<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1998
REGISTRATION NO. 333-41259
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
ENACT HEALTH MANAGEMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 8082 77-0326649
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1975 WEST EL CAMINO REAL, SUITE 306
MOUNTAIN VIEW, CA 94040
(650) 967-0379
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,OF
PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL EXECUTIVE OFFICERS)
----------------
MATTHEW SANDERS
CHIEF EXECUTIVE OFFICER
ENACT HEALTH MANAGEMENT SYSTEMS
1975 WEST EL CAMINO REAL, SUITE 306
MOUNTAIN VIEW, CA 94040
PHONE: (650) 967-0379
FACSIMILE: (650) 967-9223
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
J. HOWARD CLOWES, ESQ. DONALD J. MURRAY, ESQ.
GRAY CARY WARE & FREIDENRICH LLP DEWEY BALLANTINE 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>
EXPLANATORY NOTE
This Amendment is being filed solely for the purpose of filing certain
exhibits to the Registration Statement.
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 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, Inc. ("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>
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $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. 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 basic net loss per share (1).... $ (0.81)
=======
Shares used in computing pro forma basic
net loss per share (1)................... 5,782
=======
Pro forma diluted net loss per share (1).. $ (0.69)
=======
Shares used in computing pro forma diluted
net loss per share (1)................... 6,755
=======
</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 basic and diluted 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
6
<PAGE>
its products and services to pharmacies, managed care organizations,
diversified healthcare companies and 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 two 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
7
<PAGE>
which manufactures product for the Company in its facilities located in the
Far East, production of the AirWatch 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
8
<PAGE>
transition from development stage to commercial operations will depend upon,
among other things, the successful recruiting of highly skilled managerial and
marketing personnel with experience in business activities such as those
contemplated by the Company. Competition for the type of highly skilled
individuals sought by the Company is intense. There can be no assurance that
the Company will be able to retain existing employees or that it will be able
to find, attract and retain skilled personnel on acceptable terms. See
"Management."
SUBSTANTIAL FLUCTUATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations may fluctuate significantly from quarter
to quarter as a result of a number of factors, including, without limitation,
the timing and success of the Company's future marketing and sales efforts,
the timing of performance and payments under development agreements, if any,
the rate at which customers and partners implement disease state management
and other health information programs within their patient populations, the
rate of patient enrollment in such programs, the entry into the Company's
market of additional competitors, the number and size of clinical trials in
which the Company participates, and general economic conditions. Accordingly,
the Company's future operating results are likely to be subject to variability
from quarter to quarter and could be adversely affected in any particular
quarter. Due to the foregoing, there can be assurance that the Company's
operating results will not be below the expectations of public market analysts
and investors. In such event, the price of the Common Stock could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS RELATED TO PROPRIETARY RIGHTS
The Company's ability to compete successfully will depend, in part, on its
ability to protect its proprietary rights. Although the Company continues to
implement protective measures and intends to defend its proprietary 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
9
<PAGE>
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 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
10
<PAGE>
procedures for limiting liability have been or will be effective, that the
Company will not be subject to litigation that may adversely affect the
Company's results of operations, that adequate insurance will be available to
it in the future at acceptable cost or at all or that any insurance maintained
by the Company will cover, as to scope or amount, any claims that may be made
against the Company.
POSSIBLE NEED FOR ADDITIONAL FINANCING
In order to successfully exploit the ENACT System and implement programs
using the Company's medical data analysis and reporting system, the Company
may be required to make substantial additional investments to market and
promote its products. The Company will also be required to retain the services
of employees in advance of obtaining contracts to provide its services. The
Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the anticipated costs of marketing and
promotion of the Company's tele-health monitoring system), that the proceeds
of this offering, together with available resources, will be sufficient to
satisfy the Company's contemplated cash requirements for at least 18 months
following the consummation of this offering. In the event that the Company's
plans change, or its assumptions change or prove to be inaccurate, the Company
could be required to seek additional financing or curtail its activities. The
Company has limited current arrangements with respect to, or sources of,
additional financing. Any additional equity financing may involve substantial
dilution to the interest of the Company's stockholders, and any debt financing
could result in operational or financial restrictions on the Company. There
can be no assurance that any additional financing will be available to the
Company on acceptable terms or at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
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
11
<PAGE>
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."
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
12
<PAGE>
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, 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 merge 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 and Business--
Collaborative Agreements--Johnson & Johnson's LifeScan Subsidiary."
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 is a registered trademark of the Company in the
United States and Japan; AirWatch Care Report is a registered trademark of the
Company in the United States; Wilby is a registered trademark of the Company
in Australia; and the Wilby logo is a registered tradelogo of the Company in
the United States. 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 basic net loss
per share (1)............. $ (0.81)
=======
Shares used in computing
pro forma basic net loss
per share (1)............. 5,782
=======
Pro forma diluted net loss
per share (1)............. $ (0.69)
=======
Shares used in computing
pro forma diluted net loss
per share (1)............. 6,755
=======
</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 basic and diluted 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
18
<PAGE>
success of the Company's future marketing and sales efforts in generating
recurring revenue, and there can be no assurance that the Company will
generate meaningful revenue from these or other programs, or that such
revenues will have significant margins.
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. Under its agreement with Alza, the Company agreed to
expend a minimum of $2,500,000 in
19
<PAGE>
marketing efforts for its AirWatch Monitors and services, and the Company
fulfilled such obligation through sales and marketing expenses incurred in the
years ended December 31, 1995, 1996 and 1997. The Company intends to expand
its marketing effort in 1998 to facilitate the growth of sales of the AirWatch
Monitors and enrollments and anticipates a rapid increase in marketing
expenditures in future quarters in absolute dollars and as a percentage of
revenues.
The Company's general and administrative expenses increased to $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
20
<PAGE>
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 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. If and as purchase orders for products
increase, the Company will need to increase its inventory levels. In
particular, the Company has agreed with LifeScan to maintain levels of raw
materials for use in producing products for LifeScan, with such levels to be
agreed upon and maintained during such time as LifeScan places purchase orders
exceeding 10,000 units per month.
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.
21
<PAGE>
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.
22
<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
23
<PAGE>
caregiver must monitor the patient's health state and compliance with the
therapeutic program throughout the 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. 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
24
<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.
25
<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
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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.
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. Under the agreement, each party owns the intellectual
property that it develops, and if the parties undertake any joint development
efforts, the resulting intellectual property would be jointly owned. 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. As long as LifeScan
meets certain specified levels of product purchases from the Company, LifeScan
has the right to prohibit the transfer of the Development and Marketing
Agreement if the Company enters into an agreement to be acquired by a
competitor of LifeScan without first offering LifeScan the opportunity to
acquire the Company on the same terms offered by such competitor. Further, if
a competitor does acquire the Company, it must continue to provide the Care
Central services and make certain equipment and patient data available so that
LifeScan may operate a Care Central system. These provisions could delay or
hinder a change of control of the Company in the event the specified LifeScan
competitors attempt to merge with or acquire the Company. 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
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directly marketing to customers via pharmacies, the Company intends to include
with its products a reimbursement package which will include a certificate of
medical necessity for the physician to complete and instructions for the
patient on submitting the certificate and other materials to the payor for
reimbursement. In marketing to managed care organizations, the Company intends
to contract directly with, and be paid directly by, managed care organizations
for provision of products and services to their patient populations. Failure
of the Company to obtain additional reimbursement approvals from payors for
the Company's products and services could have a material adverse effect on
the Company's business and operating results. There can be no assurance that
the Company will be successful in entering contracts with managed care
organizations, or in promoting its products to consumers in pharmacies.
COMPETITION
The market for healthcare information products, services and devices for
health state management is a relatively new and emerging market. Although the
Company has limited direct competition, it faces indirect competition from a
number of sources and expects to experience intense competition in the future
if its products and services are accepted in the marketplace. The Company's
potential competitors include specialty healthcare companies, healthcare
information system and software vendors, healthcare management organizations,
pharmaceutical companies and other service companies within the healthcare
industry. In particular, the Company is aware of several large pharmaceutical
and medical service companies that have stated publicly that they intend to be
involved in providing comprehensive health state management services. The
Company also expects to compete against other companies that provide
statistical and data management services, including clinical trial services to
pharmaceutical companies. The Company's potential competitors include
companies with significantly greater financial, technical, product development
and marketing resources than the Company. There can be no assurance that a
competitor will not develop and successfully introduce competitive products or
services, that the introduction of such products or services will not cause a
reduction in the price at which the Company sells its products and services or
that the Company will be able to compete successfully with any of these
potential competitors. See "Risk Factors--Competition."
MANUFACTURING
The Company does not currently engage in any direct manufacturing
operations. The Company currently uses Flextronics, Ltd. ("Flextronics"), a
manufacturing sub-contractor, to act as a turnkey provider for the Company-
designed monitoring and data reporting devices. Devices are manufactured to
Company specifications and quality standards. Flextronics is ISO 9002
registered and has considerable experience in manufacturing medical devices.
Under its agreement with the Company, Flextronics is responsible for materials
purchasing, inventory management, tooling, and test fixturing, and ships
finished goods inventory to the Company or its designees from plants located
in the Far East.
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
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FDA approvals and clearances may require the submission of extensive clinical
data and supporting information to the FDA.
Under the FDC Act, medical devices are classified into one of three classes
(i.e., class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Safety and effectiveness can
reasonably be assured for class I devices through general controls (e.g.,
labeling, premarket notification and adherence to Good Manufacturing
Practices) and for class II devices through the use of general and special
controls (e.g., performance standards, postmarket surveillance, patient
registries and FDA guidelines). Generally, class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life supporting and implantable devices
or new devices which have been found not to be substantially equivalent to
legally marketed devices.)
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval ("PMA"). A 510(k) clearance will be
granted if the submitted data establishes that the proposed device is
"substantially equivalent" to a legally marketed class I or class II medical
device, or to a class III medical device for which the FDA has not called for
PMAs. It generally takes from four to 12 months from submission to obtain
510(k) premarket clearance, although it may take longer. The FDA may determine
that the proposed device is not substantially equivalent, or that additional
clinical data are needed before a substantial equivalence determination can be
made. Modifications or enhancements to products that are cleared through the
510(k) process that could significantly affect safety or effectiveness or
effect a major change in the intended use of the device require new 510(k)
submissions. The Company's manufacturer is also required to adhere to FDA Good
Manufacturing Practices and similar regulations in other countries, which
include testing, control and documentation requirements enforced by periodic
inspections.
The Company's AirWatch Monitor has received clearance through the 510(k)
process as a Class II device and the Company intends to obtain clearance for
additional personal health monitors pursuant to Section 510(k) of the FDC Act
whenever necessary. The AirWatch Monitor has been cleared as a prescription
device only. FDA clearance of a new 510(k) submission would be required should
the Company decide to market the AirWatch Monitor as an over-the-counter
device. No assurance can be given that the necessary clearances for its
products will be obtained by the Company on a timely basis, if at all, or that
extensive clinical data and supporting information or a PMA application will
not be required. FDA clearance is subject to continual review, and later
discovery of previously unknown problems may result in restrictions on a
product's marketing or withdrawal of the product from the market.
The Company understands that the FDA has recently required a more rigorous
demonstration of substantial equivalence in connection with 510(k)
notifications and that in many cases the time periods required for product
approvals have increased. If additional data is requested by the FDA, it could
delay the Company's market introduction of future monitors. There can be no
assurance that the FDA will not require additional data or that the Company
will receive marketing clearance from the FDA for any of its future monitors.
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
35
<PAGE>
to restructure its contractual arrangements in that state. Such results or the
inability to successfully restructure its contractual arrangements could have
a material adverse effect on the Company.
Confidentiality Requirements. The confidentiality of patient information is
subject to regulation by state law. A variety of statutes and regulations
exist safeguarding privacy and regulating the disclosure and use of medical
information. State constitutions may provide privacy rights and states may
provide private causes of action for violations of an individual's
"expectation of privacy." Tort liability may result from unauthorized access
and breaches of patient confidence. The Company intends to comply with state
law and regulations governing medical information privacy.
In addition, on August 21, 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996, P.L. 104-191 (the "HIPPA"). This
legislation requires the Secretary of Health and Human Services to adopt
national standards for electronic health transactions and the data elements
used in such transactions. The Secretary is required to adopt safeguards to
ensure the integrity and confidentiality of such health information. Violation
of the standards is punishable by fines and, in the case of wrongful
disclosure of individually identifiable health information, imprisonment. The
Secretary is required to issue the standards not later than February 21, 1998.
Separately, the HIPPA also requires the Secretary to submit recommendations to
Congress on standards for the privacy of individually identifiable health
information. These recommendations, which were submitted in September 1997,
propose restrictions on the disclosure and use of patient-identifiable
information, guarantees of rights of patients to information and access to
their health records and punishment for the misuse of personal health
information. Under the HIPPA, Congress has until August 1999 to adopt
legislation regarding the privacy of individually identifiable health
information. If Congress does not act, the Secretary is required to issue
regulations by January 21, 2000. The Company cannot predict what requirements
will ultimately be adopted by Congress however, any limitations imposed by or
the cost of compliance with such requirements could have an adverse effect on
the Company's business.
The Company and its customers may be subject to Federal and state laws and
regulations which govern financial and other arrangements between healthcare
providers. These laws prohibit certain fee splitting arrangements between
healthcare providers, as well as direct and indirect payments, referrals or
other financial arrangements that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Possible sanctions for violation of these
restrictions include civil and criminal penalties. Further, criminal
violations may result in mandatory exclusions of up to five years and
additional permissive exclusions from participation in Medicare and Medicaid
programs.
Regulation in the healthcare field is constantly evolving. The Company is
unable to predict what government regulations, if any, affecting its business
may be promulgated in the future. The Company's business could be adversely
affected by the failure to obtain required licenses and governmental
approvals, comply with applicable regulations or comply with existing or
future laws, rules or regulations or their interpretations.
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.
36
<PAGE>
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.
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. In the interim the Company is negotiating a short term
extension of its lease which expires on February 28, 1998 and actively
pursuing additional short term alternatives. 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.
37
<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 & Hanburys, Division of Glaxo Inc.
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
38
<PAGE>
and marketing, customer service, professional relations and international
operations from May 1989 to March 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.
39
<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 $5.00 per share. In addition,
the Company has adopted, subject to shareholder approval, the 1997 Outside
Directors Stock Option Plan, which provides for formula-based grants of
options to nonemployee directors. See "--Stock Incentive Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of Messrs. Wager, Cooley and Mario.
No interlocking relationship exists between any member of the Company's
Compensation Committee and any member of any other company's board of
directors or compensation committee. The Compensation Committee makes
recommendations regarding the Company's employee stock plans and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
40
<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation received in the most recent
fiscal year and the fiscal year ended December 31, 1996 by the Company's
President and Chief Executive Officer and by the Company's other four most
highly compensated executive officers (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
---------------------
ANNUAL COMPENSATION
------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION
- --------------------------- ---- ---------- --------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Matthew H.L. Sanders.... 1997 $180,000 $36,000 0 $ 0
Chief Executive Officer 1996 180,000 0 0 0
and President
Gilbert S. Mott, Jr..... 1997 238,000 16,000 0 12,000(1)
Executive Vice 1996 238,000 0 0 12,000(1)
President
Chris A. Tacklind....... 1997 144,000 16,000 0 0
Vice President, 1996 144,000 0 0 0
Advanced Development
and Secretary
Eitan M. Fenson......... 1997 135,000 16,000 0 0
Vice President, 1996 133,625 0 50,000 0
Information Services
Henry W. Evans.......... 1997 120,000 16,000 0 0
Chief Financial Officer 1996 96,000 0 30,000 0
</TABLE>
- --------
(1) Represents a monthly expense allowance paid by the Company.
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.
41
<PAGE>
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 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,
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<PAGE>
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.
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
43
<PAGE>
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.
44
<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 to extend the term and increase the number of shares issuable
under such note. 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 extend the term and increase the number of shares issuable under such
note. In December 1997 the note was amended again to provide for the
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
45
<PAGE>
Ventures, a private venture capital firm, of which Mr. Wager is a partner in
connection with their services securing the Teijin agreement.
In July 1997, the Company sold 250,000 and 25,373 shares of Series D
Convertible Preferred Stock to Johnson & Johnson Development Corporation
("J&J"), a 7.1% stockholder, and ALZA, respectively, at a price per share of
$12.00 (the "Series D Shares"). The Series D 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.
46
<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.
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<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.
48
<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, $0.001 par value, of which
8,912,853 shares will be outstanding and 2,000,000 of Preferred Stock, $0.001
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.
49
<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.
50
<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."
51
<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
52
<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 & 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.
53
<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 System ("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.
54
<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>
Product sales...................................... $ -- $ 1,162 $ 4,075
Service revenue.................................... -- 414 1,204
Contract and other revenue......................... 614 1,520 1,180
------- ------- -------
Total revenue...................................... 614 3,096 6,459
Operating costs and expenses:
Cost of product sales............................ -- 877 3,498
Cost of service revenue.......................... -- 435 1,071
Cost of contract and other revenue............... -- 484 437
Research and development......................... 1,365 1,752 2,035
Sales and marketing.............................. 1,185 1,475 2,758
General and administrative....................... 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 basic net loss per share................. $ (0.53) $ (0.81)
======= =======
Shares used in computing pro forma basic net loss
per share......................................... 5,319 5,782
======= =======
Pro forma diluted net loss per share............... $ (0.45) $ (0.69)
======= =======
Shares used in computing pro forma diluted net loss
per share......................................... 6,292 6,755
======= =======
</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 Bulletin No. 98, common shares issued in each of the periods
presented for nominal consideration have been included in the calculation as
if they were outstanding for all periods presented. Diluted net loss per share
has been computed on the same basis as basic net loss per share but also gives
effect to stock options and warrants issued for nominal consideration during
each of the periods presented as if they were outstanding for all periods
presented.
Basic and diluted 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 and diluted 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)
=========== =========== ===========
Basic
Weighted average shares of Common Stock
outstanding........................... 2,192,033 2,259,516 2,390,237
Shares related to Staff Accounting
Bulletin No. 98:
Common Stock......................... 199,867 132,112 2,035
----------- ----------- -----------
Shares used in computing basic net loss
per share............................. 2,391,900 2,391,628 2,392,272
=========== =========== ===========
Basic net loss per share............... $ (1.00) $ (1.17) $ (1.95)
=========== =========== ===========
Pro Forma Basic
Shares used in computing basic net loss
per share............................. 2,391,628 2,392,272
Adjusted to reflect the effect of the
assumed conversion of Preferred
Stock................................. 2,927,369 3,389,533
----------- -----------
Shares used in computing pro forma
basic net loss per share.............. 5,318,997 5,781,805
=========== ===========
Pro forma basic net loss per share..... $ (0.53) $ (0.81)
=========== ===========
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Diluted
Shares used in computing basic net loss
per share............................. 2,391,900 2,391,628 2,392,272
Shares related to Staff Accounting
Bulletin No. 98:
Stock Options........................ 783,529 783,529 783,529
Warrants............................. 189,420 189,420 189,420
----------- ----------- -----------
Shares used in computing diluted net
loss per share........................ 3,364,849 3,364,577 3,365,221
=========== =========== ===========
Diluted net loss per share............. $ (0.71) $ (0.83) $ (1.39)
=========== =========== ===========
Pro Forma Diluted
Shares used in computing diluted net
loss per share........................ 3,364,577 3,365,221
Adjusted to reflect the effect of the
assumed conversion of Preferred
Stock................................. 2,927,369 3,389,533
----------- -----------
Shares used in computing pro forma
diluted net loss per share............ 6,291,946 6,754,754
=========== ===========
Pro forma diluted net loss per share... $ (0.45) $ (0.69)
=========== ===========
</TABLE>
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 diluted
net loss per share as well as an additional 1,997 shares related to
outstanding warrants not included above (as determined using the treasury
stock method 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
F-9
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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).
F-10
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-11
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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>
F-12
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. If the Offering closes
on or prior to February 20, 1998, the outstanding shares of Series D Preferred
Stock will convert into Common Stock at a price equal to 65% of the price
received in such offering. If the Offering closes after February 20, 1998, the
outstanding shares of Series D Preferred Stock will convert into Common Stock
at a price equal to 50% of the price received in such offering. In no event
will the conversion price 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 be 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 prior to February 20, 1998 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).
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
F-13
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
F-14
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1995 AND 1997 STOCK OPTION PLANS
In March 1995, the board of directors adopted the 1995 Stock Option Plan
(the "1995 Plan") which provides for issuance of Common Stock options to
employees, consultants and directors. Incentive stock options may be granted
under the 1995 Plan with exercise prices not less than the fair value, and
nonstatutory options may be granted with exercise prices of no less than 85%
of the fair value of the Company's Common Stock on the date of the grant, as
determined by the board of directors. Options become exercisable as determined
by the board of directors (generally over four years) and expire after ten
years.
In March 1997, the board of directors adopted the 1997 Stock Option Plan
(the "1997 Plan") which provides for issuance of Common Stock options to
employees, consultants and directors. Incentive stock options may be granted
under the 1997 Plan with exercise prices of not less than the fair value,
nonstatutory options may be granted with exercise prices of no less than 85%
of the fair value, and 10% owner options may be granted with exercise prices
of no less than 110% of the fair value of the Company's Common Stock on the
date of the grant, as determined by the board of directors. A 10% owner option
means options granted to an optionee who, at the date of the grant, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company. Options 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>
F-15
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
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 $0.83
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.
F-16
<PAGE>
ENACT HEALTH MANAGEMENT SYSTEMS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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-17
<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................................................................. 23
Management............................................................... 38
Certain Transactions..................................................... 45
Principal Stockholders................................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 51
Underwriting............................................................. 52
Legal Matters............................................................ 53
Experts.................................................................. 53
Additional Information................................................... 54
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, as amended.
10.8 Convertible Note issued by ENACT Health Management Systems Health
Management Systems to ALZA Corporation dated August 30, 1996, as
amended.
10.9 Convertible Note issued by ENACT Health Management Systems to Nippon
Enterprise Development Corp. dated October 21, 1996, as amended.
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, as
amended.
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.
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>
- --------
* Filed with this Amendment 4. 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 10th day of February 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 February 10, 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. 4 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
February 9, 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, as amended.
10.8 Convertible Note issued by ENACT Health Management Systems Health
Management Systems to ALZA Corporation dated August 30, 1996, as
amended.
10.9 Convertible Note issued by ENACT Health Management Systems to Nippon
Enterprise Development Corp. dated October 21, 1996, as amended.
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, as
amended.
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.
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>
- --------
* Filed with this Amendment 4. 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 10.7
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR
HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT
COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE
ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
CONVERTIBLE NOTE
----------------
$1,500,000.00 October 17, 1996
--
ENACT Health Management Systems, a California corporation (the "Company"), for
value received, hereby promises to pay to R.D. Merrill Associates II or its
registered assigns ("Holder"), the principal sum of One Million Five Hundred
Thousand Dollars ($1,500,000.00), or so much thereof as may have been advanced
by the Holder, with interest (computed on the basis of a 365-day year) on the
unpaid amount thereof at the rate of Prime Rate (which shall mean the "Prime
Rate" as that term is used and quoted from time to time by The Wall Street
Journal) per annum, compounded annually, from the date hereof (the "Rate"). The
initial Rate shall be subject to change during the term of the Convertible Note
as the Prime Rate changes.
Notwithstanding the foregoing, if during any period the Rate exceeds the
maximum lawful nonusurious rate of interest permitted under applicable law (the
"Maximum Rate"), the rate of interest in effect on this note shall be limited to
the Maximum Rate during each such period, but at all times thereafter the rate
of interest in effect on this Convertible Note shall be the Maximum Rate until
the total amount of the interest accrued on this Convertible Note equals the
total amount of interest which would have accrued hereon if the Rate had at all
times been in effect for the applicable period.
Subject to the terms and limitations of this Convertible Note, the Company may
borrow under this Convertible Note, and the term of this Convertible Note shall
be, from the date hereof until December 31, 1997, at which time all unpaid
principal and interest shall be due and payable in full. During the term of
this Convertible Note, the Holder shall advance any sum in increments of
$500,000 that the Company from time to time may request so long as the sum
requested by the Company shall not cause the outstanding principal balance under
this Convertible Note to exceed $1,500,000.00. On the date hereof, the Holder
shall advance to the Company a sum equal to $500,000, which shall be the initial
outstanding balance of this Convertible Note. Payments
<PAGE>
hereunder shall be made by the Company to the Holder, at the address as provided
to the Company by the Holder in writing, in lawful money of the United States of
America.
If any payment on this Convertible Note shall become due on a Saturday,
Sunday, or a public holiday under the laws of the State of California, such
payment shall be made on the next succeeding business day and such extension of
time shall be included in computing interest in connection with such payment.
1. Definitions. As used in this Convertible Note, the following terms shall
------------
have the definitions ascribed to them below:
1.1 "Equity Financing" shall mean the Company's first stock financing
after the date hereof which results in gross proceeds to the Company, in cash or
conversion of debt, in any ninety (90) day period of Ten Million Dollars
($10,000,000.00) or more, including but not limited to an initial public
offering of the Company's common stock.
1.2 "Securities" shall mean the securities of the Company sold in the
Equity Financing. The securities purchasable upon conversion of this Convertible
Note shall be authorized in conjunction with such Equity Financing.
1.3 "Conversion Share Price" shall mean the product of (X) price at which
a share of the Securities is sold in the Equity Financing multiplied by (Y) 0.8.
1.4 "Conversion Stock" shall mean shares of the Securities purchasable
upon conversion of this Convertible Note; the total number of shares to be
determined by dividing (A) the amount of the outstanding principal under this
Convertible Note which Holder elects to convert at the time of conversion by (B)
the Conversion Share Price.
2. Conversion.
----------
2.1 At any time after the date hereof, at Holder's option, the Holder may
convert all or any portion of the then outstanding principal under this
Convertible Note into that number of shares of Conversion Stock equal to the
amount of principal which Holder elects to convert divided by the Conversion
Share Price.
2.2 This Convertible Note may be converted in whole or part by the Holder,
at any time after the date hereof prior to the date on which all principal
hereunder is repaid, by the surrender of this Convertible Note, together with
the Notice of Conversion and Investment Representation Statement in the forms
attached hereto as Attachments 1 and 2, respectively, duly completed and
-------------------
executed at the principal office of the Company, specifying the portion of the
Convertible Note to be converted. This Convertible Note shall be deemed to have
been converted immediately prior to the close of business on the date of its
surrender for conversion as provided above, and the person entitled to receive
the shares of Conversion Stock issuable upon such conversion shall be treated
for all purposes as Holder of such shares of record as of the close of
<PAGE>
business on such date. As promptly as practicable after such date, the Company
shall issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of full shares of Conversion Stock
issuable upon such conversion. If a conversion is effected for less than the
total number of shares of Conversion Stock then issuable upon conversion,
promptly after surrender of the Convertible Note upon such conversion, the
Company will execute and deliver a new Convertible Note, dated the date hereof,
evidencing the right of the Holder to the balance of the Conversion Stock
available hereunder upon the same terms and conditions set forth herein. All
notices and other communications from the Company to the Holder of this
Convertible Note shall be delivered personally or mailed by first class mail,
postage prepaid, to the address furnished to the Company in writing by the last
Holder of this Convertible Note who shall have furnished an address to the
Company in writing, and if mailed shall be deemed given three days after deposit
in the United States mail.
3. Adjustments and Notices of Record Date. The Conversion Share Price and
--------------------------------------
the number of shares of Conversion Stock shall be subject to adjustment from
time to time in accordance with the following provisions:
3.1 Subdivision or Combinations. In case the Company shall at any time
---------------------------
subdivide the outstanding shares of the Securities, the Conversion Share Price
in effect immediately prior to such subdivision shall be proportionately
decreased, and in case the Company shall at any time combine the outstanding
shares of the Securities, the Conversion Share Price in effect immediately prior
to such combination shall be proportionately increased, effective at the close
of business on the date of such subdivision or combination, as the case may be.
3.2 Stock Dividends. In the case the Company shall at any time pay a
---------------
dividend with respect to the Securities payable in the Securities, then the
Conversion Share Price in effect immediately prior to the record date for
distribution of such dividend shall be adjusted to that price determined by
multiplying the Conversion Share Price in effect immediately prior to such
record date by a fraction (i) the numerator of which shall be the total number
of shares of the Securities outstanding immediately prior to such dividend and
(ii) the denominator of which shall be the total number of shares of the
Securities outstanding immediately after such dividend.
3.3 Number of Shares. Upon each adjustment pursuant to subdivisions (a)
----------------
or (b) of this Section 3, the registered holder of this Convertible Note shall
thereafter (until another such adjustment) be entitled to purchase, at the
adjusted Conversion Share Price, the number of shares of the Securities,
calculated to the nearest full share, obtained by recalculating the number of
shares Conversion Stock pursuant to Section 1.4 hereof.
3.4 Reclassification or Merger. In case of any reclassification, change
--------------------------
or conversion of securities of the class or series issuable upon conversion of
this Convertible Note (other than as a result of a subdivision or combination
described above), the Company, or such successor or purchasing corporation, as
the case may be, shall duly execute and delivery to the holder hereof a new
convertible note so that the holder shall have the right to receive, in lieu of
the shares of the Securities theretofore issuable upon conversion of this
Convertible Note, the
<PAGE>
kind and amount of shares of stock, other securities, money and property
receivable upon such reclassification, change or merger by the holder of the
number of shares of Securities then purchasable under this Convertible Note.
Such new convertible note shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
3. The provisions of this subsection 3.4 shall similarly apply to successive
reclassifications, changes, and mergers.
3.5 Upon any adjustment of the Conversion Share Price and any increase or
decrease in the number of shares of the Securities upon the conversion of this
Convertible Note, then, and in each such case, the Company, within thirty (30)
days thereafter, shall give written notice thereof to the registered holder of
this Convertible Note at the address of such holder as shown on the books of the
Company which notice shall state the Conversion Share Price as adjusted and the
increased or decreased number of shares of Securities purchasable upon the
conversion of this Convertible Note, setting forth in reasonable detail the
method of calculation of each.
4. Subordination. All monies subject to this Convertible Note (the
-------------
"Subordinated Debt") is subordinated in right of payment to all obligations of
the Company to ALZA Corporation, a Delaware corporation ("ALZA") now existing or
hereafter arising, together with all costs of collecting such obligations
(including attorneys' fees), including, without limitation, all interest
accruing after the commencement by or against the Company of any bankruptcy,
reorganization or similar proceeding, and all obligations under that certain
Loan Agreement (the "Loan Agreement") by and between the Company and ALZA dated
August 29, 1995, as amended (the "Senior Debt").
-----------
4.1 Holder will not demand or receive from the Company (and the Company
will not pay to Holder) all or any part of the Subordinated Debt, by way of
payment, prepayment, setoff, lawsuit or otherwise, nor will Holder commence, or
cause to commence, prosecute or participate in any administrative, legal or
equitable action against the Company, for so long as any portion of the Senior
Debt remains outstanding.
4.2 Holder shall promptly deliver to ALZA in the form received (except for
endorsement or assignment by Holder where required by ALZA) for application to
the Senior Debt any payment, distribution, security or proceeds received by
Holder with respect to the Subordinated Debt other than in accordance with this
Convertible Note.
4.3 In the event of the Company's insolvency, reorganization or any case
or proceeding under any bankruptcy or insolvency law or laws relating to the
relief of debtors, these provisions shall remain in full force and effect, and
ALZA's claims against the Company and the estate of the Company shall be paid in
full before any payment is made to Holder.
4.4 No amendment of the documents evidencing or relating to the
Subordinated Debt shall directly or indirectly modify the provisions of this in
any manner which might terminate or impair the subordination of the Subordinated
Debt. By way of example, such
<PAGE>
instruments shall not be amended to (i) increase the rate of interest with
respect to the Subordinated Debt, or (ii) accelerate the payment of the
principal or interest or any other portion of the Subordinated Debt.
4.5 The provisions of this Section 4 shall remain effective for so long as
the Company owes any amounts to ALZA under the Loan Agreement or otherwise. If,
at any time after payment in full of the Senior Debt any payments of the Senior
Debt must be disgorged by ALZA for any reason (including, without limitation,
the bankruptcy of the Company), this Section 4 and the relative rights and
priorities set forth herein shall be reinstated as to all such disgorged
payments as though such payments had not been made and Holder shall immediately
pay over to ALZA all payments received with respect to the Subordinated Debt to
the extent that such payments would have been prohibited hereunder.
4.6 The provisions of this Section 4 shall bind any successors or
assignees of Holder and shall benefit any successors or assigns of ALZA. This
Agreement is solely for the benefit of Holder and ALZA and not for the benefit
of the Company or any other party. Holder further agrees that if the Company is
in the process of refinancing a portion of the Senior Debt with a new lender,
and if ALZA makes a request of Holder, Holder shall agree to enter into a new
subordination agreement with the new lender on substantially the terms and
conditions of this Agreement.
5. Events of Default. If any of the following events shall occur (herein
-----------------
individually referred to as an "Event of Default"), the Holder may declare the
entire unpaid principal on the Convertible Note, together with accrued interest,
immediately due and payable, without presentment, demand, protest or notice of
protest of any kind, all of which are hereby expressly waived:
5.1 If the principal and interest due hereunder is not paid within twenty-
one (21) days of when due and payable.
5.2 If the Company:
(a) shall commence any proceeding or any other action relating to it
in bankruptcy or seek reorganization, arrangement, readjustment of its debts,
dissolution, liquidation, winding-up, composition or any other relief under the
United States Bankruptcy Act, as amended, or under any other insolvency,
reorganization, liquidation, dissolution, arrangement, composition, readjustment
or debt or any other similar act or law, of any jurisdiction, domestic or
foreign, now or hereafter existing;
(b) shall apply for, or consent to or acquiesce in, an appointment of
a receiver, conservator, trustee or similar officer for it or for all or a
substantial part of its property; or
(c) shall make a general assignment for the benefit of creditors.
<PAGE>
(d) shall admit in writing its inability to pay its debts as they
mature in the ordinary course of business or that the amount of its total
liabilities exceed the amount of it total assets.
5.3 If any proceedings are commenced or any other action is taken against
the Company in bankruptcy or seeking reorganization, arrangement, readjustment
of its debts, liquidation, dissolution, winding-up, composition or any other
relief under the United States Bankruptcy Act, as amended, or under any other
insolvency, reorganization, liquidation, dissolution, arrangement, composition,
readjustment of debt or any other similar act or law of any jurisdiction,
domestic, or foreign, now or hereafter existing; or a receiver, conservator,
trustee or similar officer for the Company of for all or a substantial part of
its property is appointed; and, in each such case, such event continues for
forty-five (45) days undismissed or undischarged.
6. Exchange and Transfer. This Convertible Note is subject to the
---------------------
restrictions on transfer set forth herein. Upon surrender for transfer of this
Convertible Note and compliance with said restrictions on transfer, the Company
shall execute and deliver in the name of the transferee or transferees a new
Convertible Note or Notes for a like principal amount.
This Convertible Note shall not be assigned, transferred or otherwise
conveyed, in whole or in part, by the Holder except with the prior written
consent of the Company. This Convertible Note, if presented for a transfer or
exchange to which the Company has consented, shall (if so required by the
Company) be duly endorsed by, or be accompanied by, or be accompanied by
instruments of transfer in form satisfactory to the Company duly executed by,
the registered Holder or its authorized attorney.
Any such exchange or transfer shall be without charge, except that the Company
may require payment of the sum sufficient to cover any tax or governmental
charge that may be imposed in relation thereto by a government other than the
federal government of the United States or the government of any of its States.
The Company may deem and treat the registered Holder hereof as the absolute
owner hereof (whether or not this Convertible Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon by anyone
other than the Company), for the purpose of receiving payment of or on account
of the principal hereof, for the conversion hereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
7. Prepayment. The Company may prepay this Convertible Note in full or in
----------
part before December 31, 1997 provided that it delivers thirty (30) days prior
written notice of its intention to prepay this Convertible Note and that during
such 30 day period the Holder shall retain its right to convert the outstanding
principal under this Convertible Note as provided in Section 2.
<PAGE>
8. Reservation of Stock. On and after the date of the Equity Financing, the
--------------------
Company will reserve from its authorized and unissued Securities a sufficient
number of shares to provide for the issuance of Conversion Stock upon the
conversion of this Convertible Note. Issuance of this Convertible Note shall
constitute full authority to the Company's officers who are charged with the
duty of executing stock certificates to execute and issue the necessary
certificates for shares of Conversion Stock issuable upon the conversion of this
Convertible Note.
9. Representation of Holder. By acceptance of this Convertible Note, Holder
------------------------
represents to the Company that he is (a) an "accredited investor" as defined by
Rule 501 of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, and (b) an "excluded purchaser" as defined by
the regulations promulgated under the California Corporate Securities Act of
1968. Holder also represents that by reason of its business and financial
experience it has the capacity to protect its own interests in this transaction
and is accepting this Convertible Note for its own account and not with a view
to its resale or distribution.
10. Notices. Any notice required by any provision of this Convertible Note
-------
to be given to the Holder shall be in writing and may be delivered by personal
service, sent by facsimile with confirmation of receipt or sent by registered or
certified mail, return receipt requested, with postage thereon fully prepaid.
All such communications shall be addressed to the Holder of record at its
address appearing on the books of the Company.
11. No Rights as Shareholder. This Convertible Note, as such, shall not
------------------------
entitle the Holder to any rights as a shareholder of the Company, except as
otherwise specified herein.
<PAGE>
12. Legal Fees. In the event of any legal action to enforce the rights of
----------
any party named in this Convertible Note, the party prevailing in such action
shall be entitled, in addition to such other relief as may be granted, all
reasonable costs and expenses, including reasonable attorneys' fees, incurred in
such action.
13. Headings and Governing Law. The descriptive headings in this Convertible
--------------------------
Note are inserted for convenience only and do not constitute a part of this
Convertible Note. The validity, meaning and effect of this Convertible Note
shall be determined in accordance with the laws of the State of California,
without regard to principles of conflicts of law.
IN WITNESS WHEREOF, ENACT Health Management Systems has duly caused this
Convertible Note to be signed in its name and on its behalf by its duly
authorized officer as of the date hereinabove written.
ENACT HEALTH MANAGEMENT SYSTEMS
By: /s/ Matthew Sanders
--------------------------------
Matthew Sanders, President
<PAGE>
Attachment 1
NOTICE OF CONVERSION
TO: ENACT HEALTH MANAGEMENT SYSTEMS
1. The undersigned hereby elects to convert the right to receive
$____________________________ pursuant to the terms of the attached Convertible
Note, into the right to receive _______________ shares of Conversion Stock of
ENACT Health Management Systems without further payment.
2. Please issue a certificate or certificates representing said shares of
Conversion Stock in the name of the undersigned or in such other name as is
specified below:
_________________________
(Name)
_________________________
(Address)
___________________________ __________________________________________________
(Date) (Name of Convertible Note Holder)
By:_________________________________________
Title:______________________________________
<PAGE>
Attachment 2
INVESTMENT REPRESENTATION STATEMENT
Shares of Conversion Stock
(as defined in the attached Convertible Note) of
ENACT HEALTH MANAGEMENT SYSTEMS
In connection with the purchase of the above-listed securities, the
undersigned hereby represents to ENACT Health Management Systems (the "Company")
as follows:
1. The securities to be received upon the conversion of the Convertible
Note (the "Securities") will be acquired for investment for its own account, not
as a nominee or agent, and not with a view to the sale or distribution of any
part thereof, and the undersigned has no present intention of selling, granting
participation in or otherwise distributing the same, but subject, nevertheless,
to any requirement of law that the disposition of its property shall at all
times be within its control. By executing this Statement, the undersigned
further represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer, or grant participations to such
person or to any third person, with respect to any Securities issuable upon
conversion of the Convertible Note.
(b) The undersigned understands that the Securities issuable upon
conversion of the Convertible Note at the time of issuance may not be registered
under the Securities Act of 1933, as amended (the "Act"), and applicable state
securities laws, on the ground that the issuance of such securities is exempt
pursuant to Section 4(2) of the Act and state law exemptions relating to offers
and sales not by means of a public offering, and that the Company's reliance on
such exemptions is predicated on the undersigned's representations set forth
herein.
(c) The undersigned agrees that in no event will it make a disposition of
any Securities acquired upon the conversion of the Convertible Note unless and
until (i) it shall have notified the Company of the proposed disposition and
shall have furnished the Company with a statement of the circumstances
surrounding the proposed disposition, and (ii) it shall have furnished the
Company with an opinion of counsel satisfactory to the Company and Company's
counsel to the effect that (A) appropriate action necessary for compliance with
the Act and any applicable state securities laws has been taken or an exemption
from the registration requirements of the Act and such laws is available, and
(B) the proposed transfer will not violate any of said laws.
(d) The undersigned acknowledges that an investment in the Company is
highly speculative and represents that it is able to fend for itself in the
transactions contemplated by this Statement, has such knowledge and experience
in financial and business matters as to be capable of evaluating the merits and
risks of its investments, and has the ability to bear the economic risks
(including the risk of a total loss) of its investment. The undersigned
represents that it has had the opportunity to ask questions of the Company
concerning the Company's business and assets and to obtain any additional
information which it considered necessary to verify the accuracy of or to
<PAGE>
amplify the Company's disclosures, and has had all questions which have been
asked by it satisfactorily answered by the Company.
(e) The undersigned acknowledges that the Securities issuable upon
conversion of the Convertible Note must be held indefinitely unless subsequently
registered under the Act or an exemption from such registration is available.
The undersigned is aware of the provisions of Rule 144 promulgated under the Act
which permit limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things, the
existence of a public market for the shares, the availability of certain current
public information about the Company, the resale occurring not less than two
years after a party has purchased and paid for the security to be sold, the sale
being through a "broker's transaction" or in transactions directly with a
"market makers" (as provided by Rule 144(f)) and the number of shares being sold
during any three-month period not exceeding specified limitations.
Dated:___________________
____________________________________________
(Typed or Printed Name)
By:_________________________________________
(Signature)
____________________________________________
(Title)
<PAGE>
EXHIBIT 10.7
AMENDMENT NUMBER ONE TO
-----------------------
CONVERTIBLE NOTE
----------------
This Amendment Number One dated November 25, 1997 to that certain
Convertible Note (the "Note") dated October 17, 1996 issued by ENACT Health
Management Systems, a California corporation ("ENACT"), to R.D. Merrill
Associates II ("R.D. Merrill").
RECITALS
--------
A. ENACT issued the Note to R.D. Merrill in consideration for certain
funds loaned by R.D. Merrill to ENACT.
B. Both ENACT and R.D. Merrill desire to amend the Note to extend the
term and increase the conversion rate.
NOW, THEREFORE, based on these premises and in consideration of the
mutual covenants and agreements contained herein, the parties agree as follows:
AGREEMENT
---------
1. The first sentence of third paragraph of the Note is hereby amended
to read in its entirety as follows:
"Subject to the terms and limitations of this Convertible Note,
the Company may borrow under this Convertible Note, and the term of this
Convertible Note shall be, from the date hereof until December 31, 1998, at
which time all unpaid principal and interest shall be due and payable in
full."
2. Section 1.3 of the Note is hereby amended to read in its entirety
as follows:
1.3 "Conversion Share Price" shall mean (i) for the first
$500,000 converted, the product of (X) price at which a share of the
Securities is sold in the Equity Financing multiplied by (Y) 0.5, and (ii)
for any principal and interest converted in excess of $500,000, the product
of (X) price of which a share of Securities is sold in the Equity Financing
multiplied by (Y) 0.75; provided, however, that if either such product is
less than $6.00 per share, such Conversion Share Price shall be deemed to
be $6.00."
3. The Note, as amended hereby, shall remain in full force and effect.
4. This Amendment may be executed in counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the day and year first above written.
ENACT Health Management Systems
By: /s/ Henry Evans
------------------------------
Henry Evans
Chief Financial Officer
Accepted by:
R.D. Merrill Associates II
By: /s/ William D. Pettit, Jr.
------------------------------
Name: William D. Pettit, Jr.
----------------------------
Title:
---------------------------
2
<PAGE>
EXHIBIT 10.18
CONFIDENTIAL
OPERATING AGREEMENT
-------------------
THIS AGREEMENT ("Agreement") is made and entered into as of the effective
date ("Effective Date") set forth below between ENACT Health Management Systems,
having its principal place of business at 421 Jacaranda Lane, Palo Alto, CA
94306 ("ENACT"), and ALZA Corporation, having its principal place of business at
950 Page Mill Road, Palo Alto, CA 94304 ("ALZA").
RECITALS
--------
WHEREAS, ENACT is engaged in the business of designing, manufacturing,
selling and providing products and services for health management systems; and
WHEREAS, ALZA wishes to act as a promotional representative for certain
products produced by and services provided by ENACT;
NOW THEREFORE, in consideration of the mutual promises and covenants set
forth below, the parties agree as follows:
AGREEMENT
---------
1. DEFINITIONS.
-----------
1.1 To "promote" means to encourage purchase of Products and Services
-------
by Payers and seek access to and reimbursement approval of the Products and
Services by Payers in the Territory as more fully set forth in Section 3.
1.2 "NAMs" shall mean ALZA's National Account Managers.
----
1.3 "Territory" means the United States of America and Puerto Rico.
---------
1.4 "Products" means the ENACT AirWatch products described in Exhibit
-------- -------
"A".
- ---
1.5 "Payer" means federal (including military and the veterans
-----
administration), state (including Medicaid), managed care or other third party
payers for health care products and services, including, but not limited to,
health maintenance organizations, preferred provider organizations and managed
insurance accounts.
1.6 "Net Sales" means the net amount invoiced by ENACT or any third
---------
party for the Products and Services after deducting all reasonable trade and
quantity discounts actually taken, taxes on sales and freight, insurance and
other transportation charges, in each case to the extent added to the sales
price and set forth separately as such in the total amount invoiced.
1.7 "Exempt Sales" means sales of the Products and Services to or
------------
through pharmaceutical companies and clinical research organizations by ENACT
for
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
one-time clinical or pharmacoeconomic studies; provided, however, that
Exempt Sales shall not include the continuation of the Services for clinical
study subjects beyond the end of such study.
1.8 "Services" means the ENACT AirWatch Central Service and related
--------
services described in Exhibit "A".
-----------
1.9 An "affiliate" means a corporation or any other entity which
---------
controls, is controlled by, or is under common control with, the designated
party.
2. APPOINTMENT OF ALZA.
-------------------
2.1 Appointment. ENACT hereby appoints ALZA, and ALZA accepts such
-----------
appointment, as an authorized representative of ENACT to promote the Products
and Services to Payers within the Territory subject to the terms and conditions
of this Agreement. Notwithstanding the foregoing, except as otherwise limited
by the rights of ALZA set forth herein, ENACT may market and conduct promotional
and sales efforts either within or without the Territory; provided, however,
that such marketing, promotional and sales efforts in the Territory shall not
relieve ENACT of its obligation to pay commissions to ALZA in accordance with
this Agreement. ALZA will act as the primary contact with Payers in the
Territory with respect to access to and reimbursement approval of Products and
Services and shall manage overall Payer promotional strategy and specific
promotional call plans to implement such strategy in the Territory. ENACT shall
coordinate its activities with ALZA when ENACT or its designated representatives
other than ALZA are contacting any Payer in the Territory.
2.2 Cooperation. Each party hereto shall cooperate with and assist
-----------
the other in promotional and marketing efforts within the Territory; provided,
however, that, except as otherwise expressly provided herein, ALZA shall not
have primary responsibility for any promotional or marketing effort, but shall
assist ENACT with such efforts upon ENACT's reasonable request and subject to
the availability of ALZA's existing resources as determined by ALZA. Whenever
reasonably requested by one party hereto, the other party shall follow up on
correspondence with any Payer relating to the Products and Services within the
Territory, and shall assist in the resolution of commercial or technical issues
which may arise with such Payer.
3. ALZA'S GENERAL DUTIES. ALZA shall use reasonable diligent efforts, on
---------------------
a similar basis as ALZA's promotion of its own products to Payers, to: (a)
introduce, promote, solicit and otherwise encourage and seek access to and
reimbursement approval of the Products and Services by Payers in the
Territory; (b) cooperate in implementing lawful and applicable Products and
Services sales programs and policies of ENACT; and (c) except as otherwise
provided in this Agreement, bear the entire cost and expense of conducting all
of its activities under this Agreement. Except as otherwise agreed upon by
ENACT and ALZA, ALZA's scope of promotional responsibility shall not include
direct contact with prescribing physicians or other respiratory care
specialists except to the extent that such persons affect or can influence
decisions regarding product access, formulary approval, reimbursement (both
initial approval and continued approval) and prescribing by Payers.
4. ALZA'S SPECIFIC DUTIES. Without in any way limiting the generality of
----------------------
the
2
<PAGE>
preceding paragraph, ALZA agrees as follows:
4.1 Promotion. ALZA's promotional efforts shall include, but are not
---------
limited to, direct contacts and visitation with representatives of Payers,
including medical and pharmacy directors, formulary committee members, outcome/
pharmacoeconomic staff, utilization managers, plan administrators and health
plan sales and marketing staff. Notwithstanding anything herein to the
contrary, ALZA's obligations hereunder shall not include direct contacts with
Payers other than the large, influential Payers in the Territory such as those
listed in Exhibit " B." ALZA shall not make any representations, warranties,
-------------
claims or other descriptions with respect to the Products or Services except as
set forth in ENACT's most current written instructional materials and product
warranty as furnished by ENACT to ALZA.
4.2 Maintenance of Reimbursement Approval. In addition to the
-------------------------------------
seeking of access to and reimbursement approval of the Products and Services by
Payers, ALZA shall seek to maintain access and reimbursement approval of the
Products and Services by Payers.
4.3 Soliciting Contracts. ALZA shall use reasonable diligent efforts
--------------------
(similar to those ALZA would use to promote its own products of similar
commercial potential) to solicit and obtain contracts to purchase the Products
and Services from Payers, as is appropriate. Contracting practices shall be
developed jointly by ALZA and ENACT as set forth in greater detail in Section
5.6 hereof.
4.4 Dedication of NAMs. ALZA agrees to devote the following to
------------------
promoting the Products and Services pursuant to this Agreement: (a) in the
twelve months immediately following the Effective Date, ALZA will devote the
services of its NAMs [*], (b) after the twelfth month through the twenty-fourth
month following the Effective Date, ALZA will devote the services of its NAMs
[*], and (c) thereafter, through termination of this Agreement, ALZA will devote
the services of its NAMs [*]. During the twelve months immediately following the
date of commercial launch of the Products and Services, ALZA agrees to base a
portion of the incentive compensation of each NAM involved in promoting the
Products and Services under this Agreement on such activities, which portion
shall be, in the aggregate, [*]. Thereafter, ALZA agrees to base a portion of
the incentive compensation of each NAM involved in promoting the Products and
Services on such activities, which portion [*].
4.5 Additional Support. Upon ENACT's reasonable request, ALZA shall
------------------
provide ENACT with additional support and assistance in the areas of market
research, convention/conference organization, managed care and other advisory
groups, public relations and clinical protocol review/input (including but not
limited to pharmacoeconomic studies); provided, however, such additional support
shall be subject to the availability of ALZA's existing resources as determined
by ALZA at the
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
3
<PAGE>
time of such request and shall in no event exceed [*]. Except as otherwise
expressly provided herein, ENACT shall have primary responsibility for the
preparation, development and execution of such projects and any additional
support and assistance provided by ALZA hereunder shall be in the form of
review, comment and other similar assistance. ENACT shall reimburse ALZA for all
reasonable out-of-pocket expenses incurred by ALZA while providing such
additional support and assistance.
4.6 Reports and Meetings. ALZA and ENACT will jointly develop and
--------------------
design an overall Payer promotional strategy. ALZA will develop specific
promotional call plans to implement such strategy. Within thirty (30) days of
the end of each quarter, ALZA shall prepare and submit to ENACT a quarterly call
activity report summarizing the account call activities of ALZA's NAMs
hereunder, other activities and efforts conducted by ALZA hereunder and any
material customer feedback received with respect to the Products and Services
during the preceding quarter. ALZA and ENACT, together with ENACT's other
representatives, shall cooperate with each other to formalize a process for
making quarterly forecasts as to the level of expected sales of the Products and
Services. In addition, ALZA shall forward to ENACT information regarding any
significant promotional problems or significant problems with the Products and
Services promptly upon receipt by ALZA. Additionally, ALZA and ENACT shall meet
no less than twice each calendar year, or as may be more frequently agreed upon,
to review and discuss the relationship of the parties and the sales, marketing
and promotional strategies (including the overall Payer promotional strategy)
and efforts of both parties.
4.7 Professional Association Meetings and Trade Conventions. ALZA
-------------------------------------------------------
agrees to display the Products and Services at appropriate professional
association meetings, trade conventions and industry symposia in managed
health care attended by ALZA at which ALZA personnel are displaying other
products. At ENACT's expense, ENACT shall provide to ALZA for such events all
printed promotional materials and, as appropriate, display graphics to ALZA's
display specifications. ALZA will be responsible for coordinating, and shall
coordinate, such meeting, convention and symposia plans and schedules with
ENACT. To the extent such events as agreed to by ALZA and ENACT require ALZA
to retain a greater exhibit display space than ALZA would need for products
being displayed by ALZA other than the Products and Services, ALZA and ENACT
shall share the associated costs payable to third parties (including without
limitation display space rental) of such events.
4.8 ENACT Materials. ALZA shall provide ENACT with ALZA's supply
---------------
destination for the ENACT promotional information, marketing literature, forms
and other marketing materials. ALZA shall then be responsible for distributing
and disseminating such information, marketing literature and other materials in
connection with its activities hereunder, and shall notify ENACT when additional
materials are required. ALZA shall not use any ENACT promotional information,
marketing literature, forms or other printed material of any kind, for any
purpose, except as may otherwise be provided herein and except to the extent
ALZA is required to disclose ALZA's promotion of the Products and Services
during the course of its business operations, without obtaining ENACT's prior
written consent for such use.
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
4
<PAGE>
5. ENACT'S DUTIES, REPRESENTATIONS AND WARRANTIES.
----------------------------------------------
5.1 Promoting and Marketing Products. Consistent with ALZA's rights
--------------------------------
to promote the Products and Services as set forth in this Agreement, ENACT,
through its own marketing organization or through designated representatives,
shall diligently promote and market the Products and Services throughout the
term of this Agreement. ENACT's promotional and marketing efforts shall
include, without limitation, direct detailing to allergy, pulmonary and other
appropriate prescribing physicians.
5.2 Marketing Plan. ENACT has developed a marketing plan with
--------------
respect to the Products and Services covering the period from the Effective Date
through December 31, 1996, a copy of which is attached hereto as Exhibit "C".
-----------
By November 30 of each year after 1995 during the term of this Agreement, ENACT
and its designated representatives will prepare and present to ALZA a marketing
and business plan for the Products and Services for the following calendar year.
ENACT will seek and consider in good faith ALZA's input in the development of
each such plan.
5.3 Product Marketing. From the Effective Date through the later of
-----------------
(a) the date which is 12 months after the date of commercial launch of the
Products and Services, and (b) the date which is 18 months after the Effective
Date, ENACT shall invest a minimum of Two Million Five Hundred Thousand Dollars
($2,500,000) to fund marketing expenses of the Products and Services (which
expenses (i) may include ENACT's marketing personnel and administration
expenses, to the extent such personnel are devoted to marketing the Products and
Services and to the extent such marketing personnel and administration expenses
do not exceed $500,000 and (ii) may not include packaging, packaging development
and clinical outcomes research expenses) consistent with the marketing
activities set forth in the marketing plan attached hereto as Exhibit "C".
-----------
5.4 Reports and Meetings. Within forty-five (45) days of the end of
--------------------
each quarter, ENACT shall provide ALZA with a detailed report on direct
detailing and marketing activities undertaken by ENACT and its designated
representatives during the preceding quarter, including, without limitation, the
total number of sales calls and the number of direct details to allergy,
pulmonary and other appropriate prescribing physicians. Such report shall also
include a summary of any material customer feedback received with respect to the
Products and Services during the preceding quarter. Within twenty (20) days of
the end of each month, ENACT shall provide ALZA with a summary report of all
contacts ENACT, acting directly or through its designated representatives, had
with Payers during the preceding calendar month, including, without limitation,
the identity of the Payer contacted and the purpose of the contact. In addition
to fulfilling the mutual reporting and meeting obligations described in Section
4.6 hereof, ENACT shall forward to ALZA information regarding any significant
sales and marketing problems or significant problems with the Products and
Services promptly upon receipt by ENACT.
5.5 Literature and Promotional Materials. ENACT shall furnish ALZA,
------------------------------------
without charge (except as may otherwise be agreed upon), with such quantities as
ALZA may reasonably request of technical, advertising and selling information
and literature concerning the Products and Services and samples of the Products,
which
5
<PAGE>
ENACT may from time to time produce or have available for trade
circulation. Upon ALZA's reasonable request, ENACT shall cooperate with ALZA to
develop modifications of such information and literature, or packages comprised
of the foregoing and/or samples of Products, for use specifically with
particular Payers to assist ALZA in its promotion of the Products and Services
to such Payers. All ENACT technical, promotional and other literature and sales
samples which are provided to ALZA must be maintained in a commercially
reasonable manner and any unused materials shall be returned to ENACT upon
request. ENACT shall develop and review such information and literature in on-
going consultation with ALZA and shall update such information and literature on
a timely basis and notify ALZA promptly of any such updates.
5.6 Pricing, Terms and Conditions and Warranties. ENACT and ALZA
--------------------------------------------
shall develop in consultation with each other contract terms relating to the
price and availability of Products and Services for Payers, which terms will
be based on ENACT's general pricing policies, and contracting practices.
Subject to such joint development obligations, ALZA shall have no right or
authority, express or implied, directly or indirectly, to alter, enlarge or
limit ENACT's terms and conditions of sale or the representations or
guarantees expressly contained in ENACT's most current written product
warranty as distributed by ENACT for the applicable Product and ENACT shall be
solely responsible for setting, and may, in its sole discretion and with
prompt notice to ALZA, amend, alter or change, the terms and conditions of
sale and/or the product warranty.
5.7 Training. ENACT shall provide to ALZA training sessions for
--------
ALZA's NAMs and other sales representatives at locations specified and provided
for by ALZA. Each party shall be responsible for such expenses and costs that
it incurs for such training sessions, including training materials,
transportation costs, facilities, etc.
5.8 Pharmacoeconomic Support. ENACT will provide ALZA, at ENACT's
------------------------
expense, pharmacoeconomic and outcomes support in ALZA's promotional efforts
hereunder. Pharmacoeconomic support shall include, without limitation,
development of customized protocols and analysis of Product and Services data,
as requested by Payers. ENACT will allow ALZA to have input into the
development of any pharmacoeconomic studies relating to the Products and
Services and shall provide ALZA with access to the results of any such studies.
5.9 Clinical Studies. ENACT shall be responsible for conducting any
----------------
clinical studies necessary or desirable in connection with the Products and
Services and shall provide ALZA with copies of all clinical publications and
reports promptly as such publications and reports become available.
5.10 Sales Representative in Territory. During the first three years
---------------------------------
and six months of this Agreement, ENACT will engage the services of Muro
Pharmaceutical Inc. ("Muro"), or some other sales representative with at least
the same capabilities as Muro as of the Effective Date, to act as primary sales
representative for the Products and Services in the Territory. ENACT will notify
ALZA promptly of any material change in its relationship and agreements with
Muro at any time after the Effective Date. After the first three years and six
months of this Agreement, ENACT and/or its qualified designated representative
shall promote the Products and Services to prescribers in a
6
<PAGE>
manner consistent with commercial opportunity and practice. ENACT will provide
to ALZA copies of any agreements reached with primary sales representatives for
the Products and Services in the Territory during the term of this Agreement.
5.11 Manufacturing. ENACT represents and warrants that the Products
-------------
will be manufactured in accordance with Good Manufacturing Practices. ENACT
shall maintain a secured source for the manufacture of the Products with
sufficient capacity to meet projected sales forecasts and shall maintain
sufficient inventories of the Products to meet projected sales forecasts.
5.12 Regulatory Compliance. ENACT represents and warrants that ENACT
---------------------
has obtained all applicable governmental and regulatory approvals for the
promotion, sale and use of the Products and Services in the Territory and that
ENACT will maintain such approvals and such other approvals as may become
necessary during the term of this Agreement and will comply with all laws and
regulations applicable to the packaging, labelling, use, promotion and sale of
the Product and Services. In furtherance and not in limitation of the
foregoing, ENACT shall prepare all technical, advertising and selling
information and literature concerning the Products and Services in full
compliance with all applicable laws and regulations, including but not limited
to any applicable United States Food and Drug Administration guidelines
concerning promotional materials, and shall be solely responsible for complying
with all applicable pharmacovigilance requirements.
5.13 Provision of Services. Throughout the term of this Agreement,
---------------------
ENACT will diligently perform the Services, including, without limitation,
customizing data reports upon the reasonable demand of Payers and prescribers
and providing periodic newsletters to Payers, prescribers and subscribers to the
Services. In addition, ENACT will provide sufficient operational support in
order to meet the foregoing obligations. ENACT will develop a back-up data
storage site for use in providing the Services in the event of an emergency at
the primary data storage site for the Services.
5.14 Distribution and Customer Service. ENACT shall have the sole
---------------------------------
responsibility for Product warehousing and distribution, processing, invoicing
and collection of customer orders for the Products and Services, inventory,
receivables and handling customer service activities, either directly or through
its designated or qualified representatives. ENACT shall maintain a toll-free
customer telephone line available to ENACT's customers during ENACT's regular
business hours.
5.15 Other Assistance. Upon ALZA's reasonable request, ENACT shall
----------------
provide ALZA with such other sales, engineering and technical assistance and
training regarding the Products and Services as may be reasonably necessary to
promote the Products and Services to Payers in the Territory.
6. COMMISSIONS.
-----------
6.1 Accrual and Payment of Commissions.
----------------------------------
(a) Beginning on the Effective Date and continuing until this
Agreement is terminated, ENACT shall pay ALZA a commission equal to [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
7
<PAGE>
percent [*] of the Net Sales of Products and Services in the Territory,
including any renewals of the Services in the Territory, and, with respect to
the Services, subject to the adjustments set forth below.
(b) Beginning on the Effective Date and continuing until this
Agreement is terminated, ENACT shall pay ALZA a commission on any license fee or
other payments made by third parties to ENACT with respect to the
commercialization of products and/or services which are related to the
measurement and reporting of pulmonary function in connection with respiratory
illness including asthma and chronic obstructive pulmonary disease ("COPD")
which would directly compete with the Products or Services ("Competing Products
and Services") as follows: (i) [*] percent [*] of any payments for engineering,
design and manufacturing services received by ENACT or any of its affiliates
from a third party with respect to any Competing Products and Services; (ii) the
greater of (A) [*] percent [*] of the sales of any Competing Products and
Services by a third party, and (B) twenty-five percent (25%) of all revenues
received by ENACT or any of its affiliates from such third party in respect of
the sales of Competing Products and Services (and not otherwise included in
Section 6.1(b)(i) hereof); and (iii) [*] percent [*] of any up front payments or
special one-time fees received by ENACT or any of its affiliates from such third
party for commercial rights to any Competing Products and Services (and not
otherwise included in Section 6.1(b)(i) hereof).
(c) Commissions due pursuant to this Section 6 shall be paid by
ENACT to ALZA on or before fifteen (15) days after the last day of each
fiscal quarter and in a manner and in amounts that are consistent with the
timing of ENACT's revenue recognition policy, attached hereto as Exhibit
-------
"D," which shall be in accordance with generally accepted accounting
----
principles and which is subject to change by mutual agreement of ENACT and
ALZA. ALZA acknowledges that ENACT will recognize, in conformance with
generally accepted accounting principles, revenue for Services over the
terms of the Services provided. Accompanying each payment of commission
hereunder, ENACT shall also deliver a statement setting forth the
information necessary to calculate Net Sales during the period for which
the commissions are being paid and the calculation of the commissions due
by ENACT for such period. ALZA's sole source of compensation for rendering
services on ENACT's behalf pursuant to this Agreement shall be the
commissions payable under this Agreement. Except as otherwise expressly
provided herein, ALZA shall have no right to receive any other compensation
from ENACT for services rendered as a promotional representative or to
receive reimbursement of any expenses or other costs incurred by ALZA in
connection therewith. ENACT shall not, without ALZA's written consent,
accept consideration for any sale or transfer of Products or Services in
the Territory in a form that would not be reflected in Net Sales.
6.2 Ineligible Sales. Notwithstanding any other provisions of this
----------------
Agreement, ALZA shall not be entitled to receive commissions on the following:
[*];
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
8
<PAGE>
[*]
[*].
6.3 Commission Adjustments. There shall be deducted by ENACT from
----------------------
any future commissions earned by, owed to or later accruing to ALZA, an amount
equal to previously paid commissions (or a portion thereof) received by ALZA for
any canceled Services for which a commission has been paid in advance, but only
if ENACT refunds to the purchaser amounts paid by such purchaser in advance and
only if such cancellation is not a result of ENACT's nonperformance under the
applicable service agreement. This deduction from or charge against any future
commissions shall be made within the three calendar months immediately following
the event giving rise to the need for the deduction from or charge against
present or future commissions. In the event that no commissions are earned by
and payable to ALZA within such three calendar month period, ALZA shall
reimburse ENACT for the full amount of such deduction or charge within thirty
(30) days of the end of such three calendar month period.
6.4 Right of Audit. ENACT shall maintain accurate records of (a)
--------------
marketing expenses incurred in compliance with Section 5.3 hereof, and (b) Net
Sales of Products and Services in the Territory, the dates of sale, the price of
the Products and Services sold, and other information relating to discounts,
cancellations and the like. To ensure compliance with the terms of this
Agreement, ALZA shall have the right to have an inspection and audit of all the
relevant accounting and sales books and records of ENACT conducted by an
independent audit firm reasonably acceptable to both parties, and any such
inspection and audit shall be conducted during regular business hours at
ENACT's offices and in such a manner as not to interfere with ENACT's normal
business activities. ENACT agrees to cooperate fully with any such audit. In
no event shall audits be made hereunder more frequently than every six (6)
months. Such audit firm shall present to ENACT and ALZA a confidential summary
of its conclusions as to what marketing expenses have been incurred by ENACT
and whether commissions paid are sufficient under this Agreement, and such
audit firm shall keep confidential all information disclosed or made available
to it by ENACT in the investigation. If such inspections should disclose any
underreporting of commissions, ENACT shall promptly pay ALZA such amount,
together with interest thereon at the rate of 1-1/2% per month or the highest
interest rate allowed by law, whichever is lower from
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
9
<PAGE>
the date on which such amount became due, plus the cost of the audit,
including, without limitation, the fee of the independent audit firm. If an
inspection does not disclose any underreporting of commission in excess of
five percent (5%) over the course of the applicable audit period or is
requested solely for purposes of verifying marketing expenses, ALZA shall bear
the cost of the audit.
7. SALES OF PRODUCTS AND SERVICES. ENACT shall accept and reject orders
------------------------------
for the purchase of the Products and Services at its sole discretion. ENACT
shall not have any obligation to ALZA to accept any purchase order for Products
and Services and shall not have any liability to ALZA for any rejection,
cancellation or other action taken by ENACT with respect to a purchase order;
provided ENACT acts in good faith and in a manner consistent with its other
obligations under this Agreement.
8. PROPRIETARY RIGHTS AND CONFIDENTIAL INFORMATION.
-----------------------------------------------
8.1 Use and Ownership of Proprietary Rights. Ownership and all
---------------------------------------
right, title and interest in and to any trademarks, trade names or service marks
relating to the Products and Services are and shall remain vested solely in
ENACT. ENACT grants to ALZA a non-exclusive, limited license to use ENACT's
trademarks, trade names, service marks and logos solely to identify ALZA as a
promotional representative of ENACT in the Territory. ALZA acknowledges the
ownership of ENACT in the trademarks, trade names and service marks and agrees
to use reasonable efforts to preserve ENACT's rights in such proprietary rights.
ALZA acknowledges that ALZA's utilization of such trademarks, trade names and
service marks will not create any right, title or interest in or to such
proprietary rights by ALZA, and shall inure to the benefit of ENACT. ALZA shall
provide to ENACT, at no cost to ENACT, examples of its use of ENACT's
trademarks, trade names, service marks and logos, shall use such proprietary
rights in a manner which conforms with the standards set by ENACT and shall
modify such use if reasonably requested by ENACT. ALZA shall not adopt any
trademarks, trade names or service marks which are confusingly similar to the
trademarks, trade names or service marks used by ENACT to sell or assist in the
sale of its Products and Services.
8.2 Confidentiality of Information. Each party hereto acknowledges
------------------------------
that, in the course of promoting the Products and Services and performing its
duties under this Agreement, it may obtain information relating to the other
party and the products of the other party which it knows or has reason to know
is of a confidential and/or proprietary nature ("Confidential Information").
Such Confidential Information may include, but is not limited to, minimum
price guidelines, future product releases, trade secrets, know-how,
inventions, techniques, processes, programs, schematics, software source
documents, data, pricing and discount schedules, customer lists, financial
information and sales and marketing plans. Each party hereto shall keep and
hold such Confidential Information in the strictest confidence, and shall not
use such Confidential Information for any purpose, other than as may be
reasonably necessary for the performance of its duties pursuant to this
Agreement, without such other party's prior written consent. No party shall
disclose any Confidential Information to any person or entity, other than to
its employees or consultants who are bound by obligations of confidentiality
at least as stringent as those set forth in this Agreement as may be
reasonably necessary for purposes of performing its duties hereunder, without
such other party's prior written consent. The duty to protect the other
party's
10
<PAGE>
Confidential Information expires three years from the date of disclosure of
such Confidential Information. The obligations of this paragraph shall survive
the termination of this Agreement.
9. TERM AND TERMINATION.
--------------------
9.1 Finite Term. This Agreement is effective as of the Effective
-----------
Date and shall expire and terminate 5 years and 6 months following the Effective
Date, unless renewed by mutual consent of both parties for such further term as
the parties may determine; provided, however, for each month that the launch and
commencement of commercial sales of the Products and Services in the Territory
is delayed after November 1, 1995, the date of termination under this Section
9.1 shall be extended for an additional month.
9.2 ALZA Termination Without Cause. ALZA may terminate this
------------------------------
Agreement at any time and for any reason, without cause and without penalty and
without compensation of any kind except as expressly set forth herein, effective
270 days after delivery of written notice of termination to ENACT if such notice
is given within three years of the Effective Date of this Agreement; otherwise
such termination shall be effective 180 days after delivery of such notice to
ENACT.
9.3 Immediate Termination for Cause by ENACT. Notwithstanding the
----------------------------------------
foregoing, upon the occurrence of any of the following events, ENACT may
terminate this Agreement for cause immediately by giving to ALZA written notice
of such termination:
9.3.1 ALZA materially breaches or defaults in any of the terms or
conditions of this Agreement and such breach or default is not corrected or
rectified to the reasonable satisfaction of ENACT within 90 days following
notice of breach or default from ENACT.
9.3.2 Any general assignment by ALZA for the benefit of
creditors, or admission in writing of its inability to pay its debts as they
become due, or filing of a voluntary petition in bankruptcy, or adjudication
as a bankrupt or insolvent, or filing by ALZA of any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief from creditors, or filing of any
answer admitting or failing to deny the material allegations of a petition
filed against it for any such relief, or seeking or consenting to or
acquiescing in the appointment of any trustee, receiver or liquidator of
itself or all or substantially all of its properties.
9.4 Immediate Termination for Cause by ALZA. Notwithstanding the
---------------------------------------
foregoing, upon the occurrence of any of the following events, ALZA may
terminate this Agreement immediately by giving ENACT written notice of
termination:
9.4.1 ENACT materially breaches or defaults in any of the
terms or conditions of this Agreement (other than as provided in Section
9.4.2) and such breach or default is not corrected or rectified to the
reasonable satisfaction of ALZA within 90 days following notice of breach or
default from ALZA.
11
<PAGE>
9.4.2 ENACT fails to make a payment when due to ALZA under this
Agreement and such failure to pay is not rectified to the reasonable
satisfaction of ALZA within 30 days following notice of failure to pay from
ALZA.
9.4.3 ENACT and its designated representatives do not diligently
promote and market the Product.
9.4.4 Except as otherwise agreed upon by ENACT and ALZA in
writing, ENACT and its designated representative do not achieve, through direct
detailing to allergy, pulmonary and other appropriate prescribing physicians, a
minimum of 30,000 direct details in the Territory each fiscal quarter during the
first three years and six months of this Agreement; provided, however, if the
number of details achieved in a fiscal quarter is between 15,000 and 30,000 in
the Territory, ENACT shall have the immediately following two fiscal quarters to
makeup any deficiency in a given quarter such that the average of all three
quarters is at least 30,000 direct details in the Territory.
9.4.5 Any general assignment by ENACT for the benefit of
creditors, or admission in writing of its inability to pay its debts as they
become due, or filing of a voluntary petition in bankruptcy, or adjudication as
a bankrupt or insolvent, or filing by ENACT of any petition or answer seeking
for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief from creditors, or filing of any
answer admitting or failing to deny the material allegations of a petition
filed against it for any such relief, or seeking or consenting to or
acquiescing in the appointment of any trustee, receiver or liquidator of
itself or all or substantially all of its properties.
9.4.6 ENACT materially defaults under the terms of the Loan
Agreement dated August ___, 1995 between ENACT and ALZA, and such default is not
cured pursuant to the terms of the Loan Agreement.
9.5 Post-Termination Marketing and Other Obligations. Following
------------------------------------------------
notice of intent to terminate pursuant to Sections 9.2, 9.3 or 9.4 of this
Agreement, ENACT shall pay to ALZA, in accordance with the payment periods set
forth in Section 6 hereof, commissions as determined pursuant to Section 6.1 for
such remaining period(s), if any, up to the effective date of termination.
ENACT shall have the right after the effective date of termination of this
Agreement to deal with, and solicit orders from, any and all persons and
entities, including Payers who dealt with ALZA, without any liability of any
kind to ALZA, except as expressly provided herein. ALZA shall, within 30 days
after termination of this Agreement, provide to ENACT a list of all Payers, with
their address, that ALZA contacted in the course of its promotional activities
hereunder.
9.6 Post-Termination Payment. Following termination of this
------------------------
Agreement pursuant to Section 9.1 or termination of this Agreement for cause by
ALZA pursuant to Section 9.4, and until the earlier of (i) the date cumulative
commission payments to ALZA under this Agreement equal $15 million or (ii) the
date on which post-termination commissions paid pursuant to this Section 9.6
shall have been paid for 15 years, ALZA shall be entitled to receive a three
percent 3% commission based
12
<PAGE>
upon Net Sales of Products and Services in the Territory, including any
renewals of the Services in the Territory, subject to the payment conditions
and adjustments set forth in Article 6 hereof; provided, however, that in the
event ENACT has offered in writing to ALZA to extend the term of the Agreement
under Section 9.1 for an additional two-year term on the terms set forth in
this Agreement (including, without limitation, the same commission and payment
structure, the same commitment of NAM support at the same level as is required
immediately prior to the time of renewal, and the right to receive the same
post-termination payments at the end of such renewal period), and ALZA has
rejected such an offer, no post-termination payment shall be due under this
Section 9.6. During the term of this post-termination payment, all obligations
of ENACT relating to the payment of commissions hereunder, including without
limitation, Sections 6.1, 6.2, 6.3 and 6.4, shall remain in full force and
effect.
13
<PAGE>
10. RIGHT OF FUTURE PRODUCTS AND SERVICES.
-------------------------------------
(a) ALZA shall have the right, during the term of this Agreement,
to promote to Payers any and all improvements and upgrades of the Products and
Services and future ENACT products and services that measure and report
pulmonary function in connection with respiratory illness, including asthma
and COPD, that are developed by or for ENACT, or acquired by ENACT, on the
terms and conditions contained herein. Any such future products and services
shall automatically be included in the definitions of "Products" and
"Services" contained in Sections 1.4 and 1.8, respectively, without being
described on Exhibit A hereto, and without further action on the part of
---------
either party hereto.
(b) ALZA shall have an exclusive right of first negotiation to
promote any new products and services of ENACT (other than products or
services covered by Section 10(a)) to Payers and/or any other customers in the
Territory on terms as appropriate to the commercial opportunity (and ENACT
agrees to negotiate with ALZA in good faith for at least 60 days with respect
thereto, commencing at least six months prior to market launch of the
applicable product and/or service). If the parties do not reach agreement
under the right of first negotiation for any product and/or service, and if
ENACT thereafter determines to offer the right to promote such product and/or
service in the Territory to Payers and/or any other customers on materially
different economic terms than offered to or negotiated with ALZA, then ENACT
shall, prior to offering such terms to another party, offer such new terms to
ALZA and negotiate in good faith with ALZA for at least 30 days to conclude an
agreement on such terms. Notwithstanding the foregoing, if ALZA determines in
its sole discretion that the applicable product and/or service is not of
strategic interest to ALZA, ALZA may waive the foregoing 60-day negotiation
period and/or ALZA's right of first refusal, in whole or in part, in writing.
11. WARRANTY OF NON-INFRINGEMENT. ENACT represents and warrants that, to
----------------------------
ENACT's knowledge after conducting a reasonable investigation, ENACT has
sufficient title and ownership of all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, proprietary rights and processes
necessary for the manufacture, use and sale of the Products and Services and
that the manufacture, use and sale of the Products and Services, will not
infringe on the proprietary rights of any third party.
12. LIMITATION OF REMEDY. Neither party hereto shall have any claim
--------------------
against the other for compensation or otherwise with regard to this Agreement or
the promotional representation created hereby, whether in contract, in tort,
under any warranty or otherwise, either during the term of this Agreement or
after its termination, except as expressly provided herein. The remedies for
commissions on termination set forth in Section 9.6 are exclusive remedies,
and any liability of a party hereto, whether in contract, in tort, under any
warranty or otherwise, with respect to this Agreement, or anything done in
connection with the promotional representation created hereby including, but
not limited to, the performance or breach hereof or the development,
manufacture, acceptance or rejection of orders for, sale and delivery of
Products and Services, shall not, except as expressly provided herein, exceed
or in any way differ from the compensation provided for in this Agreement.
14
<PAGE>
13. LIMITATION OF LIABILITY. Except as expressly provided herein, neither
-----------------------
party hereto shall, by reason of the termination of this Agreement or otherwise,
be liable to the other party for any special, incidental or consequential
damages such as, but not limited to, compensation or damages for loss of present
or prospective profits or revenues, loss of actual or anticipated commissions on
sales or anticipated sales, or expenditures, investments or commitments made in
connection with the establishment, development or maintenance of the promotional
representation created by this Agreement or in connection with the performance
of obligations hereunder.
14. INDEMNIFICATION. ENACT shall indemnify, defend and hold ALZA and its
---------------
officers, directors, agents and employees harmless from and against any and all
claims, liabilities, demands, damages, money judgments and costs and expenses
(including reasonable attorneys' fees) of any kind arising from or relating to
the testing, manufacture, marketing, packaging, distribution, storage, handling,
sale or use of Products or Services, including, without limitation, any product
liability claims and any claim against ALZA for patent or trademark infringement
in connection with the promotion of the Products and Services, excepting only
any such claims by a third party that result directly from a breach by ALZA of
its obligations under this Agreement. ALZA shall permit ENACT's attorneys, at
ENACT's discretion and cost, to handle and control the defense of any claims and
suits as to which ALZA may be entitled to indemnity hereunder, and ALZA agrees
not to settle any claims or suits without the prior written consent of ENACT.
ALZA shall indemnify, defend and hold ENACT and its officers, directors, agents
and employees harmless from and against any and all claims, liabilities,
demands, damages, money judgments and costs and expenses (including reasonable
attorneys' fees) of any kind arising from or relating to any claims by a third
party that result directly from ALZA making any misrepresentations with respect
to the Products and Services by contradicting information set forth in written
instructional materials and the product warranty furnished by ENACT to ALZA.
ENACT shall permit ALZA's attorneys, at ALZA's discretion and cost, to handle
and control the defense of any claims and suits as to which ENACT may be
entitled to indemnity hereunder, and ENACT agrees not to settle any claims or
suits without the prior written consent of ALZA.
15. GENERAL PROVISIONS.
------------------
15.1 No Competing Product Representation and Non-Solicitation.
--------------------------------------------------------
Except as otherwise provided in Section 10(a), ALZA shall not, during the term
of this Agreement, engage in the Territory either as the sales or technical
representative or agent in the sale of any products or parts thereof relating
to the measurement and reporting of pulmonary function in connection with
respiratory illness including asthma and COPD and which would directly compete
with any of the Products and Services. During and for a period of two (2)
years following the termination of this Agreement, neither party shall
interfere in any way with the business of the other party. By way of example
and not of limitation, neither party shall during this period solicit or
induce any employee or independent contractor to terminate any employment,
contractual or other relationship established with the other party.
15.2 No Waiver. The failure of either party to enforce at any time or
---------
for any period any of the provisions of this Agreement shall not be construed to
be a waiver of those provisions or of the right of that party thereafter to
enforce each and every
15
<PAGE>
provision hereof.
15.3 Return of Property. Promptly upon the termination of this
------------------
Agreement, each party hereto shall turn over to the other party all Confidential
Information and all other information and material, including, without
limitation, all samples, pamphlets, catalogs, booklets and other technical
advertising data and literature concerning such other party and/or its products,
and all copies thereof, in its possession, custody or control; provided,
however, that a party shall be entitled to retain one set of all Confidential
Information for the sole purpose of monitoring such party's obligations under
Section 8.2 hereunder.
15.4 Prohibitions. Neither party hereto shall enter into any
------------
agreement, contract or arrangement with any government or government
representative or with any other person, firm, corporation, entity or enterprise
imposing any legal obligation or liability of any kind on the other party
hereto. Without limiting the generality of the foregoing, neither party hereto
shall sign the other party's name to any commercial paper, contract or other
instrument and neither shall contract any debt or enter into any agreement,
either express or implied, binding such other party to the payment of money
and/or in any other regard.
15.5 Independent Contractor. Each of ENACT and ALZA shall be
----------------------
independent contractors in all matters relating to this Agreement. Neither
party shall be deemed an agent for the other for any purposes and neither shall
have power or authority, whether apparent, actual, ostensible or otherwise, to
bind or commit the other in any way. Neither party hereto or its employees
shall be deemed to be or act as employees of the other party for any purpose,
including, but not limited to, under the meaning or application of any federal,
state or local unemployment insurance laws, social security laws, workers'
compensation or industrial accident laws or under any other laws or regulations
which would or might impute any obligation or liability to the other party
hereto by reason of any employment relationship.
15.6 Notices. All notices which any party to this Agreement may be
-------
required or may wish to give may be given by addressing them to the other party
at the addresses set forth below by: (a) personal delivery, (b) by commercial
overnight courier with written verification of actual receipt, (c) by registered
or certified mail, or (d) by facsimile with receipt confirmed:
If to ALZA: ALZA Corporation
950 Page Mill Road
P.O. Box 10950
Palo Alto, California 94303-0802
Attention: Vice President and General Counsel
If to ENACT: Enact Health Management Systems
421 Jacaranda Lane
Palo Alto, CA 94306
Attention: President
If so mailed or otherwise delivered, such notices shall be deemed and presumed
to have been given on the earlier of the date of actual receipt or three (3)
days after mailing or authorized form of delivery.
16
<PAGE>
15.7 Governing Law. This Agreement (and any other documents referred
-------------
to herein) shall in all respects be interpreted, enforced and governed by and
under the laws of the State of California applicable to instruments, persons and
transactions which have legal contacts and relationships solely within the State
of California. The language of this Agreement shall be construed as a whole
according to its fair meaning, and not strictly for or against either of the
parties.
15.8 Binding Arbitration. Any claim, dispute or controversy arising
-------------------
out of or in any way relating to this Agreement or to the promotional
representative relationship created hereby, or the enforcement or alleged
infringement, interference or breach of any related right or obligation of the
parties hereto, shall be submitted to binding arbitration by the American
Arbitration Association in accordance with the commercial rules then in effect
for that Association. The arbitration shall be conducted in San Mateo or Santa
Clara County, California. Notwithstanding this provision and the agreement
between the parties to submit their disputes to binding arbitration, nothing in
this Agreement shall prevent either party from seeking injunctive relief (or any
other provisional remedy) from any court having jurisdiction over the parties
and the subject matter of their dispute. The prevailing party in any such
arbitration or in any action at law or suit in equity relating to this Agreement
shall be paid by the other party a reasonable sum for attorneys' fees and
expenses of such prevailing party.
15.9 Assignment. Neither party shall transfer, pledge or assign this
----------
Agreement or any part hereof, interest herein, obligation hereunder or
commissions or compensation due to it hereunder without obtaining in each
instance the prior written consent of the other; provided, however, that ALZA
may assign its rights to any affiliate of ALZA without the consent of ENACT.
15.10 Integration/Modification/Entire Agreement. This Agreement
-----------------------------------------
constitutes the entire agreement and final understanding of the parties with
respect to the subject matter hereof and supersedes and terminates any and all
prior and/or contemporaneous negotiations, representations, understandings,
discussions, offers and/or agreements between the parties, whether written or
verbal, express or implied, relating in any way to the subject matter hereof.
This Agreement is intended by the parties to be a complete and wholly integrated
expression of their understanding and agreement, and it may not be altered,
amended, modified or otherwise changed in any way except in writing.
17
<PAGE>
15.11 Survivability. The provisions of Sections 6.4, 8.2, 9.5, 9.6,
-------------
14, 15.1, 15.3 and this Section 15.11 shall survive the termination for any
reason of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of August __, 1995 (the "Effective Date").
ENACT HEALTH MANAGEMENT SYSTEMS ALZA CORPORATION
By: _____________________________ By: ___________________________
Title: __________________________ Title: ___________________________
Date: ___________________________ Date: ___________________________
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
18
<PAGE>
EXHIBIT A
---------
[*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT B
---------
[*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT C
---------
[*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT D
---------
Revenue Recognition
Revenues result primarily from sales of devices and the execution of agreements
to provide tele-monitoring services for customers over a specified time period,
generally one year.
Revenues from device sales are recognized upon shipment of devices to customers,
and revenues from the underlying tele-monitoring services agreements are
recognized on a straight line basis over the terms of the respective agreements.
<PAGE>
Exhibit 10.19
DEVELOPMENT AND MARKETING AGREEMENT
THIS DEVELOPMENT AND MARKETING AGREEMENT ("Agreement") is made and
entered into as of July 25, 1997 (the "Effective Date") by and between ENACT
Health Management Systems ("ENACT"), a California corporation with a principal
place of business at 1975 West El Camino Real, Suite 306, Mountain View,
California 94040, and LifeScan, Inc. ("LifeScan"), a California corporation with
a principal place of business at 1000 Gibraltar Drive, Milpitas, California
95035-6312.
RECITALS
--------
LifeScan and ENACT intend to cooperate to develop and expand the market for
diabetes care by employing innovative new approaches to remote patient
monitoring, reporting, and disease management. The parties intend in
particular, to improve the lives of persons with diabetes, to increase
LifeScan's market share and to promote adoption of ENACT's health reporting
system.
ENACT has developed products and information services for the management of
chronic medical conditions; ENACT has developed an electronic reporting
methodology currently embodied in a device referred to as "Reporter", and on
line health reporting system ("Care Central") that allows individuals with
diabetes systems to transmit monitored data over phone lines or other electronic
networks to a centralized database/records repository; authorized persons are
able to access the repository to receive health status information via fax,
electronic network, or mail;
LifeScan desires to develop, market and distribute various products and
services based on Reporter and Care Central throughout the world to health care
providers and patients involved in managing diabetes, and is willing to make
certain purchase and other commitments to ENACT. In consideration of the
foregoing, the parties agree as follows:
1. Definitions.
1.1 "Affiliate" means any person that is directly or indirectly
controlled by, under common control with or that controls the person with which
it is affiliated. For purposes of this definition, control will be deemed to
exist where (a) a person has the ability to elect a majority of the directors,
trustees (or other managers) of such other person; (b) a person is a general
partner of such other person; or (c) a person directly or indirectly holds (or
has power to vote) more than forty percent (40%) of the voting equity interests
of such other person.
1.2 "Care Central" means ENACT's electronic records repository,
database, and communications center(s) used for the receipt, storage, and
electronic delivery of monitored End User medical data including data from
LifeScan Diabetes Systems, as further described in Exhibit G. "Care Central" is
---------
a service mark of ENACT.
- --------------------------------------------------------------------------------
CONFIDENTIAL
[*] = CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
1
<PAGE>
1.3 "Care Central Services" means the services offered by ENACT
hereunder to receive, store, and report data and derivations thereof for
applications in diabetes management utilizing the Reporter and ENACT's Care
Central as described in Exhibit D.
---------
1.4 "Diabetes System" means any device that measures and stores blood
glucose and/or other diagnostic readings and measurements (all of which are
directly related to diabetes monitoring) and that is capable of downloading such
measurements to another device or system.
1.5 "ENACT Interface" means the circuit design, software protocols,
and other technical information and devices, used to connect remote LifeScan
medical monitors to Care Central, whether embodied in a separate device such as
a Reporter or embedded in a medical device.
1.6 "End User" means the individual person whose Diabetes System is
connected by a Reporter to Care Central.
1.7 "End User Enrollment" or in the past tense "Enrolled" means the
establishment in Care Central of a data record for an End User for one year, or
for a period mutually agreed upon by ENACT and LifeScan for specific programs,
for the purpose of providing Care Central Services for a fee.
1.8 "End User Record" means the diabetes related data measurements
and other collected information for a single End User that are stored in Care
Central and associated with that End User.
1.9 "Exclusive Period" shall have the meaning set forth in
Section 3.1.
1.10 "Intellectual Property Rights" means (i) all United States and
foreign letters patent and applications for letters patent, industrial models,
industrial designs, utility models, certificates of invention, and other indicia
of invention ownership, including any such rights granted upon any reissue,
division, continuation or continuation-in-part applications now or hereafter
filed ("Patent Rights"); (ii) all trade secret rights arising under the laws of
any jurisdiction; (iii) all United States and foreign semiconductor mask work
rights and registrations for such rights; and (iv) all copyright rights and all
other literary property and author rights, whether or not copyrightable, and all
copyrights and copyrighted interests, including any renewals thereof but will
not include any rights in any trademarks, trade names, service marks, logos and
the goodwill associated therewith.
1.11 "Products and Services" means Reporters and Care Central
Services.
1.12 "Product Warranty" means the warranty for Reporters and Care
Central Services described in Section 15 of this Agreement.
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1.13 "Reporter" (or "Product") means the device developed by ENACT
that interfaces a LifeScan Diabetes System to a telephone line or electronic
network and transmits data to the Care Central database. "Reporter" includes
the initial Reporter as specified in Exhibit C and functional equivalents
---------
thereof developed by ENACT.
1.14 "Territory" means the United States, Canada and such additional
countries of the world as the parties agree to include pursuant to the
provisions of Section 3.5.
2. Pre-Commercial Activities; Pilot Programs; Payments
2.1 LifeScan's Pre-Commercial Responsibilities. In order to rapidly
------------------------------------------
and appropriately identify market opportunities and to effectively prepare
Products and Services for use with LifeScan Diabetes Systems, prior to
[*] (other than the actions provided for in Section 2.1.6), LifeScan will:
2.1.1 identify market segments and applications for Products and
Services,
2.1.2 conduct market research and pricing analyses,
2.1.3 [*],
2.1.4 perform market pilot studies as appropriate,
2.1.5 prepare marketing programs and undertake commercial
launches of such Products and Services determined to be commercially viable by
LifeScan in its sole and absolute discretion, and
2.1.6 [*].
LifeScan will regularly advise ENACT of the status and timing of its
actions hereunder.
2.2 ENACT's Pre-Commercial Responsibilities. Prior to LifeScan's
----------------------------------------
commercial sales of Products and Services, and until [*], ENACT will support
LifeScan's activities in Section 2.1. Specifically ENACT will:
2.2.1 [*].
2.2.2 Manufacture [*] pilot-production Reporter units,
including procuring materials and building product tooling, test and quality
fixturing as required.
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2.2.3 Develop ENACT's Care Central Services for LifeScan's
identified markets, including making reasonable additions and/or modifications
to reports, delivery methods, enrollment forms, and other materials required to
support the commercial programs.
2.2.4 [*].
2.3 Milestone Payments to ENACT. In consideration of ENACT's Pre-
----------------------------
Commercial efforts in Section 2.2, and in consideration of LifeScan's Exclusive
Interface Rights under this Agreement, LifeScan agrees to pay ENACT One Million
Eight Hundred Thousand dollars ($1,800,000.00) in milestone payments, subject to
the satisfaction of the conditions set forth in each such milestone provision
below, as follows:
2.3.1 Five Hundred Thousand Dollars ($500,000) for certain of
ENACT's development efforts through the date of this Agreement, which has been
paid, coincident with an order for 2,800 pilot production Reporter units.
2.3.2 Five Hundred Thousand Dollars ($500,000) within ten (10)
days after signing of this Agreement by both parties in consideration of the
development efforts through the date of this Agreement and for 2,800 pilot
production units;
2.3.3 Eight Hundred Thousand Dollars ($800,000) for providing the
Care Central Services described in Section 2.2.4 at any time after completion of
the trials described in Section 2.2.4, but in any event prior to January 20,
1998 unless such trials shall not have been completed as of such date due to
material non-performance or breach on the part of ENACT.
3. Exclusivity, New Products, Distribution Rights.
3.1 Exclusive Interface Rights; Rights of LifeScan to Contract with
---------------------------------------------------------------
Others. In recognition of the efforts and funding provided by LifeScan
- ------
hereunder, ENACT hereby grants to LifeScan, and LifeScan hereby accepts, (i) the
exclusive right during the Exclusive Period, as defined below, to market and
distribute Products and Services for use with Diabetes Systems in the Territory;
and (ii) Exclusive Interface Rights during the Exclusive Period for Diabetes
Systems within the Territory. "Exclusive Interface Rights" means that ENACT
shall not offer or provide or agree to offer or provide an ENACT Interface (or
any similar device) for Diabetes Systems manufactured by or for any other
entity. LifeScan shall have the right to sell products and/or services that are
competitive with the Products and Services but during the Exclusive Period
LifeScan shall (i) not itself transfer or solicit End Users to transfer from the
Products and Services to competitive products and services, except upon the
request of such End Users, and (ii) notify ENACT in writing if it intends to
sell competitive products and services. "Exclusive Period" shall mean the period
commencing on the Effective Date and continuing for each subsequent full
calendar year during the term of this Agreement if LifeScan has met the minimum
End User Enrollments specified under "Exclusive Minimums" on Exhibit E for the
---------
prior calendar year. During any calendar year ENACT may request that LifeScan
advise it as to whether LifeScan
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expects to meet such minimums for such calendar year, and LifeScan will so
advise ENACT in writing. Upon any written notice from LifeScan advising ENACT
that it will not meet such minimum End User Enrollments, ENACT shall have the
sole option to terminate the Exclusive Period. Notwithstanding anything to the
contrary in this Agreement, nothing in this Agreement shall restrict LifeScan's
absolute freedom to operate in the general field of telemedicine, with or
without partners and whether or not such operation is competitive with the sale
of Products and Services. For the avoidance of doubt, such freedom is explicitly
unaffected by whether or not LifeScan has met the Exclusive Minimums for the
prior calendar year.
3.2 Compatibility with New LifeScan Products.
----------------------------------------
3.2.1 ENACT agrees that during the term of this Agreement,
LifeScan shall be entitled to receive any Products and Services modified for
those new models of LifeScan Diabetes Systems that have data ports. Such right
shall be exclusive during the period of LifeScan's exclusivity under Section 3.1
for the functionality provided by the Products and Services and nonexclusive if
LifeScan's rights are nonexclusive hereunder.
3.2.2 [*].
3.3 [*]. If the parties mutually determine to proceed with such a
project, the parties will attempt to negotiate a separate agreement based on
additional commercial development, licensing, purchasing, exclusivity and other
terms mutually acceptable to the parties.
3.4 Additional Products and Services. From time to time ENACT or
--------------------------------
LifeScan may identify additional products or services not contemplated by this
Agreement, but applicable to the diabetes market described herein. If both
parties are interested in offering such products and services, they shall work
cooperatively to include such products or services under this Agreement, with
such changes to the Agreement as may be appropriate.
3.5 Additional Territory - Right of First Offer. If during the
-------------------------------------------
Exclusive Period, either party intends to commence offering either the
Products and Services or other products and services competitive therewith in
any country or countries outside the Territory, whether with a third party or
not, such party (the "Offering Party") shall first notify the other (the
"Other Party") in writing of such intention and provide necessary information
on the proposed country, product offering and intended terms and milestones on
a confidential basis. The Offering Party will grant the Other Party sixty (60)
days from the date of the Other Party's receipt of such notice to negotiate a
project development agreement with respect to such country or countries (the
"Negotiation Period") and such discussions will include the right of LifeScan
to permit distribution in such other territories by [*]. If the parties are
unable to agree on a
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project development agreement by the end of the Negotiation Period, then the
Offering Party and the Other Party shall be free to negotiate an agreement with
respect to such countries with any third party on terms and conditions not more
favorable, in the aggregate, to the third party than those last offered by the
party which is intending to enter into such agreement with the third party. In
the event the parties fail to reach an agreement on any country and such an
agreement is to be entered into by the Offering Party with a third party, the
Offering Party shall send the Other Party a certificate signed by its President
or Chief Executive Officer certifying that the terms of this Section have been
complied with. The rights provided herein shall remain in effect during the
Exclusive Period and shall terminate upon the termination of the Exclusivity
Period.
3.6 Option on Non-Invasive Diabetes Systems. If, during the Exclusive
---------------------------------------
Period, a third party decides to market a non-invasive Diabetes System that has
received regulatory clearance, and such third party wishes to negotiate with
ENACT regarding the use of products and services similar in function to the
Products and Services in connection therewith, ENACT will so notify LifeScan in
writing. If LifeScan intends to market a non-invasive Diabetes System and
reasonably believes that it can bring such product to market in conjunction
with ENACT products and services similar to the Products and Services within 12
months from LifeScan's receipt of such notification from ENACT, then LifeScan
shall have 60 days to so notify ENACT and enter into a suitable addendum to this
Agreement with ENACT. Such addendum would address product and service
specifications and delivery schedules, and other such matters as the parties
mutually deem appropriate. If LifeScan and ENACT agree on such an Addendum, then
LifeScan shall maintain exclusivity for invasive and non-invasive Diabetes
Systems, as provided in Section 3.1. If LifeScan elects not to, or does not,
meet the terms hereof then LifeScan's exclusivity under Section 3.1 shall not
apply to non-invasive Diabetes Systems. During the time that LifeScan maintains
such exclusivity, ENACT shall not enter into any agreement or understanding with
other developers, manufacturers, sellers or re-sellers of non-invasive Diabetes
Systems regarding the sale of its products or services for use with such
systems.
4. LifeScan's Commercial Marketing Activities.
------------------------------------------
4.1 Marketing and Distribution Rights. Subject to the terms and
---------------------------------
conditions of this Agreement, ENACT hereby grants to LifeScan, and LifeScan
hereby accepts, the exclusive right to market and distribute Products and
Services for Diabetes Systems within the Territory. LifeScan will have
exclusive responsibility, except as described in the next sentence and in
Section 4.5, to accept orders for Products and Services from customers, and to
perform physical distribution thereof as required. ENACT will also have the
right to promote Products and Services, but will direct customers to LifeScan
for purchase and fulfillment. LifeScan and ENACT agree to cooperate and bear
their own costs in joint marketing efforts, and if the parties mutually
determine that it is preferable for orders to be placed directly with ENACT,
ENACT would agree to accept such orders. LifeScan may distribute through a sub-
distributor only with ENACT's prior written consent, which shall not be
unreasonably withheld, provided such sub-distributor acknowledges and agrees to
the territorial restrictions herein and the obligations set forth in
Sections 4.9, 4.10 and 4.12 of this Agreement.
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4.2 Market Plan. LifeScan shall be primarily responsible with input
-----------
from ENACT for developing and revising a marketing plan for the Products and
Services in the Territory in conjunction with LifeScan's Diabetes Systems.
LifeScan shall develop the initial marketing plan within [*] of this Agreement
and shall consult with ENACT in the course of such preparation. LifeScan will
prepare an annual update to the marketing plan including forecasts, resources,
market analysis, and major marketing programs, by [*], and provide copies
thereof to ENACT. In preparing the marketing plan and updates, LifeScan will
seek ENACT's input and share drafts with ENACT to the extent considered
appropriate by LifeScan.
4.3 LifeScan's General Duties. LifeScan shall:
-------------------------
4.3.1 Introduce, promote, solicit and otherwise encourage the use
of the Products and Services by pharmacies, health plans, managed care
organizations, third party payers, physicians, and individual End Users and
others, where economically feasible.
4.3.2 Accept such orders and enroll such End Users in the
Territory,
4.3.3 Devote as much time, attention and skill as may in
LifeScan's judgment be commercially reasonable to properly conduct such
activities,
4.3.4 Cooperate with ENACT as practicable in implementing sales
programs, policies, training, instructions, and response to requests that best
represent the Products and Services and their benefits, and
4.3.5 Bear the entire cost and expense of conducting all of
LifeScan's activities under this Agreement.
4.4 Marketing Materials. LifeScan will develop with cooperation from
-------------------
ENACT the marketing materials necessary to ensure awareness of the Reporter and
Care Central Services among customers. LifeScan agrees to allow ENACT to review
such materials prior to finalization.
4.5 End User Enrollments. It generally shall be the responsibility of
--------------------
LifeScan to register End Users and to maintain (or renew as appropriate) their
Enrollments. If the parties mutually determine that it is desirable for ENACT
to enroll End Users, then in such event ENACT shall charge LifeScan an
enrollment fee appropriate to the application fee as agreed by the parties.
ENACT and LifeScan will cooperate to develop procedures and forms for End User
Enrollment and renewal as appropriate.
4.6 End User Enrollments - Quantities. The annual minimum number of
---------------------------------
End User Enrollments by LifeScan for the Care Central Services are listed in
Exhibit E.
- ---------
The number of enrollments shall be determined by the number of End
Users Enrolled into Care Central on the last day of each calendar year. Should
LifeScan fail to achieve the annual
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minimum Enrollments as set forth in Exhibit E in any calendar year and provided
----------
LifeScan has performed its obligations hereunder in all material respects, then
LifeScan shall not be in default of this Agreement. However, effective at the
end of the calendar year in which such failure occurs, LifeScan's exclusive
rights under Section 3.1 above shall become nonexclusive. Any shortfalls by
LifeScan that are due to ENACT's failure to deliver against LifeScan's accepted
purchase orders, or due to ENACT's failure to provide sufficient capacity for
the enrollment of End Users in a timely manner, shall be credited toward
LifeScan's minimum annual number of End User Enrollments.
4.7 Commercial Launch. LifeScan intends to [*], provided ENACT meets
-----------------
its responsibilities set forth in Sections 2.2 and 5.
4.8 Steering Committee. The parties shall establish a Steering
------------------
Committee which will meet monthly for first twelve months of the term of this
Agreement and quarterly (or as otherwise agreed) thereafter. The Steering
Committee will be comprised of two persons from each party and will be
responsible for communication and oversight of all aspects of the Agreement and
development of business between the parties, including customer feedback and the
marketing strategies and efforts of both parties, including listings of
customers signed-up directly by ENACT.
4.9 No Representations and Warranties Regarding Products. LifeScan
----------------------------------------------------
shall not make any representations, warranties, claims or other descriptions
with respect to the Products and Services except as set forth in ENACT's most
current written specifications therefor and Product Warranty as published by
ENACT for the applicable Products and Services and as may be modified from time
to time by ENACT after written notification to LifeScan.
4.10 Compliance with Law. In marketing the Products and Services,
-------------------
each party shall comply with all applicable laws and regulations.
4.11 Independent Pricing. Nothing in this Agreement shall be
-------------------
construed as restricting in any way LifeScan's discretion in setting the prices
at which it resells Products and Services.
4.12 LifeScan Customer Support. LifeScan agrees to provide first line
-------------------------
direct customer support to assist health care providers, End Users and others to
understand and use the Products and Services, and to respond to customer
problems. ENACT shall provide "second-line" support to LifeScan as provided in
Section 5.4 ("ENACT Customer Support").
5. ENACT's Responsibilities.
------------------------
5.1 Reporter Production and Supply. ENACT shall use reasonable
------------------------------
commercial efforts to develop and produce Products and Services as specified in
Exhibits C and D in sufficient quantities to meet demand as forecasted by
- ----------------
LifeScan. ENACT retains the right to manufacture the Reporter at its own
facilities or to subcontract its manufacturing obligations to a third party,
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provided that all manufacturing, testing and inspection requirements contained
in this Agreement shall apply to such third party provided that ENACT shall
remain liable for all manufacturing obligations so subcontracted.
5.2 Care Central Services. ENACT shall provide various Care Central
---------------------
Services as listed in Exhibit D and as priced in Exhibit A for Enrolled End
--------- ---------
Users using a Reporter. Any additional services not listed on Exhibit D may be
---------
added to this Agreement upon mutual agreement of the parties, in which case
Exhibit D shall be amended, modified or supplemented in writing.
- ---------
5.3 Additions and Modifications. In order to enhance the use of the
---------------------------
Products and Services and the potential market for LifeScan's related products,
ENACT agrees to make reasonable modifications and additions to the Care Central
Services from time to time as recommended by LifeScan. ENACT shall also have the
right to modify Services from time to time, so long as ENACT notifies LifeScan
of such changes and assures that the function of the Services is retained. The
Steering Committee will be responsible for determining and implementing a change
control process to meet the needs of each party.
5.4 ENACT Customer Support. ENACT agrees to provide Product support to
----------------------
LifeScan personnel from 8:00 a.m. Eastern Time to 6:00 p.m. Pacific Time, and
will make customer service personnel available by pager 24 hours per day for
special circumstances. Such assistance shall normally be provided to LifeScan
personnel or to customers directly enrolled by ENACT (provided such direct calls
do not exceed a mutually agreed amount). However, the parties agree to develop
an escalation process for ENACT personnel to address questions or problems by
telephone directly with End Users that cannot be handled by LifeScan. ENACT
support shall not include providing medical advice of any kind.
5.5 Training. Upon one month's advance request, ENACT will provide
--------
training at LifeScan's facilities in Milpitas, CA for designated LifeScan
personnel on the use of the Reporter and Care Central Services. [*].
5.6 End User Record/Maintenance/[*].
----------------------------------
5.6.1 ENACT shall maintain for each enrolled End User a record of
End User information, transmitted readings, and other information as needed to
deliver the Care Central Services provided. Said information shall reside in
ENACT's Care Central database and the parties shall have the same rights of
access to and use of such information, subject to the provisions of Section
5.6.2. ENACT will maintain said information in electronic format for the longer
of three years from receipt of last entry or as otherwise required by applicable
laws.
5.6.2 [*]. Absent a specific
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request by LifeScan, ENACT will provide a reasonable format [*].
5.6.3 [*].
5.7 Expenses. ENACT shall bear the entire cost and expense of
--------
conducting all of ENACT's activities under this Agreement, other than for
payments from LifeScan explicitly provided for herein.
6. Equity Purchase in ENACT. Concurrent with the execution of this
------------------------
Agreement, Johnson & Johnson Development Corporation shall enter into an
agreement for the purchase of three million dollars ($3,000,000) of ENACT
preferred stock in the form of the Series D Preferred Stock Purchase Agreement
attached as Exhibit F.
---------
7. Purchase Orders and Forecasts.
7.1 Purchase Orders. LifeScan shall have no obligation hereunder to
---------------
purchase Product from ENACT, except as expressly set forth in official purchase
orders executed on behalf of LifeScan by authorized representatives of LifeScan,
and accepted by ENACT. Except for the Initial Purchase Order, LifeScan shall
not be required to purchase any minimum quantities, or be held responsible for
any restocking fees, or bill backs for not ordering any estimated purchase
volume. Purchase Order(s) will contain the Product description, quantity,
pricing and required delivery dates. ENACT shall within ten (10) days following
receipt, notify LifeScan of its acceptance or rejection of each such Purchase
Order. Once accepted by ENACT the requirements specified in such Purchase
Orders will be firm subject to the variations provided in Section 7.2 below.
LifeScan will issue its Purchase Orders for Products based upon their forecasted
usage. LifeScan will issue subsequent Purchase Orders or Change Orders monthly
to continue a rolling [*] product purchase commitment. No terms and conditions
in purchase orders or any other order documents shall be binding on the parties
except model numbers, quantities, requested delivery dates and destinations, and
prices, all of which shall be consistent with this Agreement.
7.2 Purchase Order Variations and Raw Materials Inventory. From and
-----------------------------------------------------
after the time that LifeScan places purchase orders for more than 10,000 units
per month and so long as orders continue at such rate, LifeScan may vary its
purchase order quantities and schedules for any specific month from LifeScan's
previous purchase order quantities for such month as follows:
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Allowable Allowable Allowable Maximum
Month Prior to Quantity Quantity Quantity Reschedule
Date of Delivery Increases Cancelable Reschedulable Period
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
- -----------------------------------------------------------------------------------------
</TABLE>
There will be no cancellation charge for orders canceled within the allowable
time frames and quantities set forth above. Any purchase order quantities
rescheduled pursuant to this Section 7.2 may not subsequently be canceled or
rescheduled by LifeScan without the prior written approval of ENACT. ENACT
shall notify the LifeScan buyer by telephone immediately upon knowledge that any
order quantity exceeds ENACT's capacity constraints and shall within one (1)
week confirm this notification in writing by fax or by letter with the identity
of the limiting factor(s) preventing ENACT from fulfilling the LifeScan order.
Once LifeScan places purchase orders for more than 10,000 units per month
and so long as orders continue at such rate, to assure a continuing source of
supply of Products and to support the flexibility requirements specified above,
ENACT shall during the term of this Agreement purchase, and retain certain
mutually agreed upon raw materials in inventory at its manufacturing location.
The quantities maintained in such inventory shall be modified from time to time,
but no more often than quarterly, based upon LifeScan's actual and forecasted
usage. Products maintained in such inventory are to be used solely for
fulfilling LifeScan Purchase Orders and are to be continuously cycled to
LifeScan on a First-In, First-Out basis. Title to all such inventory shall
remain in ENACT until such time it is shipped to LifeScan. Annually LifeScan
will negotiate and reimburse ENACT for reasonable carrying costs associated with
maintaining such raw materials in inventory. At the expiration of this Agreement
or during the notice period of any termination for convenience issued hereunder,
ENACT is to attempt to deplete this inventory. Nevertheless LifeScan shall be
responsible for purchasing any such LifeScan authorized raw materials inventory
at the prices specified in Exhibit A at the expiration or earlier termination of
---------
this Agreement. LifeScan will not be responsible for any such inventories in the
event LifeScan terminates this Agreement pursuant to Sections 14.2.2 or 14.2.3.
7.3 Delivery Dates. [*] its customer orders; therefore, ENACT shall
--------------
notify LifeScan of any delay as soon as ENACT is aware of same and shall use its
best efforts to minimize such delay by working reasonable overtime at its own
expense. If ENACT fails to meet LifeScan's delivery schedule on all or any part
of any Purchase Order, then LifeScan may terminate the applicable portion of the
Purchase Order. With respect to the portion of any such Purchase Order not
terminated, if any, the unit price will not change and ENACT will otherwise
continue performance under this Agreement.
7.4 Initial Purchase Order. LifeScan's initial firm Purchase Order
----------------------
specifying quantities and delivery dates will be issued within 45 days after the
Effective Date.
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7.5 Long Term Forecasts. LifeScan shall each month provide ENACT with
-------------------
a non-binding forecast of the anticipated quantity of Product and Services to be
contracted with Supplier over the next twelve (12) month period. Thereafter,
each month during the term of this Agreement, LifeScan will use reasonable
efforts to provide ENACT a rolling twelve (12) month forecast of its usage of
Products and Services. Such forecast shall specify LifeScan's reasonable
estimates of the anticipated quantity of Products and Services required weekly
during the first three (3) months and monthly during the remaining nine (9)
months.
7.6 Services Forecast. At the same time as it places its first
-----------------
commercial order, LifeScan shall provide to ENACT a non-binding forecast of
Enrolled End Users anticipated for the following twelve (12) month period.
After the first commercial shipments as described in Section 2.1.6, LifeScan
shall provide ENACT a monthly non-binding rolling forecast of Enrolled End Users
covering a twelve (12) month period.
8. Pricing, Invoicing, Payment.
---------------------------
8.1 Products and Services. LifeScan shall pay ENACT for each End User
----------------------
Enrollment and each Reporter unit shipped to LifeScan or its designees at prices
to be mutually agreed from time to time in writing, but in no event less than
the minimum prices set forth in Exhibit A for the items listed therein. LifeScan
---------
shall be invoiced for the service fee for one annual Enrollment upon activation
of an End User in Care Central and for each Reporter shipped at the time of
shipping. A separate invoice is required for each payment made hereunder.
Invoices must match the applicable Purchase Order and will be rendered no more
often than semimonthly. Product will be shipped FOB ENACT's facilities in
Northern California.
8.2 Renewals. ENACT will notify LifeScan of upcoming expirations by
---------
submitting its invoice(s) for renewals approximately sixty (60) days prior to
the then applicable expiration date(s). ENACT will handle renewals for
customers that had originally enrolled directly with ENACT.
8.3 Payment Terms. Payment terms are net 30 days after receipt of
--------------
invoice.
8.4 Other. The provisions of this Section 8 shall not apply to the
------
payments described in Section 2.4 for Pre-Commercial activities.
9. Taxes. LifeScan shall pay all taxes, duties, or other amounts, however
-----
designated, which are levied or based upon payments made by LifeScan to ENACT
for Products or Services provided by ENACT, provided that LifeScan shall not be
liable for taxes based upon ENACT's income or net income. If LifeScan provides
a reseller certificate to ENACT verifying that sales taxes are not due upon a
sale to LifeScan, ENACT shall not invoice LifeScan for such taxes, however
LifeScan shall indemnify ENACT for any taxes, including penalties and interest,
which are assessed against ENACT therefor if such reseller certificate is
inaccurate and such inaccuracy is the primary cause for the assessment of such
penalties and interest.
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10. Manufacturing; Quality Assurance Testing; Acceptance.
----------------------------------------------------
10.1 Quality Assurance. Prior to the shipment of any Reporter for
------------------
resale by LifeScan, and prior to the initiation of Care Central Services, ENACT
and LifeScan shall jointly develop test procedures ("QA Test") for the Reporter
and Care Central Services to ensure compliance with the applicable
Specifications. All Reporters shipped to LifeScan by ENACT shall be accompanied
by a certification from ENACT that each such Reporter has passed the applicable
QA Test. Notwithstanding the fact that the Products and Services have
successfully passed the QA test they will continue to be subject to the warranty
obligations in Section 15 and the inspection and remedy provisions of
Section 10.2 At LifeScan's request, ENACT shall provide copies of ENACT's
documentation of QA Tests on any shipped Reporters, and on Care Central
Services.
10.2 Inspections. Acceptance testing, when deemed applicable by
------------
LifeScan, shall be performed by LifeScan in accordance with LifeScan's Quality
Acceptance Procedures within fourteen (14) calendar days after receipt of the
Products. Any discrepancies found during such test period shall be noted in
reasonable detail and if found non-conforming, LifeScan may at its option return
the Products to ENACT freight collect after obtaining a return material
authorization number from ENACT and including such number on the return shipping
label. ENACT shall bear the risk of loss for rejected Reporters, beginning at
such time as they are taken at LifeScan's premises for return delivery. ENACT
shall immediately review the cause of rejection and upon confirmation take
corrective action to eliminate reoccurrence of the non-conformance. ENACT shall
repair or replace any such non-conforming Products and prepay the freight.
Otherwise, after the fourteen (14) day testing period referenced above, the
Products will be considered accepted by LifeScan. Failure to inspect or reject
one shipment shall not constitute a waiver of LifeScan's rights with respect to
any other. "Non-conforming goods" means that the Reporters (a) fail to conform
to the specifications provided in Exhibit C hereto (as amended by the parties in
---------
writing from time to time), (b) are not the model ordered or differ from the
quantity ordered, (c) fail to pass the QA Test and/or (d) are damaged or
reasonably appear to be damaged, except that ENACT shall not be held responsible
for shipping damage given that Products are to be shipped FOB ENACT, unless
damage results from inadequate packaging. LifeScan shall obtain a return
material authorization number from ENACT, which number shall be provided to
LifeScan within twenty-four (24) hours of LifeScan's request (if ENACT accepts
the RMA), before returning Reporters and shall include such number on the
shipping label therefor. This Section 10.2 sets forth LifeScan's sole and
exclusive remedy for rejected Reporters. To the extent rejected Reporters are
examined by ENACT and found to meet the Specifications, LifeScan shall pay all
freight, evaluation, and reshipping charges, and the RMA shall be rescinded.
10.3 Regulatory Standards & On Site Inspections: During the term of
------------------------------------------
this Agreement ENACT must:
10.3.1 Comply with all requirements specified herein and the
Specifications referenced above.
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<PAGE>
10.3.1.1 Any changes to the Specifications proposed by
ENACT must be reviewed and approved in writing by LifeScan prior to
implementation. LifeScan is under no obligation to approve any proposed
change(s) to the Specifications.
10.3.1.2 All deviations from the Specifications must be
reviewed and approved in writing by LifeScan prior to shipment of the affected
Product. LifeScan is under no obligation to approve any requested deviation from
the Specifications.
10.4 Quality Improvements. In order to improve yields and the overall
--------------------
quality of the Products produced by ENACT, upon request of LifeScan, ENACT
agrees to actively participate in LifeScan Program for Controlling a Process and
to the extent applicable to request its manufacturing subcontractor to
participate therein. This program will be presented by LifeScan to ENACT's
representative(s) following notification to ENACT that LifeScan would like ENACT
to participate. It consists of the following ten steps:
1. Process Flow Diagram
2. Failure Mode and Effects Analysis
3. Identify Critical "Nodes"
4. Identify Critical Measuring Gauges
5. Run Gaugeability Study
(Gauges R & R)
6. Establish Gauge Control Chart
7. Set-up Data Collection
8. Components of Variance
9. Establish Control Charts
10. Establish "Out of Control" Procedures
11. Record Keeping. LifeScan and ENACT respectively agree (and ENACT agrees
--------------
to cause its manufacturing subcontractor) to maintain complete, clear and
accurate records of information required by governmental agencies for a period
of three years or as required by law, whichever is longer. Each party shall
permit the other party to inspect, at such other party's own expense, records
pertaining to the Reporter and Care Central Services to ensure compliance by the
other party. Any such inspection shall be conducted during regular business
hours and in such a manner as not to interfere with normal business activities
of LifeScan and ENACT.
12. Intellectual Property.
---------------------
12.1 Ownership. Technology, including any know-how, copyrights and
---------
patents therein, developed hereunder solely by Enact (hereinafter "Enact
Technology") shall belong solely to Enact. Technology, including any know-how,
copyrights and patents therein, developed hereunder solely by LifeScan, or its
Affiliates (hereinafter "LifeScan Technology"), shall belong solely to LifeScan.
Technology, including any know-how, copyrights and patents therein, jointly
developed hereunder by Enact and LifeScan, or its Affiliates, (hereinafter
"Joint Technology") shall be jointly owned by Enact and LifeScan. The parties
agree to advise each other in advance if either of them believes they are likely
to develop technology jointly, or if either is aware that they have developed
Joint Technology in order to determine whether the parties desire such potential
or existing Joint Technology to be governed by the provisions of this Section
12.1 or to negotiate a separate agreement with respect thereto. For avoidance of
doubt, in the absence of such an agreement in writing, the terms of this Section
shall govern. In particular, if the parties reach agreement to incorporate the
ENACT Interface into any LifeScan Diabetes System, they intend
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<PAGE>
that ENACT will have no ownership rights in the Diabetes System and that
LifeScan shall have no ownership rights in the ENACT Interface.
For Joint Technology, the parties shall work together to prepare a
mutually acceptable protection strategy and shall jointly hire outside
professionals to prepare and file patent applications, copyright registrations
or other filings necessary to protect the technology, and shall share jointly in
the expenses associated with such protection. If the parties cannot mutually
agree upon a protection strategy, or a party holding title to an invention,
copyright or other intellectual property refuses to participate in the filing,
prosecution or maintenance of a patent, copyright registration or other
appropriate protection thereto, in any country, the other party shall have the
right to file, continue the prosecution of, or maintain such patent application,
patent, copyright registration or other protection in such country at its sole
expense and to have the entire right and title to such patent application,
patent, copyright registration or other intellectual property in such country
assigned to it.
12.2 Report Formats. The parties agree that they shall jointly own
--------------
the report formats developed for the delivery of Care Central Services for
diabetes under this Agreement. Each party hereby assigns and agrees to assign
to the other party an undivided co-equal interest in all Intellectual Property
Rights in such report formats developed in the course of this Agreement. ENACT
agrees to file for copyrights for such formats. Each party shall retain sole
ownership of any rights in works pre-existing the date of this Agreement.
12.3 Reservation of Rights. All rights not expressly granted herein
---------------------
are reserved to the owner, and no other licenses are granted herein, by
implication, estoppel or otherwise. Specifically, nothing in this Agreement
shall either expressly or by implication, estoppel or otherwise give either
party any license to the other party's Patent Rights not explicitly granted
herein.
12.4 Notices. Each party agrees to mark products that it provides to
-------
the other party and/or to others, under this Agreement, with appropriate notice
of any patents that cover the Products. Each party agrees to retain and not
remove any patent, copyright, trademark and other proprietary rights notices
which are on the products or documents received from the other party. LifeScan
will have final approval of any report forms for use with the Products and
Services.
13. Trademarks.
----------
13.1 Use of Marks on Products. The Reporters and report forms and
------------------------
other documentation for the Care Central Services provided by ENACT to LifeScan
and its End Users shall contain the ENACT name and trade/service marks ("ENACT
Marks"), as selected from time to time by ENACT, along with LifeScan's name and
trade/service marks or those of LifeScan's Affiliates ("LifeScan Marks"), as
selected from time to time by LifeScan.
13.2 Use of Marks in Marketing by LifeScan. LifeScan agrees to
-------------------------------------
include references to ENACT as the source of the Reporters and Care Central
Services provided by
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<PAGE>
ENACT in LifeScan's marketing and promotional materials therefor. ENACT hereby
grants LifeScan a nonexclusive, non-transferable license to use the ENACT Marks
for such purposes subject to such reasonable guidelines on usage of the ENACT
Marks as ENACT may provide to LifeScan from time to time.
13.3 Use of Marks in Marketing by ENACT. ENACT agrees to include
----------------------------------
references to LifeScan Marks in ENACT's marketing and promotional materials for
Reporters and Care Central Services to be used with LifeScan's Diabetes Systems.
LifeScan hereby grants ENACT a nonexclusive, non-transferable license to use the
LifeScan Marks for such purposes subject to such reasonable guidelines on usage
of the LifeScan Marks as LifeScan may provide to ENACT from time to time.
13.4 Approval for Use of Marks. Each party agrees to obtain the prior
-------------------------
written approval of the other party for any marketing or promotional materials
which use the other party's Marks.
14. Term, Termination and Renewal.
-----------------------------
14.1 Term. The initial term of this Agreement shall be from the date
----
of execution through December 31, 2000. After such initial term, the Agreement
may be renewed for successive one year terms upon the written agreement of the
Parties, provided that LifeScan has met the number of Exclusive Minimums for
each year as listed in Exhibit E.
---------
14.2 Termination.
-----------
14.2.1 By ENACT. ENACT may terminate this Agreement upon ten
--------
(10) days written notice to LifeScan upon the occurrence of any of the
following:
14.2.1.1 LifeScan has materially breached one or more of
its obligations under this Agreement, including the failure to pay any amounts
owed under this Agreement when due, if such breach is not cured within sixty
(60) days after receipt of written notice thereof; or
14.2.1.2 LifeScan has failed to commercially launch
Products and Services by January 31, 1998 through no fault of ENACT.
14.2.2 By LifeScan. LifeScan may terminate this Agreement upon
-----------
ten (10) days written notice to ENACT upon the occurrence of any of the
following:
14.2.2.1 ENACT has materially breached one or more of
its obligations under this Agreement if such breach is not cured within sixty
(60) days after receipt of written notice thereof; or
14.2.2.2 ENACT has failed to deliver Reporters and Care
Central Services meeting the Specifications in Exhibits C and D by December 31,
----------------
1997.
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<PAGE>
14.2.3 By Either Party. ENACT or LifeScan may immediately
---------------
terminate this Agreement after giving written notice (i) if the other party
becomes insolvent, or (ii) if the other party shall have a receiver appointed
over the whole or any part of its assets.
14.3 Rights Upon Termination by ENACT. In addition to all rights
--------------------------------
provided under law, upon termination of this Agreement by ENACT pursuant to
Section 14.2.1:
14.3.1 LifeScan's appointment as a distributor for the Products
and Services shall immediately terminate.
14.3.2 Except as set forth in Section 14.3.4, LifeScan shall
immediately cease promoting and distributing Products and Services and shall
discontinue all representations that it is an authorized ENACT representative or
distributor.
14.3.3 LifeScan shall not be entitled to any compensation,
damages, or payments in respect of goodwill or otherwise or for any damages on
account of prospective profits or anticipated sales, and LifeScan shall not be
entitled to reimbursement in any amount for any training, advertising, market
development, investments, leases or other costs that shall have been expended,
in the event of such termination of this Agreement by ENACT. LifeScan hereby
waives its rights under applicable laws for any such compensation,
reimbursement, or damages.
14.3.4 Provided that LifeScan is not offering products and
services that are competitive with Products and Services at that time, ENACT
shall, at its option, permit LifeScan to sell its inventory and/or purchase such
inventory from LifeScan and refund LifeScan's cost. ENACT shall take reasonable
efforts to minimize any further costs.
14.3.5 ENACT will continue for a period of no less than two
(2) years from the date of termination to provide Care Central Services to
persons who were End Users at the date of termination at the then current prices
for such Care Central Services.
14.4 Rights Upon Termination by LifeScan. In addition to all rights
-----------------------------------
provided under law, upon termination of this Agreement by LifeScan pursuant to
Section 14.2.2:
14.4.1 LifeScan may terminate all outstanding purchase orders,
including the Initial Purchase Order.
14.4.2 Notwithstanding the foregoing Section 14.4.1, LifeScan
shall pay for all Reporters shipped by ENACT to LifeScan pursuant to LifeScan
purchase orders before the date of termination, in accordance with the terms
hereof.
14.4.3 ENACT will continue for a period of no less than two
(2) years from the date of termination to provide Care Central Services to
persons who were End Users at the date of termination at the then current prices
for such Care Central Services.
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<PAGE>
14.4.4 LifeScan shall take reasonable efforts to minimize
further costs.
15. Warranty; Disclaimer; Consequential Damages; Limitation of Liability.
--------------------------------------------------------------------
15.1 Product Warranty to LifeScan.
----------------------------
15.1.1 (a) For a period of twelve (12) months after delivery of a
Reporter to LifeScan, ENACT warrants the Reporter shall be free of defects in
materials and workmanship, and will conform to the Specifications listed in
Exhibit C. Notwithstanding the foregoing, the warranties provided by ENACT do
- ---------
not apply to any Reporter that has been altered, repaired (other than by ENACT),
or which has been subjected to abuse, misuse, misapplication or negligence of a
person other than ENACT or an agent of ENACT, or accident or disaster, or that
has been damaged due to the failure to return the Reporter in its original or a
functionally equivalent shipping container.
15.1.2 LifeScan shall obtain a return material authorization
number from ENACT (which shall not be unreasonably withheld or delayed by ENACT)
before returning Reporters and shall include such number on the shipping label
therefor. All freight and insurance for the return of Nonconforming Reporters
will be paid by ENACT. Defective Reports shall be repaired or replaced at
ENACT's election. If ENACT can not repair or replace such Reporter within
30 days after receipt from LifeScan, LifeScan shall at its request be credited
or reimbursed based upon the current per unit invoice price for Reporters sold
to LifeScan. The foregoing is LifeScan's sole and exclusive remedy for breach of
the warranty in this Section 15.1 except for LifeScan's rights under
Sections 17.1 and 17.2.
15.2 Services Warranty. ENACT warrants to LifeScan that the
-----------------
transmission interface from the Reporter to Care Central and from Care Central
to health care providers or End Users will conform to generally accepted analog
telephone and data transmission standards, and will not require equipment
different than other standard data transmission devices. ENACT does not warrant
that End User equipment (such as End User facsimile devices) will perform
properly or that the quality of the telephone connection will be adequate or
that access to the database will be uninterrupted. If ENACT fails to provide to
an End User access meeting the requirements of this warranty, LifeScan shall be
entitled to a refund of Reporter and Service fees for such End User. The
foregoing is LifeScan's sole and exclusive remedy for breach of the warranty in
this Section 15.2 except for LifeScan's rights under Sections 17.1 and 17.2.
15.3 Recalls. In the event either party believes or is notified that
--------
a recall, product withdrawal, or field correction to the Reporter may be
necessary and/or appropriate, such party shall notify LifeScan's Vice President
of Quality Assurance and ENACT's President, at the addresses set forth on page
one of this Agreement, of its belief, and the parties shall cooperate with each
other in determining the necessity and nature of appropriate action. In the
event any governmental agency having jurisdiction shall request or order, or if
LifeScan in its reasonable judgment shall determine to undertake, any corrective
action with respect to the Reporters supplied hereunder, including any recall,
customer notice, restriction, change, corrective action or market action or any
change to the Reporters, and the cause or basis of such corrective action is
- --------------------------------------------------------------------------------
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<PAGE>
primarily attributable to a breach by ENACT of any of its warranties,
guarantees, representations, obligations or covenants contained herein, then
ENACT shall be liable, and shall reimburse LifeScan for the reasonable costs of
such action including the cost of any Reporter affected thereby whether or not
such particular Reporter shall be established to be in breach of any warranty by
ENACT hereunder.
15.4 Representations and Warranties of ENACT; Audit Rights.
------------------------------------------------------
15.4.1 ENACT represents and warrants to LifeScan that all
Products and Services supplied in connection with this Agreement shall be of
merchantable quality, and free from defects in material and workmanship and
shall be manufactured and provided by ENACT (i) in accordance and conformity
with the Specifications and in compliance with this Agreement and (ii) in
compliance with all applicable federal, state or municipal statutes, laws, rules
or regulations, including those relating to the environment, food or drugs and
occupational health and safety. Without limiting the foregoing, ENACT represents
and warrants that it shall comply or cause its suppliers to comply with all
present and future statutes, laws, ordinances and regulations relating to the
manufacture, assembly and supply of the Products being provided hereunder,
including, without limitation, those enforced by the United States Food and Drug
Administration (including compliance with current good manufacturing practices)
and International Standards Organization Rules 9,000 et seq. ENACT further
represents and warrants to LifeScan that the performance of its obligations
under this Agreement will not result in a violation or breach of, and will not
conflict with or constitute a default under its Articles of Incorporation or by-
laws or any agreement, contract, commitment or obligation to which ENACT or any
of its Affiliates is a party or by which it is bound.
15.4.2 LifeScan shall have the right, upon reasonable notice to
ENACT and during regular business hours, to inspect and audit the facilities
being used by ENACT for production of the Products and Services or cause its
suppliers to permit such inspection and audit to assure compliance by ENACT and
its suppliers with applicable rules and regulations and with other provisions of
this Agreement and to determine ENACT's raw materials and manufacturing costs in
connection with the Products and Services. Such inspections will be limited to
no more than one (1) inspection during any twelve (12) consecutive month period,
with follow-up as requested LifeScan, unless otherwise agreed by ENACT. ENACT
shall within thirty days remedy any deficiencies which may be noted in any such
audit, and the failure by ENACT to remedy any such deficiencies within such
thirty day period shall be deemed as material breach of this Agreement. ENACT
acknowledges that the provisions of this paragraph granting LifeScan certain
audit rights shall in no way relieve ENACT of any of its obligations under this
Agreement, nor shall such provisions require LifeScan to conduct any such
audits.
15.5 Limitation and Disclaimer. EXCEPT FOR THE EXPRESS WARRANTIES SET
-------------------------
FORTH IN THIS SECTION 15, ENACT MAKES NO OTHER WARRANTIES RELATING TO THE
PRODUCTS OR SERVICES, EXPRESS, IMPLIED OR STATUTORY, AND EXPRESSLY EXCLUDES ANY
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY OR
NONINFRINGEMENT OF THIRD PARTY RIGHTS.
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<PAGE>
16. Limitation of Liability; Waiver and Consequential Damages. NEITHER
---------------------------------------------------------
PARTY WILL BE LIABLE TO THE OTHER PARTY FOR SUCH OTHER PARTY'S INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING LOST
PROFITS) REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT, TORT, STRICT
LIABILITY, OR OTHERWISE, EVEN IF PREVIOUSLY ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. FOR AVOIDANCE OF DOUBT, THE FOREGOING SHALL NOT RELIEVE EITHER PARTY
OF ANY OF ITS INDEMNIFICATION OBLIGATIONS SET FORTH IN SECTION 17 TO THE EXTENT
RELATED TO THE INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY
KIND (INCLUDING LOST PROFITS) OF THIRD PARTIES OTHER THAN ANY AFFILIATE OF A
PARTY HERETO.
17. Indemnification.
---------------
17.1 Intellectual Property. At LifeScan's election, ENACT shall save,
---------------------
defend, indemnify and hold harmless LifeScan and its affiliates and their
respective officers, directors, employees, agents, successors and assigns
(collectively, "LifeScan Indemnities") from and against any and all claims,
losses, damages, judgments, costs, awards, expenses (including reasonable
attorney's fees) and liabilities of every kind, including, without limitation,
reimbursement for inventory of Reporters which LifeScan is unable or unwilling
to sell because of such claim (collectively, "Losses") arising out of or
resulting from any claim, suit, action or proceeding of which ENACT shall have
received notice based upon an assertion of infringement of any Intellectual
Property Rights in the Territory by the Reporter and/or Care Central Services.
LifeScan shall cooperate with ENACT in the defense of any such action. ENACT
shall use counsel that is reasonably acceptable to LifeScan. Alternatively,
LifeScan may elect to defend itself against any such claims in lieu of any
indemnification by ENACT under this Section 17.1 in which case ENACT shall be
entitled to maintain its own defense at its own expense. Notwithstanding any
other provision of this Agreement to the contrary or any firm purchase order
that may have been issued pursuant to this Agreement, LifeScan shall be under no
obligation to purchase any Reporters or pay for any Care Central Services if
LifeScan has a reasonable basis to believe such product or service may infringe
upon the rights of any third party and the minimums set forth in Exhibit H shall
---------
be adjusted accordingly. ENACT may, at ENACT's choice, negotiate a license with
any third party or replace the Product with non-infringing product; if the
foregoing are not commercially reasonable, ENACT may take back the infringing
Products from LifeScan or from such LifeScan customers as may be willing to
return Products) and refund the price paid therefor as well as any payments made
by LifeScan pursuant to Section 2.3.3. THE FOREGOING STATES LIFESCAN'S SOLE AND
EXCLUSIVE REMEDY WITH RESPECT TO CLAIMS OF INFRINGEMENT OF THIRD PARTY
PROPRIETARY RIGHTS OF ANY KIND.
17.2 ENACT Indemnity. At LifeScan's election, ENACT shall save,
---------------
defend, indemnify and hold harmless each of the LifeScan Indemnities from and
against any and all Losses arising out of or resulting from (i) any breach by
ENACT of any of its warranties, guarantees, representations, obligations or
covenants contained herein, (ii) ENACT's negligence or misrepresentation in the
conduct of the activities to be performed by ENACT under this
- --------------------------------------------------------------------------------
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<PAGE>
Agreement or (iii) the acts or omissions of ENACT, its employees, agents,
representatives, subcontractors or invitees. LifeScan shall cooperate with ENACT
in the defense of any such action. ENACT shall use counsel that is reasonably
acceptable to LifeScan. Alternatively, LifeScan may elect to defend itself
against any such claims in lieu of any indemnification by ENACT under this
Section 17.2 in which case ENACT shall be entitled to maintain its own defense
at its own expense.
17.3 LifeScan Indemnity. At ENACT's election, LifeScan shall save,
------------------
defend, indemnify and hold harmless ENACT and its affiliates and their
respective officers, directors, employees, agents, successors and assigns
(collectively, "ENACT Indemnities") from and against any and all Losses, arising
out of or resulting from (i) LifeScan's negligence or misrepresentation in the
conduct of the activities to be performed by LifeScan under this Agreement,
(ii) the acts or omissions of LifeScan, its employees, agents, representatives,
subcontractors or invitees, or (iii) any breach of this Agreement by LifeScan,
its employees, agents, representatives, subcontractors or invitees. LifeScan
shall be solely responsible for any claims, warranties or representations made
to LifeScan's customers by LifeScan or LifeScan's employees or agents which
differ from the warranty provided in writing by ENACT, and LifeScan shall defend
and indemnify ENACT Indemnities from any such different claims, warranties
and/or representations. ENACT shall cooperate with LifeScan in the defense of
any such action. LifeScan shall use counsel that is reasonably acceptable to
ENACT (which shall be deemed to include in-house counsel of LifeScan or its
parent, Johnson & Johnson). Alternatively, ENACT may elect to defend itself
against any such claims in lieu of any indemnification by LifeScan under this
Section 17.3 in which case LifeScan shall be entitled to maintain its own
defense at its own expense. LifeScan shall not be responsible for any
compromise made without its written consent.
17.4 General Obligations. A party seeking indemnity hereunder shall
-------------------
provide prompt written notice of and information regarding any matter as to
which it intends to seek indemnity hereunder, but provided that the interests of
the indemnifying party are not materially hindered thereby, providing of such
notice shall not be a condition to indemnification. In no event will an
indemnifying party be responsible for any compromise made without its written
consent.
18. Confidential Information.
------------------------
18.1 General.
-------
18.1.1 "Confidential Information" as used in this Agreement
means that information of one party ("Disclosing Party") which is disclosed to
the other party ("Receiving Party") pursuant to this Agreement and which, if in
written form, is marked "Confidential". Any Confidential Information initially
disclosed orally or visually will be identified as being confidential at the
time of disclosure and confirmed in writing by the Disclosing Party within
thirty (30) days of such disclosure.
18.1.2 Each party agrees that all Confidential Information
received from the other party under this Agreement shall be maintained in
confidence for a period of five (5) years from the Effective Date of this
Agreement, and the Receiving Party agrees to use such
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CONFIDENTIAL
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<PAGE>
Confidential Information only for purposes related to this Agreement. Each party
shall use the same standard of care to protect the confidentiality of
information received from the other party as it uses to protect its own
confidential information, and shall limit disclosure of such information to
those of its personnel and consultants who have an actual need to know and have
a written obligation to protect the confidentiality of such information.
18.1.3 Notwithstanding the preceding provisions of this Section 18.1,
obligations regarding confidentiality and use of Confidential Information
disclosed hereunder shall not include:
18.1.3.1 information which, at the time of disclosure, was
published, known publicly, or otherwise in the public domain,
18.1.3.2 information which, after disclosure, is published,
becomes known publicly, or otherwise becomes part of the public domain through
no fault of the Receiving Party
18.1.3.3 information which, prior to the time of disclosure, is
known to the Receiving Party or, after disclosure, is independently developed by
the Receiving Party as evidenced by its written records; and
18.1.3.4 information which, after disclosure, is made available
to the Receiving Party in good faith by a third party who is under no obligation
of confidentiality or secrecy
18.2 No License. Neither this Agreement nor any disclosure made
----------
hereunder by either party shall be deemed, by implication or otherwise, to vest
in the Receiving Party any license or other ownership rights to or under any
patents, know-how, or trade secrets.
18.3 Return. At any time upon the request of the Disclosing Party,
------
(a) the Confidential Information, including all copies (with the exception of a
single copy thereof which may be kept by the Receiving Party to establish the
extent of disclosure of Confidential Information by the disclosing Party) shall
be returned to the Disclosing Party and (b) all other embodiments of the
Confidential Information in the possession of the Receiving Party, including all
copies and/or any other form or reproduction and/or description.
18.4 Publicity. Except to the extent required by law and for
---------
disclosure to each party's legal, accounting and financial advisors and
investors subject to confidentiality obligations, neither party shall disclose
the terms of this Agreement without the prior written approval of the other
party, which approval shall not be unreasonably withheld.
19. Notices. All notices permitted or required under this Agreement shall
-------
be in writing and shall be delivered as follows with notice deemed given as
indicated: by personal delivery when delivered personally; by overnight courier
upon written verification of receipt; by telecopy or facsimile transmission when
confirmed by telecopier or facsimile transmission; or by certified or
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<PAGE>
registered mail, return receipt requested, five (5) days after deposit in the
mail. All notices must be sent to the addresses described below or to such other
address that the receiving party may have provided for the purpose of notice in
accordance with this Section 19. All notices shall be sent to the attention of:
LifeScan
--------
Attention: President
Address: LifeScan, Inc.
1000 Gibraltar Drive
Milpitas, California 95035-6312
Fax No.: (408) 956-4701
Copy to: Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Attention: Office of the General Counsel
Fax No.: (908) 524-2788
ENACT
-----
Attention: Matthew H. Sanders, President
Address: 1975 West El Camino Real, Suite 306
Mountain View, CA, 94040
Fax No.: (415) 967-9223
Copy to: Chief Financial Officer
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<PAGE>
20. Force Majeure. Neither party shall be liable hereunder by reason of any
-------------
failure or delay in the performance of its obligations hereunder (except for the
payment of money) on account of any cause beyond the reasonable control of such
party including the following only to the extent beyond the reasonable control
of such party: strikes, labor disputes, insurrection, fires, flood, explosions,
acts of God, war, component shortages, governmental action or earthquakes. The
party so affected shall give prompt notice to the other party of such cause and
shall take reasonable steps as are necessary to relieve the effect of such cause
as rapidly as practicable. Such non-performance will be excused for three months
or until the termination of such cause (whichever occurs sooner). Such non-
performing party shall exercise all reasonable efforts to eliminate the Force
Majeure Event and to resume performance of its affected obligations as soon as
practicable.
21. Waiver. The failure of either party to require performance by the other
------
party of any provision hereof shall not affect the full right to require such
performance at any time thereafter; nor shall the waiver by either party of a
breach of any provision hereof be taken or held to be a waiver of the provision
itself.
22. Severability. In the event that any provision of this Agreement shall
------------
be unenforceable or invalid under any applicable law or be so held by applicable
court decision, such unenforceability or invalidity shall not render this
Agreement unenforceable or invalid as a whole.
23. Controlling Law. This Agreement shall be governed by and construed and
---------------
interpreted in accordance with the laws of the State of California without
regard to its conflicts of laws rules. The United Nations Convention on the
International Sale of Goods shall have no application to this Agreement.
24. No Agency. Nothing contained herein shall be construed as creating any
---------
agency, partnership, or other form of joint enterprise between the parties.
25. Survival. Any and all provisions, promises and warranties contained
--------
herein which by their nature or effect are required or intended to be observed,
kept or performed after termination of this Agreement will survive the
termination of this Agreement and remain binding upon and for the benefit of the
parties hereto, including Sections 12, 14, 15, 16, 18, 23, 25, and 27.
26. Assignment. Neither party may assign any rights or obligations under
----------
this Agreement, except (i) upon a reorganization for the purpose of changing the
jurisdiction of incorporation or (ii) as otherwise subject to the restrictions
provided in this Section 26. LifeScan may assign its rights and/or obligations
under this Agreement to any Affiliate thereof provided that LifeScan shall
remain liable for the assignee's performance under this Agreement.
26.1 ENACT may assign this Agreement to the acquirer in a merger or
in an acquisition of all or substantially all of the assets or of more than
40%, by voting power of the outstanding shares of ENACT (an "Acquisition"),
subject during the Exclusive Period to the restrictions in this Section 26.
- --------------------------------------------------------------------------------
CONFIDENTIAL
24
<PAGE>
26.1.1 If during the Exclusive Period a third party proposes to ENACT
that it enter into any agreement for an Acquisition, and if such third party is
a "LifeScan Competitor" as defined below, then this Agreement may not be
assigned to the LifeScan Competitor and ENACT shall be deemed in material breach
hereof unless ENACT complies with each of the following provisions:
26.1.1.1 During the Exclusive Period LifeScan shall have a right
to first refusal to enter into the same form of agreement regarding an
Acquisition as proposed in a bona fide offer made by the LifeScan Competitor
(the "Competitor's Offer"), and ENACT shall provide LifeScan with prompt written
notice of any such offer which it intends or is required by law to consider,
including the full terms therof. ENACT shall provide the same information to
LifeScan as it provides to the LifeScan Competitor. Unless LifeScan shall within
fifteen days after the date of such notice deliver to ENACT a binding offer to
consummate an Acquisition on the same or better terms as the Competitor's Offer,
then ENACT may assign this Agreement to the surviving entity in the proposed
transaction, subject to the restrictions in subsection 26.1.2.1. If LifeScan
makes such a binding offer, then ENACT shall have fifteen (15) days to either
accept LifeScan's offer or decline all then pending offers. If, at any time, a
LifeScan Competitor changes the Competitor's Offer in any manner materially more
favorable to the LifeScan Competitor than the prior Competitor's Offer, ENACT
shall not notify LifeScan, and the provisions of this subsection 26.1.1.1 shall
apply to the parties with respect to such revised Competitor's Offer.
26.1.2 If during the Exclusive Period, any party (other than a
LifeScan Competitor) advises ENACT that it desires to enter into negotiations
for or enter into a letter of intent regarding an agreement for an Acquisition,
and if ENACT intends to enter into negotiations with such third party, then
before ENACT enters into a binding agreement or any letter of intent or similar
agreement which would restrict ENACT from negotiating with other parties for an
Acquisition, ENACT shall provide written notice to LifeScan of such third
parties' intentions. ENACT shall not be required to disclose the terms of any
third party proposal, if any. ENACT shall not enter into a binding agreement for
an Acquisition or any agreement which would restrict ENACT from negotiating with
LifeScan for an Acquisition by LifeScan until fifteen days after providing
LifeScan with such written notice.
26.1.2.1 The following provisions shall apply to any LifeScan
Competitor that during the Exclusive Period consummates or enters into an
agreement to consummate an Acquisition: (i) the LifeScan Competitor shall not be
provided with any data received from End Users using LifeScan Diabetes Systems,
(ii) the LifeScan Competitor must agree in writing as a condition to the
consummation of an Acquisition to continue to provide Care Central Service to
LifeScan for at least two years following such Acquisition on terms
substantially similar to those provided by ENACT hereunder, and (iii) the
LifeScan Competitor must agree in writing as a condition to the consummation of
an Acquisition to provide to LifeScan all of the patient data and equipment (at
reasonable cost) and software (under license) necessary for LifeScan to operate
a Care Central System.
- --------------------------------------------------------------------------------
CONFIDENTIAL
25
<PAGE>
26.1.2.2 A "LifeScan Competitor" shall be any third party
which the parties believe has revenues together with its Affiliates from drug
or devices for diabetes in excess of $50,000,000 for its most recently ended
fiscal year, and which, for avoidance of doubt include, without limitation, the
following entities: Novo Nordisk, Boehringer Mannheim, Abbott Laboratories,
Bayer Laboratories, Warner Lambert, Eli Lilly and Company, Pfizer, and Becton
Dickinson and any successor by merger or otherwise to the foregoing parties. The
parties will cooperate to amend this list if another entity reasonably appears
to have such revenues but no such amendment shall be effective until executed in
writing.
27. Disputes. Any and all disputes between the parties relating to this
--------
Agreement shall be settled by binding arbitration at a mutually acceptable
neutral location in Santa Clara, California. Such arbitration shall be
conducted in accordance with the then current rules of the American Arbitration
Association with a panel of three arbitrators. The arbitrators shall be
selected from the National Panel of Arbitrators of the American Arbitration
Association. Reasonable discovery as determined by the arbitrators shall apply
to the arbitration proceeding. California law shall apply to the arbitration
proceedings. Judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof. Each party in such arbitration shall
be responsible for its own costs and expenses including attorney costs and
expenses. The parties agree neither to request or seek to enforce any punitive
or exemplary damages from the arbitrator and shall not be empowered to grant any
such damages. The arbitrator shall issue written findings of fact and
conclusions of law. Either party may appeal issues of law to the appropriate
court in the State where the arbitration is held, including the application of
law to the facts. From the date a party notifies the other party that it wishes
to commence arbitration regarding any such dispute until such time as such
dispute has been finally settled by arbitration, the running of the time periods
set forth in this Agreement within which a party may cure a breach shall be
suspended as to the subject matter of such dispute.
28. Entire Agreement. This Agreement is the entire agreement between the
----------------
parties regarding its subject matter. It supersedes and its terms govern, all
prior proposals, agreements, or other communications between the parties, oral
or written, regarding such subject matter. This Agreement shall not be modified
unless done so in a writing signed by officers of both ENACT and LifeScan.
LifeScan, Inc. ENACT Health Management
Systems
/s/ Richard J. Wiesner /s/ Matthew Sanders
By: ______________________________ By: ______________________________
7-8-97 7-8-97
Date: ____________________________ Date: ____________________________
- --------------------------------------------------------------------------------
CONFIDENTIAL
26
<PAGE>
EXHIBIT A
Base Reporter and Care Central Service Pricing
Reporter (each)
[*] $[*]
[*] $[*]
Example Annual Enrollment Fee (per End User) $[*]
12 Send Calls
Modem Access
(Items (1) and (2) on Exhibit D)
Example Annual Enrollment Fee (per End User) $[*]
12 Send Calls
12 FAX Reports
Modem Access
(Items (1), (2) and (3) on Exhibit D)
Other Available Care Central Services [*]
(Items (4) through (9) on Exhibit D)
(a) Assumes individual purchase order of [*] or more Reporters
- --------------------------------------------------------------------------------
CONFIDENTIAL
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT B
LifeScan Reporter Pilot List
(Preliminary)
Customer Application Start/Finish # End Users
- -------- ----------- ------------ -----------
To Be Provided by August 1, 1997
- --------------------------------------------------------------------------------
CONFIDENTIAL
<PAGE>
EXHIBIT C
Reporter(TM)
A Communications Accessory for the
LifeScan OneTouch(R) II and the OneTouch(R) Profile
Product Specification
Revision 1.3
7/12/96
- --------------------------------------------------------------------------------
CONFIDENTIAL
<PAGE>
GENERAL DESCRIPTION
Revision 1.3
[*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
[*]
- --------------------------------------------------------------------------------
CONFIDENTIAL
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
[*]
- --------------------------------------------------------------------------------
CONFIDENTIAL
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT D
Care Central Services- Examples
(1) [*];
(2) [*].
(3) [*].
(4) [*].
(5) [*].
(6) [*]
(7) [*].
(8) [*].
(9) [*].
(10) [*].
- --------------------------------------------------------------------------------
CONFIDENTIAL
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT E
[*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
EXHIBIT F
ENACT HEALTH MANAGEMENT SYSTEMS
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into and effective as of the
______ day of July 1997 by and between ENACT Health Management Systems, a
California corporation (the "Company"), and Johnson & Johnson Development
Corporation, a Delaware corporation (the "Purchaser").
In consideration of the mutual promises, covenants and conditions hereinafter
set forth, the parties hereto agree as follows:
1. Authorization and Sale of the Shares.
------------------------------------
1.1 Authorization; Filing of Restated Articles of Incorporation. The
-----------------------------------------------------------
Company has authorized the issuance and sale pursuant to the terms and
conditions hereof of up to 250,000 shares of its Series D Preferred Stock,
having the rights, preferences, privileges and restrictions as set forth in the
Amended and Restated Articles of Incorporation of the Company (the "Articles") a
copy of which is attached hereto as Exhibit A, including, without limitation, an
---------
adjustment of the conversion ratio upon the closing of an initial public
offering pursuant to Article III Section 4(e)(3) thereof.
1.2 Issuance and Sale. Subject to the terms and conditions hereof, on
-----------------
the Closing Date (as defined below), the Company will issue and sell to the
Purchaser, and the Purchaser will purchase 250,000 shares of Series D Preferred
Stock (the "Preferred Shares"), at a purchase price of $12.00 per share or an
aggregate purchase price of $3,000,000.
2. Closing; Delivery.
-----------------
2.1 Closing Date. The purchase and sale of the Preferred Shares to the
------------
Purchaser (the "Closing") shall take place at the offices of Gray Cary Ware &
Freidenrich, A Professional Corporation, 400 Hamilton Avenue, Palo Alto,
California 94301 on July ___, 1997 or such earlier date upon which the
conditions set forth in Section 5 hereof are satisfied, or such other date as is
acceptable to the Company and the Purchaser (the "Closing Date").
2.2 Delivery. Subject to the terms of this Agreement, at the Closing
--------
the Company will deliver to Purchaser a stock certificate registered in the
Purchaser's name representing the number of Preferred Shares purchased by the
Purchaser at the Closing, and Purchaser will deliver to the Company payment for
the Preferred Shares by check or wire transfer in the amount set forth in
Section 1.2 above.
3. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to Purchaser that, except as set forth on the Schedule
of Exceptions
<PAGE>
attached hereto as Exhibit B, which exceptions shall be deemed to be
---------
representations and warranties as if made hereunder:
3.1 Organization, Good Standing and Qualification. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California and has all requisite corporate power and authority
to carry on its business as now conducted. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on its business or
properties.
3.2 Capitalization. At the Closing, the authorized capital stock of
--------------
the Company will be 20,000,000 shares of common stock ("Common Stock") and
10,000,000 shares of preferred stock, of which 2,340,160 shares shall be
designated Series A Preferred Stock, 220,385 shares shall be designated Series B
Preferred Stock, 684,231 shares shall be designated Series C Preferred Stock and
550,746 shares shall be designated Series D Preferred Stock. At the Closing,
2,389,500 shares of the Common Stock, 2,325,960 shares of Series A Preferred
Stock, 220,385 shares of Series B Preferred Stock and 381,024 shares of Series C
Preferred Stock will be issued and outstanding. The Corporation has a reserve of
115,500 shares of Common Stock which may be issued to employees and consultants
pursuant to Board-approved stock grants, stock purchase plans or stock option
plans. In addition, on the Closing Date there will be issued and outstanding
warrants to purchase an aggregate of 60,000 shares of Common Stock, warrants to
purchase an aggregate of 131,419 shares of Series C Preferred Stock, options to
purchase 712,000 shares of Common Stock, a convertible note for $1,000,000 which
converts into 171,788 shares of Series C Preferred Stock and convertible notes
for a total aggregate amount of $2,000,000 (of which $1,000,000 has been brought
down) which will convert into securities sold in the next equity financing in
excess of $10,000,000 at a per share conversion price equal to eighty percent
(80%) of the per share price of the securities sold in such financing. Except as
otherwise described in this Agreement, there are no outstanding rights, plans,
options, warrants, conversion rights or agreements for the purchase or
acquisition from the Company of any shares of its capital stock.
3.3 Financial Statements. The Company has provided to the Purchaser
--------------------
its unaudited financial statements as of and for the year-ended, December 31,
1996, including, in cash case, the rates thereto (the "Financial Statements").
The Financial Statements are complete and correct in all material respects, are
in accordance with the books and records of the Company, have been prepared in
accordance with generally accepted accounting principles, consistently applied,
and fairly present the financial position of the Company as of the date thereof
or for the period then ended, as the case may be.
3.4 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity.
<PAGE>
3.5 Authorization.
-------------
a) Corporate Action. All corporate action on the part of the
----------------
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, the performance of all
obligations of the Company hereunder and the authorization, issuance (or
reservation for issuance) and delivery of the Preferred Shares being sold
hereunder and the Common Stock issuable upon conversion of the Preferred Shares
(the "Underlying Common Shares") has been taken or will be taken prior to the
Closing, and this Agreement constitutes a valid and legally binding obligation
of the Company, enforceable in accordance with its terms, except as may be
limited by bankruptcy, insolvency, moratorium and other laws of general
application affecting the enforcement of creditors' rights.
b) Valid Issuance. The Preferred Shares, when issued in compliance
--------------
with the provisions of this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable and will be free of any liens, encumbrances
preemptive rights or rights of first refusal and will be issued in compliance
with all Federal and state Securities laws; provided, however, that the
Preferred Shares may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein, and as may be required by future
changes in such laws. The Underlying Common Shares have been duly and validly
reserved for issuance. Upon conversion of the Preferred Shares into the
Underlying Common Shares in conformity with the Articles, such Underlying Common
Shares will be duly authorized, validly issued, fully paid and nonassessable,
and will be free of any liens, encumbrances preemptive rights or rights of first
refusal caused or created by the Company and will be issued in compliance with
all Federal and state securities laws.
3.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the valid and lawful
authorization, execution and delivery by the Company of this Agreement or the
consummation of the transactions contemplated by this Agreement, except for the
filing pursuant to Section 25102(f) of the California Corporation Securities Law
of 1968, as amended, and the rules thereunder, which filing will be effected
within 15 days after the sale of the Preferred Shares hereunder.
3.7 Litigation. There is no claim, action, suit, proceeding or
----------
investigation pending or currently threatened against the Company which
questions the validity of this Agreement or the right of the Company to enter
into it, or to consummate the transactions contemplated hereby, or which might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The foregoing
includes, without limitation, actions pending or threatened (or any basis
therefor known to the Company) involving the prior employment of any of the
Company's employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or
<PAGE>
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.
3.8 Patents and Trademarks. The Company has or can obtain without
----------------------
material expense sufficient title and ownership of all patents, trademarks,
service marks, trade names, copyrights, trade secrets, information, proprietary
rights and processes necessary for its business as now conducted without any
conflict with or infringement of the rights of others. There are no outstanding
options, licenses, or agreements of any kind relating to the foregoing, nor is
the Company bound by or a party to any options, licenses or agreements of any
kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, proprietary rights and
processes of any other person or entity. The Company has not received any
communications alleging, nor is the Company aware, to the best of its knowledge,
if any, basis for such allegations that the Company has violated any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not aware
that any of it employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of such employee's best efforts to promote the interests
of the Company. Neither the execution nor delivery of this Agreement nor the
carrying on of the Company's business by the employees of the Company will, to
the best of the Company's knowledge, conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees are now obligated. Each
employee of and consultant to the Company with access to confidential or
proprietary information has executed a proprietary information agreement
obligating such employee or consultant to hold all such information in
confidence. The Company does not believe, to the best of its knowledge, that it
is or will be necessary to utilize any inventions of any of its employees (or
people it currently intends to hire) made prior to their employment by the
Company.
3.9 Compliance with Other Instruments. The Company is not in violation
---------------------------------
or default of any provisions of its Articles of Incorporation or Bylaws or of
any instrument, judgment, order, writ, decree or contract to which it is a party
or by which it is bound or, to its knowledge, of any provision of federal, state
or local statute, rule or regulation applicable to the Company. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event which results in the creation of any lien,
charge or encumbrance upon any assets of the Company.
3.10 Tax Matters.
-----------
a) All taxes, including, without limitation, income, excise,
property, sales, transfer, use, franchise, payroll, employees' income
withholding and social security taxes imposed or assessed by the United States
or by any foreign country or by any state, municipality,
<PAGE>
subdivision or instrumentality of the United States or of any foreign country,
or by any other taxing authority, which are due or payable by the Company, and
all interest, penalties and additions thereon, whether disputed or not, have
been paid in full; all tax returns or other documents required to be filed in
connection therewith have been accurately prepared and duly and timely filed;
and the Company is not the beneficiary of any extension of time within which to
file any such returns. The Company has not been delinquent in the payment of
any foreign or domestic tax, assessment or governmental charge or deposit and
has no tax deficiency or claim outstanding, assessed or, to the best of its
knowledge, proposed against it, and there is no basis for any such deficiency or
claim. No issues have been raised (or are currently pending) by the Internal
Revenue Service or any other taxing authority in connection with any of the
returns and reports referred to above, and no waivers of statutes of limitations
have been given or requested with respect to the Company in connection
therewith. The provisions for taxes in the Financial Statements are sufficient
for the payment of all accrued and unpaid federal, state, county and local taxes
of the Company.
b) To the best of the Company's knowledge, all elections and notices
required by Section 83(b) of the Code and any analogous provisions of applicable
state tax laws required to have been filed by the date of the Closing by all
individuals who have purchased shares of Common Stock have been timely filed.
3.11 Disclosure. The Company has fully provided the Purchaser with all
----------
the information which the Purchaser has requested for deciding whether to
purchase the Preferred Shares. Neither this Agreement nor any other statements
or certificates made or delivered in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements herein or therein not misleading.
3.12 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not, in any case, individually or in the aggregate, materially impair the
Company's ownership or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance with such leases
and, to the best of its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances.
3.13 Liabilities. Except as listed on the Disclosure Schedule, the
-----------
Company has no debts, obligations or liabilities, contingent or otherwise, other
than (i) liabilities incurred in the ordinary course of business, and (ii)
obligations under contracts and commitments incurred in the ordinary course of
business, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company. The
Company maintains a standard system of accounting established and administered
in accordance with generally accepted accounting principles.
3.14 Securities Laws. Assuming that the Purchaser's representations
---------------
and warranties contained in Section 4 of this Agreement are true and correct,
the offer, issuance and sale of the Preferred Shares and the underlying Common
Shares are and will be exempt from the
<PAGE>
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended (the "Securities Act"), and have been registered or qualified (or are
exempt from registration and qualification) under the registration, permit or
qualification requirements of all applicable state securities laws. The Company
agrees that neither the Company nor anyone acting on its behalf will offer any
of the Preferred Shares or any similar securities for issuance or sale to, or
solicit any offer to acquire any of the same from, anyone so as to make the
issuance and sale of the Preferred Shares subject to the registration
requirements of Section 5 of the Securities Act.
3.15 Business. The Company has complied in all material respects with
--------
all Federal, state, local, or foreign laws, ordinances, regulations or orders
applicable to the business of the Company as presently or previously conducted.
The Company has all Federal, state, local and foreign governmental licenses and
permits that are required for the conduct of its business presently or
previously conducted by the Company where failure to obtain any such license or
permit would be reasonably likely to have a material adverse effect on the
business, operations, properties, assets (including intangible assets),
liabilities (contingent or otherwise), financial condition or results of
operations of the Company (collectively, a "Material Adverse Effect"), which
licenses and permits are in full force and effect, and no violations are
outstanding or uncured with respect to any such licenses or permits and no
proceeding is pending or, to the best knowledge of the Company, threatened to
revoke or limit any thereof.
3.16 Brokerage. There are no claims for brokerage commissions or
---------
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement made by or on behalf of
the Company and the Company agrees to indemnify and hold the Purchaser harmless
against any damages incurred as a result of any such claim.
3.17 Insurance. The Company maintains in full force such types and
---------
amounts of insurance issued by issuers of recognized responsibility insuring the
Company, with respect to its liability, workers' compensation, business and
properties, in such amounts and against such losses and risks as are adequate
against risks usually insured against by Persons (as hereinafter defined)
operating similar businesses and properties.
3.18 Environmental and Safety Laws.
-----------------------------
a) The Company, the operation of its business, and any real property
that the Company owns, leases or otherwise occupies or uses (the "Premises") are
in compliance with all applicable Environmental Laws (as defined below),
including, without limitation, any Environmental Laws or orders of directives
with respect to any cleanup or remediation of any release or threat of release
of Hazardous Substances, where failure to so comply would be reasonably likely
to have a Material Adverse Effect. The Company has not received any citation,
directive, letter or communication, written or oral, or any notice of any
proceeding, claim or lawsuit, from any person arising out of the ownership or
occupation of the Premises, or the conduct of its operations, and the Company is
not aware of any basis therefor. The Company has obtained and is maintaining in
full force and effect all necessary permits, licenses and approvals required by
all Environmental Laws applicable to the Premises and the business operations
<PAGE>
conducted thereon (including operations conducted by tenants on the Premises),
where failure to obtain such permits, licenses and approvals would be reasonably
likely to have a Material Adverse Effect, and is in compliance with all such
permits, licenses and approvals, where failure to so comply would be reasonably
likely to have a Material Adverse Effect. The Company has not caused or allowed
a release, or a threat of release, or any Hazardous Substance unto, at or near
the Premises, and, to the best of the Company's knowledge, neither the Premises
nor any property at or near the Premises has ever been subject to a release or
a threat of release, of any Hazardous Substance. For the purposes of this
Agreement, the term "Environmental Laws" shall mean any Federal, state or local
law or ordinance or regulation pertaining to the protection of human health or
the environment, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et. seq., the
--- ----
Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 1101, et.
----
seq., and the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
- ---
et. seq. For purposes of this Agreement, the term "Hazardous Substance" shall
- --- ---
include oil and petroleum products, asbestos, polychlorinated biphenyls, urea
formaldehyde and any other materials classified as hazardous or toxic under any
Environmental Laws.
b) The Company is in compliance with every applicable statute, law
or regulation relating to occupational health and safety, where failure to so
comply would be reasonably likely to have a Material Adverse Effect, and, to the
best of the Company's knowledge, no material expenditures are required in order
to comply with any such existing statute, law or regulation.
3.19 Retirement Obligations; Unions
------------------------------
a) The Company does not maintain nor is it a party to (or ever
maintained or was a party to) any "employee welfare benefit plan," as defined in
Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or any other written, unwritten, formal or informal plan or
arrangement involving direct or indirect compensation other than workers'
compensation, unemployment compensation and other government programs under
which the Company has any present or future liability. The Company does not
maintain nor is it a party to (or ever maintained or was a party to) any
"employee pension benefit plan," as defined in Section 3(2) of ERISA, and the
Company does not contribute to any "multiemployer plan" as defined in Section
3(37) or ERISA.
b) The Company does not have any employees that are represented by a
union. The Company is not a party to any collective bargaining agreement and, to
the best of the Company's knowledge, no organizational efforts are presently
being made with respect to any of its employees. The Purchaser will not incur
through consummation of any of the transactions contemplated by the Agreement
any liability in respect of employees of the Company or any of its employee
benefit plans.
3.20 Transactions with Affiliates. No shareholder, officer or director
----------------------------
of the Company, nor any "Affiliate" or "Associate" of such persons (as such
terms are defined in the rules and regulations promulgated under the Securities
Act (herein, a "Related Party")) is a party
<PAGE>
to any material transaction with the Company (except employment and consulting
agreements), including, without limitation, any contract, agreement or other
arrangement providing for the rental of real or personal property from, or
otherwise requiring payments to, any Related Party. No employee of the Company
nor any Related Party is indebted in an amount greater than $20,000 to the
Company and the Company is not indebted to any such employee or Related Party.
3.21 Investment Company. The Company is not an "investment company"
------------------
within the meaning of the Investment Company Act of 1940, as amended, and will
not, as a result of the transactions contemplated hereby, become an "investment
company."
3.22 Registration Rights. Except as set forth herein and in the
-------------------
Amended and Restated Rights Agreement by and among the Company and certain
investors dated August 29, 1995, as amended, (the "Rights Agreement") the
Company is not under any contractual obligation to register any of its currently
outstanding securities or any of its securities that may hereafter be issued.
3.23 Agreements. Except as listed on Schedule 3.23, the Company is not
----------
a party to any written or oral contract not made in the ordinary course of
business and, whether or not made in the ordinary course of business, the
Company is not a party to any written or oral (a) contract for the future
purchase of fixed assets or for the future purchase of materials, supplies or
equipment in excess of normal operating requirements, (b) contract for the
employment of any officer, employee or other person on a full-time basis or any
contract with any person on a consulting basis, (c) bonus, pension, profit-
sharing, retirement, stock purchase, stock option, insurance or similar plan,
contract or understanding in effect with respect to any employees or officers,
(d) agreement or indenture relating to the borrowing of money or to the
mortgaging, pledging or otherwise placing of a lien on any assets of the
Company, (e) guaranty of any obligation for borrowed money or otherwise, (f)
lease or agreement under which the Company is lessee of or holds or operates any
property, real or personal, owned or controlled by any other party, (g) lease or
agreement under which the Company is lessor of or permits any third party to
hold or operate any property, real or personal, owned or controlled by the
Company, (h) agreement or other commitment for capital expenditures in excess of
$10,000, (i) contract, agreement or commitment under which the Company is
obligated to pay any broker's fees, finder's fees or any such similar fees to
any third party, (j) contract, agreement or commitment under which the Company
has issued, or may become obligated to issue, any shares of capital stock of the
Company, or any warrants, options, convertible securities or other commitments
pursuant to which the Company is or may become obligated to issue any shares of
its capital stock, (k) license or other agreement relating in whole or in part
to patents, trademarks, trade names, service marks or copyrights (including any
license or other agreement under which the Company has the right to use any of
the same owned or held by a third party) or any agreement or obligation to
assign rights in the same to any third party, or (l) any other contract,
agreement, license, arrangement or understanding which is material to the
operation of the business of the Company. The Company has furnished to the
Purchaser true and correct copies of all such written agreements and other
documents. Each agreement, contract, lease, license or commitment or instrument
of the Company described in Schedule 3.23 (collectively, the
<PAGE>
"Contracts") is valid, binding and in full force and effect and is enforceable
by the Company in accordance with its terms. The Company has performed all
material obligations required to be performed by it to date under the Contracts
and it is not (with or without the lapse of time or the giving of notice, or
both) in material breach or default thereunder, and, to the best knowledge of
the Company, no other party to any of the Contracts is (with or without the
lapse of time or the giving of notice, or both) in material breach or default
thereunder.
3.24 Employees. There are no controversies or labor troubles pending,
---------
or to the best knowledge of the Company, threatened between it and its
employees. All key employees and officers of the Company have signed
confidential disclosure agreements with the Company. To the best of the
Company's knowledge: (a) no employee of the Company is in violation of any term
of any employment contract, patent or other proprietary information disclosure
agreement or any other contract or agreement relating to the right of any such
employee to be employed by the Company, and the continued employment by the
Company of its respective present employees will not result in any such
violation; (b) no officer or key employee has any present intention of
terminating his or her employment with the Company nor does the Company have any
present intention of terminating any such employment; and (c) the Company has
complied with all applicable state and federal laws and regulations respecting
employment and employment practices, terms and conditions of employment, wages
and hours and other laws related to employment, and there are no arrears in the
payments of wages, withholding or social securities taxes, unemployment
insurance premiums or other similar obligations.
3.25 Books and Records. The minute books of the Company contain
-----------------
complete and accurate records of all meetings and other corporate actions of the
Company's shareholders, Board of Directors and all committees, if any, appointed
by its Board of Directors. The Company's stock ledger, as maintained by its
transfer agent is, to the best of the Company's knowledge, complete and reflects
all issuances, transfers, repurchases and cancellations of shares of capital
stock of the Company. The books of accounts, ledgers, records and documents of
the Company accurately and completely reflect all material information relating
to its business, the nature, acquisition, maintenance, location and collection
of its assets and the nature of all transactions giving rise to its obligations
and its accounts receivable.
3.26 Certain Regulatory Matters. There are no unfulfilled outstanding
--------------------------
agreements with or commitments to the United States Department of Health, Food
and Drug Administration (the "FDA") or any other regulatory body of any kind of
character with respect to any product sold by the Company (the "Products");
there are no adverse regulatory actions by the FDA or any other regulatory body
(domestic or foreign) pending with respect to any Product; and the Company does
not have any knowledge or information with respect to the initiation, pendency
or threat by the FDA or other such regulatory body of any adverse regulatory
action that could affect any of the Products.
3.27 Voting Arrangements. To the best of the Company's knowledge,
-------------------
there are no outstanding shareholder agreements, voting trusts, proxies or other
arrangements or understandings among the shareholders of the Company relating to
the voting of their respective shares.
<PAGE>
3.28 Loans and Advances. The Company does not have any outstanding
------------------
loans or advances to any person and is not obligated to make any such loans or
advances, except, in each case, for advances to employees of the Company in
respect of reimbursable business expenses anticipated to be incurred by them in
connection with their performance of services for the Company.
3.29 Assumptions, Guaranties, Etc. of Indebtedness of Other Persons.
--------------------------------------------------------------
The Company has not assumed, guaranteed, endorsed or otherwise become directly
or contingently liable on any indebtedness of any other person (including
without limitation, liability by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or otherwise invest
in the debtor, or otherwise to assure the creditor against loss), except for
guaranties by endorsement of negotiable instruments for deposit or collection in
the ordinary course of business consistent with past practice.
3.30 U.S. Real Property Holding Corporation. The Company is not now
--------------------------------------
and has never been a "United States real property holding corporation," as
defined in Section 897(c)(2) of the Code and Section 1.897.2(b) of the
Regulations promulgated by the Internal Revenue Service, and the Company has
filed with the Internal Revenue Service all statements, if any, with its United
States income tax returns which are required under Section 1.987-2(h) of such
Regulations.
4. Representations and Warranties of the Purchaser and Restrictions on
-------------------------------------------------------------------
Transfer Imposed by the Securities Act and the California Corporate Securities
- ------------------------------------------------------------------------------
Law of 1968 (the "California Law").
- ----------------------------------
4.1 Representations and Warranties by the Purchaser. The Purchaser
-----------------------------------------------
represents and warrants to the Company as follows:
a) The Preferred Shares and the Underlying Common Shares
(collectively, the "Securities") will be acquired for the Purchaser's own
account, for investment and not with a view to, or for resale in connection
with, any distribution or public offering thereof.
b) The Purchaser understands that the Securities have not been
registered under the Securities Act by reason of their issuance in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) thereof, that the Company has no present
intention of registering the Securities, that the Securities must be held by the
Purchaser indefinitely, and that the Purchaser must therefore bear the economic
risk of such investment indefinitely, unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from registration. The
Purchaser further understands that the Securities have not been qualified under
the California Law by reason of their issuance in a transaction exempt from the
qualification requirements of California Law, which exemptions depend upon,
among other things, the bona fide nature of the Purchaser's investment intent
expressed above.
<PAGE>
c) During the negotiation of the transactions contemplated herein,
the Purchaser and its representatives have been afforded full and free access to
corporate books, financial statements, records, contracts, documents, and other
information concerning the Company, and to its offices and facilities, have been
afforded an opportunity to ask such questions of the Company's officers,
employees, agents, accountants and representatives concerning the Company's
business, operations, financial condition, assets, liabilities and other
relevant matters as they have deemed necessary or desirable, and have been given
all such information as has been requested, in order to evaluate the merits and
risks of the prospective investment contemplated herein.
d) The Purchaser and its representatives have been solely
responsible for the Purchaser's own "due diligence" investigation of the Company
and its management and business, for its own analysis of the merits and risks of
this investment, and for its own analysis of the fairness and desirability of
the terms of the investment; in taking any action or performing any role
relative to the arranging of the proposed investment, the Purchaser has acted
solely in its own interest, and neither the Purchaser nor any of its
representatives has acted as an agent of the Company. Notwithstanding the
foregoing, such due diligence investigation shall not limit the representations
and warranties made by the Company in Section 3 hereof. The Purchaser has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of the purchase of the Securities pursuant to
the terms of this Agreement and of protecting its interests in connection
therewith.
e) The Purchaser is able to bear the economic risk of the purchase
of Securities pursuant to the terms of this Agreement.
f) The Purchaser has the full right, power and authority to enter
into and perform the Purchaser's obligations under this Agreement, and this
Agreement constitutes a valid and binding obligation of the Purchaser
enforceable in accordance with its terms except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and rules
or laws concerning equitable remedies.
g) No consent, approval or authorization of or designation,
declaration or filing with any governmental authority on the part of the
Purchaser is required in connection with the valid execution and delivery of
this Agreement by Purchaser.
4.2 Legends. Each certificate or instrument representing the
-------
Securities may be endorsed with legends in substantially the following forms:
a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE "RESTRICTED
SECURITIES" AS DEFINED IN THE RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES
MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN
CONJUNCTION
<PAGE>
WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SUCH ACT, OR
(II) IN COMPLIANCE WITH RULE 144 OR (III) IF THE HOLDER HEREOF PRESENT AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO COUNSEL FOR THE CORPORATION THAT
SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SUCH SALE, OFFER OR
DISTRIBUTION."
"ADDITIONALLY, THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO CERTAIN CONDITIONS OF CO-SALE
AND RIGHT OF FIRST REFUSAL AS CONTAINED IN CERTAIN AGREEMENTS BETWEEN THE
COMPANY AND CERTAIN HOLDERS OF STOCK. COPIES OF SUCH AGREEMENTS MAY BE OBTAINED
WITHOUT CHARGE UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY."
b) Any legends required by Sections 417 and 418 of the California
Corporations Code.
c) Any other legends required by California law or other applicable
state securities laws.
The Company need not register a transfer of any Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in the foregoing legends are satisfied to the
extent applicable.
4.3 Removal of Legends and Transfer Restrictions.
--------------------------------------------
a) Any legend endorsed on the Securities pursuant to Section 4.2(a)
and the stop transfer instructions with respect to the Securities shall be
removed and the Company shall issue a certificate or instrument without such
legend to the holder thereof if such Securities are registered under the
Securities Act and a prospectus meeting the requirements of Section 10 of the
Securities Act is available, if such legend may be properly removed under the
terms of Rule 144 promulgated under the Securities Act or if such holder
provides the Company with an opinion of counsel for such holder reasonably
satisfactory to legal counsel for the Company, to the effect that a sale,
transfer or assignment of such Securities may be made without registration.
b) Any legend endorsed on a certificate pursuant to Section 4.2(c)
and the stop transfer instructions with respect to such Securities shall be
removed upon receipt by the Company of an order of the California Department of
Corporations or other appropriate state securities authority authorizing such
removal, which order the Company shall seek in a timely manner in those
circumstances in which such order is appropriate in the Company's reasonable
opinion.
5. Conditions to Closing.
---------------------
<PAGE>
5.1 Conditions to Obligations of the Purchaser. The obligation of
------------------------------------------
Purchaser to purchase the Securities at the Closing is subject to the
fulfillment on or prior to the Closing Date of the following conditions, any of
which may be waived by Purchaser:
a) The representations and warranties made by the Company in Section
3 hereof shall be true and correct when made, and shall be true and correct in
all material respects on the Closing Date with the same force and effect as if
they had been made on and as of said date; the Company shall not have been
adversely affected in any material way prior to the Closing Date; and the
Company shall have performed all obligations and conditions herein required to
be performed or observed by the Company on or prior to the Closing Date.
b) The Company shall have obtained any and all consents (including
all governmental or regulatory consents, approvals or authorizations required in
connection with the valid execution and delivery of this Agreement), permits and
waivers necessary or appropriate for consummation of the transactions
contemplated by this Agreement. The Company, the Holders of the Company's Series
A Preferred Stock, Series B Preferred Stock and the Series C Preferred Stock and
the Purchaser shall have entered into Amendment No. 2 to the Rights Agreement
attached hereto as Exhibit C.
---------
c) The purchase of the Securities by the Purchaser hereunder shall
be legally permitted by all laws and regulations to which Purchaser and the
Company are subject.
d) The Articles shall have been filed with the California Secretary
of State, and shall be in full force and effect at the Closing.
e) The Company shall have delivered to Purchaser a Certificate,
executed by the President of the Company, dated the Closing Date, certifying the
fulfillment of the conditions specified in subsections (a), (b) and (d) of this
Section 5.1.
f) The Purchaser shall have received from Gray, Cary, Ware &
Freidenrich, counsel to the Company, an opinion addressed to it, dated the
Closing Date, in the form of Exhibit D.
g) The Development and Marketing Agreement of the even date herewith
(the "Ancillary Agreement") shall have been executed and delivered by the
Company.
h) The Company shall have delivered to the Purchaser Good Standing
Certificates from the California Secretary of State and Franchise Tax Board
dated not more than ten (10) days prior to the Closing Date.
i) The Company shall have delivered to Purchaser a Certificate of
Incumbency, executed by the Secretary of the Comany, dated the Closing Date,
certifying the incumbency of the Company's President.
5.2 Conditions to the Company's Obligations. The Company's obligation
---------------------------------------
to sell and issue the Securities at the Closing is subject to the fulfillment to
the Company's satisfaction on
<PAGE>
or prior to the Closing Date of the following conditions, any of which may be
waived by the Company:
a) The representations and warranties made by Purchaser herein shall
be true and correct as of the Closing Date, with the same force and effect as if
they had been made
<PAGE>
on and as of said date, and Purchaser shall have performed all obligations and
conditions required to be performed or observed by it on or prior to the Closing
Date.
b) The Company shall have obtained any and all consents (including
all governmental or regulatory consents, approvals or authorizations), permits
and waivers necessary or appropriate for consummation of the transactions
contemplated by this Agreement.
c) The purchase of the Securities by Purchaser hereunder shall be
legally permitted by all laws and regulations to which Purchaser and the Company
are subject.
d) The Articles shall have been filed with the California Secretary
of State.
e) The Ancillary Agreement shall have been executed and delivered by
the Purchasers.
6. Covenants of the Company and Purchaser. The Company hereby covenants
--------------------------------------
and agrees as set forth in Sections 6.1 through 6.5. Purchaser hereby covenants
and agrees as set forth in Section 6.6.
6.1 Financial Information.
---------------------
a) Annual Financial Information. As soon as practicable after the
----------------------------
end of each fiscal year, and in any event within ninety (90) days thereafter,
the Company will furnish to the Purchaser audited financial statements,
including consolidated balance sheets of the Company and its subsidiaries, if
any, as at the end of such fiscal year and consolidated statements of income and
surplus and consolidated statements of changes in financial position of the
Company and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles and setting forth in each case in
comparative form the figures for the previous fiscal year.
b) Quarterly Reports. Furnish to the Purchaser, as soon as
-----------------
practicable, and in any case within forty-five (45) days, after the end of each
fiscal quarter, a written report on financial and operational highlights of such
quarter, and an unaudited quarterly report, including a balance sheet, profit
and loss statement, cash flow analysis, and comparison to year-earlier results
and to projected results.
6.2 Observer and Inspection Rights. The Purchaser may have an observer
------------------------------
present at any meeting of the Board of Directors of the Company (the "Board").
Such observer will comply with such reasonable confidentiality procedures,
including, without limitation, exclusion during certain portions of Board
meetings to be determined by the Board, and execution of customary
confidentiality agreements, as the Company may reasonably request. In addition,
the Purchaser will have the right, at its expense, to visit the inspect any of
the properties of the Company or any of its subsidiaries, to examine its books
and records, and to discuss its affairs, financial condition and accounts with
its officers, all at such reasonable times and as
<PAGE>
often as may reasonably be requested; provided, however, the that Company will
not be obligated to provide any information that it reasonably considers to be a
trade secret or to contain confidential information, absent execution and
delivery by the Purchaser and its reviewing representatives of such customary
confidentiality agreements as the Company may request.
6.3 Insurance. The Company shall maintain appropriate insurance on its
---------
business and properties, and the Company shall maintain key man insurance on
Matthew Sanders, Chris Tacklind, Geoffrey Walne, Eitan Fenson and Gil Mott in
the aggregate amount of $2,500,000. The Company shall also maintain insurance,
in reasonably adequate amounts, to cover the risk of loss or damage to its
material properties and other insurable assets. Insurance policies shall be
renewed and approved by the Company's Board of Directors annually.
6.4 Litigation, etc. The Company shall provide Purchaser with notice
---------------
of material litigation, disputes and labor controversies as soon as practicable
after the Company becomes aware of such litigation, disputes or labor
controversies.
6.5 Offering. Subject in part to the accuracy of Purchaser's
--------
representations and warranties set forth herein, the offer, sale and issuance of
the Securities as contemplated by this Agreement are exempt from registration
requirements of the Securities Act, and neither the Company nor any authorized
agent acting on its behalf will take any action that would cause the loss of
such exemption.
6.6 Confidentiality of Information. Purchaser agrees that any
------------------------------
information obtained by it pursuant to Sections 6.1 and 6.2 will not be
disclosed to any person or entity without the prior written consent of the
Company; provided however, that such consent shall not be unreasonably withheld
and that, notwithstanding the foregoing, Purchaser may disclose such information
without the prior written consent of the Company to its partners, shareholders,
legal counsel, professional accountants, associates or employees in order to
evaluate this investment and as may be necessary to continue to evaluate the
Company. Purchaser agrees that any person receiving information from the
Purchaser pursuant to Sections 6.1 and 6.2 shall agree to be bound by the
provisions of this Section 6.6 or shall be otherwise bound by applicable ethical
standards of confidentiality with respect to such information. Purchaser's
obligations under this Section 6.6 shall not apply to any information which:
a) was in the public domain at the time it was communicated to the
Purchaser by the Company;
b) entered the public domain subsequent to the time it was
communicated to Purchaser through no fault of the Purchaser;
c) was in the Purchaser's possession free of any obligation of
confidence at the time it was communicated to the Purchaser by the Company;
d) was rightfully communicated to Purchaser by a third party free of
any obligation of confidence; or
<PAGE>
e) was disclosed by the Purchaser in response to a valid order by a
court or other governmental body, was otherwise required by law, or was
necessary to establish the rights of either party under this Agreement.
6.7 Termination of Covenants. The covenants set forth in Sections 6.5
------------------------
through 6.8 shall terminate and be of no further force and effect upon (i) the
closing of an underwritten public offering of the Company's securities
registered under the Securities Act, or (ii) upon any merger, consolidation,
asset transfer or share exchange as a result of which the shareholders of the
Company immediately prior to such transaction shall own less than 50% of the
voting securities of the surviving corporation.
7. Registration Rights. Purchaser shall have registration rights as set
-------------------
forth in the Rights Agreement.
8. Co-Sale Rights. Purchaser is entitled to the rights under and is
--------------
subject to the co-sale rights contained in the Rights Agreement.
9. Right of First Refusal Upon Issuance of Securities by the Company.
-----------------------------------------------------------------
9.1 Right of First Refusal. The Company hereby grants to Purchaser the
----------------------
right of first refusal to purchase, pro rata, all or any part of New Securities
(as defined in this Section 9.1) which the Company may, from time to time,
propose to sell and issue. A pro rata share, for purposes of this right of first
refusal, is the ratio that the number of shares of Capital Stock then held by
Purchaser bears to the sum of the total number of shares of Capital Stock then
outstanding.
a) The number of shares of "Capital Stock" then outstanding shall be
calculated as follows: the sum of (x) the number of shares of Common Stock then
outstanding and (y) the number of shares of Common Stock issuable upon, exercise
or exchange of any obligations to issue shares of stock (whether warrants,
options, stock purchase rights or otherwise) or upon conversion of any shares of
stock of the Company.
b) "Equity Securities" shall mean any securities having voting
rights in the election of the Board of Directors not contingent upon default, or
any securities evidencing an ownership interest in the Company, or any
securities convertible into or exercisable for any shares of the foregoing, or
any securities issuable pursuant to any agreement or commitment to issue any of
the foregoing.
c) Except as set forth below, "New Securities" shall mean any Equity
Securities, whether now authorized or not, and rights, options or warrants to
purchase said Equity Securities. Notwithstanding the foregoing, "New Securities"
does not include (i) up to 3,151,500 shares of Common Stock issued or issuable
on or after the date of incorporation of the Corporation to officers, directors,
employees or consultants of the Corporation pursuant to stock grants, stock
purchase and stock option plans or other stock incentive programs, agreements or
<PAGE>
arrangements approved by the Board of Directors prior to June 30, 1996 such
amount to increase by five percent (5%) on December 31, 1996 and annually on
December 31 thereafter; (ii) securities offered to the public generally pursuant
to a registration statement under the Securities Act; (iii) securities issued
pursuant to the acquisition of another corporation by the Company by merger,
purchase of substantially all of the assets or other reorganization whereby the
Company or its purchasers own not less than fifty-one (51%) percent of the
voting power of the surviving or successor corporation; (iv) warrant or warrants
for the purchase of shares of capital stock of the Company (and stock issued
upon exercise of such warrant or warrants) which have been unanimously approved
by the Board of Directors of the Company and issued in connection with an
equipment lease or equipment financing; (v) stock issued pursuant to any rights
or agreements including without limitation convertible securities, options and
warrants, provided that the rights of first refusal established by this Section
9 apply with respect to the initial sale or grant by the Company of such rights
or agreements; or (vi) stock issued in connection with any stock split, stock
dividend or recapitalization by the Company.
d) In the event the Company proposes to undertake an issuance of New
Securities, it shall give Purchaser written notice of its intention, describing
the type of New Securities, and the price and terms upon which the Company
proposes to issue the same. Purchaser shall have thirty (30) days from the date
of receipt of any such notice to agree to purchase up to its respective pro rata
share of such New Securities for the price and upon the applicable terms
specified in the notice by giving written notice to the Company and stating
therein the quantity of New Securities to be purchased.
e) In the event Purchaser fails to exercise the right of first
refusal within said thirty (30) day period, the Company shall have one-hundred-
twenty (120) days following delivery to Purchaser of such notice to sell the New
Securities not elected to be purchased by Purchaser at the price and upon the
terms no more favorable to the purchasers of such securities than specified in
the Company's notice. In the event the Company has not sold the New Securities
within said one-hundred-twenty (120) day period, the Company shall not
thereafter issue or sell any New Securities, without first offering such
securities in the manner provided above.
f) The right of first refusal granted under this Agreement shall
expire upon the closing of the first firm commitment underwritten offering of
the Company's securities to the public pursuant to an effective registration
statement under the Securities Act.
g) The right of first refusal hereunder may be assigned to a
transferee or assignee reasonably acceptable to the Company in connection with
any transfer or assignment of the Preferred Shares or securities issuable upon
conversion thereof, or in exchange therefor, by Purchaser provided that: (i)
such transfer may otherwise be effected in accordance with applicable securities
laws, and (ii) such assignee or transferee acquires at least 200,000 shares
(appropriately adjusted for any stock split, stock dividend and
recapitalizations). Notwithstanding the foregoing, such rights of first refusal
may be assigned to any affiliate of Purchaser, without compliance with item (ii)
above, provided written notice thereof is promptly given to the Company.
<PAGE>
10. Company's Right of First Refusal on Resale. Before any of the
------------------------------------------
Securities registered in the name of the Purchaser may be sold or transferred
(including transfer by operation of law) other than as set forth in Section 10.5
below, such shares (the "Transfer Shares") shall first be offered to the
Company, which will have the right to purchase all, but not less than all, of
the Transfer Shares proposed to be transferred ("Right of First Refusal"), in
the following manner:
10.1 Prior to any proposed transfer of the Transfer Shares, the
Purchaser desiring a transfer shall give a written notice (the "Transfer
Notice") to the Company describing fully the proposed transfer, including the
number of Transfer Shares, the name and address of the proposed transferee (the
"Proposed Transferee") and, if the transfer is voluntary, the proposed transfer
price, and containing such information necessary to show the bona fide nature of
the proposed transfer. In the event the Purchaser proposes to transfer any of
the Securities to more than one (1) Proposed Transferee, the Purchaser shall
provide a separate Transfer Notice for the proposed transfer to each Proposed
Transferee. The Transfer Notice shall be signed by the Purchaser and contain a
statement setting forth such Purchaser's bona fide intention to transfer the
Transfer Shares. In the event of a bona fide gift or involuntary transfer, the
proposed transfer price shall be deemed to be the fair market value of the
Transfer Shares as reasonably determined by the Company and the Purchaser,
provided however, that if the parties do not agree upon the fair market value of
the Transfer Shares within ten (10) days (the "Valuation Period") after the
receipt of the Transfer Notice by the Company the parties agree to abide by the
determination of an investment banker selected as follows: the parties shall use
good faith efforts to select a mutually agreeable investment banker within the
Valuation Period, however if no such selection is made, the parties shall each
name one investment bank of national reputation, and such two investment banks
shall, within 5 business days of the end of the Valuation Period, select a third
investment bank which shall then be solely responsible for determining the fair
market value of the Transfer Shares. The investment bank selected by the parties
shall independently review the value of the Transfer Shares and determine their
fair market value within 5 business days of the selection of the investment
bank, and the determination of such investment bank shall be final and binding
upon the parties.
10.2 The Company shall have the right to purchase all, but not less
than all, of the Transfer Shares at the purchase price and on the terms set
forth in the Transfer Notice by delivery to the Purchaser of a notice of
exercise of the Right of First Refusal within thirty (30) days after the date
the Transfer Notice is delivered to the Company. The Company's exercise or
failure to exercise the Right of First Refusal with respect to any proposed
transfer described in a Transfer Notice shall not affect the Company's ability
to exercise the Right of First Refusal with respect to any proposed transfer
described in any other Transfer Notice, whether or not such other Transfer
Notice is issued by the Purchaser or issued by a person other than the Purchaser
with respect to a proposed transfer to the same Proposed Transferee. If the
Company exercises the Right of First Refusal, the Company and the Purchaser
shall thereupon consummate the sale of the Transfer Shares to the Company on the
terms set forth in the Transfer Notice; provided, however, that in the event the
Transfer Notice provides for the payment for the Transfer Shares other than in
cash, the Company shall have the option, with the consent of the Purchaser, of
<PAGE>
paying for the Transfer Shares by the cash equivalent of the consideration
described in the Transfer Notice (the "Cash Equivalent") as reasonably
determined by the Company and the Purchaser, provided however, that if the
parties do not agree upon the Cash Equivalent within ten (10) days (the
"Negotiation Period") after the Company provides notice of the exercise of the
Right of First Refusal the parties agree to abide by the determination of an
investment banker selected as follows: the parties shall use good faith efforts
to select a mutually agreeable investment banker within the Negotiation Period,
however if no such selection is made, the parties shall each name one investment
bank of national reputation, and such two investment banks shall, within 5
business days of the end of the Negotiation Period, select a third investment
bank which shall then be solely responsible for determining the Cash Equivalent.
The investment bank selected by the parties shall independently review the value
of the consideration and determine the Cash Equivalent within 5 business days of
the selection of the investment bank, and the determination of such investment
bank shall be final and binding upon the parties.
10.3 If the Company fails to exercise the Right of First Refusal in
full within the period specified in Section 10.2 above, the Purchaser may
conclude a transfer to the Proposed Transferee of the Transfer Shares on the
terms and conditions described in the Transfer Notice, provided such transfer
occurs not later than one hundred twenty (120) days following delivery to the
Company of the Transfer Notice. The Company shall have the right to demand
further assurances from the Purchaser and the Proposed Transferee (in a form
reasonably satisfactory to the Company) that the transfer of the Transfer Shares
was actually carried out on the terms and conditions described in the Transfer
Notice. No Transfer Shares shall be transferred on the books of the Company
until the Company has received such assurances, if so demanded, and has approved
the proposed transfer as bona fide. Any proposed transfer on terms and
conditions different from those described in the Transfer Notice, as well as any
subsequent proposed transfer by the Purchaser, shall again be subject to the
Right of First Refusal and shall require compliance by the Purchaser with the
procedure described in this Section 10.
10.4 All transferees of the Transfer Shares or any interest therein,
other than the Company, shall be required as a condition of such transfer to
agree in writing (in a form satisfactory to the Company) that such transferee
shall receive and hold such Transfer Shares or interests subject to the
provisions of this Section 10 providing for the Right of First Refusal with
respect to any subsequent transfer. Any sale or transfer of any Preferred Shares
shall be void unless the provisions of this Section 10 are met.
10.5 The Right of First Refusal shall not apply to any transfer or
exchange of the Preferred Shares to affiliated companies of the Purchaser or to
trusts for the benefit of the Purchaser or any affiliate company of the
Purchaser or if such transfer is in connection with the direct or indirect sale
or exchange by the shareholders of the Purchaser or the Company, as the case may
be, of all or substantially all of the stock of the Company, or any merger,
consolidation, asset transfer or share exchange of the Company, as the case may
be, with any other corporation in which the shareholders of the Purchaser or the
Company immediately prior to such transaction shall own less than 50% of the
voting securities of the surviving corporation.
<PAGE>
10.6 The Company shall have the right to assign the Right of First
Refusal at any time, whether or not the Purchaser has attempted a transfer, to
one (1) or more persons as may be selected by the Company.
10.7 The other provisions of this Section 10 notwithstanding, the Right
of First Refusal shall terminate, and be of no further force and effect upon (i)
the occurrence of a merger, consolidation, asset transfer or share exchange of
the Company with any other corporation in which the shareholders of the Company
immediately prior to such transaction shall own less than 50% of the voting
securities of the surviving corporation, (ii) the closing of an underwritten
public offering of the Company's securities registered under the Securities Act,
or (iii) the Company first becoming subject to the periodic reporting
requirements of Section 12(g) or 15(d) of the Securities Exchange Act of 1934,
as amended.
11. Miscellaneous.
-------------
11.1 Waivers and Amendments. Except as set forth in the Rights
----------------------
Agreement, with the written consent of the record or beneficial holders of more
than 66-2/3% of the Preferred Shares issued pursuant to this Agreement
(including any Underlying Common Shares or any and all securities obtained upon
conversion of the Preferred Shares or exchange of the Preferred Shares or
Underlying Common Shares), the obligation of the Company and the rights of the
holders of the Preferred Shares under this Agreement may be waived (either
generally or in a particular instance, either retroactively or prospectively and
either for a specified period of time or indefinitely), and with the same
consent the Company, when authorized by resolution of its Board of Directors,
may enter into a supplementary agreement for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Agreement; provided, however, that no such waiver or supplemental agreement
shall reduce the aforesaid percentage of Preferred Shares, the holders of which
are required to consent to any waiver or supplemental agreement, without the
consent of the record or beneficial holders of all of the Preferred Shares.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, but only by a statement in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, except to the extent provided in this Section 11.1. Upon
the effectuation of each such waiver, consent, agreement of amendment or
modification, the Company shall promptly give written notice thereof to the
record or beneficial holders of the Preferred Shares issued pursuant to this
Agreement who have not previously consented thereto in writing.
11.2 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
11.3 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the execution of this Agreement and the
closing of the transactions contemplated hereby.
<PAGE>
11.4 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
11.5 Entire Agreement. This Agreement, the exhibits to this Agreement
----------------
and the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
11.6 Notices. All notices which any party to this Agreement may be
-------
required or may wish to give may be given by addressing them to the other party
at the addresses set forth below by: (a) personal delivery, (b) by commercial
overnight courier with written verification of actual receipt, (c) by registered
or certified mail, or (d) by facsimile with receipt confirmed:
If to Purchaser: Johnson & Johnson Development Corporation
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Attention: President
With a Copy to: Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Attention: Office of General Counsel
If to Company: ENACT Health Management Systems
1975 El Camino Real, Suite 306
Mountain View, CA 94040
Attention: Matthew Sanders, President
Copy to: Henry Evans, Chief Financial Officer
If so mailed or otherwise delivered, such notices shall be deemed and presumed
to have been given on the earlier of the date of actual receipt or three (3)
days after mailing or authorized form of delivery.
11.7 Separability. In case any provision of this Agreement shall be
------------
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
11.8 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
11.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
<PAGE>
11.10 Delays or Omissions. It is agreed that no delay or omission to
-------------------
exercise any right, power or remedy accruing to the Purchaser, upon any breach
or default of the Company under this Agreement, shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on the Purchaser's part of any breach or default under
this Agreement, or any waiver on the Purchaser's part of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing and that all remedies, either
under this Agreement, or by law or otherwise afforded to the Purchaser, shall be
cumulative and not alternative.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY:
ENACT Health Management Systems
By:_________________________________________
Name:_______________________________________
Title:______________________________________
<PAGE>
COUNTERPART SIGNATURE PAGE TO
ENACT HEALTH MANAGEMENT SYSTEMS
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
PURCHASER:
Johnson & Johnson Development Corporation
By:______________________________________________
Name:____________________________________________
Title:___________________________________________
<PAGE>
EXHIBIT G
[*]
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CONFIDENTIAL
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
