlord, without any deduction or
set-off whatsoever, an annual rental ("basic rent") at the rate of $25,155.00
($2,096.25/month) per annum, payable in twelve equal monthly installments in
advance on the first day of each calendar month, beginning with the first day of
the calendar month immediately following the commencement date. Basic rent for
any period less than one calendar month shall be apportioned on the basis of the
number of days in that month. Basic rent for the period from the commencement
date to the first day of the next succeeding calendar month shall be paid on the
commencement date. In addition to such remedies as may be available to Landlord
at law or under this Lease, the Landlord shall be entitled to a late charge of
five percent (5%) of the amount of the monthly installment of basic rent if not
received by Landlord by the fifth day of the month.
(b) Increase in Basic Rent. Basic Rent for subsequent lease years shall be
payable as follows:
Lease Year 2: $26,122.50 per annum; $2,176.85 per month
Lease Year 3: $27,090.60 per annum; $2,257.50 per month
6. TAXES. Landlord shall pay all real estate taxes, assessments and
other governmental charges which shall be levied or assessed or which become
liens upon the land or building.
<PAGE>
8. MAINTENANCE AND REPAIRS. Tenant shall, at its sole cost and expense,
take good care of the premises and Landlord's fixtures and appurtenances
therein. Tenant shall be responsible for any damage to the premises caused by
Tenant's occupation thereof, normal wear expected. Landlord shall perform all
maintenance and make all repairs and replacements to the parking facility,
common areas of the building and building service systems of every kind and
nature now or hereafter attached to or used in connection with the operation of
the building, including but not limited to, plumbing, sprinkler, HVAC, and
elevators.
<PAGE>
9. LANDLORD'S SERVICES. Landlord shall, at its sole cost and expense,
subject to section 5 (c) herein, furnish to Tenant the following services,
supplies and facilities:
(a) Elevator service (if applicable).
(d) Vermin extermination and repair and replacement of any property
damaged by vermin.
(e) General security for the building not including security personnel or
a building security system other than non-electric door key locks.
10. ALTERATIONS AND IMPROVEMENTS. Tenant shall not make or allow to be
made any alterations or physical addition in or to the premises without the
prior written consent of Landlord. Any alterations, physical additions or
improvements to the premises made by the Tenant shall at once become the
property of the Landlord and shall be surrendered to Landlord upon termination
of this Lease. Landlord, at its option, may require Tenant to remove any
physical additions and/or repair any alterations in order to restore the
premises to the condition existing at the time Tenant took possession, all costs
of removal and/or alterations to be borne by Tenant. Upon the expiration or
earlier termination of this Lease, Tenant will peaceably yield up to Landlord
the premises in good order and condition, ordinary wear and tear excepted.
Tenant shall repair all damage to the premises and to the building caused by
removal of its furniture, equipment and machinery.
11. UTILITIES/JANITORIAL SERVICES. Tenant shall be responsible for
arranging, and shall be responsible for direct payment, of all utilities to the
premises and the interior and exterior glass and window cleaning, and janitorial
services for the premises.
12. INSPECTION. The Landlord shall, upon advance oral notice to the
Tenant (except in an emergency), have the right at all reasonable times during
business hours to inspect the premises and show the same to prospective
mortgagees and/or to prospective tenants and, at all times to make repairs or
replacements as required by this Lease or as may be necessary.
<PAGE>
13. CASUALTY. If any portion of the premises or common areas is damaged
by fire or other casualty, and the damaged property can, in the Landlord's
opinion, be repaired within ninety (90) days from the date of damage, the
Landlord shall proceed to repair the damage. This Lease shall not terminate,
but Tenant shall be entitled to a proportionate abatement of rent and additional
rents payable during the period commencing on the date of the damage and ending
on the date the damaged property is repaired and the premises are delivered to
Tenant. For purposes of this paragraph, rental abatement shall be based upon
the portion of the premises rendered untenantable during the period Landlord is
making repairs. If in the Landlord's opinion the damaged property cannot be
repaired within ninety (90) days from the date of the damage, either party may
terminate this Lease (by notice to the other within twenty (20) days form the
date on which the Landlord's opinion is delivered to Tenant. In the event of
termination under this paragraph, this lease and the term hereof shall terminate
on the date of the notice and rent and additional rents shall be apportioned as
of the date of the damage.)
14. INSURANCE. Landlord shall at all times during the term of this Lease
maintain a policy or policies of fire, extended coverage or similar casualty
insurance covering the building against loss, damage or destruction in an amount
equal to ninety percent (90%) of the full replacement cost of the building
structure and its improvements as of the date of loss (exclusive of
architectural and engineering fees, excavation, footings and foundations);
provided, that Landlord shall not be required in any way or manner to insure any
personal property of Tenant or which Tenant may have upon or within the Premises
or any fixtures installed by or paid for by Tenant upon or within the premises.
Landlord and Tenant each hereby waives its right of recovery against the other
and each releases the other from any claim arising out of loss, damage or
destruction to the building, premises or contents tehreon or therein, to the
extent its respective property is covered by a policy of insurance, whether such
loss, damage or distruction may be attributable to the negligence of either
party or its respective agent, visitor, contractor, servant or employee. Each
policy shall include a waiver of the insurer's rights of subrogation against the
party thereto who is not the insured under said policy.
Tenant shall at al times during the term hereof maintain general public
liability insurance covering injury to persons or damage to property in or about
the Premises, insuring Landlord and Tenant, in coverage amounts not less than
$1,000,000 for bodily injury or death and not less than $100,000 for property
damage. The foregoing notwithstanding, Tenant agrees to indemnify and hold
harmless Landlord from and against any loss or liability resulting from Tenant's
use and occupancy of the premises during the term hereof.
15. CONDEMNATION. If at any time during the term hereof the entire
building shall be taken for any public or quasi-public use, under any statute,
or by right of eminent domain, this Lease shall terminate on the date title to
the building is transferred to the applicable governmental authority. If less
than all of the building shall be taken and the portion taken does not include
all of the premises, this Lease shall remain unaffected, except that the Tenant
shall be entitled to a pro rata abatement of rent and additional rents based on
the proportion which the area of the premises taken bears to the area of the
premises immediately prior to the taking. Landlord shall be entitled to receive
the entire award or awards in any condemnation proceeding without deduction for
any estate vested in the tenant and the Tenant shall
<PAGE>
receive no part of any award or awards from Landlord or in the condemnation
proceedings.
16. SIGNS. Tenant shall not place any signs on the land or exterior of
the building. Tenant's name and the location in the building shall be affixed
to a directory board provided by the Landlord at Landlord's expense. Tenant may
place a sign on the inside of the windows in their premises after Tenant has
received written approval from the Landlord for the sign size, color, and style.
17. DEFAULT. If Tenant shall fail to pay basic rent or any additional
rent on the due date therefor or within five (5) days thereafter or if Tenant
defaults in the performance of any of its other obligations under this Lease and
fails to cure the default within thirty (30) days after receipt of written
notice from Landlord, then Landlord may:
(a) Cure any such default and any costs and expenses incurred by Landlord
therefor shall be deemed additional rent to be paid by Tenant hereunder.
(b) Enter and take possession of the premises without terminating this
Lease and sublease the premises for the account of Tenant. Tenant shall be
liable for the difference between the rent and other amounts paid by the
sublessee and the rent and other amounts payable by Tenant hereunder and all
reasonable expenses incurred in entering the premises and preparing it for such
sublease.
(c) Terminate this Lease without further notice and reenter the premises
and remove all persons and any property therefrom, either by summary
proceedings, ejectment or otherwise, and repossess the premises together with
all additions, alterations, improvements and personal property, now or hereafter
erected, maintained or located thereon. The Landlord shall have the right to
take such action without being guilty of trespass. At any time and from time to
time after such termination, Landlord may, at its option relet the premises or
any part thereof, without notice to Tenant, upon such terms and conditions as
landlord, in its sole discretion, deems advisable, and receive and collect the
rents therefor, applying the same first to payment of all costs and expenses of
reletting and then to payment of damages in amounts equal to the rental due
hereunder and to the cost and expense of performing the other covenants of
Tenant. Tenant agrees to pay Landlord the rent, additional rent and all other
charges required to be paid by Tenant up to the time of termination of this
lease. Thereafter, Tenant agrees to pay Landlord during the remainder of the
term of this Lease, all rent and additional rent and all other charges required
to be paid by Tenant under this Lease, less the net proceeds, if any, received
from the reletting of the premises.
No remedy set forth in this paragraph 16 is intended to be exclusive of any
other remedy, and every remedy shall be cumulative and in addition to every
other remedy herein or now or hereafter existing at law, in equity or by
statute. No delay or failure to exercise any right or power accruing upon a
default under this Lease shall impair any such right or power accruing upon a
default under this Lease shall impair any such right or power or shall be
construed to be a waiver thereof.
18. HOLDOVER. If Tenant remains in the premises beyond the expiration or
earlier termination of the term of this Lease, the holding over shall not
constitute
<PAGE>
a renewal or extension of this Lease. Any holding over by Tenant hereunder shall
constitute a tenancy at will.
19. NOTICES AND PAYMENTS. Any notice, document or payment required or
permitted to be delivered or remitted hereunder or by law shall be deemed to be
delivered or remitted, whether actually received or not, when deposited in the
United States mail, postage prepaid, certified or registered, return receipt
requested, addressed to the parties hereto at the respective addresses set out
below, or at such other address as they shall have specified by written notice
delivered in accordance with the terms of this Lease:
LANDLORD: TENANT:
NORTH HILLS PROPERTIES, INC. ENACT Health Management Systems
Post Office Box 17004 421 Jacaranda Lane
Raleigh, North Carolina 27619 Palo Alto, CA 94306
20. ASSIGNMENT AND SUBLETTING. Tenant shall not, by operation of law or
otherwise, assign, mortgage, pledge, encumber or otherwise transfer any interest
in this Lease, or sublet the premises or any part thereof, without the prior
written consent of Landlord. Any assignment, sublease, mortgage, pledge,
encumbrance or transfer by Tenant in contravention of this paragraph shall be
void. The consent by Landlord to an assignment or subletting shall not in any
way be construed to relieve Tenant from obtaining the express consent of the
Landlord to any further assignment or subletting. Landlord shall be reasonable
in providing its consent for such assignment or subletting.
21. QUIET ENJOYMENT. Tenant shall have the peaceable and quiet possession
of the premises for the term of this Lease provided the Tenant pays the rent and
performs and observes the other covenants to be performed and kept by the Tenant
hereunder. Tenant acknowledges that its peaceable and quiet possession of the
premises may be disturbed by Landlord's up-fitting of certain areas of the
building and Tenant hereby agrees that the Landlord's up-fitting work shall not
constitute a breach of the covenants contained in this lease.
22. SUBORDINATION. This Lease shall be subordinate and subject to all
ground or underlying leases and all mortgages thereon and to all mortgages
covering the fee of the building, or land, that now or may hereafter affect the
building, or land, and to all renewals, modifications or replacements thereof.
If the ground or underlying lessor and/or mortgagee or any successor in interest
shall succeed to the rights of the Landlord under this Lease, whether through
possession, surrender, assignment, subletting, judicial or foreclosure action,
or delivery of a deed or otherwise, Tenant will attorn to and recognize the
successor-landlord as Tenant's landlord and the successor-landlord will accept
such attornment and recognize Tenant's rights of possession and use of the
premises in accordance with the provisions of this Lease. This clause shall be
self-operative and no further instrument of subordination shall be required.
<PAGE>
23. ESTOPPEL CERTIFICATE. Tenant agrees that upon occupancy and from time
to time thereafter during the term of this Lease, Tenant will execute,
acknowledge and deliver to Landlord a statement in writing (i) certifying that
this Lease is unmodified and in full force and effect (or if there have been
modifications that this Lease is in full force and effect as modified and
stating the modifications); (ii) stating the dates to which the rent and other
charges hereunder have been paid by Tenant; (iii) stating whether Tenant has
knowledge that Landlord is in default in the performance of any covenant,
agreement or condition contained in this lease, and, if the Tenant has knowledge
of such a default, specifying each default and (iv) stating the address to which
notices to Tenant shall be sent.
24. MEMORANDUM OF LEASE. The parties shall, if requested by either,
execute a memorandum of this Lease for recording purposes. The requesting party
shall pay all costs of recording.
25. BINDING AGREEMENT. This Lease shall bind and inure to the benefit of
the parties hereto and their respective executors, distributees, heirs,
representatives, successors and assigns.
26. APPLICABLE LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of North Carolina.
27. SEVERABILITY. If for any reason any provision of this Agreement is
determined to be invalid, such invalidity shall not impair the operation of or
effect those portions of this Agreement which are valid.
28. SECURITY DEPOSIT. Upon the execution of this Lease, Tenant agrees to
deposit with the Landlord the sum of $1,677.08 as security for Tenant's faithful
performance of its obligations under this Lease (the "security deposit"). If
Tenant defaults in the performance of any of the terms of this Lease, including
the payment of basic rent or additional rent, Landlord may use, apply or retain
the whole or any part of the security deposit to the extent required for the
payment of any rent or additional rent or for any sum which Landlord may expend
or may be required to expend by reason of Tenant's default in respect to any of
the terms of this Lease.
29. RELOCATION. Landlord hereby retains the right and power to relocate
Tenant to a space in the building of comparable size to the premises upon thirty
(30) sixty (60) days prior written notice to the Tenant. All reasonable costs
incurred by Tenant as a result of relocation under this paragraph 29 shall be
paid by the Landlord. If Tenant does not wish to move to the Relocation
Premises designated by Landlord, Tenant may terminate this Lease upon notice to
Landlord within ten (10) days after Tenant receives relocation notice, and this
Lease shall terminate sixty (60) days after receipt by Landlord of Tenant's
election to terminate this Lease.
<PAGE>
30. ENTIRE AGREEMENT. This Lease contains the entire agreement of the
parties and may not be modified except by an instrument in writing which is
signed by both parties.
IN WITNESS WHEREOF, this Lease has been duly executed by the parties hereto
as of the day and year first above written.
ATTEST: LANDLORD:
NORTH HILLS PROPERTIES, INC.
By: /s/ James A. Walker
________________________________ ---------------------------------------
Carol ter Wee, Secretary James A. Walker, President
[CORPORATE SEAL} Address: 4224 Six Forks Road
Raleigh, North Carolina 27609
Date:
---------------------------------------
WITNESS: TENANT:
ENACT HEALTH MANAGEMENT SYSTEMS
By: /s/ Matthew Sanders
________________________________ ---------------------------------------
CFO Matthew Sanders, President and CEO
Address for notice prior to
commencement date:
421 Jacaranda Lane
Palo Alto, CA 94306
Date: [10/23/95]
----------------------------------
<PAGE>
EXHIBIT "A"
Floor Plan
<PAGE>
Lease Agreement between North Hills Properties, Inc., as Landlord and Enact
Health Management Systems, Tenant.
EXHIBIT "B"
LEGAL DESCRIPTION
Being a tract of land within MacGregor Park which tract contains 21.0759 acres
as fully shown and described on a map of same dated March 29, 1983, revised
April 7, 1983 and entitled "Boundary Survey-MacGregor Park Shopping Center Site,
Cary, Wake County, North Carolina: which map is recorded in the Office of the
Register of Deeds of Wake County, North Carolina in Book of Maps 1983 Page 564
and being the same property as shown and fully described on a map dated May 6,
1983 by Runa A. Cooper, Land Surveyors, Cary, North Carolina which map is
entitled "Property of North Hills Properties, Inc., Cary Wake County, North
Carolina."
<PAGE>
Lease Agreement between North Hills Properties, Inc., as Landlord and Enact
Health Management Systems, Tenant.
EXHIBIT "C"
Landlord's Work
LANDLORD'S WORK:
1. Landlord will paint and re-carpet the premises at its expense. Tenant may
select paint color and carpet from selections available from Landlord.
2. Landlord will provide Tenant two (2) gallons of paint for future use.
3. Landlord will leave the two (2) three (3) existing easel boards in the
premises.
TENANT'S WORK:
1. Tenant will be responsible for their phone and phone lines, computer
equipment and any computer cabling or wiring, and the installation of such
equipment. In addition, Tenant shall be responsible for movable partitions,
office furniture and any or all trade fixtures.
2. Tenant will construct two walls and install a door per plan shown on
Exhibit A, and install a vanity cabinet in the restroom. All of Tenant's work
shall be at Tenant's cost and expense.
3. Tenant will not be required to return premises to original configuration at
end of lease term, but Tenant will be required to return premises to the
condition as indicated on Exhibit A, page 12 of this Lease.
<PAGE>
Lease Agreement between North Hills Properties, Inc., as Landlord and Enact
Health Management Systems, Tenant.
EXHIBIT D
Rules and Regulations
1. The entrances, corridors, passages, stairways, and elevators shall be
under the exclusive control of the Landlord and shall not be obstructed, nor
used by the Tenant for any purpose other than ingress and egress to and from the
leased premises.
2. The Tenant shall neither place nor permit to be placed any signs,
advertisements, notices in or upon any part of the building, except on the doors
of the premises leased, or as approved in writing by Landlord and all such
doorway signs shall be approved by the Landlord. All signs not approved in
writing by the Landlord shall be subject to removal without notice.
3. The Tenant shall not put up, nor operate, any engine, boiler, -dynamo
of machinery of any kind nor carry any kind nor carry on any mechanical business
in said premises, nor place any explosive therein, nor use any kerosene, oils,
or burning fluids in said premises without first obtaining the written consent
of the Landlord.
4. If any tenant shall desire an iron safe for depositing valuables and
securities, the Landlord shall have the right to prescribe its weight, size and
proper position.
5. No nails are to be driven, and premises are not to be defaced in any
way, and no boring or cutting for wires or other purpose is to be done, and no
change in electric fixtures or other appurtenances of premises is to be made
without the written consent of the Landlord.
6. If the Tenant desires telephonic or telegraphic connections, the
Landlord will direct the electricians as to where and how the wires are to be
introduced, and without such written directions, no boring for wires will be
permitted.
7. The leased premises shall not be used for the purpose of lodging or
sleeping rooms, nor in any way to damage the reputation of the building and the
Tenant shall not disturb, nor permit the disturbance of other tenants, by the
use of musical instruments or any unseemly noises, nor by any interference
whatever, and nothing shall be placed or permitted upon the outside window
sills.
8. No person or persons, other than employees of the building, shall be
employed by the Tenant for the purpose of cleaning or taking care of said
premises without the written consent of the Landlord. Any person or persons so
employed by Tenant (with the written consent of the Landlord) shall be subject
to, and under the control and direction of, the Landlord in the use of the
building and its facilities.
<PAGE>
9. the Landlord shall have the right to exclude or eject from the
building animals of every kind, birds, bicycles, and all canvassers and other
persons who conduct themselves in such manner as to be, in the judgment of the
Landlord, an annoyance to the tenants or a detriment to the building.
<PAGE>
EXHIBIT "E"
SIGN CRITERIA
I. It is the responsibility of the Tenant at his expense to provide the Leased
Premises with an identification sign prior to opening for business.
II. Tenant will, prior to fabrication and installation of proposed sign, submit
shop drawings to the Landlord for his approval.
<PAGE>
NORTH HILLS, INC.
4224 SIX FORKS RD
PO BOX 17004, RALEIGH NC 27619
(919)787-2662 FAX (919)787-1923
October 12, 1995
Mr. Matthew Sanders
President and CEO
ENACT Health Management Systems
421 Jacaranda Lane
Palo Alto, CA 94306-1846
RE: New Office Lease for MacGregor Village, Cary, North Carolina
Dear Mr. Sanders:
I am providing the following leases for your new office in Cary, North Carolina
along with some instructions for expediting the documents:
1. Three (3) sets of originals are enclosed. I have added a new signature
page, page 11. Please sign where indicated by the signature tab and have
the Lease attested and sealed.
2. I have provided for you the original signature pages. You can destroy
these.
3. Is ENACT Health Management Systems, Inc. a California corporation?
4. I made a minor addition to the language on page 14; "But Tenant will be
required to return premises to the condition as indicated on Exhibit A,
page 12 of this lease." Please initial this change where indicated.
5. I have enclosed a pre-addressed overnight envelope for your convenience.
Once you have signed, attested and sealed the leases and initialed page 14,
please return to me.
<PAGE>
I have already released our construction personnel to start the painting and
carpeting work We look forward to having ENACT join us at MacGregor Village.
Mr. Matthew Sanders
ENACT Health Management Systems
October 12, 195
Page Two
Please do not hesitate to contact me if you have any questions.
Sincerely,
NORTH HILLS, INC.
/s/ Jim Lepley
------------------------
Jim Lepley
Vice President
Leasing
dmr
Enclosures
cc: Mr. Gil Mott, w/o enclosure
Ms. Melinda Hall, w/o enclosure
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss................ ($1,556,000) ($2,380,000) ($2,807,000) ($1,933,000) ($3,342,000)
=========== =========== =========== =========== ===========
Weighted average shares
of Common Stock
outstanding............ 2,100,000 2,192,033 2,259,516 2,226,087 2,389,683
Shares related to Staff
Accounting Bulletin
topic 4D:
Stock options.......... 122,818 122,818 122,818 122,818 122,818
Series D Preferred
Stock(1).............. 462,164 462,164 462,164 462,164 462,164
----------- ----------- ----------- ----------- -----------
Shares used in computing
net loss per share..... 2,684,982 2,777,015 2,844,498 2,811,069 2,974,665
=========== =========== =========== =========== ===========
Net loss per share...... ($0.58) ($0.86) ($0.99) ($0.69) ($1.12)
=========== =========== =========== =========== ===========
Pro Forma
Calculation of shares
outstanding for
computing pro forma net
loss per share:
Shares used in
computing net loss per
share................. 2,844,498 2,974,665
Adjusted to reflect the
effect of the assumed
conversion of Series
A, B and C Preferred
Stock................. 2,927,369 2,927,369
----------- -----------
Shares used in computing
pro forma net loss per
share.................. 5,771,867 5,902,034
=========== ===========
Pro forma net loss per
share.................. ($0.49) ($0.57)
=========== ===========
</TABLE>
- --------
(1) Assumes an initial public offering price of $11.00 per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 1,048 1,935
<SECURITIES> 0 0
<RECEIVABLES> 1,162 247
<ALLOWANCES> 79 37
<INVENTORY> 224 503
<CURRENT-ASSETS> 2,451 2,835
<PP&E> 435 1,092
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 2,899 3,537
<CURRENT-LIABILITIES> 2,484 3,206
<BONDS> 0 0
0 0
4,374 7,492
<COMMON> 205 206
<OTHER-SE> (7,407) (10,724)
<TOTAL-LIABILITY-AND-EQUITY> (2,828) (3,026)
<SALES> 1,162 3,961
<TOTAL-REVENUES> 3,096 5,458
<CGS> 877 3,421
<TOTAL-COSTS> 5,793 8,621
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 171 250
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,807) (3,342)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (0.49) (0.87)
</TABLE>
