<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1998
REGISTRATION NO. 333-41259
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- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 TO 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.
DEWEY BALLANTINE LLP
GRAY CARY WARE & FREIDENRICH LLP
400 HAMILTON AVENUE 1301 AVENUE OF THE AMERICAS
PALO ALTO, CALIFORNIA 94301 NEW YORK, NY 10019
PHONE: (650) 328-6561 PHONE: (212) 259-8000
FACSIMILE: (650) 327-3699 FACSIMILE: (212) 259-6333
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. [_]
----------------
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 JANUARY 16, 1998
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 Common Stock has been approved for listing 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>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share $ $ $
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Total(3) $ $ $
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</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 $750,000 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 ,
1998 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New
York 10001.
--------
SALOMON SMITH BARNEY________________________________________LEHMAN BROTHERS
, 1998
<PAGE>
TELE-HEALTH MONITORING
LINKING PATIENTS, PROVIDERS
AND PLANS IN MINUTES
[ENACT LOGO]
[Picture of a young girl breathing into the AirWatch monitor]
Home-based monitoring
[Picture of the AirWatch monitor and the LifeScan blood glucose meter
superimposed on four sample Monthly Care Reports]
Objective, physiological data for providers, patients and payors
[Picture of two people discussing results]
Defines a new paradigm in health management
[Picture of a doctor giving information to a patient]
Provides information to allow care team to remotely monitor patients between
office visits
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited summary financial
information.
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>
[ENACT LOGO] THE ENACT TELE-HEALTH SYSTEM
Personal Health Monitors*
RESPIRATORY
- -----------
The ENACT 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]
CARDIOVASCULAR AND 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.
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 populations.
*To date, the Company (i) has begun commercial distribution of its AirWatch
Monitor to a limited number of patients, (ii) is preparing for the commercial
launch of its diabetes product in collaboration with LifeScan and (iii) is
developing products for cardiovascular and other disease markets. The Company
has a limited operating history and has received limited revenue from sales of
products and services attributable solely to sales of the AirWatch Monitor and
related services. See "Risk Factors."
<PAGE>
[ENACT LOGO] THE ENACT TELE-HEALTH SYSTEM
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 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 CASE MANAGER
- ----------------
Using ENACT's Internet tools, case managers at managed care organizations can
target patients requiring intervention.
[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 can help assess medication effectiveness.
[Picture of a physician]
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.
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. 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
program using its health monitoring and reporting system (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. Based on preliminary marketing efforts,
patient surveys and discussions with collaborative partners, the Company
believes that the ENACT System is likely to appeal both to patients who are
increasingly taking a more active role in managing their own health and managed
care organizations seeking cost savings. 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. A study by the University of
California, San Francisco reported that chronic disease treatment costs totaled
$425 billion in 1990 and that chronic disease patients account for more than
70% of healthcare expenditures, despite only comprising 40% of the population.
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 regimens. 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 December 31, 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) 783,529 shares
of Common Stock issuable upon exercise of options with a weighted average
exercise price of $2.35 per share, (ii) 816,571 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)
459,667 shares of Common Stock issuable upon the conversion of convertible
promissory notes in the aggregate principal amount of $3,000,000. See
"Management--Stock Plans" and Notes 5 and 6 of Notes to Financial
Statements.
RISK FACTORS
The Company is in an early stage of development, has a limited operating
history and has generated limited revenues to date. For a description of these
and other risks associated with the purchase of Common Stock, see "Risk
Factors."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................ $ 140 $ 614 $ 3,096 $ 6,459
Operating costs and expenses:
Cost of revenues........................ -- -- 1,796 5,006
Research and development................ 1,417 1,365 1,752 2,035
Sales and marketing..................... -- 1,185 1,475 2,758
General and administrative.............. 288 420 770 1,085
------- ------- ------- -------
Total operating costs and expenses........ 1,705 2,970 5,793 10,884
------- ------- ------- -------
Loss from operations...................... (1,565) (2,356) (2,697) (4,425)
Interest income (expense), net............ 9 (24) (110) (249)
------- ------- ------- -------
Net loss.................................. $(1,556) $(2,380) $(2,807) $(4,674)
======= ======= ======= =======
Pro forma net loss per share (1).......... $ (0.79)
=======
Shares used in computing pro forma
net loss per share (1)................... 5,934
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................. $(2,731) $26,859
Total assets.......................................... 2,901 32,491
Notes payable to stockholders......................... 4,000 3,000
Accumulated deficit................................... (12,010) (13,178)
Total stockholders' equity (net capital deficiency)... (4,350) 26,240
</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." Also
includes the effect of an imputed non-cash charge to interest expense with
an offsetting entry to additional paid-in capital of $1,168,000 as a result
of certain short-term borrowings becoming convertible upon completion of
this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 of Notes to Financial
Statements.
----------------
Unless otherwise indicated, information in this Prospectus, including share
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 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. The conversion price
for the Series D Preferred Stock is subject to adjustment based upon the
offering price of the Common Stock and the date of the closing for this
offering. All share amounts contained herein with respect to, or that include
shares of Common Stock issuable upon conversion of Series D Preferred Stock,
assume a public offering price of $11.00 per share and a closing date on or
prior to February 20, 1998. If the public offering price is lower, or the
closing date is after February 20, 1998, a larger number of shares of Series D
Preferred Stock would be issuable upon the conversion of the Series D Preferred
Stock. See "Description of Capital Stock," "Underwriting" and "Certain
Transactions."
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 December 31, 1997
had incurred cumulative net losses of $12.0 million. The Company expects such
losses to continue for the foreseeable future. The Company's cumulative
revenues are $10.3 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.
CUSTOMER CONCENTRATION
A small number of customers have historically accounted for a substantial
portion of the Company's revenues. Sales to the Company's four largest
customers accounted for approximately 75% of the Company's revenues in 1997.
During fiscal 1997, Glaxo Wellcome, Inc. and LifeScan, a subsidiary of Johnson
& Johnson, accounted for 60% and 15%, respectively, of the Company's revenues.
During fiscal 1996, Teijin, Ltd. and Zeneca Pharmaceuticals, Inc. accounted
for 49% and 23%, respectively, of the Company's revenues. No other customer
represented more than 10% of the Company's revenues for any of such periods.
The loss of or reduction or delay in orders from a significant customer could
adversely affect the Company's business, financial condition and operating
results. There can be no assurance that large purchases from these customers
will recur from year to year. See "Business--Collaborative Agreements" and
Note 2 of Notes to Financial Statements.
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. Additionally,
because the Company has contracted with a single manufacturer which
manufactures product for the Company in its facilities located in the Far
East, production of the AirWatch
7
<PAGE>
Monitor and the ENACT Reporter may be directly affected by the political and
economic conditions in the Far East. Although the Company believes it can find
alternate manufacturers for its products on relatively short notice, any
prolonged work stoppages, civil unrest or other inability of the manufacturer
to manufacture the Company's products, could materially adversely affect the
Company's business, financial condition or results of operations.
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 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. The Company has employment agreements with only a limited
number of key employees. See "Management--Executive Compensation--Employment
Agreements." 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
8
<PAGE>
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 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."
FUTURE DEPENDENCE UPON REIMBURSEMENT BY THIRD-PARTY PAYORS; POTENTIAL
REDUCTIONS IN REIMBURSEMENT BY THIRD-PARTY PAYORS
The Company expects that in the future a significant portion of its revenues
may be derived directly or indirectly from reimbursements by third-party
payors. Cost containment pressures are increasing in the health care industry
as third-party payors institute measures designed to limit payments to health
care providers. Such cost containment measures include reducing reimbursement
rates, limiting services and products covered, increasing utilization review
of services, negotiating prospective or discounted contract pricing, adopting
capitation strategies and seeking competitive bids. There can be no assurance
that such measures will not adversely affect the amounts or types of services
and products that may be reimbursable in the future, or that this trend will
not result in significant pressure on the price of the Company's products and
services. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government restrictions, all of which could materially decrease
the range of services and products covered or the reimbursement rates paid for
the Company's services or products. Any
9
<PAGE>
such reductions or changes could have a material adverse effect on the
Company's business, financial condition and operating results.
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."
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.
10
<PAGE>
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."
YEAR 2000 COMPLIANCE
Both the Company's internal operations and products use a significant number
of computer software programs and operating systems. To the extent that these
software applications contain source code that is unable to appropriately
interpret the upcoming calendar year 2000, some level of modification or
possibly even replacement of such source code or applications will be
necessary. The Company is in the process of identifying the software
applications that are not "Year 2000" compliant. Given the information known
at this time about the Company's systems, coupled with the Company's ongoing
efforts to upgrade or maintain business critical systems as necessary, it is
currently not anticipated that the "Year 2000" issue or related costs will
have a material adverse effect on the Company's business, financial condition
and results of operations. However, the Company is still analyzing its
software applications and those utilized by key suppliers and, to the extent
they are not fully "Year 2000" compliant, there can be no assurance that the
costs necessary to update software or potential systems interruptions would
not have a material adverse effect on the Company's business, financial
condition and results of operations.
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 31.9% 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
of 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. The Company will also expend up to $1.0 million of such net
proceeds for 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. See "Use
of Proceeds."
11
<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 $8.06
(assuming a public offering price of $11.00 per share and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company). 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 will be 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 December 31, 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 2,470,027 Restricted Shares of Common Stock
(2,292,033 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 2,757,575 Restricted Shares of Common Stock (2,757,575 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 5,734,859 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 3,389,533 shares of Common Stock and a note
convertible into an additional 171,788 shares of Common Stock,
12
<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."
13
<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 estimated
underwriting discounts and commissions and 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 (approximately $6.0 million), funding
advertising programs (approximately $4.0 million) and launching the Company's
pharmacy programs and managed care sales initiatives (approximately $5.0
million). The Company also intends to 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. The foregoing uses of the net proceeds are estimates
based on current projections and are subject to change. The actual amount of
the net proceeds of this offering expended for each purpose may vary
significantly depending on many factors, including the timing and success of
the Company's marketing and sales efforts, the rate at which the Company's
partners implement the Company's programs and the rate of patient enrollments
in such programs. Any proceeds 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 a portion of 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.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 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 at a weighted average exercise price of $4.95 per
share 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 estimated underwriting discounts and
commissions and offering expenses and the application of the net proceeds
therefrom as described in "Use of Proceeds." The pro forma and adjusted
capitalization also includes the effect of an imputed non-cash charge to
interest expense with an offsetting entry to additional paid-in capital of
$1,168,000 as a result of certain short-term borrowings becoming convertible
upon the consummation of this offering. See "Managements Discussion and
Analysis of Financial Condition and Results of Operations" and Note 5 of Notes
to Financial Statements. 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>
DECEMBER 31, 1997
----------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to stockholders--noncurrent................ $ 2,000 $ 1,000
Long-term capital lease obligations...................... 309 309
-------- -------
Total long-term obligations........................... 2,309 1,309
Stockholders' equity:
Preferred Stock, $0.001 par value, 2,000,000
authorized, none issued and outstanding, as adjusted.. -- --
Common Stock, $0.001 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............................. 8,595 39,700
Deferred compensation.................................. (259) (259)
Note receivable from stockholder....................... (32) (32)
Accumulated deficit.................................... (12,010) (13,178)
-------- -------
Total stockholders' equity (net capital deficiency)... (3,700) 26,240
-------- -------
Total capitalization................................. $ (1,391) $27,549
======== =======
</TABLE>
- --------
(1) Excludes (i) 783,529 shares of Common Stock issuable upon exercise of
options with a weighted average exercise price of $2.35 per share (ii)
816,571 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) 459,667 shares of Common Stock issuable upon the
conversion of convertible promissory notes in the aggregate principal
amount of $3,000,000. See "Management--Stock Plans" and Notes 5, 6 and 8
of Notes to Financial Statements.
15
<PAGE>
DILUTION
The pro forma negative net tangible book value of the Company at December
31, 1997 was $3.7 million, or $0.63 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 December 31, 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 December 31, 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 deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company), the adjusted pro forma net tangible book value of the Company
at December 31, 1997, would have been $26.2 million, or $2.94 per share. This
represents an immediate dilution in net tangible book value of $8.06 per share
to new investors purchasing shares in this offering and an immediate increase
in net tangible book value of $3.57 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 December
31, 1997................................................. $(0.63)
Increase per share attributable to new investors.......... 3.57
------
Pro forma net tangible book value per share after offering.. 2.94
------
Dilution per share to new investors......................... $ 8.06
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1997
(giving pro forma effect to the conversion of all outstanding shares of
Convertible Preferred Stock and the exercise of warrants to purchase
Convertible Preferred Stock which terminate upon completion of this offering)
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 December 31, 1997, and no conversion
of outstanding convertible promissory notes in the aggregate amount of $3.0
million. As of December 31, 1997, there were options outstanding to purchase a
total of 783,529 shares of Common Stock under the Company's stock option plan,
at a weighted average exercise price of $2.35 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 December 31, 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.
16
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data at December 31, 1996 and 1997 and for
each of the three years in the period ended December 31, 1997 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, 1994 and 1995 and for the year ended December 31,
1994 and the period from inception to December 31, 1993 are derived from the
audited financial statements not included herein. 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
(INCEPTION) TO YEARS ENDED DECEMBER 31,
DECEMBER, 31 ----------------------------------
1993 1994 1995 1996 1997
-------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues............. $ -- $ 140 $ 614 $ 3,096 $ 6,459
Operating costs and
expenses:
Cost of revenues......... -- -- -- 1,796 5,006
Research and
development............. 335 1,417 1,365 1,752 2,035
Sales and marketing...... -- -- 1,185 1,475 2,758
General and
administrative.......... 257 288 420 770 1,085
----- ------- ------- ------- -------
Total operating costs and
expenses.................. 593 1,705 2,970 5,793 10,884
----- ------- ------- ------- -------
Loss from operations....... (593) (1,565) (2,356) (2,697) (4,425)
Interest income (expense),
net....................... -- 9 (24) (110) (249)
----- ------- ------- ------- -------
Net loss................... $(593) $(1,556) $(2,380) $(2,807) $(4,674)
===== ======= ======= ======= =======
Pro forma net loss per
share (1)................. $ (0.79)
=======
Shares used in computing
pro forma net loss per
share (1)................. 5,934
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $1,018 $ 230 $ 787 $ (33) $ (2,731)
Total assets..................... 1,066 434 3,646 2,899 2,901
Notes payable to stockholders.... -- -- 1,000 3,000 4,000
Long-term capital lease
obligations..................... -- -- 69 243 309
Accumulated deficit.............. (593) (2,149) (4,529) (7,336) (12,010)
Total stockholders' equity
(net capital deficiency)........ 1,038 277 (80) (2,828) (4,350)
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing pro forma net loss per share.
17
<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 December 31, 1997 had incurred cumulative losses of $12.0
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 $10.3 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
18
<PAGE>
no assurance that the Company will generate meaningful revenue from these or
other programs, or that such revenues will have significant margins.
Upon the closing of this offering, outstanding borrowings totaling to $2.0
million will become convertible into shares of Common Stock. The conversion
price of such borrowings will be based on the offering price. To the extent
the market value of the shares issuable upon conversion of the borrowings
exceeds the $2.0 million carrying value of the borrowings, then the difference
will be recognized as a one-time, non-cash charge to interest expense at the
date the offering is consummated. Assuming an offering price of $11.00 per
share, the outstanding borrowings will be converted into approximately 288,000
shares of Common Stock with a market value of $3.2 million, resulting in an
imputed non-cash interest charge of $1.2 million. The Company anticipates
borrowing an additional $0.5 million with similar terms prior to the
consummation of this offering which, based on an offering price of $11.0 per
share, would result in an additional non-cash interest charge of $0.2 million
at the date this offering is consummated.
The conversion price of the Company's Series D Preferred Stock will be
adjusted based on the date of the closing of this offering and the per share
offering price. To the extent that this adjusted conversion price results in
the holders of Series D Preferred Stock receiving additional shares of Common
Stock upon conversion, the fair value of such incremental shares will be
deemed to be the equivalent of a Preferred Stock dividend. Any such deemed
dividend will be recorded at the time of conversion by offsetting charges and
credits to additional paid in capital, without any effect on total
stockholders' equity (net capital deficiency). There will be no effect on net
income (loss) from the conversion; however, the amount will reduce the income
allocable to Common Stock in the calculation of net income (loss) per share in
the period of conversion. If this offering price is $11.00 per share, the
Company will recognize a deemed dividend of $1.8 million at the date this
offering is consummated.
Neither the non-cash interest charge nor the non-cash deemed dividend
represents an amount guaranteed as a gain for the holders of the underlying
securities. The actual amounts of gain or loss realized by these investors
will be based on the price at which they are able to sell their shares of
Common Stock obtained upon conversion after their 180 day lock-up periods
expire, should they choose to sell their holdings.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Total revenues increased to $6.5 million for the year ended December 31,
1997 from $3.1 million for the year ended December 31, 1996, an increase of
$3.4 million or 109%. 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 $5.0 million for the year ended December 31,
1997 from $1.8 million for the year ended December 31, 1996, an increase of
$3.2 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 $2.0 million
for the year ended December 31, 1997 from $1.8 million for the year ended
December 31, 1996, an increase of $0.3 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 $2.8 million for the year ended
December 31, 1997 from $1.5 million for the year ended December 31, 1996, an
increase of $1.3 million or 87%. 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.
19
<PAGE>
The Company's general and administrative expenses increased to $1.0 million
for the year ended December 31, 1997 from $0.8 million for the year ended
December 31, 1996, an increase of 41%. The increase in absolute dollars from
the 1996 period to the 1997 period primarily reflects added administrative
capacity necessary to support Company growth.
Interest expense increased to $0.3 million from $0.2 million as a result of
increased borrowings under the Company's existing credit facilities.
The Company has not recorded an income tax expense (benefit) as the Company
has not been profitable to date. At December 31, 1997, the Company had net
operating loss carryforwards for federal and state income tax purposes of
approximately $10.4 million and $4.1 million, respectively, which expire at
various dates through 2012, 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.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues increased to $3.1 million for the year ended December 31,
1996 from $0.6 million for the year ended December 31, 1995. 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 for the year ended December 31, 1996 and
were negligible for the year ended December 31, 1995. 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 for the year
ended December 31, 1996 from $1.4 million for the year ended December 31,
1995, 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 for the year ended
December 31, 1996 from $1.2 million for the year ended December 31, 1995, an
increase of 24%. 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
for the year ended December 31, 1996 from $0.4 million for the year ended
December 31, 1995, an increase of 83%. The increases reflect growth in the
Company's infrastructure to support the commercial launch of the Company's
respiratory program in late 1995 and to support commercial operations in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
$2.4 million raised in private financings, $4.0 million of net borrowings from
stockholders and $5.1 million from corporate partners' equity investments. As
of December 31, 1997, the Company has $1.1 million of cash and $0.5 million
available for borrowing under a convertible note agreement with a stockholder.
Operations used net cash of $3.7 million during the year ended December 31,
1997, used net cash of $4.1 million in 1996 and generated a negligible amount
in 1995. Cash used in operations in the year ended December 31, 1997 was due
to increased operating activities offset in part by increased payables and
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.
Net cash provided by financing activities was $3.8, $1.9 and $2.9 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash
provided by financing activities was generated from the sale of
20
<PAGE>
common and preferred stock to individuals, employees and corporate partners
and through borrowings under credit facilities.
Of the $4.0 million of borrowings from stockholders, $2.5 million bears
interest at the prime rate, $1.0 million bears interest at the prime rate plus
1.75% and $0.5 million bears interest at LIBOR plus 2.5%. Of the outstanding
borrowings, $2.0 million is due on December 31, 1998 and becomes convertible
into a maximum of 333,333 shares of Common Stock on the closing of this
offering at the option of the lenders. The conversion price of such borrowings
will be based on the offering price. To the extent the market value of the
shares issuable upon conversion of the borrowings exceeds their $2.0 million
carrying value, the difference will be recognized as a one-time, non-cash
charge to interest expense at the date the initial public offering is
consummated. Assuming an offering price of $11.00 per share, the outstanding
borrowings will be converted into approximately 288,000 shares of Common Stock
with a market value of $3.2 million, resulting in an imputed non-cash interest
charge of $1.2 million. The Company anticipates borrowing an additional $0.5
million with similar terms prior to the consummation of the offering which,
based on an offering price of $11.00 per share, would result in an additional
non-cash interest charge of $0.2 million at the date the offering is
consummated. 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 Company's monitoring devices and reporters are manufactured by a single
supplier. Open purchase orders with this supplier were approximately $244,000
at December 31, 1997. The Company expects to take delivery of such inventory
during the first quarter of 1998.
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.
YEAR 2000 COMPLIANCE
Both the Company's internal operations and products use a significant number
of computer software programs and operating systems. To the extent that these
software applications contain source code that is unable to appropriately
interpret the upcoming calendar year 2000, some level of modification or
possibly even replacement of such source code or applications will be
necessary. The Company is in the process of identifying the software
applications that are not "Year 2000" compliant. Given the information known
at this time about the Company's systems, coupled with the Company's ongoing
efforts to upgrade or maintain business critical systems as necessary, it is
currently not anticipated that the "Year 2000" issue or related costs will
have a material adverse effect on the Company's business, financial condition
and results of operations. However, the Company is still analyzing its
software applications and those utilized by key suppliers and, to the extent
they are not fully "Year 2000" compliant, there can be no assurance that the
costs necessary to update software or potential systems interruptions would
not have a material adverse effect on the Company's business, financial
condition and results of operations.
21
<PAGE>
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. 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
program using its health monitoring and reporting system (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. Based on preliminary marketing
efforts, patient surveys and discussions with collaborative partners, the
Company believes that the ENACT System is likely to appeal both to patients
who are increasingly taking a more active role in managing their own health
and managed care organizations seeking cost savings. 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
("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. A study
by the University of California, San Francisco reported that direct medical
costs for chronic disease treatment, which include physician fees, hospital
care, emergency services and medication, totaled $425 billion in 1990. The
same study indicated that 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
22
<PAGE>
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 are highly labor-intensive.
Moreover, the data gathered by case managers tends to be either subjective or
subject
23
<PAGE>
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.
24
<PAGE>
. 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 may 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
blood glucose meters, home blood pressure monitors and advanced
thermometers. 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 may be suited for home monitoring programs utilizing
the ENACT System such as chronic obstructive pulmonary disease and
medication compliance.
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, which measures and records a patient's lung function
levels, for the Company's asthma program, or by third parties, such as blood
glucose monitors, which measure and record patients' blood glucose levels,
manufactured by Johnson & Johnson's LifeScan subsidiary. The Company has
designed the ENACT System so that it may accommodate the collection and
monitoring of physiological data on patients' health states across numerous
disease states, including cardiovascular disease. 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.
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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 (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
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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 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 asthma, diabetes and cardiovascular disease.
Currently, the Company (i) has begun commercial distribution of its AirWatch
Monitor to a limited number of patients, (ii) is preparing for the commercial
launch of its diabetes product in collaboration with LifeScan and (iii) is
developing products for cardiovascular and other disease markets. To date, the
Company has not generated any revenue from sales of products or services in
the diabetes or cardiovascular disease markets.
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 1993 and 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
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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 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 has initially targeted large
pharmaceutical companies within the asthma field for sales of its AirWatch
Monitor and related services based on the belief that utilization of these
products and services by such companies will help create a greater awareness
of the Company's products. The following companies have purchased products and
services from the Company since the beginning of fiscal 1996 in connection
with various clinical and marketing trials: Glaxo Wellcome Inc., Zeneca
Pharmaceuticals, Inc., Abbott Laboratories, Boehringer Ingelheim International
GMBH, Novartis, Kaiser Permanente, Merck & Co. and the National Jewish Center
for Immunology and Respiratory Medicine. As the Company attempts to capitalize
on this greater product awareness by funding marketing programs with a portion
of the proceeds of this offering, the Company anticipates that its future
customer base will contain proportionately more payors and patients. 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
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(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 Diabetes Control and Complications Trial
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%.
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
There are currently a variety of monitors which collect physiological data
on patients' health states across numerous chronic disease fields. The Company
has designed the ENACT System to interact with such medical devices or with
new devices created by the Company or third parties by extracting the data
from these devices and transmitting the data via a phone line to Care Central
for processing, similar to the ENACT Reporter developed in collaboration with
LifeScan for use with LifeScan's products. Based on preliminary marketing
efforts, patient surveys and discussions with collaborative partners, 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.
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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.
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, a manufacturer of home-
based blood glucose monitoring systems, and a related stock
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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 payments of $1.8 million, all of which has been
received by the Company, in connection with the establishment of a pilot
program. 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. See "Certain Transactions."
ALZA. The Company and ALZA Corporation, a designer and producer of
therapeutic drug delivery systems ("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 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 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. In addition,
ALZA has made equity investments in the Company totaling approximately $2.0
million and subject to certain conditions, made a $2.0 million line of credit
available to the Company. 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. See "Certain Transactions."
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. The Company
received non-refundable up-front payments of $2.5 million and may receive up
to an additional $2.0 million upon achievement of certain milestones by
Teijin. 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.
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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.
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.)
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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.
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
34
<PAGE>
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.
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 December 31, 1997, the Company had 36 employees and three nearly full-
time contractors, comprising nine in sales and marketing, 15 in systems
development and operations, five in product development, six in customer
service and four in administration.
35
<PAGE>
FACILITIES
The Company's principal administrative, sales and marketing and product
development activities are conducted at a 4,500 square foot facility in
Mountain View, California that the Company occupies pursuant to a lease that
expires in October 1998. The Company has a short term lease, which will expire
on February 28, 1998, on an additional 2,200 square foot facility in Palo
Alto, California which is used for research and development activities. The
Company's Care Central database is located at the Mountain View site, and the
Company is in the process of completing a fully redundant system in a 685
square foot facility in San Diego, California, leased through December 1999.
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 in order to consolidate all of the Company's Northern
California operations in a single facility and to facilitate future expansion
of its workforce. There can be no assurance that the Company will be able to
locate additional space, or that such space will be available on reasonable
commercial terms.
LEGAL MATTERS
The Company is not a party to any material legal proceedings.
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<PAGE>
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
December 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Matthew H. L. Sanders ............... 45 Chairman of the Board, President and Chief
Executive Officer
Gilbert S. Mott, Jr. ................ 46 Executive Vice President and Director
Eitan M. Fenson, Ph.D. .............. 44 Vice President, Information Services
John H. Hyle......................... 48 Vice President, Sales and Marketing
Chris A. Tacklind.................... 41 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, a maker of graphics supercomputers ("Ardent"), 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
37
<PAGE>
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 Chief Executive Officer and a Director of ALZA
Corporation and a designer and producer of therapeutic drug delivery systems
since August 1993. Dr. Mario was the Co-Chairman of ALZA Corporation from
August 1993 to November 1997 and has been the Chairman of ALZA Corporation
since November 1997. 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.
38
<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 1996, 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 March 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 $5.00 per share. In addition,
the Company has adopted, subject to shareholder approval, the 1997 Outside
Directors Stock Option Plan, which provides for formula-based grants of
options to nonemployee directors. See "--Stock Incentive Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Messrs. Wager, Cooley and Mario.
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of
directors or compensation committee. The Compensation Committee makes
recommendations regarding the Company's employee stock plans and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
EXECUTIVE COMPENSATION
The following table shows the compensation received in the most recent
fiscal year by the Company's President and Chief Executive Officer and by the
Company's other four most highly compensated executive officers (collectively,
the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION
--------------------------- ---------- --------- ------------
<S> <C> <C> <C>
Matthew H.L. Sanders......................... $180,000 $36,000 $ 0
Chief Executive Officer and President
Gilbert S. Mott, Jr.......................... 238,000 16,000 12,000(1)
Executive Vice President
Chris A. Tacklind............................ 144,000 16,000 0
Vice President, Advanced Development and
Secretary
Eitan M. Fenson.............................. 135,000 16,000 0
Vice President, Information Services
Henry W. Evans............................... 120,000 16,000 0
Chief Financial Officer
</TABLE>
- --------
(1) Represents a monthly expense allowance paid by the Company.
39
<PAGE>
STOCK INCENTIVE PLANS
None of the Named Executive Officers received grants of options to purchase
the Company's Common Stock during the fiscal year ended December 31, 1997.
The following table sets forth information concerning stock options held as
of December 31, 1997 by the Named Executive Officers. There were no option
exercises by any Named Executive Officers during the fiscal year ended
December 31, 1997.
AGGREGATE OPTION EXERCISES IN THE 1997 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 12/31/97 (1) 12/31/97 ($)(2)
------------------------- -------------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Matthew H. L. Sanders......... -- -- -- --
Gilbert S. Mott, Jr........... 366,666 33,334 $3,244,995 $ 295,006
Chris A. Tacklind............. -- -- -- --
Eitan M. Fenson............... 20,833 29,167 $ 83,332 $116,668
Henry W. Evans................ 12,500 17,500 $ 50,000 $ 70,000
</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) Calculated by determining the difference between the fair value of the
securities underlying the option at December 31, 1997 ($9.00 per share)
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 December 31, 1997, options to purchase an aggregate
556,584 shares of Common Stock were outstanding under the 1995 Option Plan of
which 439,658 shares underlying unexercised options were no longer subject to
the Company's right of repurchase. Options granted under the 1995 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 904,000
shares of Common Stock for issuance under the Company's 1997 Option Plan. As
of December 31, 1997, there were outstanding options to purchase an aggregate
of 226,945 shares of Common Stock under the 1997 Plan of which 66,459 shares
underlying unexercised options were no longer subject to the Company's right
of repurchase. 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. Generally, 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
40
<PAGE>
terminated sooner pursuant to the provisions of the 1997 Option 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 Outside Directors Stock Option Plan. The 1997 Outside 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 25th 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 offering periods of approximately 24 months in duration. Each
offering period will be divided into four consecutive purchase periods, each
of which is generally six months long. 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 on the
date this offering is completed and will end on January 31, 2000.
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 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.
41
<PAGE>
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.
42
<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 approximately $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
December 31, 1997, the Company has incurred commission expenses of $423,000
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, which was amended in
November 1997. The Company has drawn down $1.5 million under such Convertible
Note which becomes convertible into 204,545 shares of Common Stock upon the
consummation of this offering.
In October 1996, Nippon Enterprises Development agreed to loan the Company
$500,000 under the terms of a Convertible Note, which was amended in November
1997 to provide for a commitment of an additional $500,000. The Company has
not drawn down the additional $500,000 under such Convertible Note. The
outstanding borrowings become 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.
43
<PAGE>
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 Shares are 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 $10.0 million. 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.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of December 31, 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.............. 885,801(3) 15.0% 9.9%
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(5) 7.1 4.7
Corporation.......................
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
First Marathon Securities, Ltd..... 305,300(6) 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(7) 8.1 5.4
Gilbert S. Mott, Jr................ 400,000(8) 6.3 4.3
Eitan M. Fenson, Ph.D. ............ 125,000(9) 2.1 1.4
Wayne C. Wager..................... 78,733(10) 1.3 *
A. Crawford Cooley................. 126,500(11) 2.1 1.4
Ernest Mario, Ph.D. ............... 656,560(12) 10.7 7.2
Henry W. Evans..................... 95,000(13) 1.6 1.0
All directors and executive 3,365,545(14) 56.9 37.8
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
December 31, 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.
45
<PAGE>
(3) Includes 284,000 shares of Common Stock held by affiliates of R.D.
Merrill, 204,545 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 issuable upon exercise
of stock options 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) Johnson & Johnson Development Corporation is a wholly-owned subsidiary of
Johnson & Johnson, a public corporation.
(6) The beneficial owner of the shares held by First Marathon Securities,
Ltd. is Peripatetic Investments, Ltd. ("Peripatetic"). The sole owner,
director and shareholder of Peripatetic is Robert Disbrow, an individual.
(7) 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.
(8) Includes 400,000 shares of Common Stock issuable upon exercise of stock
options, none of which are subject to a right of repurchase in favor of
the Company on the date 60 days from December 31, 1997.
(9) Includes 50,000 shares of Common Stock issuable upon exercise of stock
options, of which 26,388 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997.
(10) Includes 20,000 shares of Common Stock issuable upon exercise of stock
options, of which 8,833 shares were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997.
(11) 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.
(12) Includes 25,000 shares of Common Stock issuable upon exercise of stock
options on the date 60 days from December 31, 1997, and 459,771 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.
(13) Includes 30,000 shares of Common Stock issuable upon exercise of stock
options, of which 15,833 were unvested and subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997 and 12,639 shares of unvested Common Stock subject to a right of
repurchase in favor of the Company on the date 60 days from December 31,
1997.
(14) 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 December 31,
1997, 65,500 shares held of record by trusts for which an officer or
director is trustee and 631,560 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.
46
<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 December 31, 1997, there were 5,912,853 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 and a holder of a note convertible into an additional 171,788 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.
47
<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.
48
<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 December 31, 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 2,470,027 Restricted Shares of Common Stock
(2,292,033 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 2,757,575 Restricted Shares of Common Stock (2,757,575 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
5,734,859 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."
49
<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
50
<PAGE>
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 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 5,734,859 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 LLP ("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 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, 1996 and 1997, and
for each of the three years in the period ended December 31, 1997, 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.
51
<PAGE>
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 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.
52
<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, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 6, 1998
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
----------------- DECEMBER 31,
1996 1997 1997 (NOTE 6)
------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 1,048 $ 1,088
Accounts receivable, net of allowance for
doubtful accounts of $79 and $39 in 1996
and 1997, respectively.................... 1,162 139
Inventories................................ 224 407
Deferred financing costs................... -- 530
Other current assets....................... 17 47
------- --------
Total current assets......................... 2,451 2,211
Property and equipment, net.................. 435 679
Deposits..................................... 13 11
------- --------
$ 2,899 $ 2,901
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET
CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable........................... $ 579 $ 1,179
Accrued liabilities........................ 153 240
Accrued financing costs.................... -- 470
Current portion of capital lease
obligations............................... 180 332
Deferred revenue........................... 1,572 721
Convertible notes payable to stockholder... -- 2,000
------- --------
Total current liabilities.................... 2,484 4,942
Long-term capital lease obligations.......... 243 309
Note payable to stockholder.................. 1,000 1,000
Convertible notes payable to stockholders.... 2,000 1,000
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,
1996 and 3,202,742 shares issued and
outstanding at December 31, 1997;
2,000,000 shares authorized and no shares
issued and outstanding pro forma
(aggregate liquidation preference of
$7,742,000 at December 31, 1997), at
amounts paid in........................... 4,374 7,492 $ --
Common Stock, $0.001 par value, 20,000,000
shares authorized, 2,389,500 and 2,391,900
shares issued and outstanding at
December 31, 1996 and 1997, respectively;
50,000,000 shares authorized, 5,912,853
shares issued and outstanding pro forma... 205 106 6
Additional paid-in capital................. -- 353 8,595
Deferred compensation...................... (39) (259) (259)
Note receivable from stockholder........... (32) (32) (32)
Accumulated deficit........................ (7,336) (12,010) (12,010)
------- -------- --------
Total stockholders' equity (net capital
deficiency)................................. (2,828) (4,350) $ (3,700)
------- -------- ========
$ 2,899 $ 2,901
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Product sales.............. $ -- $ 1,162 $ 4,075
Service revenue............ -- 414 1,204
Contract and other reve-
nue....................... 614 1,520 1,180
------- ------- -------
Total revenue.............. 614 3,096 6,459
Operating costs and ex-
penses:
Cost of product sales.... -- 877 3,498
Cost of service revenue.. -- 435 1,071
Cost of contract and
other revenue........... -- 484 437
Research and develop-
ment.................... 1,365 1,752 2,035
Sales and marketing...... 1,185 1,475 2,758
General and administra-
tive.................... 420 770 1,085
------- ------- -------
Total operating costs and
expenses.................. 2,970 5,793 10,884
------- ------- -------
Loss from operations....... (2,356) (2,697) (4,425)
Interest income............ 29 61 86
Interest expense........... (53) (171) (335)
------- ------- -------
Net loss................... $(2,380) $(2,807) $(4,674)
======= ======= =======
Pro forma net loss per
share..................... $ (0.48) $ (0.79)
======= =======
Shares used in computing
pro forma net loss per
share..................... 5,803 5,934
======= =======
</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 ADDITIONAL RECEIVABLE EQUITY
PREFERRED COMMON PAID-IN DEFERRED FROM ACCUMULATED (NET CAPITAL
STOCK STOCK CAPITAL COMPENSATION STOCKHOLDER DEFICIT DEFICIENCY)
----------- ------ ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 47 100 (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................... 4,374 105 100 (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................. 3,118 -- -- -- -- -- 3,118
Issuance of 2,400
shares of Common
Stock upon exercise
of options........... -- 1 -- -- -- -- 1
Deferred compensation
related to grant of
stock options........ -- -- 253 (253) -- -- --
Amortization of
deferred compensation
..................... -- -- -- 33 -- -- 33
Net loss.............. -- -- -- -- -- (4,674) (4,674)
------ ---- ---- ----- ---- -------- -------
Balance at December 31,
1997 .................. $7,492 $106 $353 $(259) $(32) $(12,010) $(4,350)
====== ==== ==== ===== ==== ======== =======
</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>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................... $(2,380) $(2,807) $(4,674)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 49 199 329
Amortization of deferred compensation............ 28 33 33
Issuance of Common Stock for services............ 19 -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (53) (1,109) 1,023
Inventories.................................... (90) (134) (183)
Deferred financing costs....................... -- -- (530)
Other assets................................... (69) 39 (28)
Accounts payable, accrued financing costs and
accrued liabilities........................... 498 154 1,157
Deferred revenue............................... 2,020 (448) (851)
------- ------- -------
Net cash provided by (used in) operating
activities........................................ 22 (4,073) (3,724)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment, net........... (21) (34) (73)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of Preferred and Common
Stock............................................. 1,976 26 3,119
Proceeds from issuance of notes payable............ 1,500 2,000 1,000
Repayment of note payable.......................... (500) -- --
Principal payments on capital lease obligations.... (33) (155) (282)
------- ------- -------
Net cash provided by financing activities.......... 2,943 1,871 3,837
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 2,944 (2,236) 40
Cash and cash equivalents at beginning of period... 340 3,284 1,048
------- ------- -------
Cash and cash equivalents at end of period......... $ 3,284 $ 1,048 $ 1,088
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES
Acquisition of equipment with capital lease
financing......................................... $ 84 $ 450 $ 500
======= ======= =======
Deferred compensation related to grant of stock
options........................................... $ 100 $ -- $ --
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest............................. $ 53 $ 110 $ 260
======= ======= =======
Issuance of Common Stock for stockholder note...... $ -- $ 32 $ --
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
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.
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, 1996 and 1997.
CONCENTRATION OF CREDIT RISK
The Company has sold its products and services directly to major
pharmaceutical companies under contractual arrangements and to 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. Revenues from customers representing 10% or more of total revenue
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Source:
Customer A...................................... 81% 49% 2%
Customer B...................................... -- 23% 6%
Customer C...................................... -- -- 60%
Customer D...................................... -- -- 15%
</TABLE>
F-7
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
Effective December 31, 1997, the Company adopted statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented.
In accordance with SFAS 128, basic net loss per share has been computed
using the weighted-average number of shares of Common Stock outstanding during
the period, except that pursuant to Securities and Exchange Commission 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), even
though the effect is anti-dilutive as a result of the Company's net loss
position.
Pro forma net loss per share as presented in the Statement of Operations has
been computed as described above and also gives effect to the conversion of
the convertible Preferred Stock not included in the above calculation 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.
F-8
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of shares used in the calculation of basic net loss per
share and pro forma net loss per share follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss................................ $(2,380,000) $(2,807,000) $(4,674,000)
=========== =========== ===========
Weighted average shares of Common Stock
outstanding............................ 2,192,033 2,259,516 2,390,237
Shares related to Staff Accounting
Bulletin topic 4D:
Stock options......................... 153,818 153,818 153,818
Preferred Stock....................... 462,164 462,164 462,164
----------- ----------- -----------
Shares used in computing net loss per
share.................................. 2,808,015 2,875,498 3,006,219
=========== =========== ===========
Net loss per share...................... $ (0.85) $ (0.98) $ (1.55)
=========== =========== ===========
Pro Forma
Calculation of shares outstanding for
computing pro forma net loss per share:
Shares used in computing net loss per
share................................ 2,875,498 3,006,219
Adjusted to reflect the effect of the
assumed conversion of Preferred
Stock................................ 2,927,369 2,927,369
----------- -----------
Shares used in computing pro forma net
loss per share......................... 5,802,867 5,933,588
=========== ===========
Pro forma net loss per share............ $ (0.48) $ (0.79)
=========== ===========
</TABLE>
Diluted net loss per share has not been presented as, due to the Company's
net loss position, it is anti-dilutive. Had the Company been in a net income
position, diluted earnings per share would have included the shares used in
the computation of pro forma net loss per share as well as an additional
590,924 shares related to the Company's outstanding stock options and warrants
(as determined using the treasury stock at the estimated public offering
price) and 171,788 shares related to convertible notes payable. See also Note
5 for a description of contingently convertible notes payable.
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 31, 2001, or after termination
under certain conditions. During the years ended December 31, 1996 and 1997,
the Company recognized commission expense of $88,000 and $335,000,
respectively, pursuant to this agreement. At December 31, 1996 and 1997, the
Company owed $70,000 and $127,000 to ALZA related to commissions. 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 non-refundable payments
of $2.5 million which are being recognized as revenue as the Company's
obligations under the contract are fulfilled, including delivery of computer
equipment, related technology and technical support. The Company may also
receive up to $2.0 million upon the achievement of certain milestones by
Teijin, including the negotiation of a distribution agreement between the
parties. No milestone payments have been earned or received to date. During
the years ended
F-9
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1995, 1996 and 1997, revenue totaling $500,000, $1.5 million and
$156,000, respectively, was recognized pursuant to this agreement. At December
31, 1997, $324,000 is included in deferred revenue. 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 pre-commercial development of its
diabetes product, manufacture a specified number of pilot production units,
and provide pre-commercial monitoring and reporting services for a specified
number of patients. In exchange, the Company is entitled to receive $1.8
million, of which $1.0 million was received and recognized as revenue upon
completion of certain pre-commercial development activities and the delivery
of the pilot production units in 1997. The remaining $800,000 was received in
January 1998 and will be recognized as revenues as the Company fulfills its
obligations to provide pre-commercial monitoring and reporting services under
the agreement. Additionally, the Company issued 250,000 shares of Series D
Preferred Stock at $12.00 per share to Johnson & Johnson for gross proceeds of
$3.0 million (see Note 6).
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures.................................... $ 4 $ 10
Computers and purchased software.......................... 737 1,165
------ -------
741 1,175
Less accumulated depreciation............................. (306) (496)
------ -------
Property and equipment, net............................... $ 435 $ 679
====== =======
</TABLE>
Computers and purchased software include approximately $1.0 million recorded
under capital leases at December 31, 1997 ($628,000 at December 31, 1996). The
related accumulated amortization totaled approximately $444,000 at December
31, 1997 ($231,000 at December 31, 1996).
4. COMMITMENTS
OPERATING LEASE COMMITMENTS
The Company leases its facilities under agreements expiring in October 1998.
Rent expense was approximately $48,000, $115,000 and $189,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1997,
minimum rental payments under operating leases were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998..................................................... $123
1999..................................................... 10
----
$133
====
</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.
F-10
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital leases are as follows at
December 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fiscal year ended
1998...................................................... $388
1999...................................................... 255
2000...................................................... 74
----
Total minimum lease payments................................ 717
Less amount representing interest........................... (76)
----
Present value of net minimum lease payments................. 641
Less current portion........................................ 332
----
Long-term portion........................................... $309
====
</TABLE>
PURCHASE COMMITMENTS
The Company's monitoring devices and reporters are currently manufactured by
a single supplier with significant operations in Asia. 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. Purchase
commitments for inventory at December 31, 1997 were approximately $244,000.
The Company expects to take delivery of such inventory during the first
quarter of 1998.
5. CREDIT FACILITIES
The Company has a $2.0 million line of credit with ALZA (see Note 2), all of
which was outstanding at December 31, 1996 and 1997. Borrowings under the line
of credit must be repaid by June 30, 2000. Interest is payable quarterly at
the then current prime rate (8.5% at December 31, 1997). During 1996, the line
of credit was modified to permit ALZA to convert $1.0 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 $1.0
million of convertible borrowings increased to prime plus 1.75% on June 30,
1997.
In October 1996, the Company established $2.0 million of credit facilities
with two stockholders. The credit facilities were originally due to expire on
December 31, 1997, but in November 1997 were extended to December 31, 1998. At
December 31, 1996 and 1997, $1.0 million and $2.0 million, respectively, of
borrowings were outstanding under the credit facilities. The credit facilities
are subordinated to the outstanding borrowings described in the paragraph
above and bear interest at the prime rate. The borrowings become convertible
into the class of equity securities issued in an offering by the Company which
generates gross proceeds to the Company of at least $10.0 million (a
"Qualified Offering"). Initially, the borrowings were to become convertible at
80% of the price per share paid in a Qualified Offering, however in connection
with the November 1997 extension of the credit facilities, the conversion
price was modified for borrowings outstanding as of that date ($1.0 million)
to 50%, and for any new borrowings to 75%, of the price paid in a Qualified
Offering. In no case will the conversion price be less than $6.00 per share.
To the extent that the value of the shares issuable upon conversion of the
outstanding borrowings exceeds the carrying value of such borrowings, then the
difference will be recognized as an imputed, non-cash charge to interest
expense. Thus if the Company's proposed initial public offering (the
"Offering") is consummated at an $11.00 per share price, the $2.0 million of
outstanding borrowings will become convertible into approximately 288,000
shares of Common Stock with a market value of $3.2 million, resulting in an
imputed, non-cash interest charge of $1.2 million which will be recognized
upon
F-11
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the closing of the Offering. On December 31, 1997, one of the lenders
increased the credit facility by $500,000 which remains available for
borrowing at an interest rate of LIBOR plus 2.5% (8.5% at December 31, 1997).
Simultaneously the lender amended the interest rate on $500,000 of outstanding
borrowings to LIBOR plus 2.5%.
The carrying value of the above obligations approximate their fair value
based on prevailing interest rates.
6. STOCKHOLDERS' EQUITY
In November 1997, the Board of Directors authorized the Company to proceed
with 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
December 31, 1997 will automatically convert into 3,389,533 shares of Common
Stock. The conversion price of outstanding shares of Series D Preferred Stock
is dependent on the initial public offering price as discussed below.
Unaudited pro forma stockholders' equity (net capital deficiency), as adjusted
for the assumed conversion of all outstanding shares of Convertible Preferred
Stock and for the assumed exercise of warrants to purchase 131,420 shares of
Convertible Preferred Stock which terminate upon completion of the Offering,
and their related conversion to Common Stock is set forth on the accompanying
balance sheet. Concurrent with the closing of the Offering, the Company
intends 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.
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock consists of the following at December 31, 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 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 adjusted based upon the date of the closing of a Qualified
Offering and the price per share paid in such offering, but in no event will
be less than $5.25 per share. To the extent the adjusted conversion price
results in the holders of Series D Preferred Stock receiving in excess of
275,373 shares of Common Stock upon conversion, then the fair value of the
incremental shares is deemed to be the equivalent of a preferred stock
dividend. Any such deemed dividend will be recorded at the time of conversion
by offsetting charges and credits to additional paid in capital, without any
effect on total stockholders' equity (net capital deficiency). There will no
effect on net income (loss) from the conversion. However, the amount will
reduce the income allocable to Common Stock, or increase the loss allocable to
Common Stock, in the calculation of net income (loss) per share in the period
of the conversion. If the Company's proposed initial public offering is
consummated at an $11.00 per share price, the Series D Preferred Stock will
convert into 462,164 shares of Common Stock with a market value of $5.1
million, resulting in a deemed non-cash dividend of $1.8 million.
Additionally, shares of Preferred Stock automatically convert into Common
Stock upon completion of an underwritten public offering of Common Stock under
the Securities Act of 1933 in which the Company receives at least $10.0
million 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-12
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Series D preferred stockholders are entitled to receive a stock dividend of
one share of Series D Preferred Stock if the Company has not completed a
Qualified Offering within 210 days following the date of the first issuance of
any Series D Preferred Stock (the "Series D Stock Dividend"), or February 20,
1998. Should the Series D Stock Dividend occur prior to the close of a
Qualified Offering, the formula by which the Series D Preferred Stock
conversion price is determined will be modified such that the number of shares
of Common Stock issuable upon conversion will be unchanged as a result of the
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 the Company's right of
repurchase which generally expires ratably over three years from date of
issuance. At December 31, 1996 and 1997, 65,222 and 18,232 shares were subject
to repurchase at their original issue prices.
The Company has reserved shares of Common Stock for issuance as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Outstanding stock options..................................... 783,529
Future grants of stock options................................ 816,571
Outstanding Common Stock warrants............................. 60,000
Conversion of Preferred Stock and warrants.................... 3,688,213
Conversion of notes payable to stockholders................... 505,121
---------
5,853,434
=========
</TABLE>
F-13
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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. The
Purchase Plan will become effective following the consummation of the
Offering.
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 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 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 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.
At December 31, 1997, the warrants outstanding have a weighted average
exercise price of $3.55 and a weighted average remaining contractual life of
41 months.
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
F-14
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of stock of the Company. Options are immediately exercisable, however shares
issued pursuant to options are subject to the Company's right of repurchase
which lapses over periods determined by the board of directors (generally over
three 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.
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.
Activity under the option plans 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.................. 792,000 -- --
Options granted at exercise prices
equal to fair value................ (231,000) 231,000 $5.00
Options exercised................... -- (2,400) $0.50
Options canceled.................... 18,571 (18,571) $2.69
-------- --------
Balance at December 31, 1997.......... 691,571 783,529 $2.35
======== ========
</TABLE>
At December 31, 1997 508,517 shares underlying unexercised options were no
longer subject to the Company's right of repurchase. Stock options outstanding
at December 31, 1997 had exercise prices and remaining contractual lives as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------------------------
WEIGHTED- UNDERLYING
AVERAGE SHARES NOT
EXERCISE NUMBER REMAINING SUBJECT TO
PRICES OF SHARES CONTRACTUAL LIFE REPURCHASE
-------- --------- ---------------- ----------
(IN YEARS)
<S> <C> <C> <C>
$0.15 400,000 7.16 366,667
$0.50 30,584 8.19 16,332
$5.00 352,945 9.23 125,518
------- -------
783,529 508,517
======= =======
</TABLE>
F-15
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company adopted SFAS 123. 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,
1996 and 1997 was estimated at the date of grant using the minimum value
method with the following weighted-average assumptions: risk-free interest
rates for 1995, 1996 and 1997 of 6.30%, 5.74% and 5.5%, respectively, an
expected option life of three years, and no dividends. The weighted-average
fair value of options granted in 1995, 1996 and 1997 was $0.03, $0.05 and
$2.01 per share. The weighted-average fair value of options granted in 1996 at
exercise prices in excess of fair value was negligible. For purposes of pro
forma disclosures, the estimated fair value of options is amortized to pro
forma net income (loss) over the options' vesting period. The Company's pro
forma net loss and pro forma net loss per share were $4.8 million and $0.81
for the year ended December 31, 1997. The effect of applying the minimum value
method to 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.
7. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $10.4 million and $4.1
million, respectively. At December 31, 1997, the Company also has federal and
California research and development tax credit carryforwards of approximately
$288,000. The federal net operating loss and credit carryforwards expire at
various dates beginning in the year 2007 through 2012, if not utilized. The
State of California net operating losses will expire at various dates
beginning in 1997 through 2002, 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 net operating losses and
credits before utilization.
Deferred income taxes reflect the net tax 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,
------------------------
1996 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward................. $ 2,500,000 $ 3,770,000
Research and development credit carryforward.... 200,000 288,000
Deferred revenue................................ 200,000 395,000
Other........................................... -- 277,000
----------- -----------
Total deferred tax assets....................... 2,900,000 4,730,000
Valuation allowance............................. (2,900,000) (4,730,000)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased by $984,000, $1,050,000 and $1,830,000 for
the fiscal years ended 1995, 1996 and 1997, respectively.
F-16
<PAGE>
BETTER INFORMATION--
BETTER UNDERSTANDING
[Picture of a smiling child with a doctor]
<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.............................................................. 14
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 22
Management............................................................... 37
Certain Transactions..................................................... 43
Principal Stockholders................................................... 45
Description of Capital Stock............................................. 47
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 50
Legal Matters............................................................ 51
Experts.................................................................. 51
Additional Information................................................... 52
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
, 1998
-------
SALOMON SMITH BARNEY
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...................................... 39,782
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................................................... 136,532
--------
Total......................................................... $750,000
========
</TABLE>
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 10.1) 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 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.
II-1
<PAGE>
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 40,000
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 $800,000.
(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. In August 1996, the Registrant cancelled 36,163 shares subject
to such warrant.
(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 to two sophisticated
investors Convertible Promissory Notes which were amended in November and
December 1997, to increase the aggregate amount of loan commitments from
$2,000,000 to $2,500,000 of which $2,000,000 is outstanding. Such
outstanding borrowings will become convertible upon the completion of this
offering into 287,878 shares of Common Stock (or 348,484 shares of Common
Stock if the Company draws down the entire $2,500,000) at a weighted
average price of $6.95 per share.
(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 December 31, 1997, the Registrant issued options
to purchase an aggregate of 919,000 shares of Common Stock under the
Company's stock option plans, of which options to purchase 116,900 shares
have been exercised at a weighted average exercise price of $2.119 per
share.
(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.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following is a list of exhibits filed herewith as part of this
amendment to the 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 Amended 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 Corporation dated August 29, 1995.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<C> <S>
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.
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by Amendment.
** Filed with this Amendment 2. Exhibits not marked have been previously
filed.
+ As proposed to be filed with the Secretary of State of the State of
Delaware prior to the effectiveness of this offering.
++ Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of
Exhibit have been omitted and are marked by an asterisk.
(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 Amendment to the
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 15th day of January 1998.
Enact Health Management Systems
/s/ Henry Evans
By: _________________________________
HENRY EVANS
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on January 15, 1998 by the
following persons in the capacities indicated.
SIGNATURE TITLE
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)
Chris Tacklind* Director
- -------------------------------------
(CHRIS TACKLIND)
Gilbert S. Mott* Director
- -------------------------------------
(GILBERT S. MOTT)
Wayne Wager* Director
- -------------------------------------
(WAYNE WAGER)
A. Crawford Cooley* Director
- -------------------------------------
(A. CRAWFORD COOLEY)
Ernest Mario* Director
- -------------------------------------
(ERNEST MARIO)
/s/ Henry Evans
*By: ________________________________
HENRY EVANS, ATTORNEY-IN-FACT
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 January 6,
1998, in Amendment No. 2 to 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
January 15, 1998
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
Year ended December 31,
1997................... $ 79 $(28) $(12) $ 39
</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, LLP, 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 Amended 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 Corporation 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
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, LLP, (included in Exhibit
5.1).
24.1 Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by Amendment.
** Filed with this Amendment 2. Exhibits not marked have been previously filed.
+ As proposed to be filed with the Secretary of State of the State of Delaware
prior to the effectiveness of this offering.
++ Exhibit has been filed separately with the Commission pursuant to an
application for confidential treatment. The confidential portions of Exhibit
have been omitted and are marked by an asterisk.
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
ENACT HEALTH MANAGEMENT SYSTEMS
DELAWARE CORPORATION
FIRST: The name of this corporation is ENACT Health Management Systems
-----
Delaware Corporation (hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Incorporating Services, Ltd., 15 East North Street, in the
City of Dover, County of Kent. The name of the registered agent at that address
is Incorporating Services, Ltd.
THIRD: 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 Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
------
have authority to issue is One Thousand (1,000) shares of Common Stock, par
value $0.001 per share (the "Common Stock").
FIFTH: The name and mailing address of the incorporator is:
-----
Lynn Rooke
c/o Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
SIXTH: The business and affairs of the Corporation shall be managed by or
-----
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by Statute or by this Certificate of
Incorporation or the Bylaws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as
<PAGE>
may be exercised or done by the Corporation. Election of directors need not be
by written ballot unless the Bylaws so provide.
SEVENTH: The Board of Directors is authorized to make, adopt, amend, alter
-------
or repeal the Bylaws of the Corporation. The stockholders shall also have power
to make, adopt, amend, alter or repeal the Bylaws of the Corporation.
EIGHTH: This Corporation reserves the right to amend or repeal any of the
------
provisions contained in this Certificate of Incorporation in any manner now or
hereafter permitted by law, and the rights of the stockholders of this
Corporation are granted subject to this reservation.
NINTH: To the fullest extent permitted by the Delaware General Corporation
-----
Law, a director of this Corporation shall not be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director. Any repeal or modification of the foregoing provisions of this
Article NINTH by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the time of
such repeal or modification.
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereto set my hand this 23 day of April, 1997.
/s/ Lynn Rooke
--------------------------------
Lynn Rooke
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
ENACT HEALTH MANAGEMENT SYSTEMS DELAWARE CORPORATION
<PAGE>
<TABLE>
<S> <C>
ARTICLE I STOCKHOLDERS........................................... 1
Section 1.1 Annual Meeting......................................... 1
Section 1.2 Special Meetings....................................... 1
Section 1.3 Notice of Meetings..................................... 1
Section 1.4 Quorum................................................. 1
Section 1.5 Conduct of the Stockholders' Meeting................... 2
Section 1.6 Conduct of Business.................................... 2
Section 1.7 Notice of Stockholder Business......................... 2
Section 1.8 Proxies and Voting..................................... 3
Section 1.9 Stock List............................................. 3
ARTICLE II BOARD OF DIRECTORS..................................... 4
Section 2.1 Number and Term of Office.............................. 4
Section 2.2 Vacancies and Newly Created Directorships.............. 4
Section 2.3 Removal................................................ 4
Section 2.4 Regular Meetings....................................... 5
Section 2.5 Special Meetings....................................... 5
Section 2.6 Quorum................................................. 5
Section 2.7 Participation in Meetings by Conference Telephone...... 5
Section 2.8 Conduct of Business.................................... 5
Section 2.9 Powers................................................. 5
Section 2.10 Compensation of Directors.............................. 6
Section 2.11 Nomination of Director Candidates...................... 6
ARTICLE III COMMITTEES............................................. 7
Section 3.1 Committees of the Board of Directors................... 7
Section 3.2 Conduct of Business.................................... 8
ARTICLE IV OFFICERS............................................... 8
Section 4.1 Generally.............................................. 8
Section 4.2 Chairman of the Board.................................. 8
Section 4.3 President.............................................. 8
Section 4.4 Vice President......................................... 9
Section 4.5 Treasurer.............................................. 9
Section 4.6 Secretary.............................................. 9
Section 4.7 Delegation of Authority................................ 9
Section 4.8 Removal................................................ 9
Section 4.9 Action With Respect to Securities of Other Corporations 9
ARTICLE V STOCK.................................................. 9
Section 5.1 Certificates of Stock.................................. 9
Section 5.2 Transfers of Stock..................................... 10
Section 5.3 Record Date............................................ 10
Section 5.4 Lost, Stolen or Destroyed Certificates................. 10
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Section 5.5 Regulations............................................ 10
ARTICLE VI NOTICES................................................ 10
Section 6.1 Notices................................................ 10
Section 6.2 Waivers................................................ 10
ARTICLE VII MISCELLANEOUS.............................................. 11
Section 7.1 Facsimile Signatures................................... 11
Section 7.2 Corporate Seal......................................... 11
Section 7.3 Reliance Upon Books, Reports and Records............... 11
Section 7.4 Fiscal Year............................................ 11
Section 7.5 Time Periods........................................... 11
ARTICLE VIII INDEMNIFICATION OF DIRECTORS AND OFFICERS.............. 11
Section 8.1 Right to Indemnification............................... 11
Section 8.2 Right of Claimant to Bring Suit........................ 12
Section 8.3 Non-Exclusivity of Rights.............................. 13
Section 8.4 Indemnification Contracts.............................. 13
Section 8.5 Insurance.............................................. 13
Section 8.6 Effect of Amendment.................................... 13
ARTICLE IX AMENDMENTS............................................. 13
Section 9.1 Amendment of Bylaws.................................... 13
</TABLE>
2
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS DELAWARE CORPORATION
A DELAWARE CORPORATION
BYLAWS
ARTICLE I
STOCKHOLDERS
------------
Section 1.1 Annual Meeting. An annual meeting of the stockholders, for
--------------
the election of directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
Section 1.2 Special Meetings. Special meetings of the stockholders, for
----------- ----------------
any purpose or purposes prescribed in the notice of the meeting, may be called
only (i) by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there
exists any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board of Directors for adoption) or (ii) by the
holders of not less than 10% of all shares entitled to cast votes at the
meeting, voting together as a single class and shall be held at such place, on
such date, and at such time as they shall fix. Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice.
Section 1.3 Notice of Meetings. Written notice of the place, date, and
----------- ------------------
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 1.4 Quorum. At any meeting of the stockholders, the holders of
----------- ------
a majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law.
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 1.5 Conduct of the Stockholders' Meeting. At every meeting of
----------- ------------------------------------
the stockholders, the Chairman, if there is such an officer, or if not, the
President of the Corporation, or in his absence the Vice President designated by
the President, or in the absence of such designation any Vice President, or in
the absence of the President or any Vice President, a chairman chosen by the
majority of the voting shares represented in person or by proxy, shall act as
Chairman. The Secretary of the Corporation or a person designated by the
Chairman shall act as Secretary of the meeting. Unless otherwise approved by the
Chairman, attendance at the stockholders' meeting is restricted to stockholders
of record, persons authorized in accordance with Section 8 of these Bylaws to
act by proxy, and officers of the Corporation.
Section 1.6 Conduct of Business. The Chairman shall call the meeting to
----------- -------------------
order, establish the agenda, and conduct the business of the meeting in
accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule on
the precedence of and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.6 and
Section 1.7, below. The Chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 1.6 and
Section 1.7, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
Section 1.7 Notice of Stockholder Business. At an annual or special
----------- ------------------------------
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before a
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
properly brought before the meeting by or at the direction of the Board of
Directors, (c) properly brought before an annual meeting by a stockholder, or
(d) properly brought before a
2
<PAGE>
special meeting by a stockholder, but if, and only if, the notice of a special
meeting provides for business to be brought before the meeting by stockholders.
For business to be properly brought before a meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder proposal to be presented at an
annual meeting shall be received at the Corporation's principal executive
offices not less than 120 calendar days in advance of the date that the
Corporation's (or the Corporation's predecessor's) proxy statement was released
to stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been changed by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
or in the event of a special meeting, notice by the stockholder to be timely
must be received not later than the close of business on the tenth day following
the day on which such notice of the date of the meeting was mailed or such
public disclosure was made. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the annual or
special meeting (a) a brief description of the business desired to be brought
before the annual or special meeting and the reasons for conducting such
business at the special meeting, (b) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such business.
Section 1.8 Proxies and Voting. At any meeting of the stockholders,
----------- ------------------
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing or by a transmission permitted by law filed in
accordance with the procedure established for the meeting. No stockholder may
authorize more than one proxy for his shares.
Each stockholder shall have one vote for every share of stock entitled to
vote which is registered in his or her name on the record date for the meeting,
except as otherwise provided herein or required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast.
Section 1.9 Stock List. A complete list of stockholders entitled to
----------- ----------
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his or her name, shall be open to the examination of any
such stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within
3
<PAGE>
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or if not so specified, at the place where the meeting is
to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office. The number of directors shall
----------- -------------------------
initially be six (6) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). Upon the closing of the
first sale of the Corporation's common stock pursuant to a firmly underwritten
registered public offering (the "IPO"), the directors shall be divided into
three classes, with the term of office of the first class to expire at the first
annual meeting of stockholders held after the IPO, the term of office of the
second class to expire at the second annual meeting of stockholders held after
the IPO, the term of office of the third class to expire at the third annual
meeting of stockholders held after the IPO and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election. A vacancy resulting from the removal of a director by the
stockholders as provided in Article II, Section 2.3 below may be filled at
special meeting of the stockholders 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.
Section 2.2 Vacancies and Newly Created Directorships. Subject to the
----------- -----------------------------------------
rights of the holders of any series of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause (other than removal
from office by a vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the next annual meeting of
stockholders. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Section 2.3 Removal. Subject to the rights of holders of any series of
----------- -------
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, with or without cause, but
only by the affirmative vote of the holders of at least a majority of the voting
power of all of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class. Vacancies in the Board of Directors resulting from such removal
may be filled by a majority of
4
<PAGE>
the directors then in office, though less than a quorum, or by the stockholders
as provided in Article II, Section 2.1 above. Directors so chosen shall hold
office until the new annual meeting of stockholders.
Section 2.4 Regular Meetings. Regular meetings of the Board of
----------- ----------------
Directors shall be held at such place or places, on such date or dates, and at
such time or times as shall have been established by the Board of Directors and
publicized among all directors. A notice of each regular meeting shall not be
required.
Section 2.5 Special Meetings. Special meetings of the Board of
----------- ----------------
Directors may be called by one-third of the directors then in office (rounded up
to the nearest whole number) or by the chief executive officer and shall be held
at such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
each director by whom it is not waived by mailing written notice not fewer than
five (5) days before the meeting or by telegraphing or personally delivering the
same not fewer than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 2.6 Quorum. At any meeting of the Board of Directors, a
----------- ------
majority of the total number of authorized directors shall constitute a quorum
for all purposes. If a quorum shall fail to attend any meeting, a majority of
those present may adjourn the meeting to another place, date, or time, without
further notice or waiver thereof.
Section 2.7 Participation in Meetings by Conference Telephone. Members
----------- -------------------------------------------------
of the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 2.8 Conduct of Business. At any meeting of the Board of
----------- -------------------
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the directors present, except as otherwise provided herein or
requited by law. Action may be taken by the Board of Directors without a meeting
if all members thereof consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Directors.
Section 2.9 Powers. The Board of Directors may, except as otherwise
----------- ------
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(a) To declare dividends from time to time in accordance with law;
(b) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
5
<PAGE>
(c) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind, negotiable or non-
negotiable, secured or unsecured, and to do all things necessary in connection
therewith;
(d) To remove any officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any officer upon any
other person for the time being;
(e) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(f) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers, employees and agents
of the Corporation and its subsidiaries as it may determine;
(g) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers, employees and agents of the Corporation
and its subsidiaries as it may determine; and
(h) To adopt from time to time regulations, not inconsistent with
these bylaws, for the management of the Corporation's business and affairs.
Section 2.10 Compensation of Directors. Directors, as such, may receive,
------------ -------------------------
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 2.11 Nomination of Director Candidates. Subject to the rights of
------------ ---------------------------------
holders of any class or series of Preferred Stock then outstanding, nominations
for the election of Directors may be made by the Board of Directors or a proxy
committee appointed by the Board of Directors or by any stockholder entitled to
vote in the election of Directors generally. However, any stockholder entitled
to vote in the election of Directors generally may nominate one or more persons
for election as Directors at a meeting only if timely notice of such
stockholder's intent to make such nomination or nominations has been given in
writing to the Secretary of the Corporation. To be timely, a stockholder
nomination for a director to be elected at an annual meeting shall be received
at the Corporation's principal executive offices not less than 120 calendar days
in advance of the date that the Corporation's (or the Corporation's
Predecessor's) Proxy statement was released to stockholders in connection with
the previous year's annual meeting of stockholders, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the date contemplated at the time of
the previous year's proxy statement, or in the event of a nomination for
director to be elected at a special meeting, notice by the stockholders to be
timely must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the special meeting was
mailed or such public disclosure was made. Each such notice shall set forth:
(a) the name and address of the stockholder who intends to make the
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nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote for the election of Directors on the date of such notice and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected.
In the event that a person is validly designated as a nominee in accordance
with this Section 2.11 and shall thereafter become unable or unwilling to stand
for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee, of a written notice to the
Secretary setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 2.11 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.11,
such nomination shall be void; provided, however, that nothing in this Section
2.11 shall be deemed to limit any voting rights upon the occurrence of dividend
arrearages provided to holders of Preferred Stock pursuant to the Preferred
Stock designation for any series of Preferred Stock.
ARTICLE III
COMMITTEES
Section 3.1 Committees of the Board of Directors. The Board of
----------- ------------------------------------
Directors, by a vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a director or
directors to serve as the member or members, designating, if it desires, other
directors as alternate members who may replace any absent or disqualified member
at any meeting of the committee. Any committee so designated may exercise the
power and authority of the Board of Directors to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law if the
resolution which designates the committee or a supplemental resolution of the
Board of Directors shall so provide.
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In the absence or disqualification of any member of any committee and any
alternate member in his place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 3.2 Conduct of Business. Each committee may determine the
----------- -------------------
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; one-
third of the authorized members shall constitute a quorum unless the committee
shall consist of one or two members, in which event one member shall constitute
a quorum; and all matters shall be determined by a majority vote of the members
present. Action may be taken by any committee without a meeting if all members
thereof consent thereto in writing, and the writing or writings are filed with
the minutes of the proceedings of such committee.
ARTICLE IV
OFFICERS
Section 4.1 Generally. The officers of the Corporation shall consist of
----------- ---------
a President, one or more Vice Presidents, a Secretary and a Treasurer. The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board and such other officers as may from time to time be
appointed by the Board of Directors. Officers shall be elected by the Board of
Directors, which shall consider that subject at its first meeting after every
annual meeting of stockholders. Each officer shall hold office until his or her
successor is elected and qualified or until his or her earlier resignation or
removal. The Chairman of the Board, if there shall be such an officer, and the
President shall each be members of the Board of Directors. Any number of offices
may he held by the same person.
Section 4.2 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 4.3 President. The President shall be the chief executive
----------- ---------
officer of the Corporation. Subject to the provisions of these bylaws and to the
direction of the Board of Directors, he or she shall have the responsibility for
the general management and control of the business and affairs of the
Corporation and shall perform all duties and have all powers which are commonly
incident to the office of chief executive or which are delegated to him or her
by the Board of Directors. He or she shall have power to sign all stock
certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all of the other
officers, employees and agents of the Corporation.
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Section 4.4 Vice President. Each Vice President shall have such
----------- --------------
powers and duties as may be delegated to him or her by the Board of Directors.
One Vice President shall be designated by the Board to perform the duties and
exercise the powers of the President in the event of the President's absence or
disability.
Section 4.5 Treasurer. Unless otherwise designated by the Board of
----------- ---------
Directors, the Chief Financial Officer of the Corporation shall be the
Treasurer. The Treasurer shall have the responsibility for maintaining the
financial records of the Corporation and shall have custody of all monies and
securities of the Corporation. He or she shall make such disbursements of the
funds of the Corporation as are authorized and shall render from time to time an
account of all such transactions and of the financial condition of the
Corporation. The Treasurer shall also perform such other duties as the Board of
Directors may from time to time prescribe.
Section 4.6 Secretary. The Secretary shall issue all authorized notices
----------- ---------
for, and shall keep, or cause to be kept, minutes of all meetings of the
stockholders, the Board of Directors, and all committees of the Board of
Directors. He or she shall have charge of the corporate books and shall perform
such other duties as the Board of Directors may from time to time prescribe.
Section 4.7 Delegation of Authority. The Board of Directors may from
----------- -----------------------
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.8 Removal. Any officer of the Corporation may be removed at
----------- -------
any time, with or without cause, by the Board of Directors.
Section 4.9 Action With Respect to Securities of Other Corporations.
----------- -------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
STOCK
Section 5.1 Certificates of Stock. Each stockholder shall be entitled
----------- ---------------------
to a certificate signed by, or in the name of the Corporation by, the President
or a Vice President, and by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer, certifying the
number of shares owned by him or her. Any of or all the signatures on the
certificate may be facsimile.
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Section 5.2 Transfers of Stock. Transfers of stock shall be made only
----------- ------------------
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of Article V of these bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 5.3 Record Date. The Board of Directors may fix a record date,
----------- -----------
which shall not be more than sixty (60) nor fewer than ten (10) days before the
date of any meeting of stockholders, nor more than sixty (60) days prior to the
time for the other action hereinafter described, as of which there shall be
determined the stockholders who are entitled: to notice of or to vote at any
meeting of stockholders or any adjournment thereof; to receive payment of any
dividend or other distribution or allotment of any rights; or to exercise any
rights with respect to any change, conversion or exchange of stock or with
respect to any other lawful action.
Section 5.4 Lost, Stolen or Destroyed Certificates. In the event of the
----------- --------------------------------------
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5.5 Regulations. The issue, transfer, conversion and
----------- -----------
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI
NOTICES
Section 6.1 Notices. Except as otherwise specifically provided herein
----------- -------
or required by law, all notices required to be given to any stockholder,
director, officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the mails, postage paid, or by sending such notice by
prepaid telegram, mailgram, telecopy or commercial courier service. Any such
notice shall be addressed to such stockholder, director, officer, employee or
agent at his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
Section 6.2 Waivers. A written waiver of any notice, signed by a
----------- -------
stockholder, director, officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, director, officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
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ARTICLE VII
MISCELLANEOUS
Section 7.1 Facsimile Signatures. In addition to the provisions for use
----------- --------------------
of facsimile signatures elsewhere specifically authorized in these bylaws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 7.2 Corporate Seal. The Board of Directors may provide a
----------- --------------
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Treasurer or by an Assistant Secretary or Assistant Treasurer.
Section 7.3 Reliance Upon Books, Reports and Records. Each director,
----------- ----------------------------------------
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.
Section 7.4 Fiscal Year. The fiscal year of the Corporation shall be as
----------- -----------
fixed by the Board of Directors.
Section 7.5 Time Periods. In applying any provision of these bylaws
----------- ------------
which require that an act be done or not done a specified number of days prior
to an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 8.1 Right to Indemnification. 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, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer or employee of another corporation, or of a Partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer or employee or in any other capacity
while serving as a director, officer or employee, shall be indemnified and held
harmless by the
11
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Corporation to the fullest extent authorized by Delaware Law, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said Law permitted the Corporation to provide prior
to such amendment) against all expenses, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid
or to be paid in settlement and amounts expended in seeking indemnification
granted to such person under applicable law, this bylaw or any agreement with
the Corporation) 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 or employee 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 an action, suit or
proceeding (or part thereof) initiated by such person only if (a) such
indemnification is expressly required to be made by law, (b) the action, suit or
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation, (c) such indemnification is provided by the Corporation, in its
sole discretion, pursuant to the powers vested in the Corporation under the
Delaware General Corporation Law, or (d) the action, suit or proceeding (or part
thereof) is brought to establish or enforce a right to indemnification under an
indemnity agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law. Such right shall be a
contract right and shall include the right to be paid by the Corporation
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, unless the Delaware General Corporation
-------- -------
Law then so prohibits, the payment of such expenses incurred by a director or
officer of the Corporation in his or her capacity as a director or officer (and
not in any other capacity in which service was or is tendered by such person
while a director or officer, including, without limitation. service to an
employee benefit plan) 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 director or officer, to repay all amounts so advanced if it
should be determined ultimately that such director or officer 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 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 such suit is not frivolous or brought in bad
faith, the claimant shall be entitled to be paid also the expense of prosecuting
such claim. The burden of proving such claim shall be on the claimant. It shall
be a defense to any such action (other then 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 this
Corporation) that the claimant has not met the standards of conduct which
make it permissible under the Delaware 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 its stockholders) 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 Delaware General Corporation Law, nor an actual determination
by the Corporation (including its
12
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Board of Directors, independent legal counsel, or its stockholders) 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.
Section 8.3 Non-Exclusivity of Rights. The rights conferred on any
----------- -------------------------
person in Sections 1 and 2 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 8.4 Indemnification Contracts. The Board of Directors is
----------- -------------------------
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person 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, providing for indemnification rights equivalent to or, if the
Board of Directors so determinates, greater than, those provided for in this
Article VIII.
Section 8.5 Insurance. The Corporation shall maintain insurance to the
----------- ---------
extent reasonably available, at its expense, to protect itself and any such
director, officer, employee or agent of the Corporation or another 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 Delaware
General Corporation Law.
Section 8.6 Effect of Amendment. Any amendment, repeal or modification
----------- -------------------
of any provision of this Article VIII by the stockholders and 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.
ARTICLE IX
AMENDMENTS
Section 9.1 Amendment of Bylaws. The Board of Directors is expressly
----------- -------------------
empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption,
amendment or repeal of Bylaws of the Corporation by the Board of Directors shall
require the approval of a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any resolution providing for adoption, amendment or repeal is
presented to the Board). The stockholders shall also have power to adopt, amend
or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of
By-Laws of the Corporation by the stockholders shall require, in addition to any
vote of the holders of any class or series of stock of the Corporation required
by law or by this Certificate of Incorporation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class.
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CERTIFICATE OF SECRETARY
------------------------
I hereby certify that I am the duly elected and acting Secretary of ENACT
Health Management Systems Delaware Corporation, a Delaware corporation (the
"Corporation"), and that the foregoing Bylaws, comprising thirteen (13) pages,
constitute the Bylaws of the Corporation as duly adopted on May 1, 1997, by the
unanimous written consent of the Board of Directors of the Corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name on May 1, 1997.
/s/ Henry Evans
------------------------------
Henry Evans
14
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Exhibit 10.1
------------
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of __________, 1997, is made by and
between Enact Health Management Systems, a Delaware corporation (the "Company"),
and ________________ (the "Indemnitee").
RECITALS
--------
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers and
agents and the directors, officers and agents of its subsidiaries to assume the
risk of huge judgments and other expenses which may occur in cases in which the
director, officer or agent received no personal profit and in cases where the
director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to
1
<PAGE>
encourage such individuals to take the business risks necessary for the success
of the Company and its subsidiaries, it is necessary for the Company to
contractually indemnify its directors, officers and agents and the directors,
officers and agents of its subsidiaries, and to assume for itself maximum
liability for expenses and damages in connection with claims against such
directors, officers and agents in connection with their service to the Company
and its subsidiaries, and has further concluded that the failure to provide such
contractual indemnification could result in great harm to the Company and its
subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
---------
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
-----------
(a) Agent. For the purposes of this Agreement, "agent" of the Company
-----
means any person who is or was a director, officer, employee or other agent of
the Company or a subsidiary of the Company; or is or was serving at the request
of, for the convenience of, or to represent the interests of the Company or a
subsidiary of the Company as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include all
--------
out of pocket expenses costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or
2
<PAGE>
enforcing a right to indemnification under this Agreement or Section 145 or
otherwise; provided, however, that "expenses" shall not include any judgments,
fines, ERISA excise taxes or penalties, or amounts paid in settlement of a
proceeding.
(c) Proceeding. For the purposes of this Agreement, "proceeding"
----------
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
----------
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
------------------
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. Liability Insurance.
-------------------
(a) Maintenance of D&O Insurance. The Company hereby covenants and
----------------------------
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
-------------------
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
---------------------------------------------------
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. Mandatory Indemnification. Subject to Section 9 below, the Company
-------------------------
shall indemnify the Indemnitee as follows:
3
<PAGE>
(a) Successful Defense. To the extent the Indemnitee has been
------------------
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) Third Party Actions. If the Indemnitee is a person who was or is
-------------------
a party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is a
------------------
party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is 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 he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not
4
<PAGE>
limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid
in settlement) for which payment is actually made to Indemnitee under a valid
and collectible insurance policy of D&O Insurance, or under a valid and
enforceable indemnity clause, by-law or agreement.
5. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the
---------------------------------
Company shall advance all expenses incurred by the Indemnitee in connection with
the investigation, defense, settlement or appeal of any proceeding to which the
Indemnitee is a party or is threatened to be made a party by reason of the fact
that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company.
7. Notice and Other Indemnification Procedures.
-------------------------------------------
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable action to cause such insurers to pay, on behalf of the Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
(c) In the event the Company shall be obligated to pay the expenses of
any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ his
counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the
employment of counsel by the Indemnitee has been previously authorized by the
Company, (B) the Indemnitee shall have reasonably concluded that there may be a
conflict of
5
<PAGE>
interest between the Company and the Indemnitee in the conduct of any such
defense; or (C) the Company shall not, in fact, have employed counsel to assume
the defense of such proceeding, the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
------------------------
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
9. Non-exclusivity. The provisions for indemnification and advancement
---------------
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by this
-----------
Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in
any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has been tendered to the Company)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation
(including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such
6
<PAGE>
enforcement action that indemnification of Indemnitee is proper in the
circumstances, nor an actual determination by the Company (including its Board
of Directors or its stockholders) that such indemnification is improper, shall
be a defense to the action or create a presumption that Indemnitee is not
entitled to indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. Survival of Rights.
------------------
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties hereto
---------------------------
intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
------------
be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or amendment of
-----------------------
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
7
<PAGE>
16. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on
the signature page of this Agreement, or as subsequently modified by written
notice.
17. Governing Law. This Agreement shall be governed exclusively by and
-------------
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
18. Consent to Jurisdiction. The Company and the Indemnitee each hereby
-----------------------
consent to the jurisdiction of the courts of the State of Delaware with respect
to any action or proceeding which arises out of or relates to this Agreement.
8
<PAGE>
The parties hereto have entered into this Indemnity Agreement effective as
of the date first above written.
THE COMPANY:
ENACT HEALTH MANAGEMENT SYSTEMS
By ____________________________________
Its ___________________________________
Address: 1975 W. El Camino Real, Suite 306
Mountain View, California 94040
INDEMNITEE:
________________________________________
[NAME]
Address: ________________________________________
________________________________________
9
<PAGE>
EXHIBIT 10.4
ENACT HEALTH MANAGEMENT SYSTEMS
1997 OUTSIDE DIRECTORS STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The ENACT Health Management Systems 1997 Outside
Directors Stock Option Plan (the "PLAN") is hereby established effective as of
the effective date of the initial registration by the Company of its Stock under
Section 12 of the Exchange Act (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 and retain highly qualified persons to serve as Outside Directors
of the Company and by creating additional incentive for Outside Directors to
promote 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.
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 a 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.
(e) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an
Employee or a Director.
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<PAGE>
(f) "DIRECTOR" means a member of the Board or 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, 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.
Notwithstanding the foregoing, the Fair Market Value per share of Stock on the
Effective Date shall be deemed to be the public offering price set forth in
the final prospectus filed with the Securities and Exchange Commission in
connection with the initial public offering of the Stock.
(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.
(j) "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.
(k) "OPTIONEE" means a person who has been granted one or more
Options.
(l) "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.
(m) "OUTSIDE DIRECTOR" means a Director of the Company who is
not an Employee.
2
<PAGE>
(n) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(q) "SERVICE" means the Optionee's 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.
(r) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(s) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) 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
use of the term "or" shall include the conjunctive as well as the disjunctive.
3. ADMINISTRATION. 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.
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 one hundred twenty-five thousand (125,000)
and shall consist of authorized but unissued shares 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,
3
<PAGE>
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, to the "Initial Option" and "Annual Option" (as
defined in Section 6.1), and to any outstanding Options, and in the exercise
price 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 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 down to the nearest
whole number, 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.
5. ELIGIBILITY AND TYPE OF OPTIONS.
-------------------------------
5.1. PERSONS ELIGIBLE FOR OPTIONS. An Option shall be granted only
to a person who, at the time of grant, is an Outside Director.
5.2. OPTIONS AUTHORIZED. Options shall be nonstatutory stock options;
that is, options which are not treated as incentive stock options within the
meaning of Section 422(b) of the Code.
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. AUTOMATIC GRANT OF OPTIONS. Subject to execution by an Outside
Director of the appropriate Option Agreement, Options shall be granted
automatically and without further action of the Board, as follows:
(a) INITIAL OPTION. Each person who is first elected or
appointed as an Outside Director after the Effective Date shall be granted an
Option to purchase twenty thousand (20,000) shares of Stock on the date of
such initial election or appointment (an "INITIAL OPTION"). Notwithstanding
anything herein to the contrary, an Initial Option shall not be granted to a
Director of the Company who previously did not qualify as an Outside Director
but subsequently becomes an Outside Director as a result of the termination of
his or her status as an Employee.
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<PAGE>
(b) ANNUAL OPTION. Each Outside Director (including any
Director who previously did not qualify as an Outside Director but who
subsequently becomes an Outside Director) shall be granted on the date of each
annual meeting of the shareholders of the Company which occurs after the
Effective Date (an "ANNUAL MEETING") following which such person remains an
Outside Director an Option to purchase five thousand (5,000) shares of Stock
(and "ANNUAL OPTION"). Notwithstanding the foregoing, an Outside Director who
has not served continuously as a Director of the Company for at least six (6)
months as of the date of such Annual Meeting shall not receive an Annual
Option on such date.
(c) RIGHT TO DECLINE OPTION. Notwithstanding the foregoing, any
person may elect not to receive an Option by delivering written notice of such
election to the Board no later than the day prior to the date such Option would
otherwise be granted. A person so declining an Option shall receive no payment
or other consideration in lieu of such declined Option. A person who has
declined an Option may revoke such election by delivering written notice of such
revocation to the Board no later than the day prior to the date such Option
would be granted pursuant to Section 6.1(a) or (b), as the case may be.
6.2. EXERCISE PRICE. The exercise price per share of Stock subject
to an Option shall be the Fair Market Value of a share of Stock on the date
the Option is granted.
6.3. EXERCISE PERIOD. Each Option shall terminate and cease to be
exercisable on the date ten (10) years after the date of grant of the Option
unless earlier terminated pursuant to the terms of the Plan or the Option
Agreement.
6.4. RIGHT TO EXERCISE OPTIONS.
(a) INITIAL OPTIONS. Except as otherwise provided in the Plan
or in the Option Agreement, an Initial Option shall (i) first become
exercisable on the date which is one (1) month after the date on which the
Initial Option was granted (the "INITIAL OPTION VESTING DATE"); and (ii) be
exercisable on and after the Initial Option Vesting Date and prior to the
termination thereof in an amount equal to the number of shares of Stock
initially subject to the Initial Option multiplied by the Vested Ratio as set
forth below, less the number of shares previously acquired upon exercise
thereof. The Vested Ratio described in the preceding sentence shall be
determined as follows:
Vested
Ratio
-----------
Prior to Initial Option Vesting Date 0
On Initial Option 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 Option Vesting Date until the
Vested Ratio equals 1/1, an additional
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<PAGE>
(b) ANNUAL OPTIONS. Except as otherwise provided in the Plan or
in the Option Agreement, an Annual Option shall (i) first become exercisable
on the date which is twenty-five (25) months after the date on which the
Annual Option was granted (the "ANNUAL OPTION VESTING DATE"); and (ii) be
exercisable on and after the Annual Option Vesting Date and prior to the
termination thereof in an amount equal to the number of shares of Stock
initially subject to the Annual Option multiplied by the Vested Ratio as set
forth below, less the number of shares previously acquired upon exercise
thereof. The Vested Ratio described in the preceding sentence shall be
determined as follows:
Vested
Ratio
-----------
Prior to Annual Option Vesting Date 0
On Annual Option Vesting Date, provided 1/12
the Optionee's Service has not terminated prior
to such date
Plus
----
For each full month of the Optionee's continuous 1/12
Service from the Annual Option Vesting Date
until the Vested Ratio equals 1/1, an additional
6.5. 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, or attestation to
the ownership, of shares of Stock owned by the Optionee having a Fair Market
Value 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"), or (iv) by any combination thereof.
(b) TENDER OF STOCK. Notwithstanding the foregoing, an
Option may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock to the extent such tender, or attestation to the
ownership, 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, or attestation to the ownership, 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.
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<PAGE>
6.6 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 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 exercise thereof. Alternatively or in addition, in its
sole discretion, the Company shall have the right to require the Optionee 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 exercise thereof. The Company shall have no obligation to
deliver shares of Stock until the Participating Company Group's tax
withholding obligations have been satisfied.
7. STANDARD FORM OF OPTION AGREEMENT.
---------------------------------
7.1. GENERAL. Each Option shall comply with and be subject to the
terms and conditions set forth in the appropriate form of Nonstatutory Stock
Option Agreement adopted by the Board concurrently with its adoption of the
Plan and as amended from time to time.
7.2. 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 are not
inconsistent with the terms of the Plan.
8. CHANGE IN 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 change in all or substantially
all of the assets of the Company; or
(iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN 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
7
<PAGE>
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 CHANGE IN CONTROL ON OPTIONS. In the event of a
Change in Control, any unexercisable or unvested portion of the outstanding
Options shall be immediately exercisable and vested in full as of the date ten
(10) days prior to the date of the Change in Control. The exercise or vesting
of any Option that was permissible solely by reason of this Section 8.2 shall
be conditioned upon the consummation of the Change in Control. In addition,
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 Change in 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 Change in
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
Change in Control was entitled. Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Change in
Control nor exercised as of the date of the Change in Control shall terminate
and cease to be outstanding effective as of the date of the Change in Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option
prior to the Change in Control and any consideration received pursuant to the
Change in 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 Change in 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.
9. 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.
8
<PAGE>
10. 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.
11. 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 total number of shares of
Stock that may be issued under the Plan (except by operation of the provisions
of Section 4.2), and (b) 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 necessary
to comply with any applicable law, regulation or rule.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing ENACT Health Management Systems 1997 Outside Directors Stock
Option Plan was duly adopted by the Board on November 17, 1997.
/s/ Chris Tacklind
-------------------------------
Secretary
9
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PLAN HISTORY
------------
November 17, 1997 Board adopts Plan, with an initial reserve of 125,000
shares.
______________, 1997 Shareholders approve Plan, with an initial reserve of
125,000 shares.
10
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ENACT HEALTH MANAGEMENT SYSTEMS
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(INITIAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (INITIAL
OPTION) (the "OPTION AGREEMENT") is made and entered into as of
______________________________, 19____, 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").
1. DEFINITIONS AND CONSTRUCTION.
----------------------------
1.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means _________________________, 19__.
(b) "NUMBER OF OPTION SHARES" means twenty thousand (20,000)
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 the Date of Option Grant.
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(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows: columns
Vested Ratio
------------
Prior to 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
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "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" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means a 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 in the Plan, 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.
(k) "COMPANY" means ENACT Health Management Systems, a California
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor,
engaged by a Participating Company to render services other than as an
Employee or a Director.
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the permanent and total disability of the
Optionee within the meaning of Section 22(e)(3) of the Code.
2
<PAGE>
(o) "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.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(q) "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.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.
(u) "PLAN" means the ENACT Health Management Systems 1997 Outside
Directors Stock Option Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(w) "SERVICE" means the Optionee's 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
3
<PAGE>
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.
(x) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(y) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) 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 STATUS OF THE 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, 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. 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 full
payment of the aggregate Exercise Price for the number of shares of Stock being
purchased. The Option shall
4
<PAGE>
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, or
attestation to the ownership, of whole shares of Stock owned by the Optionee
having a Fair Market Value 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, or attestation to the
ownership, of shares of Stock to the extent such tender, or attestation to the
ownership, 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, or attestation to the
ownership, 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 agrees to make adequate provision for 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, or (iii) the lapsing of any
restriction with respect to any shares acquired upon exercise of the Option.
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, 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
5
<PAGE>
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 the Option following termination of the
Optionee's Service as described in Section 7, or (c) a Change in 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.
6
<PAGE>
(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 six (6)
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 six (6) months 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.
8. OWNERSHIP CHANGE AND CHANGE IN 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
7
<PAGE>
(iv) a liquidation or dissolution of the Company.
(b) A "CHANGE IN 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 CHANGE IN CONTROL ON OPTION. In the event of a
Change in Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Change in Control. Any exercise of the Option that was permissible solely
by reason of this Section 8.2 shall be conditioned upon the consummation of the
Change in Control. In addition, 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 Change in Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Change in Control nor exercised as of the
date of the Change in Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Change in Control and any consideration
received pursuant to the Change in 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 Change in 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.
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)
8
<PAGE>
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
down to the nearest whole number, 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.
10. RIGHTS AS A SHAREHOLDER. 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.
11. LEGENDS. The Company may at any time place legends referencing 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.
12. 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.
13. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
------------------------
or the Option at any time; provided, however, that 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, regulation or rule. No amendment
or addition to this Option Agreement shall be effective unless in writing.
14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
--------------------
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, 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. To the extent
contemplated herein, the provisions of this Option Agreement shall survive any
exercise of the Option and shall remain in full force and effect.
9
<PAGE>
15. 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 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.
OPTIONEE
Date:_______________________________ ____________________________________
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ENACT HEALTH MANAGEMENT SYSTEMS
NONSTATUTORY STOCK OPTION AGREEMENT
FOR OUTSIDE DIRECTORS
(ANNUAL OPTION)
THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (ANNUAL
OPTION) (the "OPTION AGREEMENT") is made and entered into as of
_____________________________, 19____, 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").
1. DEFINITIONS AND CONSTRUCTION.
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1.1 DEFINITIONS. Whenever used herein, the following terms
shall have their respective meanings set forth below:
(a) "DATE OF OPTION GRANT" means _____________________________ ,
19____.
(b) "NUMBER OF OPTION SHARES" means five thousand (5,000) 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 twenty-five
(25) months after the Date of Option Grant.
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(f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:
Vested Ratio
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Prior to Initial Vesting Date 0
On Initial Vesting Date, provided the 1/12
Optionee's Service has not terminated
prior to such date
Plus
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For each full month of the Optionee's 1/12
continuous Service from the Initial
Vesting Date until the Vested Ratio
equals 1/1, an additional
(g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.
(h) "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" shall also mean such Committee(s).
(i) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.
(j) "COMMITTEE" means a 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 in the Plan, 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.
(k) "COMPANY" means ENACT Health Management Systems, a California
corporation, or any successor corporation thereto.
(l) "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.
(m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(n) "DISABILITY" means the permanent and total disability of the
Optionee within the meaning of Section 22(e)(3) of the Code.
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(o) "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.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(q) "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
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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.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.
(u) "PLAN" means the ENACT Health Management Systems 1997 Outside
Directors Stock Option Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(w) "SERVICE" means the Optionee's 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
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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.
(x) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 9.
(y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) 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 STATUS OF THE OPTION. This Option is intended to be a
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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
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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.
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4.1 RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date (provided the
Optionee's Service has not terminated prior to such 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. 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 full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased. The
Option shall
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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, or attestation to the
ownership, of whole shares of Stock owned by the Optionee having a Fair Market
Value 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, or attestation to the ownership,
of shares of Stock to the extent such tender, or attestation to the ownership,
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, or attestation to the ownership, 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.
4.3 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
agrees to make adequate provision for 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, or (iii) the lapsing of any restriction
with respect to any shares acquired upon exercise of the Option.
4.4 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, the heirs of the Optionee.
4.5 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
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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
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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
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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 Change in Control to the
extent provided in Section 8.
7. EFFECT OF TERMINATION OF SERVICE.
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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.
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(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 six (6) 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 six (6) months 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.
8. OWNERSHIP CHANGE AND CHANGE IN 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;
(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
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(iv) a liquidation or dissolution of the Company.
(a) A "CHANGE IN 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 CHANGE IN CONTROL ON OPTION. In the event of a
Change in Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Change in Control. Any exercise of the Option that was permissible solely
by reason of this Section 8.2 shall be conditioned upon the consummation of the
Change in Control. In addition, 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 Change in Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Change in Control nor exercised as of the
date of the Change in Control. Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Change in Control and any consideration
received pursuant to the Change in 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 Change in 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.
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)
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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
down to the nearest whole number, 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.
10. RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
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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.
11. LEGENDS. The Company may at any time place legends referencing any
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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.
12. BINDING EFFECT. Subject to the restrictions on transfer set forth
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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.
13. TERMINATION OR AMENDMENT. The Board may terminate or amend the Plan
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or the Option at any time; provided, however, that 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, regulation or rule. No amendment
or addition to this Option Agreement shall be effective unless in writing.
14. INTEGRATED AGREEMENT. This Option Agreement constitutes the entire
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understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, 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. To the extent
contemplated herein, 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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15. APPLICABLE LAW. This Option Agreement shall be governed by the laws
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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 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.
OPTIONEE
Date:__________________________ _____________________________________
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Exhibit 10.5
ENACT HEALTH MANAGEMENT SYSTEMS
1997 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
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1.1 ESTABLISHMENT. The ENACT Health Management Systems 1997 Employee
Stock Purchase Plan (the "PLAN") is hereby established effective as of the
effective date of the initial registration by the Company of its Stock under
Section 12 of the Securities Exchange Act of 1934, as amended (the "EFFECTIVE
DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
Company and its shareholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
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.
2. DEFINITIONS AND CONSTRUCTION.
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2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. 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 a 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.
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(e) "COMPENSATION" means, with respect to any Offering Period,
base wages or salary, commissions, overtime, bonuses, annual awards, other
incentive payments, shift premiums, and all other compensation paid in cash
during such Offering Period before deduction for any contributions to any plan
maintained by a Participating Company and described in Section 401(k) or Section
125 of the Code. Compensation shall not include reimbursements of expenses,
allowances, long-term disability, workers' compensation or any amount deemed
received without the actual transfer of cash or any amounts directly or
indirectly paid pursuant to the Plan or any other stock purchase or stock option
plan, or any other compensation not included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of a
Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
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 an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in
good faith and in the exercise of its discretion whether an individual has
become or has ceased to be an Employee and the effective date of such
individual's employment or termination of employment, as the case may be. For
purposes of an individual's participation in or other rights, if any, under the
Plan as of the time of the Company's determination, all such determinations by
the Company shall be final, binding and conclusive, notwithstanding that the
Company or any governmental agency subsequently makes a contrary determination.
(h) "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of a share of Stock (or the
mean of the closing bid and asked prices 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
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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. If there is then no public market for the Stock, the Fair Market
Value on any relevant date shall be as determined by the Board. Notwithstanding
the foregoing, the Fair Market Value per share of Stock on the Effective Date
shall be deemed to be the public offering price set forth in the final
prospectus filed with the Securities and Exchange Commission in connection with
the initial public offering of the Stock.
(i) "OFFERING" means an offering of Stock as provided in Section
6.
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(j) "OFFERING DATE" means, for any Offering, the first day of
the Offering Period with respect to such Offering.
(k) "OFFERING PERIOD" means a period established in accordance
with Section 6.1.
(l) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(m) "PARTICIPANT" means an Eligible Employee who has become a
participant in an Offering Period in accordance with Section 7 and remains a
participant in accordance with the Plan.
(n) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation designated by the Board as a corporation
the Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to time
which Parent Corporations or Subsidiary Corporations shall be Participating
Companies.
(o) "PARTICIPATING COMPANY GROUP" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.
(p) "PURCHASE DATE" means, for any Purchase Period, the last day
of such period.
(q) "PURCHASE PERIOD" means a period established in accordance
with Section 6.2.
(r) "PURCHASE PRICE" means the price at which a share of Stock
may be purchased under the Plan, as determined in accordance with Section 9.
(s) "PURCHASE RIGHT" means an option granted to a Participant
pursuant to the Plan to purchase such shares of Stock as provided in Section 8,
which the Participant may or may not exercise during the Offering Period in
which such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
(t) "STOCK" means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2.
(u) "SUBSCRIPTION AGREEMENT" means a written agreement in such
form as specified by the Company, stating an Employee's election to participate
in the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
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(v) "SUBSCRIPTION DATE" means the last business day prior to the
Offering Date of an Offering Period or such earlier date as the Company shall
establish.
(w) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) 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, of any form of agreement
or other document employed by the Company in the administration of the Plan, or
of any Purchase Right shall be determined by the Board and shall be final and
binding upon all persons having an interest in the Plan or the Purchase Right.
Subject to the provisions of the Plan, the Board shall determine all of the
relevant terms and conditions of Purchase Rights granted pursuant to the Plan;
provided, however, that all Participants granted Purchase Rights pursuant to the
Plan shall have the same rights and privileges within the meaning of Section
423(b)(5) of the Code. All expenses incurred in connection with the
administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have the
authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The Company
may, from time to time, consistent with the Plan and the requirements of Section
423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
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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 two hundred thousand (200,000) and shall
consist of authorized but unissued or reacquired shares of Stock, or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, the shares of Stock allocable to the unexercised
portion of such Purchase Right 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, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights 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 outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights 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 down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
-----------
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
5.2 EXCLUSION OF CERTAIN SHAREHOLDERS. Notwithstanding any provision
of the Plan to the contrary, no Employee shall be granted a Purchase Right under
the Plan if, immediately after such grant, such Employee would own or hold
options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2,
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the attribution rules of Section 424(d) of the Code shall apply in determining
the stock ownership of such Employee.
6. OFFERINGS.
---------
6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately twenty-four (24)
months duration (an "OFFERING PERIOD"); provided, however, that the first
Offering Period shall commence on the Effective Date and end on January 31, 2000
(the "INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on the
first day of February and August of each year and end on the last day of the
second January and July, respectively, occurring thereafter. Notwithstanding the
foregoing, the Board may establish a different duration for one or more future
Offering Periods or different commencing or ending dates for such Offering
Periods; provided, however, that no Offering Period may have a duration
exceeding twenty-seven (27) months. If the first or last day of an Offering
Period is not a day on which the national securities exchanges or Nasdaq Stock
Market are open for trading, the Company shall specify the trading day that will
be deemed the first or last day, as the case may be, of the Offering Period.
6.2 PURCHASE PERIODS. Each Offering Period shall consist of four (4)
consecutive Purchase Periods of approximately six (6) months duration, or such
other number or duration as the Board shall determine. The Purchase Period
commencing on the Offering Date of the Initial Offering Period shall end on July
31, 1998. A Purchase Period commencing on or about February 1 shall end on or
about the next July 31. A Purchase Period commencing on or about August 1 shall
end on or about the next January 31. Notwithstanding the foregoing, the Board
may establish a different duration for one or more future Purchase Periods or
different commencing or ending dates for such Purchase Periods. If the first or
last day of a Purchase Period is not a day on which the national securities
exchanges or Nasdaq Stock Market are open for trading, the Company shall specify
the trading day that will be deemed the first or last day, as the case may be,
of the Purchase Period.
7. PARTICIPATION IN THE PLAN.
-------------------------
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless such Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for such subsequent Offering Period. An Employee who becomes
an Eligible Employee after the Offering Date of an Offering Period shall not be
eligible to participate in such Offering Period but may participate in any
subsequent Offering Period provided such Employee is still an Eligible Employee
as of the Offering Date of such subsequent Offering Period.
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<PAGE>
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 12.1 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new
Subscription Agreement for a subsequent Offering Period in accordance with the
procedures set forth in Section 7.1 if the Participant desires to change any of
the elections contained in the Participant's then effective Subscription
Agreement. Eligible Employees may not participate simultaneously in more than
one Offering.
8. RIGHT TO PURCHASE SHARES.
------------------------
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically a Purchase Right consisting of an option to
purchase the lesser of (a) that number of whole shares of Stock determined by
dividing Fifty Thousand Dollars ($50,000) by the Fair Market Value of a share of
Stock on such Offering Date or (b) five thousand (5,000) shares of Stock. No
Purchase Right shall be granted on an Offering Date to any person who is not, on
such Offering Date, an Eligible Employee.
8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
provisions of Section 8.1, if the Board establishes an Offering Period of any
duration other than twenty-four months, then (a) the dollar amount in Section
8.1 shall be determined by multiplying $2,083.33 by the number of months
(rounded to the nearest whole month) in the Offering Period and rounding to the
nearest whole dollar, and (b) the share amount in Section 8.1 shall be
determined by multiplying 208.33 shares by the number of months (rounded to the
nearest whole month) in the Offering Period and rounding to the nearest whole
share.
8.3 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any provision
of the Plan to the contrary, no Participant shall be granted a Purchase Right
which permits his or her right to purchase shares of Stock under the Plan to
accrue at a rate which, when aggregated with such Participant's rights to
purchase shares under all other employee stock purchase plans of a Participating
Company intended to meet the requirements of Section 423 of the Code, exceeds
Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or such other
limit, if any, as may be imposed by the Code) for each calendar year in which
such Purchase Right is outstanding at any time. For purposes of the preceding
sentence, the Fair Market Value of shares purchased during a given Offering
Period shall be determined as of the Offering Date for such Offering Period. The
limitation described in this Section 8.3 shall be applied in conformance with
applicable regulations under Section 423(b)(8) of the Code.
7
<PAGE>
9. PURCHASE PRICE.
--------------
The Purchase Price at which each share of Stock may be acquired in an
Offering Period upon the exercise of all or any portion of a Purchase Right
shall be established by the Board; provided, however, that the Purchase Price
shall not be less than eighty-five percent (85%) of the lesser of (a) the Fair
Market Value of a share of Stock on the Offering Date of the Offering Period or
(b) the Fair Market Value of a share of Stock on the Purchase Date. Unless
otherwise provided by the Board prior to the commencement of an Offering Period,
the Purchase Price for that Offering Period shall be eighty-five percent (85%)
of the lesser of (a) the Fair Market Value of a share of Stock on the Offering
Date of the Offering Period, or (b) the Fair Market Value of a share of Stock on
the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
--------------------------------------------------------
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set
forth the percentage of the Participant's Compensation to be deducted on each
payday during an Offering Period in whole percentages of not less than one
percent (1%) (except as a result of an election pursuant to Section 10.3 to stop
payroll deductions made effective following the first payday during an Offering)
or more than ten percent (10%). Notwithstanding the foregoing, the Board may
change the limits on payroll deductions effective as of any future Offering
Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company's
designated office an amended Subscription Agreement authorizing such change on
or before the "Change Notice Date." The "CHANGE NOTICE DATE" shall be a date
prior to the beginning of the first pay period for which such election is to be
effective as established by the Company from time to time and announced to the
Participants. A Participant who elects to decrease the rate of his or her
payroll deductions to zero percent (0%) shall nevertheless remain a Participant
in the current Offering Period unless such Participant withdraws from the Plan
as provided in Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The Company
may, in its sole discretion, suspend a Participant's payroll deductions under
the Plan as the Company deems advisable to avoid accumulating payroll deductions
in excess of the amount that could
8
<PAGE>
reasonably be anticipated to purchase the maximum number of shares of Stock
permitted during a calendar year under the limit set forth in Section 8.3.
Payroll deductions shall be resumed at the rate specified in the Participant's
then effective Subscription Agreement at the beginning of the next Purchase
Period the Purchase Date of which falls in the following calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of the Company. All payroll deductions received
or held by the Company may be used by the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company's designated office a written notice on a form
provided by the Company for such purpose. A Participant who withdraws the entire
remaining balance credited to his or her Plan account shall be deemed to have
withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn shall
be returned to the Participant as soon as practicable after the withdrawal and
may not be applied to the purchase of shares in any Offering under the Plan. The
Company may from time to time establish or change limitations on the frequency
of withdrawals permitted under this Section, establish a minimum dollar amount
that must be retained in the Participant's Plan account, or terminate the
withdrawal right provided by this Section.
11. PURCHASE OF SHARES.
------------------
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Plan and whose
participation in the Offering has not terminated before such Purchase Date shall
automatically acquire pursuant to the exercise of the Participant's Purchase
Right the number of whole shares of Stock determined by dividing (a) the total
amount of the Participant's payroll deductions accumulated in the Participant's
Plan account during the Offering Period and not previously applied toward the
purchase of Stock by (b) the Purchase Price. However, in no event shall the
number of shares purchased by the Participant during an Offering Period exceed
the number of shares subject to the Participant's Purchase Right. No shares of
Stock shall be purchased on a Purchase Date on behalf of a Participant whose
participation in the Offering or the Plan has terminated before such Purchase
Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number of
shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
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<PAGE>
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash to be returned to a Participant pursuant to the preceding sentence is an
amount less than the amount that would have been necessary to purchase an
additional whole share of Stock on such Purchase Date, the Company may retain
such amount in the Participant's Plan account to be applied toward the purchase
of shares of Stock in the subsequent Purchase Period or Offering Period, as the
case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which the Purchase Right relates shall expire immediately upon the end of the
Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised all
or part of his or her Purchase Right shall receive, as soon as practicable after
the Purchase Date, a report of such Participant's Plan account setting forth the
total payroll deductions accumulated prior to such exercise, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the cash balance, if any, remaining immediately after such purchase
that is to be refunded or retained in the Participant's Plan account pursuant to
Section 11.4. The report required by this Section may be delivered in such form
and by such means, including by electronic transmission, as the Company may
determine.
12. WITHDRAWAL FROM OFFERING OR PLAN.
--------------------------------
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may withdraw
from the Plan by signing and delivering to the Company's designated office a
written notice of withdrawal on a form provided by the Company for such purpose.
Such withdrawal may be elected at any time prior to the end of an Offering
Period; provided, however, that if a Participant withdraws from the Plan after
the Purchase Date of a Purchase Period, the withdrawal shall not affect shares
of Stock acquired by the Participant on such Purchase Date. A Participant who
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<PAGE>
voluntarily withdraws from the Plan is prohibited from resuming participation in
the Plan in the same Offering from which he or she withdrew, but may participate
in any subsequent Offering by again satisfying the requirements of Sections 5
and 7.1. The Company may impose, from time to time, a requirement that the
notice of withdrawal from the Plan be on file with the Company's designated
office for a reasonable period prior to the effectiveness of the Participant's
withdrawal.
12.2 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value
of a share of Stock on a Purchase Date of an Offering Period (other than the
final Purchase Date of such offering) is less than the Fair Market Value of a
share of Stock on the Offering Date for such Offering Period, then every
Participant shall automatically be (a) withdrawn from such Offering Period after
the acquisition of shares of Stock on the Purchase Date and (b) enrolled in the
new Offering Period effective on its Offering Date. A Participant may elect not
to be automatically withdrawn from an Offering Period pursuant to this Section
12.2 by delivering to the Company's designated office not later than the close
of business on Offering Date new Offering Period a written notice indicating
such election.
12.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's voluntary
withdrawal from the Plan pursuant to Sections 12.1 or automatic withdrawal from
an Offering pursuant to Section 12.2, the Participant's accumulated payroll
deductions which have not been applied toward the purchase of shares of Stock
(except, in the case of an automatic withdrawal pursuant to Section 12.2, for an
amount necessary to purchase an additional whole share as provided in Section
11.4) shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan or the Offering, as applicable, shall terminate. Such accumulated
payroll deductions to be refunded in accordance with this Section may not be
applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
----------------------------------------
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the Participant's
death, to the Participant's legal representative, and all of the Participant's
rights under the Plan shall terminate. Interest shall not be paid on sums
returned pursuant to this Section 13. A Participant whose participation has
been so terminated may again become eligible to participate in the Plan by again
satisfying the requirements of Sections 5 and 7.1.
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14. CHANGE IN CONTROL.
-----------------
14.1 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 "CHANGE IN 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.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the event of
a Change in Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING
CORPORATION"), may assume the Company's rights and obligations under the Plan.
If the Acquiring Corporation elects not to assume the Company's rights and
obligations under outstanding Purchase Rights, the Purchase Date of the then
current Purchase Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. All Purchase
Rights which are neither assumed by the Acquiring Corporation in connection with
the Change in Control nor exercised as of the date of the Change in Control
shall terminate and cease to be outstanding effective as of the date of the
Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
-------------------------------------
A Purchase Right may not be transferred in any manner otherwise than
by will or the laws of descent and distribution and shall be exercisable during
the lifetime of the Participant only by the Participant.
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16. COMPLIANCE WITH SECURITIES LAW.
------------------------------
The issuance of shares under the Plan shall be subject to compliance
with all applicable requirements of federal, state and foreign law with respect
to such securities. A Purchase Right may not be exercised if the issuance of
shares upon such exercise would constitute a violation of any applicable
federal, state or foreign securities laws or other law or regulations or the
requirements of any securities exchange or market system upon which the Stock
may then be listed. In addition, no Purchase Right may be exercised unless
(a) a registration statement under the Securities Act of 1933, as amended, shall
at the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said 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 under the Plan 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 a
Purchase Right, the Company may require the Participant 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.
17. RIGHTS AS A SHAREHOLDER AND EMPLOYEE.
------------------------------------
A Participant shall have no rights as a shareholder by virtue of the
Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (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 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
18. LEGENDS.
-------
The Company may at any time place legends or other identifying symbols
referencing any applicable federal, state or foreign securities law restrictions
or any provision convenient in the administration of the Plan on some or all of
the certificates representing shares of Stock issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant 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:
13
<PAGE>
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
19. NOTIFICATION OF SALE OF SHARES.
------------------------------
The Company may require the Participant to give the Company prompt
notice of any disposition of shares acquired by exercise of a Purchase Right
within two years from the date of granting such Purchase Right or one year from
the date of exercise of such Purchase Right. The Company may require that until
such time as a Participant disposes of shares acquired upon exercise of a
Purchase Right, the Participant shall hold all such shares in the Participant's
name (or, if elected by the Participant, in the name of the Participant and his
or her spouse but not in the name of any nominee) until the lapse of the time
periods with respect to such Purchase Right referred to in the preceding
sentence. The Company may direct that the certificates evidencing shares
acquired by exercise of a Purchase Right refer to such requirement to give
prompt notice of disposition.
20. NOTICES.
-------
All notices or other communications by a Participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.
21. 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 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
14
<PAGE>
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board may at any time amend or terminate the Plan, except that
(a) such termination shall not affect Purchase Rights previously granted under
the Plan, except as permitted under the Plan, and (b) no amendment may adversely
affect a Purchase Right previously granted under the Plan (except to the extent
permitted by the Plan or as may be necessary to qualify the Plan as an employee
stock purchase plan pursuant to Section 423 of the Code or to obtain
qualification or registration of the shares of Stock under applicable federal,
state or foreign securities laws). In addition, an amendment to the Plan must
be approved by the shareholders of the Company within twelve (12) months of the
adoption of such amendment if such amendment would authorize the sale of more
shares than are authorized for issuance under the Plan or would change the
definition of the corporations that may be designated by the Board as
Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing ENACT Health Management Systems 1997 Employee Stock Purchase Plan
was duly adopted by the Board of Directors of the Company on November 17, 1997.
/s/ Chris Tacklind
____________________________________
Secretary
15
<PAGE>
PLAN HISTORY
------------
November 17, 1997 Board adopts the Plan, with an initial reserve of 200,000
shares.
___________, 1997 Shareholders approve Plan, with an initial reserve of
200,000 shares.
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print): ___________________________________________________________
(Last) (First) (Middle)
[_] Original Application for the Offering Period beginning
____________________, 199__.
[_] Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1997 Employee Stock Purchase Plan (the
"PLAN") of ENACT Health Management Systems (the "COMPANY") and subscribe to
purchase shares of the Company's Stock in accordance with this Subscription
Agreement and the Plan.
I hereby authorize payroll deductions in the amount of ________ percent (in
whole percentages not less than 1% (unless an election to stop deductions is
being made) or more than 10%) of my "COMPENSATION" on each payday throughout the
"OFFERING PERIOD" in accordance with the Plan. I understand that these payroll
deductions will be accumulated for the purchase of shares of Stock at the
applicable purchase price determined in accordance with the Plan. I understand
that, except as otherwise provided by the Plan, I will automatically purchase
shares on each Purchase Date under the Plan unless I withdraw from the Plan by
giving written notice on a form provided by the Company or unless my employment
terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set forth
below. (Shares may be issued in the participant's name alone or together with
the participant's spouse as community property or in joint tenancy.)
NAME(S): _________________________________________________________________
ADDRESS: _________________________________________________________________
MY SOCIAL SECURITY NUMBER: ________________________________________________
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase of
shares under the Plan and/or my disposition of such shares. The Company may,
but will not be obligated to, withhold from my compensation the amount necessary
to meet such withholding obligations.
I agree that, unless otherwise permitted by the Company, until I dispose of
the shares I purchased under the Plan, I will hold such shares in the name(s)
entered above (and not in the name of any nominee) for at least two years from
the first day of the Offering Period in which, and at least one year from the
Purchase Date on which, I acquired such shares.
I AGREE THAT I WILL NOTIFY THE CHIEF FINANCIAL OFFICER OF THE COMPANY IN
WRITING WITHIN 30 DAYS AFTER ANY SALE, GIFT, TRANSFER OR OTHER DISPOSITION OF
ANY KIND PRIOR TO THE END OF THE PERIODS REFERRED TO IN THE PRECEDING PARAGRAPH
(A "DISQUALIFYING DISPOSITION") OF ANY SHARES I PURCHASED UNDER THE PLAN. I
FURTHER AGREE THAT IF I DO NOT RESPOND WITHIN 30 DAYS OF THE DATE OF A
DISQUALIFYING DISPOSITION SURVEY DELIVERED TO ME BY CERTIFIED MAIL, THE COMPANY
MAY TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY OF A DISQUALIFYING
DISPOSITION AND MAY COMPUTE AND REPORT TO THE INTERNAL REVENUE SERVICE THE
ORDINARY INCOME I MUST RECOGNIZE UPON SUCH DISQUALIFYING DISPOSITION.
I am familiar with the provisions of the Plan and agree to participate in
the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan.
Date:___________________ Signature:__________________________________________
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): ___________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under the ENACT Health
Management Systems 1997 Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating (the
"CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
[_] A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll
deductions credited to my account under the Plan (if any) not
previously used to purchase shares under the Plan shall not be used to
---
purchase shares on the next Purchase Date of the Current Offering.
Instead, I request that all such amounts be paid to me as soon as
practicable. I understand that this election immediately terminates
my interest in the Current Offering and in the Plan.
[_] B. I elect to terminate my participation in the Current Offering and in
the Plan following my purchase of shares on next Purchase Date of the
Current Offering.
I request that the Company cease all further payroll deductions from
my Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll
deductions credited to my account under the Plan (if any) not
previously used to purchase shares under the Plan shall be used to
purchase shares on the next Purchase Date of the Current Offering to
the extent permitted by the Plan. I understand that this election
will terminate my interest in the Current Offering and in the Plan
immediately following such purchase. I request that any cash balance
remaining in my account under the Plan after my purchase of shares be
paid to me as soon as practicable.
I understand that by making this election I am terminating my interest in
the Plan and that no further payroll deductions will be made (provided that I
have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date: _____________________ Signature:________________________________________
<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>
AMENDED 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
Prentice B. Wright 2,250 September 6, 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>
<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>
