<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1996
REGISTRATION NO. 333-04883
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDIQUAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7373 36-3112859
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
(508) 366-6365
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ERIC A. KRISS, PRESIDENT
MEDIQUAL SYSTEMS, INC.
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
(508) 366-6365
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
VICTOR J. PACI, ESQ. PHILIP P. ROSSETTI, ESQ.
BINGHAM, DANA & GOULD LLP HALE AND DORR
150 FEDERAL STREET 60 STATE STREET
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02109
(617) 951-8000 (617) 526-6000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
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 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, 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 this 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
MEDIQUAL SYSTEMS, INC.
<TABLE>
REGISTRATION STATEMENT ON FORM S-1
(CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
- ----------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
of Prospectus; Additional Information
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; The Company; Risk
Factors; Selected Financial Data
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution.................................. Risk Factors; Dilution
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock; Underwriting
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to the
Registrant................................ Outside Front Cover Page of Prospectus;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Financial Statements; Additional
Information
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
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.
SUBJECT TO COMPLETION, DATED JULY 9, 1996
PROSPECTUS
- ----------
2,200,000 SHARES
[MEDIQUAL LOGO]
COMMON STOCK
All of the 2,200,000 shares of Common Stock offered hereby are being sold
by 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 $9.00 and $11.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. Application has been made to have the Company's Common
Stock approved for quotation on the Nasdaq National Market under the symbol
MDQL.
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGE 5.
------------------
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>
=================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)..................................... $ $ $
<FN>
=================================================================================================
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 330,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public set
forth above. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
</TABLE>
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST VOLPE, WELTY & COMPANY
, 1996
<PAGE> 4
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes part of the Registration Statement, omits certain of the information
contained in the Registration Statement and the exhibits and schedules thereto
on file with the Commission pursuant to the Securities Act and the rules and
regulations of the Commission thereunder. The Registration Statement, including
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies
may be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. In addition, the Company
is required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete and in each instance
reference is made to the copy of such contract or other document, if any, filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.
As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Commission. The Company intends to
furnish to its stockholders annual reports containing financial statements
audited by its independent auditors and will make available copies of quarterly
reports for the first three quarters of each fiscal year containing unaudited
information.
------------------------------
MediQual(R) is a registered trademark of the Company. Atlas Outcomes(TM),
Atlas Market View(TM) and Atlas Resources(TM) are trademarks of the Company. All
other trademarks and trade names referred to in this Prospectus are the property
of their respective owners.
------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
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
MediQual Systems, Inc. ("MediQual" or the "Company") is a leading supplier
of clinical information management ("CIM") systems and services to the health
care industry. The Company's systems and services combine proprietary clinical
knowledge with raw patient encounter data to create valuable information that
providers, payors and suppliers use to monitor and enhance the effectiveness,
efficiency and appropriateness of care.
Health care industry participants are under continuing pressure to reduce
costs without jeopardizing quality of care. Increasingly, cost reductions beyond
those achieved through administrative efficiencies are being sought at the
clinical level, and must be supported by a measurable, quantifiable relationship
between services rendered and patient outcomes. This relationship between
services rendered and patient outcomes is imperative to maintaining the
confidence and cooperation of clinicians, and can only be established through
the analysis of patient encounter data, which resides in individual paper files
and is captured, in part, by transaction processing systems. Historically,
health care data analysts have depended upon batch reports produced by large
mainframe computers that required custom programming and long lead times. To
remain competitive, providers, payors and suppliers must develop timely and
actionable information either by installing CIM systems in-house, or by engaging
third-party consultants and analysts.
MediQual has addressed the growing demand for this information by
developing its Atlas System, a comprehensive, desktop CIM system. The Atlas
System is comprised of five major components: (i) a standardized retrospective
data repository; (ii) proprietary benchmarking databases; (iii) embedded
clinical knowledge; (iv) comprehensive provider databases and (v) on-line
analytical processing. The Atlas System enables users to perform sophisticated,
quantitative analyses which may be used for a variety of applications including:
benchmarking internal performance, competitively assessing cost and quality
positions in local markets, quantifying the impact of managed care and capitated
contracts, developing local integrated delivery networks, evaluating the
efficacy of new pharmaceuticals and medical devices, credentialing physicians
and reporting to third parties for regulatory and contract compliance. The
modular design of the Atlas System enables MediQual to integrate additional
applications quickly and easily in order to be responsive to evolving customer
needs.
The Company's CIM systems and services are supported by its proprietary
master database which contains complete clinical and administrative detail on
more than 20 million patient encounters. This master database is continually
expanding as additional patient encounters and new types of data, including
pharmaceuticals and outpatient services, are transmitted to the Company by its
customers. MediQual has developed for substantially all acute diseases more than
200 statistical regression models which are embedded in the Atlas System and
support the Company's analytical services for disease management applications.
MediQual serves approximately 400 customers, including leading hospitals,
community care networks, medical device manufacturers and pharmaceutical firms.
The Company licenses the Atlas System pursuant to annual agreements, and since
1993, has experienced customer renewal rates of 90% or higher.
The Company is subject to certain risks, including but not limited to
dependence on the Atlas System for a majority of the Company's revenues,
dependence on continued access to data, dependence on systems development
introduction and enhancements, competition from other service providers and
dependence on key personnel. The Company has also experienced a limited history
of profitability.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 2,200,000 shares
Common Stock to be outstanding after the Offering....... 8,264,306 shares(1)
Use of proceeds......................................... For redemption of Class A Preferred
Stock, redemption of warrants,
retirement of debt, working capital
and other corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.................. MDQL
</TABLE>
------------------------------------
<TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
MedisGroups......................................... $14,866 $14,700 $13,097 $ 8,459 $ 4,674 $ 2,173 $ 683
Atlas System........................................ -- -- -- 3,150 5,131 2,614 3,662
CIM Services........................................ -- -- -- 475 1,169 500 1,362
------- ------- ------- ------- ------- ------ ------
Total revenues.................................. 14,866 14,700 13,097 12,084 10,974 5,287 5,707
Research and development.............................. 2,647 4,204 4,152 3,626 4,013 2,189 1,328
Operating income (loss)............................... (1,199) (225) (233) 132 (1,392) (1,071) 1,440
Net income (loss)..................................... $(1,414) $ (274) $ (186) $ 282 $(1,462) $(1,092) $1,354
Pro forma:(2)
Net income (loss) per share......................... $ (.21) $ .20
Weighted average shares outstanding................. 6,467 6,982
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(3)
-------- ---------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 1,679 $ 1,679 $17,615
Working capital......................................................... 288 288 16,380
Total assets............................................................ 4,185 4,185 20,120
Long-term debt, including current portion............................... 259 259 --
Redeemable preferred stock.............................................. 11,509 3,569 --
Stockholders' equity (deficit).......................................... (10,407) (2,468) 17,497
<FN>
- ---------------
(1) Excludes (i) 1,813,012 shares of Common Stock reserved for issuance under
the Company's 1987 Nonqualified Stock Option Plan, as amended, and 1996
Stock Incentive Plan, of which 337,292 shares are subject to options at
exercise prices ranging from $1.00 to $9.00 per share, (ii) 26,729 shares of
Common Stock subject to warrants with an exercise price of $2.64 per share
that will be redeemed upon the closing of the Offering for $178,015
(assuming an initial public offering price of $10.00 per share) and (iii)
156,918 shares of Common Stock issuable upon the exercise of other warrants,
at an exercise price of $.80 per share, all outstanding as of June 30, 1996.
See "Capitalization," "Management -- Stock Option Plans" and Notes 6 and 9
of Notes to Financial Statements.
(2) Computed on the basis described in Note 2 of Notes to Financial Statements.
(3) Adjusted to give effect to the sale of the Common Stock offered hereby at an
assumed initial public offering price of $10.00 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
</TABLE>
----------------------------------------
Except as otherwise noted, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) assumes the
redemption of the outstanding Class A Preferred Stock and conversion of the
outstanding Class B and Class C Convertible Preferred Stock into Common Stock on
the closing of the Offering contemplated hereby and (iii) reflects a
one-for-four reverse stock split of Common Stock effected on June 19, 1996. See
"Capitalization," "Description of Capital Stock," "Underwriting" and Notes 6 and
9 of Notes to Financial Statements.
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus.
Limited History of Profitability; Possible Unavailability of Net Operating
Losses. The Company's revenue has decreased in each of the past five years and,
as of June 30, 1996, the Company had an accumulated deficit of approximately
$12.3 million. For the fiscal year ended December 31, 1995, the Company incurred
a net loss of approximately $1,462,500. Although the Company has experienced
periods of limited profitability, its profit in the first six months of 1996 was
primarily due to a change in revenue mix as a result of the transition from the
MedisGroups to the Atlas System. As part of the transition to the Atlas System,
the Company was able to reduce its workforce by approximately 30%, resulting in
annual cost savings of approximately $1.1 million, and contributing to a net
profit of approximately $1,354,000 in the first six months of 1996. Despite the
Company's profitable first six months of 1996, there can be no assurance that
revenue growth or profitability can be achieved or sustained in the future. As
of December 31, 1995, the Company had, for tax purposes, net operating loss
carryforwards of approximately $10,342,000 and federal tax credit carryforwards
of approximately $204,000, which under certain circumstances can be used to
offset future taxable income and tax liabilities. The Company has recorded a
full valuation allowance against its otherwise recognizable net deferred tax
asset due to the uncertainty of generating future taxable income sufficient to
offset the net operating loss carryforwards prior to their expiration. Under the
applicable accounting treatment, the Company cannot recognize a deferred tax
asset for the future benefit of its net operating loss carryforwards unless it
concludes that it is "more likely than not" that the deferred tax asset would be
realized. The Internal Revenue Code of 1986, as amended (the "Code"), includes
provisions that may limit the Company's ability to utilize such carryforwards in
connection with a change in ownership (as defined in the Code). Although the
Company does not believe that this Offering will result in a change in
ownership, there can be no assurance that the Company will not in the future
experience a change in ownership that could restrict the Company's ability to
make full use of such carryforwards. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Selected Financial Data."
Dependence on Atlas System. The Company currently derives the majority of
its revenues from licensing of the Atlas System and its related databases and
expects that proportion to increase in the future. Between 1993 and 1995, the
Company made significant investments in the development of the Atlas System. The
Company's future success is contingent upon, among other things, increased
market acceptance of the Atlas System, continued adoption of the system by new
users, and broader distribution of the system through third-party arrangements.
The Company believes that a number of factors will determine whether the Company
will be able to achieve increased market penetration. These factors include
system performance, accuracy of results, ease of implementation and use, user
sophistication and training, reliability and scope of application. Failure to
achieve increased market penetration in the health care industry could reduce
the future growth prospects of the Company and materially adversely affect the
Company's business, results of operations and financial condition. In addition,
the Company believes that as the market for CIM systems matures, heightened
competition will require the successful introduction of new applications,
enhancements and databases for the Atlas System. There can be no assurance that
any of the foregoing will occur.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have varied in the past and may vary significantly in the
future depending on factors such as success of the Atlas System, amount, timing
and recognition of revenue from significant orders, increased competition, the
proportion of revenues derived from third-party distribution arrangements and
other sources, changes in the Company's pricing policies or those of its
competitors, new system introductions or enhancements by competitors, delays in
the introduction of systems or system enhancements by the Company, market
acceptance of new systems, timing and nature of sales and marketing expenses,
other changes in operating expenses, personnel changes (including the addition
of sales personnel)
5
<PAGE> 8
and general economic conditions. Because the Company delivers its systems
shortly after receipt of an order, the Company typically does not have a
material backlog of unfilled orders, and revenues in any quarter are
substantially dependent on orders booked in the quarter. The Company's expense
levels are based in part on its expectations of future revenues, and the Company
may be unable to reduce spending in a timely manner to compensate for any
shortfall in revenues. If revenues are below expectations, operating results are
likely to be materially adversely affected. Net income may be disproportionately
affected by a reduction in revenues because a significant portion of the
Company's expenses are fixed and correspondingly do not vary with revenues. The
Company may also choose to reduce prices or increase spending in response to
competition or to pursue new market opportunities. In particular, if new
competitors, technological advances by existing competitors or other competitive
factors require the Company to invest significantly greater resources in
research and development efforts, the Company's operating margins in the future
may be materially adversely affected. In addition, the Company has realized
higher revenues in the third quarter of each fiscal year as a result of the
timing of customer renewals and expects this trend to continue. Although the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance, it is likely that future quarterly operating results could
be below expectations of public market analysts and investors. See "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Dependence on Pennsylvania Mandate; Other State Mandates. The Commonwealth
of Pennsylvania currently mandates the use of the Atlas Outcomes module by acute
care hospitals under its jurisdiction. Pursuant to state law, Pennsylvania acute
care hospitals must report to the state a clinical severity and complication
rate score calculated by Atlas Outcomes. During 1995, approximately 200
hospitals in Pennsylvania licensed Atlas Outcomes, generating revenues for the
Company of approximately $4.5 million, or 41% of the Company's total revenues
for such year. This Pennsylvania mandate is due to expire in 2003, unless
reenacted prior to that date. Should this state law expire without being
reenacted or be modified or repealed, the Company could lose a substantial
number of customers in Pennsylvania who, in the absence of a legal requirement,
might cease to license Atlas Outcomes from the Company. There can be no
assurance that the mandate will be reenacted or that the mandate will not be
modified or repealed at any time in the future. A mandate in Iowa with respect
to MedisGroups, similar to that in effect in Pennsylvania, expired in 1994,
resulting in a decline of approximately $310,000 in MedisGroups revenues from
customers in Iowa in 1995. A similar mandate in Colorado for MedisGroups expired
in 1995; however, all Colorado customers were subsequently converted to the
Atlas System during 1995. There can be no assurance that future mandates with
respect to the Company's offerings will be enacted in the future and that any
such mandates, if enacted, will not expire or be repealed to the Company's
detriment.
Dependence on Annual License Renewals. The Company's systems are licensed
on an annual basis. While the Company has realized historic renewal rates in
each of the past three years of over 90% (including customers in the
Commonwealth of Pennsylvania), and over 85% (excluding customers in the
Commonwealth of Pennsylvania), there can be no assurance that future renewal
rates will be maintained at these levels. A significant reduction in the number
of customers who choose to renew their licenses with the Company could
materially adversely affect the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Marketing and
Distribution."
Dependence on Access to Data Sources. The Company believes that the market
acceptance of the Atlas System will be dependent to a significant extent on its
ability to maintain and continue to expand its proprietary Atlas databases.
Currently, the Company obtains health care information data from the federal
government and approximately 20 states, as well as from most of its existing
clients. The Company believes that its success is largely dependent on the
timeliness and integrity of the data that it receives from these data providers,
and in the event that new sources of data are created or made available, its
ability to access such sources. In the event that federal or state agencies were
to cease
6
<PAGE> 9
providing, or prohibit access to, the data of such federal or state sources or
to any newly created data sources, the Company's business, results of operations
and financial condition could be materially adversely affected.
High Degree Of Competition. The market for health care information systems
and services is intensely competitive. Most of the Company's competitors and
potential competitors have significantly greater financial, technical, system
development and marketing resources than the Company. The Company competes
directly with other vendors of health care systems and consultants who provide
related services, as well as the MIS departments of large hospital networks,
some of which have developed, or plan to develop, their own CIM capabilities.
Many of these competitors and potential competitors have substantial installed
customer bases in the health care industry and the ability to fund significant
system development and acquisition efforts. The Company believes that the
principal competitive factors in its market are system functionality and
features, price, training and support, customer references and firm reputation.
There can be no assurance that the Company will be able to compete successfully
in the future or that competition will not materially adversely affect the
Company's business, results of operations and financial condition. See
"Business -- Competition."
Dependence Upon Continued Development, Acceptance and Enhancement. The
market for health care information systems for data analysis is characterized by
continual change and improvement in computer hardware and software technology.
The introduction of systems embodying new technologies or the emergence of new
industry standards could render the Company's existing systems and services
obsolete and unmarketable. The Company's future success will depend on its
ability to enhance its current systems, to introduce new software that keeps
pace with technological developments and to continue to address the complex
needs of its clients. There can be no assurance that the Company will be
successful in developing and marketing enhancements or new system application
add-ons, or that its systems will continue to address adequately the needs of
the marketplace. If the Company's systems do not perform substantially as
expected or are not accepted in the marketplace, the Company's business, results
of operations and financial condition could be materially adversely affected.
See "Business -- Systems and Services."
System and Data Defects. The Company's systems are complex and
sophisticated and could from time to time contain design defects or errors that
could be difficult to detect and correct. Software bugs or viruses may result in
loss of or delay in market acceptance or loss of data. Although the Company has
not to date experienced material adverse effects resulting from any software or
database defects or errors, there can be no assurance that, despite testing by
the Company and its customers, errors will not be found in new systems. Any
software or database defects or errors in new systems could result in a delay
in, or inability to achieve, market acceptance. The Company also depends upon
the accuracy of the data that it provides to customers, and the Company believes
that it takes adequate precautions to safeguard the validity of the information
entered into its databases. However, if a statistically significant number of
medical records were found to have been altered or entered incorrectly, the
Company's business, results of operations and financial condition could be
materially adversely affected.
Dependence on Third-Party Distribution Arrangements. A component of the
Company's strategy is to use third-party distribution arrangements to reach
certain markets. Revenues generated by such third parties will depend on their
ability to provide the Company's systems to end users, and there can be no
assurance that these third parties will be successful in such efforts. These
third parties generally offer several products, with an increasing number of
vendors competing for access to them. There can be no assurance that these third
parties will continue their current relationships with the Company or that they
will not give higher priority to the sale of other products, which could include
products of competitors. While the Company believes that its current agreement
with SpaceLabs Medical, Inc. and other contemplated alliances will generate
additional revenues, there can be no assurance that the Company's efforts to
expand its distribution arrangements will be successful. See "Business --
Strategy" and "-- Marketing and Distribution."
7
<PAGE> 10
Dependence on Proprietary Technology. The Company's success is heavily
dependent upon its ability to obtain and enforce intellectual property
protection for its technology, including its Atlas System, related databases,
disease models and statistical methodologies. The Company has no outstanding
patents or patent applications pending for its proprietary technologies, but
instead relies on a combination of copyright, trade secret and trademark laws,
license agreements and software security measures to protect its proprietary
technology and systems. Additionally, the Company enters into nondisclosure
agreements with its employees and license and confidentiality agreements with
its customers and development partners. The Company also takes precautions to
limit access to and distribution of its systems, documentation and other
proprietary information. However, there can be no assurance that the steps taken
by the Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology or independent development by others of
technologies that are substantially equivalent or superior to the Company's
technology. Moreover, the Company could incur substantial costs in protecting
and enforcing its intellectual property rights. From time to time, third parties
may assert patent, copyright and other intellectual property rights to
technologies that are important to the Company. In such an event, the Company
may be required to incur significant costs to resolve any such asserted claims
or may be required to obtain a license to intellectual property rights of such
third parties. There can be no assurance that any such licenses will be
available on reasonable terms, if at all, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business -- Intellectual Property."
Changes in the Health Care Industry. The health care industry is subject
to changing political, economic and regulatory influences that may affect the
procurement practices and operation of health care industry participants. During
the past several years, the U.S. health care industry has been subject to
changes in governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Health care industry participants may react to
changes and uncertainty in the health care system by curtailing or deferring
investments, including those for the Company's systems and services.
Additionally, although the United States Food and Drug Administration (the
"FDA") does not currently regulate the Company's systems or services, if
authorized to extend its regulation of software, the FDA could impose extensive
requirements that might negatively impact the time and expense necessary to
develop new systems. The Company cannot predict what impact, if any, such events
might have on its business, results of operations and financial condition.
Further, many health care providers are consolidating to create larger health
care delivery enterprises with greater regional market power. As a result, the
remaining enterprises could have greater bargaining power, which may lead to
price erosion of the Company's systems and services. The failure of the Company
to maintain adequate price levels could materially adversely affect the
Company's business, results of operations and financial condition. See
"Business -- Industry Background."
Management of Growth. Due to the level of technical and management
expertise necessary to support growth, in order to expand, the Company must
recruit and retain highly qualified and well-trained personnel. The number of
available persons with the requisite skills to serve in these positions may be
limited, and it may become increasingly difficult for the Company to hire such
personnel over time. Additionally, in the event the Company is successful in
expanding its operations and business, the operational, management, financial
and other resources of the Company may be strained. To manage growth
effectively, the Company must continue to develop its financial and managerial
controls and successfully expand, train and manage its employees. There can be
no assurance that the Company will be able to manage expansion effectively, or
that the Company will be able to recruit, train and retain sufficient qualified
personnel. Any failure to manage the Company's future growth properly could
materially adversely affect the Company's business, results of operations and
financial condition. See "Business -- Marketing and Distribution" and
"-- Employees" and "Management -- Executive Officers and Directors."
Dependence on Certain Key Personnel. The Company depends to a significant
extent on certain key personnel. Eric A. Kriss, the Company's Chief Executive
Officer, and certain other executive officers have been primarily responsible
for the development and expansion of the Company's business. The loss of the
services of one or more of these individuals could have a material adverse
8
<PAGE> 11
effect on the Company's business, results of operations and financial condition.
In addition, the Company believes that its future success will be dependent in
part on its continued ability to motivate and retain qualified personnel. There
can be no assurance that the Company will be successful in this regard. The
Company maintains a $1 million "key man" life insurance policy on Mr. Kriss. The
loss of key management team members could have a material adverse impact on the
Company's business, results of operations and financial condition. See
"Business -- Marketing and Distribution" and "-- Employees" and
"Management -- Executive Officers and Directors."
Broad Discretion Over Use of Proceeds; Possible Acquisitions. Management
will have broad discretion in allocating and applying the proceeds of this
Offering, a portion of which may be directed toward possible acquisitions, joint
ventures or licensing arrangements that have not yet been identified. The
Company's stockholders may not have an opportunity to review or vote upon the
terms of any such transaction or to review the financial statements of the other
party to any such transaction. The Company has no understandings, commitments or
agreements with respect to any acquisitions, joint ventures or licensing
agreements as of the date of this Prospectus. However, the Company intends to
pursue actively any such opportunities as may become available and the Company
may compete for acquisition and other strategic opportunities with other
companies that have significantly greater financial and management resources. No
assurance can be given that the Company will successfully complete any
acquisitions, joint ventures or licensing agreements or that if any such
transaction should occur it would not materially and adversely affect the
Company's business, results of operations and financial condition. Additionally,
acquisitions involve numerous risks, including difficulties in the assimilation
of operations and systems, the ability to manage geographically remote units,
the diversion of management's attention from other business concerns, the risks
of entering markets in which the Company has limited or no direct expertise and
the potential loss of key employees of the acquired companies. In addition,
acquisitions may involve the expenditure of significant funds and the incurrence
of significant debt. There can be no assurance that any acquisition will result
in long-term benefits to the Company or that management will be able to manage
effectively the resulting business. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Strategy."
No Prior Market; Determination of Public Offering Price; Possible
Volatility of Stock Price. Prior to the Offering, there has been no public
market for the Common Stock and there can be no assurance that an active public
market for the Common Stock will develop or continue after this Offering. Each
of the Representatives of the Underwriters has indicated that it intends to make
a market in the Company's Common Stock following this Offering. However, none of
the Representatives is required to make a market and there can be no assurance
that any Representative will continue to do so. The initial public offering
price will be determined by negotiation between the Company and representatives
of the Underwriters. Among the factors to be considered in determining the
initial public offering price will be prevailing market and economic conditions,
revenues and earnings of the Company, market valuations of other companies
engaged in activities similar to those of the Company, estimates of the business
potential and prospects of the Company, the present state of the Company's
business operations, the Company's management and other factors deemed relevant,
and may not be indicative of future market prices. In addition, the stock
markets in general, and the market prices for high technology and health care
companies in particular, have historically experienced volatility that at times
has been unrelated to the operating performance of such companies. The trading
price of the Common Stock could also be subject to significant fluctuations in
response to variations in quarterly results of operations, changes in earnings
estimates by analysts, announcements of new systems by the Company or its
competitors, governmental regulatory action, developments or disputes with
respect to proprietary rights, general trends in the industry and overall market
conditions, and other factors. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations, which have particularly
affected the market price for many high technology and health care companies and
which often have been unrelated to the operating performance of these companies.
These broad market fluctuations may materially adversely affect the market price
of the Company's Common Stock regardless of the Company's operating performance.
See "Underwriting."
9
<PAGE> 12
Control by Officers and Directors. Following the Offering, and assuming no
exercise of the Underwriters' over-allotment option, officers and directors of
the Company and their affiliates, as a group, will beneficially own
approximately 40% of the outstanding Common Stock. As a result, officers and
directors of the Company and their affiliates, if acting together, would be able
to exert substantial influence over the Company and may effectively control most
matters requiring approval of the stockholders of the Company, including the
election of directors. The voting power of these stockholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company and could limit the price that certain investors may be
willing to pay in the future for shares of the Common Stock. See
"Management -- Executive Officers and Directors" and "Principal Stockholders."
Shares Eligible for Future Sale. Sales of substantial amounts of the
Common Stock in the public market after this Offering could adversely affect
prevailing market prices for the Common Stock. In addition to the 2,200,000
shares of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option or exercise of outstanding stock options or warrants),
approximately 305,628 shares of Common Stock (including shares of Common Stock
issuable upon the exercise of currently exercisable warrants and options to
purchase Common Stock which are exercisable within 60 days of June 30, 1996),
which are not subject to 180-day lock-up agreements (the "Lock-up Agreements")
between the representatives of the Underwriters and the Company's executive
officers and directors and certain other stockholders of the Company, will be
eligible for immediate sale in the public market pursuant to Rule 144(k) under
the Securities Act of 1933, as amended (the "Securities Act"). Approximately
313,998 additional shares of Common Stock (including shares of Common Stock
issuable upon the exercise of currently exercisable warrants and options to
purchase Common Stock which are exercisable within 60 days of June 30, 1996),
which are not subject to the Lock-up Agreements, will be eligible for sale in
the public market in accordance with Rule 144 or Rule 701 under the Securities
Act beginning 90 days after the date of this Prospectus. Upon expiration of the
Lock-up Agreements, 180 days after the date of this Prospectus, approximately
5,990,233 shares of Common Stock (including shares of Common Stock issuable upon
the exercise of currently exercisable warrants and options to purchase Common
Stock which are exercisable within 60 days of June 30, 1996) will be eligible
for sale in the public market, subject to the provisions of Rule 144 under the
Securities Act. Hambrecht & Quist LLC may, in its sole discretion, release any
of the shares subject to the lock-up at any time without notice. Hambrecht &
Quist LLC has no present intention to release any of the shares from the Lock-up
Agreements. It has been the practice of Hambrecht & Quist LLC to consider
releasing any such shares from lock-up agreements based on a variety of factors,
including the market price of the Common Stock, the volume of shares traded and
other market conditions. In addition, holders of an aggregate of approximately
2,357,168 shares of Common Stock and warrants to purchase an additional 156,918
shares of Common Stock will have certain rights to registration of these shares
under the Securities Act. See "Shares Eligible for Future Sale," "Description of
Capital Stock -- Outstanding Registration Rights" and "Underwriting."
Effect of Anti-Takeover Provisions; Availability of Preferred Stock for
Issuance. Certain provisions of the Company's Amended and Restated Certificate
of Incorporation and Amended and Restated By-Laws could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that investors might be willing to pay in the future for
shares of the Common Stock. Certain of these provisions eliminate the right of
stockholders to act by written consent and impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, these provisions allow the Board of
Directors of the Company to issue, without any further vote or action by the
stockholders, preferred stock with voting, conversion and other rights and
preferences that may be superior to those of the Common Stock. The issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock and could adversely affect the
rights and powers, including voting rights, of the holders of the Common Stock.
In certain circumstances, such an issuance could have the effect of decreasing
the market price of the Common Stock. See "Description of Capital Stock."
10
<PAGE> 13
No Present Intention to Pay Dividends; Restrictions on Payment of
Dividends. The Company has never declared or paid any cash dividends on its
Common Stock. The Company currently intends to retain future earnings, if any,
to fund development and growth of its business and does not anticipate paying
any cash dividends on the Common Stock in the foreseeable future. In addition,
the Company's existing credit facilities prohibit the payment of cash dividends
without the consent of the lenders thereunder. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Dilution. Purchasers in this Offering will suffer immediate and
substantial dilution in the net tangible book value per share of Common Stock
from the initial public offering price, and may incur additional substantial
dilution upon the exercise of outstanding stock options and warrants by holders
thereof. See "Dilution."
THE COMPANY
MediQual Systems, Inc. was originally incorporated in Illinois in 1980 and
reincorporated as a Delaware corporation in 1984. The Company's corporate
offices are located at 1900 West Park Drive, Westborough, Massachusetts 01581.
Its telephone number is (508) 366-6365.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $10.00 per share are estimated to be $19,960,000 ($23,029,000 if the
Underwriters' over-allotment option is exercised in full). The Company expects
to use a portion of the net proceeds to redeem all 229 outstanding shares of the
Class A Preferred Stock with accrued dividends at a redemption price of
approximately $15,586 per share (assuming redemption as of June 30, 1996) in
accordance with the Company's Amended and Restated Certificate of Incorporation
for an aggregate of $3,569,083, to redeem warrants to purchase 26,729 shares of
Common Stock with an exercise price of $2.64 per share for an aggregate of
$178,015 assuming an initial public offering price of $10.00 per share, in order
to avoid having to issue shares of preferred stock upon exercise of such
warrants, and to retire debt consisting of two notes: one with an aggregate
principal amount of $183,597, which accrues interest at an annual rate of 9.75%
and is payable monthly through July 5, 1997, and the other with an aggregate
principal amount of $75,000, which accrues interest at an annual rate of 10% and
is payable to a director and officer of the Company on or before January 2,
1998. Approximately $900,000 of net proceeds will be used to increase operating
working capital. Management intends to allocate up to $3,000,000 of net proceeds
for internal research, marketing, promotions, sales force development and
information technology infrastructure investment. The remainder of the net
proceeds will be used to expand the Company's business and for possible
acquisitions of products, technologies, and businesses. While the Company
continually evaluates potential acquisitions, the Company has no present
agreements or commitments with respect to any acquisition, nor are any
negotiations regarding any acquisition currently ongoing. Pending such uses, the
Company intends to invest the net proceeds from the Offering in deposits with
banks, short-term investment-grade, interest-bearing securities (including
government obligations) or other similar instruments.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently intends to retain future earnings, if any, to fund
development and growth of its business and does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.
11
<PAGE> 14
CAPITALIZATION
<TABLE>
The following table sets forth the capitalization of the Company as of June
30, 1996, (i) on an actual basis, (ii) on a pro forma basis to reflect the
conversion of a convertible debenture of the Company into, and the exercise of a
corresponding option for, shares of Common Stock and the conversion of the
outstanding Class B and Class C Convertible Preferred Stock into Common Stock
upon the completion of this Offering and (iii) on a pro forma as adjusted basis
to reflect the application of the estimated net proceeds from the sale of
2,200,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $10.00 per share. This table should be read in conjunction
with the Financial Statements and the Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Prospectus.
<CAPTION>
JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED(1)
-------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt...................... $ 157 $ 157 --
======== ======== ========
Long-term debt, less current portion................... 102 102 $ --
-------- -------- --------
Class A Preferred Stock, nonvoting, no par value; 500
shares authorized; 229 shares issued and outstanding,
none as adjusted (at redemption value)............... 3,569 3,569 --
Class B Convertible Preferred Stock, $.01 par value;
6,500,000 shares authorized; 6,316,726 shares issued
and outstanding, none pro forma or as adjusted....... 5,205 -- --
Class C Convertible Preferred Stock, $.01 par value;
2,100 shares authorized; 2,022 shares issued and
outstanding, none pro forma or as adjusted........... 2,735 -- --
-------- -------- --------
Total redeemable preferred stock.................. 11,509 3,569 --
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 7,000,000 shares
authorized, no shares issued...................... -- -- --
Common Stock; $.001 par value; 30,000,000 shares
authorized; 3,880,776 shares issued and
outstanding, 6,064,306 shares issued and
outstanding pro forma, 8,264,306 shares issued and
outstanding as adjusted(2)........................ 4 6 8
Additional paid-in capital........................... 2,136 10,073 29,834
Accumulated deficit.................................. (12,326) (12,326) (12,326)
Treasury stock; 6,987 shares......................... (19) (19) (19)
Subscription receivable.............................. (202) (202) --
-------- -------- --------
Total stockholders' equity (deficit).............. (10,407) (2,468) 17,497
-------- -------- --------
Total capitalization......................... $ 1,204 $ 1,203 $ 17,497
======== ======== ========
<FN>
- ---------------
(1) Pro forma as adjusted reflects (i) the redemption of warrants to purchase
26,729 shares of Common Stock upon the closing of the Offering for $178,015
(assuming an initial public offering price of $10.00 per share) (ii) the
repayment of a note payable to an officer and director of the Company in an
aggregate principal amount of $75,000, and (iii) the forgiveness of a
$201,523 subscription receivable from an officer and director of the Company
pursuant to an agreement between the Company and such officer. See "Certain
Transactions."
(2) Excludes (i) 1,813,012 shares of Common Stock reserved for issuance under
the Company's 1987 Nonqualified Stock Option Plan, as amended, and 1996
Stock Incentive Plan, of which 337,292 shares were subject to options at
exercise prices ranging from $1.00 to $9.00 per share, (ii) 26,729 shares of
Common Stock subject to warrants with an exercise price of $2.64 per share
that will be redeemed upon the closing of the Offering for $178,015
(assuming an initial public offering price of $10.00 per share), and (iii)
156,918 shares of Common Stock issuable upon the exercise of other warrants,
at an exercise price of $.80 per share, all outstanding as of June 30, 1996.
See "Capitalization," "Management -- Stock Option Plans" and Notes 6 and 9
of Notes to Financial Statements.
</TABLE>
12
<PAGE> 15
DILUTION
<TABLE>
As of June 30, 1996, the Company had a pro forma net tangible book value
(deficit) of $(2,467,655), or $(.41) per share of Common Stock after giving
effect to the conversion into Common Stock of all outstanding shares of the
Class B and Class C Convertible Preferred Stock of the Company upon the closing
of the Offering. "Pro forma net tangible book value" represents the amount of
total tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding. Without taking into account any other changes in net
tangible book value after June 30, 1996, other than to give effect to the
receipt by the Company of the net proceeds from the sale of 2,200,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $10.00 per share, the pro forma net tangible book value, as of June 30,
1996, would have been approximately $17,497,143, or $2.12 per share. This
represents an immediate increase in pro forma net tangible book value of $2.53
per share to existing stockholders and an immediate dilution of $7.88 per share
to new investors. The following table illustrates this per share dilution:
<S> <C> <C>
Assumed initial public offering price............................... $10.00
Pro forma net tangible book value per share prior to the
Offering....................................................... $(.41)
Increase per share attributable to new investors.................. 2.53
-----
Pro forma net tangible book value per share after the Offering...... 2.12
------
Dilution per share to new investors................................. $ 7.88
======
</TABLE>
<TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the differences between existing stockholders and the purchasers of shares in
the Offering (at an assumed initial public offering price of $10.00 per share)
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid before
deduction of underwriting discounts and expenses relating to the Offering:
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 6,064,306 73.4% $10,487,790 32.3% $ 1.73
New investors................. 2,200,000 26.6 22,000,000 67.7 10.00
--------- ----- ----------- -----
Total....................... 8,264,306 100.0% $32,487,790 100.0%
========= ===== =========== =====
</TABLE>
The foregoing computations assume no exercise of the Underwriters'
over-allotment option or of outstanding stock options or warrants after June 30,
1996. As of June 30, 1996, there were outstanding (i) options to purchase
337,292 shares of Common Stock, with exercise prices ranging from $1.00 to $9.00
per share, (ii) warrants to purchase 156,918 shares of Common Stock, with an
exercise price of $.80 per share and (iii) warrants to purchase 26,729 shares of
Common Stock with an exercise price of $2.64 per share that will be redeemed
upon the closing of the Offering for $178,015 (assuming an initial public
offering price of $10.00). To the extent any of these options or warrants is
exercised, there will be further dilution to new investors. See Notes 6 and 9 of
Notes to Financial Statements.
13
<PAGE> 16
<TABLE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for each of the three years
ended December 31, 1993, 1994 and 1995, and at December 31, 1994 and 1995, are
derived from financial statements of the Company audited by Arthur Andersen LLP,
independent public accountants, which are included elsewhere in this Prospectus.
The selected financial data for the years ended December 31, 1991 and 1992 and
at December 31, 1991, 1992 and 1993 are derived from financial statements of the
Company audited by Arthur Andersen LLP, which are not included in the
Prospectus. The financial data for the six months ended June 30, 1995 and 1996
are derived from unaudited financial statements included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of its financial position and results of
operations for these periods. Operating results for the six months ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The selected financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
MedisGroups............................. $14,866 $14,700 $13,097 $ 8,459 $ 4,674 $ 2,173 $ 683
Atlas System............................ -- -- -- 3,150 5,131 2,614 3,662
CIM Services............................ -- -- -- 475 1,169 500 1,362
------- ------- ------- ------- ------- ------- ------
Total revenues........................ 14,866 14,700 13,097 12,084 10,974 5,287 5,707
Operating expenses:
Cost of revenues and customer support... 3,962 3,605 2,852 2,998 2,445 1,328 931
Marketing and distribution.............. 4,613 3,997 2,505 1,927 1,970 1,114 490
Research and development................ 2,647 4,204 4,152 3,626 4,013 2,189 1,328
General and administrative.............. 3,455 2,515 2,198 3,401 3,358 1,727 1,619
Restructuring charge (credit)........... 1,388 604 1,623 -- 580 -- (102)
------- ------- ------- ------- ------- ------- ------
Total operating expenses.............. 16,065 14,925 13,330 11,952 12,366 6,358 4,266
------- ------- ------- ------- ------- ------- ------
Operating income (loss)................... (1,199) (225) (233) 132 (1,392) (1,071) 1,441
Interest expense (income), net............ 264 31 (55) (173) 70 21 (98)
------- ------- ------- ------- ------- ------- ------
Income (loss) before income taxes......... (1,463) (256) (178) 305 (1,462) (1,092) 1,539
Provision (benefit) for income taxes...... (49) 18 8 23 -- -- 185
------- ------- ------- ------- ------- ------- ------
Net income (loss)......................... $(1,414) $ (274) $ (186) $ 282 $(1,462) $(1,092) $1,354
======= ======= ======= ======= ======= ======= ======
Pro forma:(1)
Net income (loss) per share............. $ (0.21) $ 0.20
Weighted average shares outstanding..... 6,467 6,982
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 158 $ 394 $ 2,401 $ 1,226 $ 1,006 $ 1,679
Total assets................................. 5,688 4,760 6,483 4,865 3,231 4,185
Long-term debt, including current portion.... 1,319 786 399 750 1,019 259
Redeemable preferred stock................... 8,317 8,389 10,594 10,986 11,281 11,509
Stockholders' equity (deficit)............... (9,933) (10,184) (10,441) (10,485) (12,227) (10,407 )
<FN>
- ---------------
(1) Computed on the basis described in Note 2 of Notes to Financial Statements.
</TABLE>
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MediQual is a leading supplier of clinical information management ("CIM")
systems and services to the health care industry. The Company's systems and
services combine proprietary clinical knowledge with raw patient encounter data
to create valuable information that providers, payors and suppliers used to
monitor and enhance the effectiveness, efficiency and appropriateness of care.
The initial version of the Company's CIM system, MedisGroups, was
introduced in 1987. In April 1994, the Company began replacing MedisGroups,
which was rapidly becoming obsolete, with a series of integrated modules
marketed as the Atlas System. Over the five-year period beginning in January
1991, revenues derived from MedisGroups declined as a result of both fewer unit
licenses and price reductions, reflecting, in part, the advancing obsolescence
of that system. In April 1994, the Company released the first module of its
Atlas System. Over the two-year period ending April 1996, the Company released
two additional Atlas System modules, thereby fully replacing the MedisGroups
system and significantly expanding the capabilities of the Company's systems.
Concurrently, the Company began the process of converting existing MedisGroups
licenses to licenses for the Atlas System. The Company no longer directs any
efforts toward developing, licensing or supporting MedisGroups, because the
Company has successfully converted over 90% of MedisGroups users to the Atlas
System. Such former MedisGroups users have renewed Atlas System licenses at a
rate approximately equal to the Company's historical customer renewal rate.
MediQual also provides CIM services, including analytic services for the
management of various diseases, data abstraction services and development of
custom databases.
<TABLE>
Prior to 1994, substantially all of the Company's revenues were derived
from licensing the MedisGroups system. Since 1993, MedisGroups revenues have
significantly declined while revenues derived from licensing the Atlas System
and from CIM Services have significantly increased. The following table shows
the amounts and percentages of the Company's total revenues represented by
MedisGroups, the Atlas System and CIM Services for the periods presented:
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- --- ------ --- ------ ---
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
MedisGroups.......... $13,097 100% $ 8,459 70% $ 4,674 43% $2,173 41% $ 683 12%
Atlas System......... -- -- 3,150 26 5,131 47 2,614 49 3,662 64
CIM Services......... -- -- 475 4 1,169 10 500 10 1,362 24
------- --- ------- --- ------- --- ------- --- ------- ---
Total revenues..... $13,097 100% $12,084 100% $10,974 100% $5,287 100% $5,707 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
The Company believes that as the market for Atlas Systems and CIM services
matures, the continued growth of the Company will require the successful
introduction, development or acquisition of new applications and further
enhancements to its existing systems and services. In order to achieve increased
market penetration of the Atlas System, the Company plans to continue to (i)
develop complementary application modules and databases to license to new
customers and cross-market to existing customers, (ii) develop improved user
interfaces to simplify customer use of the Atlas System, (iii) provide on-going
training seminars to help customers improve their analytical use of the Atlas
System and (iv) expand the Atlas System to collect new types of data which will
allow the Company to develop and license additional applications and comparative
databases to its customers.
The Company licenses its systems pursuant to annual agreements that provide
for the payment of license fees at the beginning of the term. The sales cycle,
which may vary depending on the extent of a
15
<PAGE> 18
prospective customer's planned scope of usage, generally ranges from three to
nine months. Customer renewal rates were 97%, 90% and 92% in 1993, 1994 and
1995, respectively. Annual license fee revenues are recognized upon shipment of
the systems or on the annual renewal date. A portion of the annual fee (ranging
from 5% to 20%, depending on the number of Atlas System modules licensed by a
customer) attributable to customer support is recognized ratably over the term
of the agreement. Revenues from CIM services are recognized when services are
rendered.
<TABLE>
The Company's operating expenses consist primarily of personnel costs,
including compensation, sales commissions and employee benefits. Between 1993
and 1995, the Company invested approximately $11 million in the development of
the Atlas System while maintaining the MedisGroups system. As of June 30, 1996,
the Company had completed development of the Atlas System, but intends to
continue to develop enhancements and new applications, including three
enhancements that the Company expects to introduce by early 1997. See
"Business--Systems and Services; Atlas System Enhancements and Specialized
Versions Under Development." As a result, the Company believes the aggregate
amount of research and development expenses, including personnel costs, for the
Atlas System in the future will be substantially lower than that incurred in
1995 when the Company was required to expend substantial amounts in connection
with the introduction of the Atlas System. The following table shows the
research and development expenses attributable to each of the Company's systems
for the periods presented:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT
MedisGroups......................... $1,246 $ 725 $ 401 $ 219 $ --
Atlas System and CIM Services....... 2,906 2,901 3,612 1,971 1,328
------ ------ ------ ------ ------
$4,152 $3,626 $4,013 $2,189 $1,328
====== ====== ====== ====== ======
</TABLE>
<TABLE>
MedisGroups required a significant amount of installation, custom
programming and other support costs. The Atlas System eliminated the need for a
substantial portion of these expenses through technological improvements.
However, because the conversion of the Company's customers to the Atlas System
occurred gradually since April 1994, the Company was required to maintain
significant levels of support for both MedisGroups and the Atlas System during
that period. As a result, the Company incurred substantially higher expenses
during this two-year period than the Company expects to incur in the future in
connection with supporting the Atlas System alone. In addition, the Company
consolidated customer support into a central location between late 1993 and
early 1994. The Company intends to expand fee-based seminar services to help
customers improve their analytical use of the Atlas System. The following table
shows the cost of revenues and customer support expenses attributable to each of
the Company's systems for the periods presented:
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COST OF REVENUES AND CUSTOMER SUPPORT
MedisGroups......................... $2,852 $1,800 $ 978 $ 531 $ 28
Atlas System and CIM Services....... -- 1,198 1,467 797 903
------ ------ ------ ------ ----
$2,852 $2,998 $2,445 $1,328 $931
====== ====== ====== ====== ====
</TABLE>
16
<PAGE> 19
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the statement of operations of the Company as a percentage of total
revenues:
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Total revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of revenues and customer support... 21.8 24.8 22.3 25.1 16.3
Marketing and distribution.............. 19.1 16.0 18.0 21.1 8.6
Research and development................ 31.7 30.0 36.6 41.4 23.3
General and administrative.............. 16.8 28.1 30.6 32.7 28.4
Restructuring charge (credit)........... 12.4 0.0 5.2 0.0 (1.8)
------ ---- ----- ----- -----
Total operating expenses............. 101.8 98.9 112.7 120.3 74.8
------ ---- ----- ----- -----
Operating income (loss)................... (1.8) 1.1 (12.7) (20.3) 25.2
Interest expense (income), net............ (0.4) (1.4) 0.6 0.4 1.8
------ ---- ----- ----- -----
Income (loss) before income taxes......... (1.4) 2.5 (13.3) (20.7) 27.0
Provision for income taxes................ 0.1 1.2 0.0 0.0 3.3
------ ---- ----- ----- -----
Net income (loss)......................... (1.5)% 1.3% (13.3)% (20.7)% 23.7%
====== ==== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Revenues. Total revenues for the six-month period ended June 30, 1996
increased by 8% to $5,707,000 from $5,287,000 for the same period of the prior
year. The overall growth is attributable to a combination of a 26% increase in
Atlas System license fees and a 116% increase in CIM services revenue offset by
a 41% decline in MedisGroups license fees from $2,173,000 to $683,000.
Cost of Revenues and Customer Support. Cost of revenues and customer
support expenses for the six-month period ended June 30, 1996 decreased by 30%
to $931,000 from $1,328,000 for the same period of the prior year. The overall
decrease resulted from a combination of the phase-out of MedisGroups support and
a 13% increase in Atlas System support. The Company has made significant
enhancements to the Atlas System, including on-line help and desktop tutorials,
which reduce support demands. During 1995, the Company also initiated an
electronic bulletin board and the use of remote-access support via modem. In
addition, a simplified 1995 redesign of the Atlas Glossary has reduced training
and support needs for data collection activities.
Marketing and Distribution. Marketing and distribution expenses for the
six-month period ended June 30, 1996 decreased by 56% to $490,000 from
$1,114,000 for the same period of the prior year. Beginning in the first quarter
of 1995, the Company began its transition from relying solely on field sales
representatives to a combination of telemarketing and direct field sales to
reduce the costs of its direct sales force and improve operating margins.
Research and Development. Research and development expenses for the
six-month period ended June 30, 1996 decreased by 39% to $1,328,000 from
$2,189,000 for the same period of the prior year. The overall decrease is the
combination of a decline in support required to maintain MedisGroups and the
planned development enhancements relating to the Atlas System. In December 1995,
the Company significantly reduced its research and development staff in
anticipation of the completion of the Atlas System during the first quarter of
1996. The Company also incurred lower expenses in 1996 attributable to the
operation of its data center.
General and Administrative. General and administrative expenses for the
six-month period ended June 30, 1996 decreased by 6% to $1,619,000 from
$1,727,000 for the same period of the prior year. The Company attributes the
decrease to general efficiencies derived from improved office automation, the
17
<PAGE> 20
consolidation of field offices and reduced depreciation, resulting from the fact
that the Company was required to make relatively few purchases of property and
equipment, having undergone substantial office expansion in the prior year.
Restructuring Charge (Credit). During the six months ended June 30, 1996
the Company was able to negotiate a favorable settlement for certain excess
leased facilities, resulting in a restructuring credit of approximately
$102,000. The Company does not anticipate any further adjustments relating to
the restructuring effected in December 1995.
Interest Expense (Income), Net. Interest expense (income), net increased
by 416% from interest expense of $21,000 to interest income of ($98,000) for the
six-month periods ended June 30, 1995 and 1996, respectively. The increase was
primarily due to additional interest at a rate of 9.25% incurred on the
Company's bank borrowing during 1995. The Company was required to increase its
borrowings in 1995 in order to offset the Company's negative cash flow during
such year.
Income Taxes. The provision for income taxes for the six month period
ended June 30, 1996 of $185,000 represents minimum federal and state income
taxes. The Company has available net operating loss and tax credit carryforwards
to be used to minimize income taxes payable to the federal government and
certain states.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues. Total revenues decreased by 8% from $13,097,000 in 1993 to
$12,084,000 in 1994, and decreased by 9% to $10,974,000 in 1995. The overall
decrease is a combination of a decline of $8,423,000, or 64%, in MedisGroups
license fees between 1993 and 1995 which was not entirely offset by an
approximately $10 million increase in revenues derived from the introduction of
the Atlas System and related CIM services during 1994 and 1995. The Company
attributes the decline in MedisGroups license fees to the expiration of state
mandates in several markets, the absence of new MedisGroups applications which
could be cross-marketed to existing customers and the conversion of MedisGroups
customers to the Atlas System. A mandate in Iowa for MedisGroups expired in
1994, resulting in a decline of approximately $310,000 in MedisGroups Iowa
renewals in 1995. A similar mandate in Colorado for MedisGroups expired in 1995;
however, all Colorado customers were subsequently converted to the Atlas System
during 1995.
Cost of Revenues and Customer Support. Cost of revenues and customer
support expenses increased by 5% from $2,852,000 in 1993 to $2,998,000 in 1994,
and decreased by 18% to $2,445,000 in 1995. In 1993, the Company merged eight
customer support field offices into its headquarters in Massachusetts. This
consolidation resulted in higher costs in 1994 to replace staff choosing not to
relocate and certain redundant salary costs for a portion of the year. The
decrease in 1995 reflected a combination of the phase-out of support required by
MedisGroups and a 22% increase in support related to the Atlas System.
Marketing and Distribution. Marketing and distribution expenses decreased
23% from $2,505,000 in 1993 to $1,927,000 in 1994, and increased by 2% to
$1,970,000 in 1995. The Company consolidated its field sales offices during 1994
and increased the use of telemarketing, resulting in reduced field sales
compensation, travel and office expenses. The Company attributes the increase in
marketing and distribution expenses in 1995 to increased telemarketing activity
related to the Atlas System.
Research and Development. Research and development expenses decreased by
13% from $4,152,000 in 1993 to $3,626,000 in 1994, and increased by 11% to
$4,013,000 in 1995. The overall decrease is a combination of the decline in
research and development required to maintain MedisGroups and the planned
development cycle relating to the Atlas System. In late 1994, the Company also
made capital improvements in its data center to begin the conversion from a VMS
to a UNIX operating environment. In 1995, the overall increase in research and
development expenses can be attributed to expenses for software license fees,
employee training and consultants relating to these capital investments.
18
<PAGE> 21
General and Administrative. General and administrative expenses increased
by 55% from $2,198,000 in 1993 to $3,401,000 in 1994, and decreased by 1% to
$3,358,000 in 1995. The Company attributes the increase in general and
administrative expenses in 1994 to additional office expense for the Company's
data warehousing operations, increased expense for leasehold improvements made
to the Company's headquarters and additional depreciation expense for capital
investments made in 1994. General and administrative expenses decreased in 1995
as a result of the termination of the Company's Pennsylvania office lease and
lower consulting and travel expenses.
Restructuring Charge (Credit). In 1993, the Company recorded a $1,623,000
charge to consolidate all of the Company's field operations and to write off all
remaining capitalized software costs related to discontinued systems and
obsolete equipment. The provision included severance payments, extended
benefits, asset write-offs and reserves in connection with the restructuring. In
1995, the Company recorded a $580,000 charge to reflect a staff reduction and
office space consolidation. The provision includes severance payments, rent
payments for idle office space and asset write-offs in connection with the staff
reduction. The Company's policy is to write off assets disposed of or deemed to
be excess or obsolete at the time the assets no longer have value to the
Company's ongoing operations.
Interest Expense (Income), Net. Interest expense (income), net increased
by 215% from income of ($55,000) in 1993 to income of ($173,000) in 1994, and
decreased by 140% to an expense of $70,000 in 1995. The increase in 1994 was
primarily due to a favorable settlement of a lawsuit with a former employee
regarding repayment of a loan to the employee. The receivable from the employee
was written off in 1993. The decrease in 1995 was due to additional interest
expense incurred on the Company's bank borrowings during 1994 and 1995.
Income Taxes. The provision for income taxes in 1993 and 1994 primarily
represents minimum taxes in certain states. The Company had available net
operating loss and tax credit carryforwards of $10,342,000 and $204,000 at
December 31, 1995, which have been fully reserved due to the uncertainty
relating to the utilization of the carryforwards.
19
<PAGE> 22
SELECTED QUARTERLY FINANCIAL RESULTS
The Company's quarterly operating results have been and likely will
continue to be subject to significant fluctuations. The Company has experienced
a fluctuating pattern in its operating results with the third quarter typically
having the highest revenue and net income compared to the immediately preceding
and following quarters. The Company believes this fluctuation can be
attributable to the timing of renewals under annual license agreements with its
customers.
<TABLE>
The following tables present quarterly unaudited financial information for
each of the six quarters for the period ended June 30, 1996. This unaudited
financial information includes all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of its financial position and results of operations for these
periods. The operating results for any quarter are not necessarily indicative of
the results that may be expected for any future quarter.
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
MedisGroups(1)............ $1,166 $1,007 $ 1,300 $1,201 $ 683 $ --
Atlas System.............. 1,259 1,355 1,333 1,184 1,590 2,072
CIM Services.............. 216 284 321 348 466 896
------ ------ ------ ------ ------ ------
Total revenues.......... 2,641 2,646 2,954 2,733 2,739 2,968
Operating expenses:
Cost of revenues and
customer support........ 677 652 525 592 379 553
Marketing and
distribution............ 492 622 459 398 256 234
Research and
development............. 1,155 1,034 1,010 814 628 700
General and
administrative.......... 842 885 816 815 787 832
Restructuring charge
(credit)................ -- -- -- 580 -- (102)
------ ------ ------ ------ ------ ------
Total operating
expenses............. 3,166 3,193 2,810 3,199 2,050 2,217
------ ------ ------ ------ ------ ------
Operating income (loss)...... (525) (547) 144 (466) 689 751
Interest expense (income),
net....................... 13 8 25 24 27 (125)
------ ------ ------ ------ ------ ------
Income (loss) before income
taxes..................... (538) (555) 119 (490) 662 876
Provision for income taxes... -- -- -- -- 77 107
------ ------ ------ ------ ------ ------
Net income (loss)............ $ (538) $ (555) $ 119 $ (490) $ 585 $ 769
====== ====== ====== ====== ====== ======
<FN>
- ---------------
(1) The substantial decrease in revenues derived from MedisGroups in the
three-month periods ended March 31 and June 30, 1996 is attributable to the
completion of the Company's Atlas System, the subsequent conversion of
MedisGroups licenses to Atlas System licenses and the corresponding
diminished need for MedisGroups support.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and met its capital requirements
through approximately $10 million generated by private placements of securities,
the utilization of bank lines of credit and capital leases. At June 30, 1996,
the Company's principal sources of liquidity consisted of cash and cash
equivalents and trade accounts receivables. The Company has a working capital
line of credit with Silicon Valley Bank (the "Bank") under which it may borrow
up to $1,500,000, subject to 75% of eligible accounts receivable. At June 30,
1996, the Company had no borrowings under this line of credit. The working
capital line of credit is secured by all the Company's assets and requires the
Company to maintain certain financial ratios and adhere to certain covenants
(including covenants not to participate in any merger or consolidation, pay any
dividends or dispose of any material assets
20
<PAGE> 23
without the Bank's consent). As a result of the Company's net loss during 1995,
at December 31, 1995, the Company was not in compliance with the profitability
and tangible net worth covenants under its working capital line of credit with
the Bank. On April 25, 1996, the Bank waived its remedies with respect to all
past failures to comply with these covenants. Although MediQual had no
borrowings under its working capital line of credit at June 30, 1996, the
Company intends to comply with these covenants in the event that the Company
borrows against this line of credit in the future.
At November 20, 1995, the Company was also in default of certain
obligations under a convertible debenture issued in settlement of a dispute as
to amounts owed with respect to certain royalty obligations owed to a former
product development partner. In June 1996, the debenture was converted pursuant
to its terms into approximately 52,070 shares of Common Stock at the stated
conversion price of $4.84 per share.
The Company's profitability for the six months ended June 30, 1996 has
resulted in an increase in net cash of approximately $700,000. In addition, the
Company has received approximately $400,000 from the exercise of stock options
and the sale of treasury stock.
As of December 31, 1995, the Company had, for tax purposes, net operating
loss carryforwards of approximately $10,342,000 and federal tax credit
carryforwards of approximately $204,000, which can be used to offset future
taxable income and tax liabilities. The Code includes provisions that may limit
the Company's ability to utilize such carryforwards in connection with a change
in ownership (as defined therein). The Company does not believe that this
Offering will result in a change in ownership.
The Company does not currently have any significant capital commitments.
The Company believes that the net proceeds of the Offering, together with
existing cash balances, funds available under the Company's credit lines and
funds expected to be generated from future operations, will be sufficient to
fund its operations and satisfy its working capital needs for the foreseeable
future.
21
<PAGE> 24
BUSINESS
OVERVIEW
MediQual Systems, Inc. is a leading supplier of clinical information
management ("CIM") systems and services to the health care industry. The
Company's systems and services combine proprietary clinical knowledge with raw
patient encounter data to create valuable information that providers, payors and
suppliers use to monitor and enhance the effectiveness, efficiency and
appropriateness of care.
MediQual has addressed the growing demand for this information by
developing its Atlas System, a comprehensive, desktop CIM system. The Atlas
System is comprised of five major components: (i) a standardized retrospective
data repository; (ii) proprietary benchmarking databases; (iii) embedded
clinical knowledge; (iv) comprehensive provider databases and (v) on-line
analytical processing. The Atlas System enables users to perform sophisticated,
quantitative analyses which may be used for a variety of applications including:
benchmarking internal performance, competitively assessing cost and quality
positions in local markets, quantifying the impact of managed care and capitated
contracts, developing local integrated delivery networks, evaluating the
efficacy of new pharmaceuticals and medical devices, credentialing physicians
and reporting to third parties for regulatory and contract compliance. The
modular design of the Atlas System enables MediQual to integrate additional
applications quickly and easily, in order to be responsive to evolving customer
needs.
INDUSTRY BACKGROUND
The health care industry, which exceeded $1 trillion in 1995, continues to
experience cost escalation. Health care providers, payors and suppliers remain
under pressure to reduce costs without jeopardizing quality of care. The health
care industry initially responded to this pressure primarily by reducing
administrative costs, such as those associated with non-clinical staff, and
through the negotiation of supply discounts. Further cost reductions will
require intervention at the clinical level where resource use may directly
impact patient care. Implementing changes at the clinical level must be
supported by a measurable, quantifiable relationship between services rendered
and patient outcomes to maintain the confidence and cooperation of clinicians.
As a result, providers, payors and suppliers are seeking more sophisticated
clinical information to enable them to compare performance to quality and cost
benchmarks, and to monitor or enhance clinical outcomes.
Clinical information is derived from patient encounter data, the majority
of which resides in individual paper files with limited analytical usefulness.
Some patient encounter data is captured by on-line transaction processing
("OLTP") systems. Many hospitals, for example, have automated administrative
functions such as patient admission and billing. As a by-product of this
automation, certain OLTP systems save ICD-9 diagnostic and procedure codes,
treatment charges and patient demographics, collectively known as UB-92 data
(based on the administrative billing standard designed by Health Care Financing
Administration). Other OLTP systems involved in concurrent patient treatment,
such as laboratory, radiology and pharmacy systems, can digitally store certain
clinical data, but do so without the benefit of a federal coding standard. Thus,
administrative OLTP data, which does not contain clinical elements, can be
aggregated based on its UB-92 standardization, while clinical OLTP data cannot
be aggregated without additional preparation.
The refinement of patient data for analytical use requires several
processing steps, which are as follows: (i) integrating patient encounter data
from sources such as paper files and administrative and clinical OLTP systems;
(ii) mapping clinical data elements into proprietary classifications and (iii)
aggregating data into a retrospective repository. Specifically, clinical OLTP
data must first be mapped to standardized definitions, filtered to remove
extraneous material, such as free-form text, and integrated with UB-92 data. The
combined clinical OLTP and UB-92 data must then be translated into discrete time
frames and enhanced, as required by the intended applications, by the
abstraction of paper-based data. OLTP systems cannot perform these processing
steps.
22
<PAGE> 25
Health care data analysts increasingly require a solution that processes
internal patient encounter data into an analytic repository and that also
enables comparisons against a variety of external benchmarks, both proprietary
and public (the federal government and approximately 20 states release UB-92
data). The increasing level of payor sophistication requires that encounter data
be adjusted for differing patient severity so that meaningful comparisons and
statistically significant conclusions can be made.
Until recently, providers, payors and suppliers were dependent upon batch
reports produced by MIS personnel using large mainframe computers. Modification
of such reports generally requires custom programming and long lead times, and
such a process is not easily adaptable to ad hoc queries. Rapid technological
advancements in personal computing creates an opportunity for desktop clinical
information management systems that support an iterative approach known as
on-line analytical processing. Such an approach involves rapid changes in
perspective, from summary to detail level, as well as techniques, such as the
addition or deletion of selection criteria, that continuously refine the topic
under study. To remain competitive, providers, payors and suppliers must develop
timely and actionable information either by installing CIM systems in-house, or
by engaging third-party consultants and analysts.
THE MEDIQUAL SOLUTION
MediQual has addressed the need for sophisticated health care information
by developing a comprehensive, low-cost desktop CIM system for providers, payors
and suppliers. The Company also provides comprehensive CIM services, including
data analysis and abstraction, for those clients who wish to enhance their
access to and use of such information. MediQual's systems and services
systematically analyze effectiveness (whether a particular treatment helped the
patient); efficiency (whether the proper resources were used to provide care);
and appropriateness (whether the chosen treatment was the best option). The
resulting analyses assist customers in delivering high quality, low cost care.
STRATEGY
MediQual's objective is to strengthen its position as a leading supplier of
CIM systems and services to health care providers, payors and suppliers. Key
elements of the Company's strategy to achieve this objective include:
Leverage Proprietary Master Database. The Company has developed a
proprietary database comprised of integrated clinical and administrative data
derived from more than 20 million patient encounters. The Company's master
database is continually expanded as additional patient encounters, as well as
new types of data, including pharmaceuticals and outpatient services, are
transmitted to the Company by its customers. The Company believes this expanded
master database will allow it to develop new databases and applications.
Cross-Marketing to Existing Customer Base. The modular design of the Atlas
System enables the Company to license additional databases and applications to
existing customers. For example, Mortality BenchMark, a new database covering 16
high risk topics (e.g., pneumonia, stroke and congestive heart failure), permits
users to compare internal results to those of the top performers in MediQual's
master database, and has been licensed to a significant number of existing
customers.
Extend Analytical Services. MediQual believes that there is a significant
opportunity to extend its analytical services into disease management
applications. For example, in conjunction with Ethicon Endo-Surgery, Inc., a
subsidiary of Johnson & Johnson, the Company provides analytical services for
the management of hysterectomies. These services involve linking claims data to
clinical records and include a comparison of different hysterectomy surgical
techniques, which allow providers and payors to evaluate relative
cost-effectiveness. The Company intends to enter into similar arrangements for
other disease management applications.
23
<PAGE> 26
Expand System Application Offerings. The Company plans to expand its
system application offerings to leverage its existing investment in the Atlas
System and to be responsive to evolving customer needs. The modular design of
the Atlas System enables rapid integration of additional applications through
both internal research and development and acquisitions of new technologies and
businesses. The Company plans to release three enhancements to the Atlas System
by early 1997. See "Business -- Systems and Services; Atlas System Enhancements
and Specialized Versions Under Development."
Form Alliances to Broaden Distribution. The Company seeks to form
alliances with third parties to reach market segments not currently employing
the Atlas System and to take advantage of their sales forces. The Company has
entered into a non-exclusive distribution agreement with SpaceLabs Medical, Inc.
and is also developing customized cardiac and obstetric versions of the Atlas
System, which will be distributed exclusively by Marquette Electronics, Inc. The
Company intends to pursue other alliances in order to broaden the distribution
of its systems.
SYSTEMS AND SERVICES
The initial version of the Company's CIM system, MedisGroups, was
introduced in 1987. In April 1994, the Company began replacing MedisGroups,
which was rapidly becoming obsolete, with a series of integrated modules
marketed as the Atlas System. Over the five-year period beginning in January
1991, revenues derived from MedisGroups declined as a result of both fewer unit
licenses and price reductions, reflecting, in part, the growing obsolescence of
that system. In April 1994, the Company released the first module of its Atlas
System. Over the two-year period ending April 1996, the Company released two
additional Atlas System modules, thereby fully replacing the MedisGroups system
and significantly expanding the capabilities of the Company's systems.
Concurrently, the Company began the process of converting existing MedisGroups
licenses to licenses for the Atlas System. The Company no longer directs any
efforts toward developing, licensing or supporting MedisGroups, because the
Company has successfully converted over 90% of MedisGroups users to the Atlas
System. Such former MedisGroups users have renewed Atlas System licenses at a
rate approximately equal to the Company's historical customer renewal rate.
24
<PAGE> 27
Atlas System Components
The Atlas System is a modular CIM system designed to enhance health care
value by performing quantitative analysis of patient data. The Atlas System
provides a comprehensive, cost-effective desktop solution to the problem of
generating sophisticated information from disparate raw data sources. The Atlas
System software is written in Microsoft FoxPro for Windows, Visual C++ and
Visual Basic. The Atlas System supports multiple, concurrent users in most
network environments with personal computers running Microsoft Windows and uses
Microsoft Excel to display results. The Atlas System is comprised of the major
components shown in the shaded area of the following diagram:
[ARTWORK]
[DESCRIPTION OF ARTWORK: Atlas System components shown in diagram form.]
25
<PAGE> 28
Atlas Repository and Atlas Glossary. The Atlas Repository electronically
interfaces with OLTP systems, enables the electronic capture of data from paper
medical records and selects relevant data for analysis from Atlas provider and
benchmarking databases. MediQual has developed the Atlas Glossary, a
comprehensive data dictionary and coding system that covers all aspects of
patient treatment, including lab tests, pharmaceuticals, vital signs, patient
history, radiology and clinician notes. The Atlas Glossary defines appropriate
time frames, ensures uniform collection and definition of terms, and excludes
irrelevant data. The Company believes that the Atlas Glossary is a significant
proprietary asset that is essential for the creation and standardization of
health care data for analysis. The Atlas Repository also includes Table
Maintenance, a tool for mapping provider-specific codes to Atlas Glossary codes,
thereby allowing benchmarking data to be cost-effectively developed from a wide
range of providers in geographically diverse locations.
Atlas Benchmarking Databases. Atlas users can access more than 40
specially formatted CD-ROM databases derived principally from the Company's
master database. These CD-ROM databases enable customers to benchmark by
provider location, size and specialty or by disease. MediQual's master database
is comprised of integrated clinical and administrative data derived from more
than 20 million patient encounters. MediQual routinely receives, as part of its
license agreements, a copy of provider-specific data which is standardized using
the Atlas Glossary and Table Maintenance in the Atlas Repository. This data
includes provider-specific UB-92 data, clinical OLTP data and data manually
abstracted from paper medical records.
Embedded Clinical Knowledge. The Atlas System contains clinical knowledge
that enables statistically valid conclusions to be reached from a comparison of
different patient populations. The breadth and depth of the Company's clinical
knowledge is largely attributable to the size and quality of the Company's
master database. More than 200 disease models, covering substantially all acute
conditions such as heart failure, stroke and pneumonia, were developed using
this master database and are embedded in the Atlas System in the form of
software algorithms. Disease models typically contain between 10 and 30
independent variables such as history of prior medical conditions, laboratory
test results, vital signs and physical exam findings. For example, the model
that predicts the probability of death for patients diagnosed with heart failure
contains thirty independent variables, including prior history of cancer,
presence of lethargy, use of mechanical vent, respiration rate, blood pressure
and creatinine level.
Atlas Provider Databases. The Company creates Atlas provider databases
specially formatted on CD-ROM by validating, classifying and scoring UB-92 data
from the federal government and approximately 20 states and from private data
sharing consortiums comprised of providers and payors. In addition, the Company
adds embedded clinical knowledge that is based on statistical models derived
from UB-92 data elements. This clinical knowledge enables the user to adjust for
the expected cost of treating differing combinations of diagnoses and
procedures. The Company has developed more than 125 Atlas provider databases.
On-Line Analytical Processing. The Atlas System provides on-line
analytical processing that enables real-time, drill-down and multi-dimensional
viewing of data contained in the Atlas Repository. The ability to change
perspective from summary to detail level and to add or delete selection criteria
is essential to the iterative analytical power of the Atlas System. The Atlas
System also offers advanced features such as filters, thresholds and built-in
statistics, which provide users with an ability to conduct customized data
analysis using more than 400 variables. These variables can be manipulated based
upon the analysis to be conducted and the particular database in use. For
example, the overall mortality rate for pneumonia patients can be (i) segmented
by age, gender and history of heart failure, (ii) filtered for specific
infecting organisms and (iii) refined with a minimum threshold to eliminate rare
occurrences. In this manner, users can test various hypotheses quickly using a
comprehensive iterative methodology.
26
<PAGE> 29
Atlas System Modules
The Atlas System is comprised of three modules: Atlas Market View, Atlas
Resources and Atlas Outcomes. These modules are defined primarily by the type of
data they are designed to analyze. Atlas Market View analyzes Atlas provider
databases to enable competitive assessments of physicians and hospitals by name.
Atlas Resources and Atlas Outcomes analyze provider-specific patient encounter
data together with benchmarking databases derived from the Company's proprietary
master database. Atlas Outcomes encompasses all the functionality of Atlas
Resources, and adds certain clinical applications that address effectiveness,
efficiency and appropriateness. Atlas Outcomes includes optional disease and
peer group benchmarking databases and adds the ability to collect clinical data
from paper medical records. Clients may upgrade from Atlas Resources to Atlas
Outcomes at any time. Each module is packaged with at least one of the more than
150 different CD-ROM databases that the Company has developed. Each module (and
optional CD-ROM databases) contains application frameworks, called MQ Analyses
and also includes standard reports, called MQ Templates, which may be modified
by the user to build a custom library of reports and applications.
Atlas Market View provides competitive assessments of physicians and
hospitals by name on their relative efficiency, effectiveness and
appropriateness of care. These assessments include profiles of charges, lengths
of treatment, mortality and admission criteria. Atlas Market View analyzes
federal, state and private UB-92 data that has been specially prepared and
formatted on CD-ROM. This module contains embedded clinical knowledge, based on
statistical models derived from UB-92 data, that enables the user to adjust for
diverse patient populations under study, including differing combinations of
diagnoses and procedures. Atlas Market View also contains a benchmark for
overnight admission appropriateness, based on norms derived from MediQual's
master database.
Atlas Resources provides management assessments of the efficiency and
resource utilization of clinical processes and physicians. These assessments
include individual physician profiles, summaries of various patient populations
and extensive ad hoc analysis of the related underlying costs. Atlas Resources
analyzes downloaded OLTP data that has been specially prepared for the Atlas
Repository with a national benchmark derived from MediQual's master database.
This module shares the same embedded clinical knowledge that is contained in
Atlas Market View.
Atlas Outcomes, which expands the functionality of Atlas Resources by
incorporating additional databases and applications, is designed to provide
comprehensive internal assessments of clinical processes and providers. These
assessments include profiles of specific procedures, clinical summaries of
various patient populations and extensive ad hoc analysis of efficiency,
effectiveness and appropriateness. Atlas Outcomes combines provider data
downloaded from OLTP systems with data obtained directly from paper medical
records that has been specially prepared for the Atlas Repository and analyzes
such data against multiple disease and peer benchmarks derived from MediQual's
master database. This module contains additional embedded clinical knowledge,
based on statistical models derived from both UB-92 and clinical data elements,
that enables the user to adjust for differing combinations of diagnoses,
procedures, on-admission severity, length of stay, complications and other
factors.
Atlas System Enhancements and Specialized Versions Under Development
Patient ROI. The Company is developing tools called rapid object
integrators to assist clients in integrating the Atlas System with their legacy
OLTP systems. Patient ROI, the first such tool, is designed to extend the
existing Atlas UB-92 interface for acute care patients to other patient
treatment sites, such as emergency rooms, ambulatory surgery centers,
rehabilitation facilities, psychiatric units and clinics. The Company plans to
release Patient ROI in the third quarter of 1996.
Physician BenchMark. Increasing pressure for lower costs has prompted
providers to develop more efficient practice patterns that reflect appropriate
levels of care and improved clinical performance. Physician BenchMark is a new
application for Atlas Outcomes that will enable providers to compare high volume
efficient physicians to other physicians, identify and prioritize areas for cost
27
<PAGE> 30
reduction and develop internal benchmarks. The Company plans to release
Physician BenchMark in early 1997.
Physician Report Card. To remain competitive, providers increasingly need
to be differentiated based on cost and quality parameters. Physician Report Card
is a new application for Atlas Outcomes and Atlas Resources that will provide a
statistical basis for making credentialing and managed care decisions. The
Company plans to release Physician Report Card in early 1997.
Atlas Specialized Versions. The Company is developing specialized versions
of Atlas modules and CD-ROM databases for use in cardiology and obstetrics. The
Company expects that these versions will be exclusively distributed by Marquette
Electronics, Inc. beginning in early 1997. The Company is also modifying Atlas
modules for various regional data sharing consortiums comprised of providers and
payors who desire additional analytical or reporting features. The Company will
release the first of these additional specialized versions in early 1997.
CIM Services
For providers, payors and suppliers who prefer a service solution to
address their information needs, MediQual provides analytic services for the
management of various diseases, data abstraction services and development of
custom databases. The Company has entered into an agreement with Ethicon
Endo-Surgery, Inc., a subsidiary of Johnson & Johnson, to provide analytical
services for the management of hysterectomies. These services involve linking
claims data to clinical records and include a comparison of different
hysterectomy surgical techniques, which allow providers and payors to evaluate
relative cost-effectiveness. Also, pursuant to an agreement with Merck & Co.,
Inc., the Company has developed analytical services for the management of
congestive heart failure. The Company intends to enter into similar arrangements
for other disease management applications. The Company also conducts custom
research for Pfizer Inc., Amgen Inc. and Roche BioScience.
CUSTOMERS
The Company's customers include licensees of the Atlas System and
purchasers of CIM services. As of June 30, 1996, MediQual had licensed
approximately 450 Atlas modules, used by approximately 2,700 users. The Company
has relationships with approximately 400 customers. Approximately 84% of the
Company's customers have licensed only one module. The Company's customers
include:
ATLAS SYSTEM
Borgess Medical Center
Community Hospital of Central California
Florida Hospital Medical Center
Greater Cincinnati Community Health
Foundation
Hamot Medical Center
Iroquois Health Care Consortium
Sarah Bush Lincoln Health Center
Sisters of Charity Health Care Systems
Touro Infirmary
University of Massachusetts Medical
Center
University of Pittsburgh Medical Center
Washington Hospital
CIM SERVICES
Amgen Inc.
Ethicon Endo-Surgery, Inc., a Johnson &
Johnson company
Merck & Co., Inc.
Pfizer Inc.
Roche BioScience
TRAINING AND SUPPORT
The Company believes that training and support are integral to the success
of its customers' use of the Atlas System. MediQual provides training at
customer sites, in regional seminars and at the
28
<PAGE> 31
Company's computer-based training center. The Atlas System incorporates several
training and support features, including software tutorials, on-line help and
self-testing to certify that customers have reached acceptable levels of
proficiency. Dial-in support is available on the Company's electronic bulletin
board as well as World Wide Web site and telephone support is provided during
regular business hours. In addition, the Company produces an annual CIMposium
for Atlas users and prospective customers that offers a wide range of
educational sessions, research presentations, demonstration labs and workshops.
MARKETING AND DISTRIBUTION
MediQual markets its systems and services through a direct sales force of
10 people operating out of Massachusetts, Colorado, Pennsylvania and New Jersey.
Because the decision to license the Company's systems frequently involves
clinicians, administrators and executives, the Company's senior management and
clinical support staff take an active role in marketing and sales activity.
Corporate marketing activities include seminars that showcase the Atlas System,
trade show exhibits and on-going support for the Company's World Wide Web site
(http://www.mediqual.com). The Company also markets its systems and services
through third party distribution arrangements.
The Company has entered into an agreement with Ethicon Endo-Surgery, Inc.,
a subsidiary of Johnson & Johnson, to provide analytical services for the
management of hysterectomies. These services involve linking claims data to
clinical records and include a comparison of different hysterectomy surgical
techniques, which allow providers and payors to evaluate relative cost-
effectiveness. Also, pursuant to an agreement with Merck & Co., Inc., the
Company has developed Atlas Services for the management of congestive heart
failure. The Company has entered into a non-exclusive distribution agreement
with SpaceLabs Medical, Inc. for the Atlas System and is also developing
customized cardiac and obstetric versions of the Atlas System for exclusive
distribution by Marquette Electronics, Inc.
RESEARCH AND DEVELOPMENT
Since 1993, the Company has invested approximately $11 million to develop
the Atlas System. In April 1996, the Company shifted its research and
development focus to enhancements and customized versions of the Atlas System.
Approximately 21 employees are involved in research and development.
COMPETITION
The market for health care information systems and services is intensely
competitive. Most of the Company's competitors and potential competitors have
significantly greater financial, technical, system development and marketing
resources than the Company. The Company competes directly with other vendors of
health care information and consultants who provide related services. MediQual
also competes with MIS departments of large hospital networks, some of which
have developed, or plan to develop, their own CIM capabilities. In addition,
potential competitors include OLTP vendors who may wish to build, rather than
buy, CIM technology. Many of these competitors and potential competitors have
substantial installed customer bases in the health care industry and the ability
to fund significant system development and acquisition efforts. The Company
believes that the principal competitive factors in its market are system
functionality and features, price, training and support, customer references and
firm reputation. The Company believes it competes favorably with respect to
these factors. Management seeks to differentiate the Company's systems from
those of its competitors by developing and maintaining technological advantages,
including the availability of the Company's large and expanding proprietary
database and the capability to perform sophisticated on-line analytical
processing, which contribute to the comprehensive nature of the Company's Atlas
System and the modular design of the Company's systems which permits the Company
to license additional databases and applications to existing customers.
29
<PAGE> 32
GOVERNMENT REGULATION
The health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
health care industry participants. During the past several years, the U.S.
health care industry has been subject to changes in governmental regulation of,
among other things, reimbursement rates and certain capital expenditures. Health
care industry participants may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments, including
those for the Company's systems and services. Additionally, although the FDA
does not currently regulate the Company's systems or services, if authorized to
extend its regulation of software, the FDA could impose extensive requirements
that might negatively impact the time and expense necessary to develop new
systems. The Company cannot predict what impact, if any, such events might have
on its business, results of operations and financial condition. Further, many
health care providers are consolidating to create larger health care delivery
enterprises with greater regional market power. As a result, the remaining
enterprises could have greater bargaining power, which may lead to price erosion
of the Company's systems and services.
INTELLECTUAL PROPERTY
MediQual considers its software, databases, disease models and
methodologies to be proprietary. The Company seeks to protect its intellectual
property through confidentiality agreements with its employees and consultants,
and through nondisclosure agreements with its strategic partners. The Company
also relies on a combination of physical security, trade secrets, technical
measures, copyright law and contractual provisions to protect its rights in
various methodologies, systems, databases and documentation. The Company has not
filed any patent applications or copyrights covering its software technology.
There can be no assurance that the legal protections afforded to the Company or
the precautions taken will be adequate to prevent misappropriation of the
Company's intellectual property in the future. Any infringement or
misappropriation of the Company's proprietary software and databases would
disadvantage the Company in efforts to retain and attract customers and could
cause the Company to incur revenue losses or substantial litigation expenses.
Due to the evolving nature of its systems and services, the Company believes
that the protective measures described above are less significant than the
Company's ability to continually develop, modify and enhance its intellectual
property. Although the Company believes that its current systems do not infringe
on the intellectual property rights of others, there can be no assurance that
such a claim will not be asserted against the Company in the future.
EMPLOYEES
As of June 30, 1996, the Company had 66 employees, including 57 full-time
and nine part-time employees. None of these employees is represented by a union
or other collective bargaining group. The Company believes that its relationship
with its employees is good. The Company engages independent contractors for
certain development and data warehousing projects.
FACILITIES
The Company's corporate offices are located in a 24,500 square foot office
facility at 1900 West Park Drive, Westborough, Massachusetts 01581 under a lease
that expires on March 31, 1999. The Company believes that its facilities are
adequate for its current operations.
LEGAL PROCEEDINGS
The Company is not a party to any pending litigation.
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<PAGE> 33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
The executive officers and directors of the Company are as follows:
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eric A. Kriss........................... 47 President, Chief Executive Officer and Director
William C. Price........................ 36 Vice President and Chief Financial Officer
Elizabeth A. Endyke..................... 35 Vice President of Marketing and Distribution
Diane M. Throop......................... 34 Vice President of Research and Development
James Corum............................. 55 Vice President of Information Systems
William D. Ryan(1)(2)................... 70 Chairman of the Board of Directors
Alan C. Brewster, MD.................... 57 Director
David Dominik(1)(2)..................... 39 Director
Charles M. Jacobs....................... 63 Director
<FN>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</TABLE>
Mr. Kriss has served as President, Chief Executive Officer and Director of
the Company since March 1993. From January 1991 until joining MediQual, Mr.
Kriss served as Assistant Secretary for Administration & Finance under Governor
William Weld of Massachusetts. In January 1984, Mr. Kriss founded MediVision,
Inc., an ambulatory surgery center network, where he served as CEO until
December 1989. Previously, Mr. Kriss was a partner at Bain & Company, a
strategic consulting firm and, subsequently, a partner at Bain Capital, Inc., an
investment partnership. Mr. Kriss also serves as a director of Physician
Reliance Network, Inc., a physician practice management company specializing in
oncology. Mr. Kriss holds an MBA from the University of Chicago and a BA from
Amherst College.
Mr. Price joined the Company in December 1991 and has served as Chief
Financial Officer since November 1992. From 1982 to December 1991, Mr. Price was
employed by the independent public accounting firm of Arthur Andersen LLP where
he served as a manager in both the firm's commercial and small business
divisions. Previously, he managed financial matters for Codex Corporation, a
subsidiary of Motorola, Inc., and Children's Hospital of Boston. Mr. Price is a
Certified Public Accountant and holds a BS from Northeastern University.
Ms. Endyke, Vice President of Marketing and Distribution of the Company,
joined the Company in September 1993. Prior to joining the Company, Ms. Endyke
was Director of Marketing at Elan Pharma, Inc, a manufacturer and distributor of
pharmaceutical products. From 1986 to 1991, she was Director of Marketing at
MediVision, Inc. Ms. Endyke holds an MBA from Babson College and a BA from
Assumption College.
Ms. Throop, Vice President of Research and Development of the Company,
joined the Company in 1987 as Chief Statistician, and assumed responsibility for
research and development in 1994. Previously, Ms. Throop was employed by Data
General Corporation. She holds a MS in statistics from Colorado State University
and a BS from the Massachusetts Institute of Technology.
Mr. Corum, Vice President of Information Systems of the Company, joined the
Company in June 1993. Prior to joining MediQual, Mr. Corum held various
positions with the Commonwealth of Massachusetts Office of Management
Information Systems, most recently serving as its director. Previously, he was
the Assistant Commissioner for Administration and Finance for the Massachusetts
Department of Public Health. Mr. Corum holds masters degrees in linguistics and
philosophy from the Massachusetts Institute of Technology and a BA from Harvard
University.
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<PAGE> 34
Mr. Ryan has served as Chairman of the Board, and as a Director of the
Company, since its inception. Mr. Ryan, a retired executive and a private
investor, is currently a Trustee of the University of Rochester and serves as a
director of several non-profit organizations.
Dr. Brewster, a co-founder of the Company, has been a Director since its
inception. Dr. Brewster is an independent health care consultant.
Mr. Dominik has been a Director of the Company since April 1993. He has
been a General Partner of Information Partners, L.P., a venture capital
investment firm headquartered in Boston, since January 1990 and Managing
Director of Information Partners, Inc. since June 1993. In addition, he has been
Managing Director of Bain Capital, an investment partnership, since June 1993.
Mr. Dominik also serves as a director of Oacis Healthcare Holdings Corp.,
Dataware Technologies, Inc. and several privately held companies.
Mr. Jacobs, a co-founder of the Company, has been a Director since 1982.
Mr. Jacobs has been the Chairman and Chief Executive Officer of InterQual, Inc.,
a developer of health care utilization criteria and systems since 1976. Mr.
Jacobs is also a practicing attorney.
Executive officers of the Company are appointed by the Board of Directors
on an annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the executive officers
or Directors of the Company. Each Director is elected by the stockholders of the
Company on an annual basis and holds office for a one-year term and until that
Director's successor has been duly elected and qualified. Directors who are not
employed by the Company are reimbursed for expenses actually incurred in
connection with their attendance at such meetings.
EMPLOYMENT AGREEMENTS
In March 1993, the Company entered into an Executive Employment Agreement
with Mr. Kriss pursuant to which, as such agreement has been amended to date,
Mr. Kriss will receive a base salary of $202,600 for 1996 and will be eligible
to earn a cash bonus upon the achievement of certain objectives negotiated
annually. The agreement further provides that the Company will nominate Mr.
Kriss for election as a director on each occasion during the term of the
agreement when directors are to be elected. The agreement is terminable by the
Company's Board of Directors or by Mr. Kriss at any time. In the event that Mr.
Kriss' employment is terminated by the Company without cause or by Mr. Kriss for
good reason, Mr. Kriss will continue to receive all compensation and benefits
provided under the agreement for six months and any stock options and restricted
stock in the Company held by Mr. Kriss will become immediately exercisable and
vest.
In 1995, the Board of Directors of the Company concluded that it would be
in the best interests of the Company to encourage the executive officers of the
Company to remain with the Company in order to ensure the successful completion
of the development and commercialization of the Atlas System. Accordingly, in
July 1995, the Company entered into a Stay Agreement with each of Mr. Price, Ms.
Endyke, Mr. Corum and Ms. Throop. Under the Stay Agreements, the Company
guaranteed each officer a severance payment in an amount equal to such officer's
twelve-month base salary in the event that the officer's employment is
terminated other than at such officer's volition. Pursuant to the Stay
Agreements, all stock options granted prior to the execution of the Stay
Agreements to the officers under the Company's 1987 Nonqualified Stock Option
Plan immediately vested on January 3, 1996.
In January 1996, the Company entered into an agreement with Mr. Kriss,
which provided for the issuance of a promissory note for $75,000, in lieu of the
payment of Mr. Kriss' 1995 bonus in cash, which accrues interest at a rate of
10% per year (which represented the Company's then current external cost of
capital) and is payable by January 2, 1998. Under the agreement, Mr. Kriss is
eligible to receive a cash bonus of up to $200,000 and was granted an option to
purchase up to 225,000 shares of Common Stock at a price of $1.00 per share, the
then fair market value of the Common Stock. Any shares of Common Stock purchased
upon exercise of the option are subject to a right of repurchase by the Company,
which right lapses on the fifth anniversary of the date of grant. A portion of
the cash bonus will become payable, and some or all of the shares covered by the
option will no longer be subject to
32
<PAGE> 35
repurchase by the Company, in the event of a sale of at least 50% of the Company
or the closing of an initial public offering, in each case depending on a
valuation of the Company in excess of certain predetermined amounts. In the
event that the Offering results in a valuation of the Company, determined by
multiplying the number of shares outstanding after the Offering by the initial
public offering price per share, in excess of $25,000,000, Mr. Kriss will be
eligible to receive the entire bonus and none of the shares of Common Stock
underlying the option shall be subject to repurchase by the Company. Mr. Kriss
exercised this option in full on March 29, 1996. Under the agreement, in order
to induce Mr. Kriss to remain as an officer and director at least until January
1998, the Company agreed to cancel a note receivable for $201,523 from Mr. Kriss
upon the closing of a transaction based upon a valuation of the Company in
excess of $16,000,000.
EXECUTIVE COMPENSATION
Compensation Summary
<TABLE>
The following table sets forth certain information regarding the Company's
Chief Executive Officer and each of the other four most highly compensated
executive officers during the calendar year ended December 31, 1995 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
-------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS(1)($) OPTIONS (#)
- ------------------------------------------------ ---------- ----------- -------------------
<S> <C> <C> <C>
Eric A. Kriss................................... 202,600 75,000(2) 0
President and Chief Executive Officer
William C. Price................................ 98,000 14,357(3) 7,200
Vice President and Chief Financial Officer
Elizabeth A. Endyke............................. 87,000 22,886(3) 12,500
Vice President of Marketing
Diane M. Throop................................. 87,000 24,750(3) 5,000
Vice President of Research and Development
James Corum..................................... 85,500 19,271(3) 12,500
Vice President of Information Systems
<FN>
- ---------------
(1) Includes bonuses earned in 1995 but paid in 1996, and excludes bonuses paid
in 1995 for services rendered in 1994.
(2) Mr. Kriss agreed to accept his 1995 bonus in the form of a promissory note
in the principal amount of $75,000 (accruing interest at an annual interest
rate of 10%), in lieu of payment in cash.
(3) Includes the value of 8,357, 1,785, 750 and 3,571 shares of Common Stock
issued in March 1996 to Mr. Price, Ms. Endyke, Ms. Throop and Mr. Corum,
respectively, valued at fair market value.
</TABLE>
Other than cash compensation and compensation pursuant to employee benefit
plans, no executive officer received other compensation in excess of the lesser
of $25,000 or 10% of such officer's cash compensation, nor did all executive
officers as a group receive additional compensation in excess of the lesser of
$100,000 or 10% of such officers' aggregate cash compensation.
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<PAGE> 36
Option Grants in 1995
<TABLE>
The following table contains information concerning the grant of stock
options under the Company's 1987 Nonqualified Stock Option Plan to the Named
Executive Officers during the year ended December 31, 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SHARES PERCENT OF STOCK PRICE
UNDERLYING TOTAL OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------
NAME (#) FISCAL 1995 ($/SHARE)(1) DATE 5% 10%
- ---------------------- ---------- --------------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Kriss......... -- -- -- -- -- --
William C. Price...... 7,200 9% $1.00 7/12/05 $4,528 $11,475
Elizabeth A. Endyke... 12,500 16% $1.00 7/12/05 $7,861 $19,922
Diane M. Throop....... 5,000 6% $1.00 7/12/05 $3,145 $ 7,969
James Corum........... 12,500 16% $1.00 7/12/05 $7,861 $19,922
<FN>
- ---------------
(1) All options were granted at fair market value as determined by the Board of
Directors of the Company on the date of the grant. Options become
exercisable ratably over a 50-month period.
(2) This column shows the hypothetical gains or "option spreads" of the options
granted based on both the fair market value of the Common Stock for
financial reporting purposes and assumed annual compound stock appreciation
rates of 5% and 10% over the term of the options. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock
options will depend on the future performance of the Common Stock. The
assumed annual rates of stock price appreciation result in a value per share
that is significantly below the proposed public offering price range, due to
the recent significant increase in the value of the Common Stock. The
potential realizable value of the options, at an initial public offering
price of $10.00 per share and annual rates of stock price appreciation of 5%
and 10% from the date of grant through the expiration date of the options,
would be as follows: Mr. Price, $110,080 and $179,549, respectively, Ms.
Endyke, $191,112 and $311,718, respectively, Ms. Throop, $76,445 and
$121,687, respectively, and Mr. Corum, $191,112 and $311,718, respectively.
</TABLE>
The above table does not include an option to purchase 225,000 shares of
Common Stock at an exercise price of $1.00 per share granted to Mr. Kriss on
January 2, 1996, which option was exercisable in full on the grant date. Shares
of Common Stock issued upon exercise of the option are subject to repurchase by
the Company, at $1.00 per share prior to January 2, 1998 or the closing of the
earlier of either a sale of the Company or a public offering above certain
minimum thresholds. In January 1996, the Company granted options to purchase
18,750, 6,250, 18,750 and 3,750 shares of Common Stock to Mr. Price. Ms. Endyke,
Ms. Throop and Mr. Corum, respectively, at the option exercise price of $1.00
per share. In June 1996, the Company granted options to purchase 30,000, 3,250
and 10,000 shares of Common Stock to Mr. Price, Ms. Endyke and Mr. Corum,
respectively, at an exercise price of $9.00 per share.
34
<PAGE> 37
Option Exercises and Year-End Values
<TABLE>
Stock options exercised by the Named Executive Officers during the year
ended December 31, 1995 are set forth in the following table. The following
table also sets forth certain information regarding unexercised options held by
each of the Named Executive Officers as of December 31, 1995:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<CAPTION>
AGGREGATE FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eric A. Kriss.......... -- -- -- -- -- --
William C. Price....... -- -- 5,025 3,425 45,225 30,825
Elizabeth A. Endyke.... -- -- 6,150 6,350 55,350 57,150
Diane M. Throop........ -- -- 9,850 2,650 88,650 23,850
James Corum............ -- -- 6,550 5,950 58,950 53,550
<FN>
- ---------------
(1) The exercise price per share of each option is $1.00, the fair market value
per share of the Common Stock at December 31, 1995. In order to present
meaningful information, these values have been calculated based on the
assumed initial public offering price of $10.00 per share, less the exercise
price per share.
</TABLE>
On March 29, 1996, the Company issued 225,000 shares of Common Stock to Mr.
Kriss upon the exercise of an option granted pursuant to an incentive
arrangement at an exercise price of $1.00 per share.
EMPLOYEE BONUS PROGRAM
The Company has an incentive compensation program that provides for the
annual award of cash bonuses to employees based on individual and Company
performances.
STOCK OPTION PLANS
1987 Nonqualified Stock Option Plan
In May 1987, the shareholders of the Company approved the Company's 1987
Nonqualified Stock Option Plan (the "1987 Plan"), which provides for the grant
of stock options to employees, consultants and directors of the Company
(including officers and employee directors). In May 1996, the Company's Board of
Directors adopted a resolution to terminate the 1987 Plan with respect to the
grant of new options thereunder. Outstanding options granted under the 1987 Plan
continue to be governed by the terms of the 1987 Plan, as amended, and remain
exercisable in accordance with their respective terms.
The 1987 Plan, as amended, is administered by the Compensation Committee of
the Board of Directors, which has the authority to determine the time, manner
and form of payment upon exercise of an option. Options that have been granted
under the 1987 Plan become exercisable at such time or times as were determined
by the Compensation Committee or the Board of Directors at the time they were
granted and expire after a specified period that may not exceed ten years from
the date of grant. The 1987 Plan provides that options must be exercised no more
than three months following termination of employment or service as a consultant
or director, except in the event that termination is due to death or disability,
in which case the option is exercisable for a maximum of twelve months after
such termination.
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<PAGE> 38
In the event the Company is acquired by merger, consolidation or purchase
of assets or if the Company dissolves or becomes liquidated, (i) all unexercised
options granted under the 1987 Plan that by their terms would become exercisable
on or before the ninetieth day after the earlier of the date on which the
Company enters into an agreement for, or the closing of, such a merger,
consolidation or sale or the Company's adoption of a plan of dissolution or
liquidation, and (ii) fifty percent of all remaining options granted under the
1987 Plan that would otherwise become exercisable after such ninetieth day, will
become immediately exercisable.
As of June 30, 1996, 486,196 shares of Common Stock had been issued upon
the exercise of options granted under the 1987 Plan, and options to purchase an
additional 337,292 shares were outstanding (of which 171,546 were exercisable
within 60 days of June 30, 1996). Options were granted pursuant to the 1987 Plan
at exercise prices ranging from $1.00 to $4.60, all of which were repriced to
$1.00.
1996 Stock Incentive Plan
In May 1996, the Company's Board of Directors and stockholders approved the
Company's 1996 Stock Incentive Plan (the "1996 Plan"), which provides for the
grant of incentive stock options, nonqualified stock options and restricted
stock awards to employees of the Company (including officers and employee
directors). A maximum of 1,500,000 shares are currently reserved for issuance
pursuant to the 1996 Plan. This maximum number of shares will increase,
effective as of January 1, 1998 and each January 1 thereafter during the term of
the plan, by an additional number of shares of Common Stock equal to ten percent
of the difference between (i) the total number of shares of Common Stock and
Common Stock equivalents issued and outstanding as of the close of business on
December 31 of the preceding year and (ii) the total number of shares of Common
Stock and Common Stock equivalents issued and outstanding as of the close of
business on December 31 of the year prior to such preceding year. No participant
in the 1996 Plan may in any year be granted stock options or awards with respect
to more than 500,000 shares of Common Stock, and no more than an aggregate of
3,000,000 shares of Common Stock may be issued pursuant to the exercise of
incentive stock options granted under the 1996 Plan. As of June 30, 1996, 53,500
options had been granted under the 1996 Plan, of which 18,250 were exercisable.
The 1996 Plan is administered by the Compensation Committee of the Board of
Directors, which has the authority to determine which eligible individuals are
to receive options or restricted stock awards, the terms of such options or
awards, including the number of shares, exercise or purchase prices and times at
which the options become and remain exercisable or restricted stock vests, the
time, manner and form of payment upon exercise of an option and the status of
options as incentive or nonqualified stock options under federal income tax
laws. The exercise price of options granted under the 1996 Plan may not be less
than 85% of the fair market value of a share of Common Stock on the date of
grant (100% in the case of incentive stock options). The options become
exercisable at such time or times as are determined by the Compensation
Committee and expire after a specified period that may not exceed ten years.
Options must be exercised no more than three months following termination of
employment, except in the event that termination is due to death or disability,
in which case the option is exercisable for a maximum of twelve months after
such termination.
Each option granted to an officer of the Company, subject to the
short-swing profit restrictions of the Federal securities laws, may provide, and
each outstanding option to an officer as of the date of this Prospectus does
provide, that upon the acquisition of 50% or more of the outstanding Common
Stock pursuant to a hostile tender offer, such option, if outstanding for at
least six months, will automatically be canceled in exchange for a cash
distribution to the officer based upon the difference between the tender offer
price and the exercise price of the option.
In the event the Company is acquired by merger, consolidation or purchase
of assets, all outstanding options granted under the 1996 Plan will accelerate
to the extent not assumed by the acquiring entity or replaced by comparable
options. The Compensation Committee also has discretion to provide for the
acceleration of one or more outstanding options under the 1996 Plan and the
vesting
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<PAGE> 39
of unvested shares held as restricted stock awards upon the occurrence of
certain changes in control. Such accelerated vesting may be conditioned upon
subsequent termination of the affected optionee's service.
The Compensation Committee has the authority to effect, from time to time,
the cancellation of outstanding options under the 1996 Plan in return for the
grant of new options for the same or a different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock on
the new grant date.
The Board may amend or modify the 1996 Plan at any time subject to the
rights of holders of outstanding options on the date of amendment or
modification. Stockholder approval is required for any amendment that would
change the eligibility requirements of the 1996 Plan, extend the term of the
1996 Plan or increase the number of shares subject to grant as options or
restricted stock awards under the 1996 Plan. The 1996 Plan will terminate on May
28, 2006.
1996 Employee Stock Purchase Plan
In May 1996, the Company's Board of Directors and stockholders approved the
1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which enables
eligible employees to acquire shares of the Company's Common Stock through
payroll deductions. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. Offerings under the Stock Purchase Plan are planned to
commence on February 1 and August 1 of each year and to end on July 31 and
January 31 of each year. The initial offering period is intended to commence on
the effective date of the registration statement relating to this Offering and
to end on January 31, 1997, unless otherwise determined by the Board. During
this offering period, an eligible employee may select a rate of payroll
deduction of up to 15% of his or her compensation up to an aggregate total
payroll deduction not to exceed $12,500 in any offering period. The purchase
price for the Common Stock purchased under the Stock Purchase Plan is 85% of the
lesser of the fair market value of the shares on the first day or the last day
of the offering period. A total of 300,000 shares of Common Stock have been
reserved for issuance under the Stock Purchase Plan.
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CERTAIN TRANSACTIONS
CERTAIN TRANSACTIONS
At the closing of this offering, William D. Ryan, a director of the
Company, and an entity related to Mr. Ryan will receive cash proceeds of
$3,569,083 from the mandatory redemption by the Company of all of the
outstanding shares of its Class A Preferred Stock, at a redemption price of
$10,000 per share plus accrued dividends of approximately $5,586 per share
(assuming redemption as of June 30, 1996), representing an annual rate of return
of 10%.
The Company has entered into certain employment and other agreements with
Eric A. Kriss, the President and Chief Executive Officer of the Company,
providing for the payment of salary and bonuses, the grant of stock options and
related matters. See "Management -- Employment Agreements."
In March 1993, Mr. Kriss issued a promissory note to the Company in the
aggregate principal amount of $201,523 (the "Note"). The Note, which is recourse
to Mr. Kriss and is also secured by certain shares of the Company's Common Stock
held by Mr. Kriss, bears interest at an annual rate of 3.92% (the short-term
federal interest rate in effect on the date the Note was issued) and became
payable on March 29, 1996, however the Company has not chosen to collect such
amount to date. In accordance with the terms of a letter agreement between the
Company and Mr. Kriss entered into in January 1996, the Note will be cancelled
upon the closing of a public offering of the Company's Common Stock based on a
valuation of the Company equal to or in excess of $16,000,000. Under the
agreement, in order to induce Mr. Kriss to remain as an officer and director at
least until January 1998, the Company agreed to cancel the Note upon the closing
of a transaction based upon a valuation of the Company in excess of $16,000,000.
In addition, in January 1996, the Company issued Mr. Kriss a note for $75,000 in
lieu of Mr. Kriss' 1995 cash bonus, which accrues interest at a rate of 10% per
year (which represented the Company's then current external cost of capital) and
is payable by January 2, 1998. See "Management -- Employment Agreements."
OTHER RELATIONSHIPS
David Dominik, a director of the Company, is a general partner of
Information Partners Capital Fund, L.P. and entities related thereto, which
collectively own greater than 5% of the Common Stock.
The Company has a policy that all transactions between the Company and its
officers, directors and affiliates must be on terms no less favorable than those
that could be obtained from unrelated third parties, and must be approved by a
majority of the disinterested members of the Company's Board of Directors.
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<PAGE> 41
<TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of June 30, 1996, and as adjusted to reflect the sale of 2,200,000 shares of
Common Stock offered hereby, by (i) each person or entity known to the Company
to beneficially own 5% or more of the outstanding shares of Common Stock, (ii)
each of the Company's directors, (iii) each of the Company's Named Executive
Officers and (iv) all directors and executive officers of the Company as a
group.
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------
PRIOR TO OFFERING(1) AFTER OFFERING(1)
--------------------- -----------------
NUMBER PERCENT PERCENT
--------- ------- -----------------
<S> <C> <C> <C>
5% Stockholders
TA Associates(2)....................................... 1,139,934 18.5% 13.6%
125 High Street
Boston, MA 02110
David Dominik(3)....................................... 1,054,774 17.4% 12.8%
Information Partners, L.P.(4).......................... 1,054,774 17.4% 12.8%
2 Copley Place
Boston, MA 02116
William Ryan(5)........................................ 855,833 14.1% 10.4%
2 Woodbury Place
Rochester, NY 14618
Eric A. Kriss(6)....................................... 551,904 9.1% 6.7%
c/o MediQual Systems, Inc.
1900 West Park Drive
Westborough, MA 01581
Charles M. Jacobs(7)................................... 543,152 9.0% 6.6%
c/o InterQual, Inc.
293 Boston Post Road
Marlborough, MA 01752
Other Directors and Named Executive Officers
Alan C. Brewster, M.D.(8).............................. 112,500 1.9% 1.4%
William C. Price(9).................................... 32,421 * *
James Corum(10)........................................ 16,997 * *
Elizabeth A. Endyke(11)................................ 18,950 * *
Diane M. Throop(12).................................... 15,875 * *
All Directors and executive officers as a group
(9 persons)(13)...................................... 3,202,406 52.3% 38.4%
<FN>
- ---------------
* Denotes less than one percent (1%)
(1) The number of shares of Common Stock deemed outstanding prior to this
offering includes (i) 3,880,776 shares of Common Stock outstanding as of
June 30, 1996 and (ii) an aggregate of 2,183,530 shares of Common Stock
issuable upon the conversion of the Class B and Class C Convertible
Preferred Stock. The number of shares outstanding after this offering
includes the 2,200,000 shares of Common Stock offered hereby.
(2) Consists of an aggregate of 1,036,552 shares of Common Stock and
immediately exercisable warrants to acquire 103,382 shares of Common Stock
held by the following persons related to TA Associates (shares/warrants):
Advent V Limited Partnership (609,664/60,806); Advent Atlantic & Pacific
Limited Partnership (291,775/29,101); Advent Industrial Limited Partnership
(97,258/9,700); TA Associates V Limited Partnership (23,402/2,334); and TA
Venture Investors (14,453/1,441).
(3) Consists of an aggregate of 961,778 shares of Common Stock held by
Information Partners Capital Fund, L.P. and certain related persons. Mr.
Dominik is a general partner of Information Partners Capital Fund, L.P.
and, as such, may be deemed to beneficially own all such shares. Mr.
Dominik
</TABLE>
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<PAGE> 42
disclaims beneficial ownership of such shares, except to the extent of his
proportionate pecuniary interest therein. The address of Mr. Dominik is c/o
Information Partners, L.P., 2 Copley Place, Boston, Massachusetts 02116.
(4) Includes an aggregate of 962,947 shares of Common Stock held by the
following persons related to Information Partners, L.P.; Information
Partners Capital Fund, L.P. (890,662); BCIP Trust Associates, L.P. (37,285)
and BCIP Associates (35,000). Does not include options of Information
Partners Capital Fund, L.P. to purchase 50,000 and 75,027 shares of Common
Stock held by Dr. Brewster and Mr. Jacobs, respectively, pursuant to option
agreements between Information Partners Capital Fund, L.P. and each of Dr.
Brewster and Mr. Jacobs.
(5) Includes 557,500 shares of Common Stock held by NAYR Enterprises, a limited
partnership of which Mr. Ryan is a general partner. Mr. Ryan disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(6) Includes 12,500 shares of Common Stock held in trust for Mr. Kriss' minor
children. Mr. Kriss disclaims beneficial ownership of such shares.
(7) Includes 61,875 shares of Common Stock held by Mr. Jacob's wife, 65,000
shares held in trust for Mr. Jacobs' children and 75,027 shares of Common
Stock held by InterQual, Inc., a corporation of which Mr. Jacobs is the
majority shareholder. Also includes 75,027 shares of Common Stock subject
to transfer to Information Partners Capital Fund, L.P. pursuant to an
option agreement between the parties. Mr. Jacobs disclaims beneficial
ownership of the shares held by his wife and held in trust for his
children. Mr. Jacobs also disclaims beneficial ownership of the shares held
by InterQual, Inc., except to the extent of his pecuniary interest therein.
(8) Includes 50,000 shares of Common Stock subject to transfer to Information
Partners Capital Fund, L.P. pursuant to an option agreement between the
parties.
(9) Includes 19,475 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(10) Includes 13,425 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(11) Includes 16,625 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(12) Includes 15,125 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
(13) Includes 64,650 shares issuable pursuant to options exercisable within 60
days after June 30, 1996.
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<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.001 per share, and 7,000,000 shares of Preferred
Stock, par value $.01 per share.
COMMON STOCK
As of June 30, 1996, there were 6,064,306 shares of Common Stock
outstanding and held of record by 145 stockholders, after giving effect to the
conversion of all outstanding shares of Series B Preferred Stock and Series C
Preferred Stock upon the closing of the Offering. Based upon the number of
shares of Common Stock outstanding as of that date and giving effect to the
issuance of the 2,200,000 shares of Common Stock offered hereby (assuming no
exercise of the underwriters' over-allotment option), there will be 8,264,306
shares of Common Stock outstanding upon the closing of the Offering.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities, subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock that the Company may
designate and issue in the future. Upon the closing of the Offering, there will
be no shares of Preferred Stock outstanding.
In addition, certain of the Company's stockholders hold warrants to
purchase an aggregate of 156,918 shares of Common Stock at an exercise price of
$.80 per share (such number of shares and exercise price being subject to
adjustment upon the occurrence of any consolidation or merger involving the
Company or in the event of any reclassification, subdivision or combination of,
or dividend with respect to, the Common Stock). Such warrants were issued by the
Company in April 1993 and can be exercised, in whole or in part, at any time
prior to their expiration in April 2003 by payment of the exercise price
therefor, by delivery of shares of Common Stock with a fair market value equal
to such exercise price or by net exercise.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, from time to time to
issue up to an aggregate of 7,000,000 shares of Preferred Stock in one or more
series and to fix or alter the designations, preferences and rights, and any
qualifications, limitations or restrictions thereof, of the shares of each such
series, including the number of shares constituting any such series and the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices and
liquidation preferences thereof. The issuance of any such Preferred Stock may
have the effect of delaying, deferring or preventing a change of control of the
Company. The Company has no present plans to issue any such shares of Preferred
Stock.
OUTSTANDING REGISTRATION RIGHTS
The Company is party to a Registration Rights Agreement, dated as of April
27, 1993 (the "Registration Agreement"), with certain of its stockholders,
including certain affiliates of directors of the Company (the "Registration
Stockholders"), who collectively hold approximately 2,183,530 shares of Common
Stock and warrants to purchase an additional 156,918 shares of Common Stock
(collectively, the "Registrable Shares") as of June 30, 1996. Pursuant to the
Registration Agreement, the Company has agreed, in the event the Company
proposes to register any of its securities under the
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<PAGE> 44
Securities Act in connection with a public offering of such securities for cash,
whether for its own account or otherwise at any time, to provide such
Registration Stockholders or their permitted transferees with notice of such
registration and an opportunity to include the Registrable Shares therein,
subject to certain conditions and limitations ("piggyback registration"). In
addition, the holders of fifty percent or more of one of two classes of
Registrable Shares may on up to two occasions, subject to certain conditions and
limitations, require the Company, whether or not the Company proposes to
register its Common Stock for sale, to register all or part of their Registrable
Shares for sale to the public under the Securities Act. The Registration
Stockholders may also require the Company to register all or part of their
Registrable Shares on Form S-3 under the Securities Act, or any similar form, if
the Company then qualifies for use of such form, subject to certain conditions
and limitations. The Company is obligated to pay all the expenses (other than
underwriting discounts) for each registration of Common Stock undertaken
pursuant to the Registration Agreement. Holders of a majority of each class of
the Registrable Shares required to effect a waiver of their rights to have their
Registrable Shares included in the registration statement of which this
Prospectus is a part have waived such rights to participate in this Offering. An
aggregate of 2,340,448 Registrable Shares will remain outstanding after this
Offering. Additionally, a former product development partner of the Company and
one of its affiliates have piggyback registration rights with respect to an
aggregate of 173,638 shares of Common Stock issued upon exercise of an option
and conversion of a debenture, each of which were issued by the Company in 1991
in connection with the settlement of a dispute between the parties. These
registration rights are not exercisable in connection with this Offering.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
The Company's Amended and Restated By-Laws (the "By-Laws") provide that for
nominations for the Board of Directors or for other business to be properly
brought by a stockholder before a meeting of stockholders, the stockholder must
first have given timely notice thereof in writing to the Secretary of the
Company. To be timely, a notice of nominations or other business to be brought
before an annual meeting must be delivered not less than 120 days nor more than
150 days prior to the first anniversary of the date of the proxy statement
delivered to stockholders in connection with the preceding year's annual meeting
or, if the date of the annual meeting is more than 30 days before or more than
60 days after such anniversary, or if no proxy statement was delivered to
stockholders in connection with the preceding year's annual meeting, such notice
must be delivered not earlier than 90 days prior to such annual meeting and not
later than the later of (i) 60 days prior to the annual meeting or (ii) 10 days
following the date on which public announcement of the date of such annual
meeting is first made by the Company. With respect to special meetings, notice
must generally be delivered not more than 90 days prior to such meeting and not
later than the later of 60 days prior to such meeting or 10 days following the
day on which public announcement of such meeting is first made by the Company.
The notice must contain, among other things, certain information about the
stockholder delivering the notice and, as applicable, background information
about each nominee or a description of the proposed business to be brought
before the meeting.
The Company's Amended and Restated Certificate of Incorporation (the
"Charter") empowers the Board of Directors, when considering a tender offer or
merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to stockholders. Such factors may include
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<PAGE> 45
(i) comparison of the proposed consideration to be received by stockholders in
relation to the then current market price of the Company's capital stock, (ii)
the estimated current value of the Company in a freely negotiated transaction
and the estimated future value of the Company as an independent entity, and
(iii) the impact of such a transaction on the employees, suppliers and customers
of the Company and its effect on the communities in which the Company operates.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company.
The Charter provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at duly called annual or
special meeting of the stockholders, and that special meetings may be called
only by the Chairman of the Board of Directors, a majority of the Board of
Directors or the President of the Company. These provisions could have the
effect of delaying until the next annual stockholders meeting stockholder
actions that are favored by the holders of a majority of the outstanding voting
securities of the Company. These provisions may also discourage another person
or entity from making a tender offer for the Common Stock because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The DGCL provides that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or by-laws, unless the corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage. The
Charter requires the affirmative vote of the holders of at least 67% of the
outstanding voting stock of the Company to amend or repeal any of the foregoing
Charter provisions, or to reduce the number of authorized shares of Common Stock
and Preferred Stock. Such 67% vote is also required to amend or repeal any of
the foregoing By-Law provisions. The By-Laws may also be amended or repealed by
a majority vote of the Board of Directors. Such 67% stockholder vote would be in
addition to any separate class vote that might in the future be required
pursuant to the terms of any Preferred Stock that might be outstanding at the
time any such amendments are submitted to stockholders.
See "Risk Factors -- Effect of Anti-Takeover Provisions; Availability of
Preferred Stock for Issuance."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Charter contains certain provisions permitted under the DGCL relating
to the liability of directors. These provisions eliminate a director's personal
liability for monetary damages resulting from a breach of fiduciary duty, except
in certain circumstances involving certain wrongful acts, such as the breach of
a director's duty of loyalty or acts or omissions that involve intentional
misconduct or a knowing violation of law. These provisions do not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's fiduciary duty. These provisions will not alter a director's
liability under federal securities laws. The Company's Charter and By-Laws also
contain provisions indemnifying the directors and officers of the Company to the
fullest extent permitted by the DGCL. The Company believes that these provisions
will assist the Company in attracting and retaining qualified individuals to
serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have a total of 8,264,306
shares of Common Stock outstanding. Of these shares, the 2,200,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
registration under the Securities Act by persons other than "affiliates" of the
Company, as defined under the Securities Act. The remaining 6,064,306 shares of
Common Stock outstanding will be "restricted securities" as that term is defined
by Rule 144 as promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of the
Company, 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 (approximately 82,643 shares upon completion of
the Offering) or the average weekly trading volume of the Common Stock 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 the shares proposed to be sold for at least three
years, would be entitled to sell such shares under Rule 144(k) without regard to
the requirements described above.
Under Rule 144 (and subject to the conditions thereof), approximately
2,847,921 restricted securities (including shares of Common Stock issuable upon
the exercise of currently exercisable warrants and options to purchase Common
Stock which are exercisable within 60 days of June 30, 1996) will become
eligible for sale upon completion of the Offering, of which 2,542,293 are
subject to lock-up restrictions as described below, and an additional
approximately 3,142,311 restricted securities (including shares of Common Stock
issuable upon the exercise of currently exercisable warrants and options to
purchase Common Stock which are exercisable within 60 days of June 30, 1996)
will become eligible for sale 90 days after the Offering, of which 2,828,313
shares are subject to lock-up restrictions as described below. The Company's
executive officers and directors and certain other stockholders of the Company
(who in the aggregate will hold 5,781,841 shares of Common Stock that constitute
restricted securities upon completion of the Offering, including shares of
Common Stock issuable upon the exercise of currently exercisable warrants and
options to purchase Common Stock which are exercisable within 60 days of June
30, 1996) have agreed that they will not directly or indirectly, offer, sell,
offer to sell, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, grant of any options to purchase or
sale or disposition) of any shares of Common Stock or other capital stock of the
Company, or any securities convertible into, or exercisable, or exchangeable
for, any shares of Common Stock or other capital stock of the Company without
the prior written consent of Hambrecht and Quist LLC, on behalf of the
Underwriters, for a period of 180 days from the date of this Prospectus.
Hambrecht & Quist LLC has no present intention to release any of the shares from
the Lock-up Agreements. It has been the practice of Hambrecht & Quist LLC to
consider releasing any such shares from lock-up agreements based on a variety of
factors, including the market price of the Common Stock, the volume of shares
traded and other market conditions.
The Company has granted certain warrants to purchase shares of Common
Stock. As of June 30, 1996, warrants to purchase 156,918 shares of Common Stock
at an exercise price of $.80 per share, and warrants to purchase 26,729 shares
of Common Stock at an exercise price of $2.64 per share, were outstanding. The
warrants to purchase 26,729 shares of Common Stock, at an exercise price of
$2.64 per share, will be redeemed by the Company upon the closing of the
Offering for $178,015 (assuming an initial public offering price of $10.00 per
share).
As of June 30, 1996, options to purchase a total of 283,792 and 53,500
shares of Common Stock pursuant to the Company's 1987 Nonqualified Stock Option
Plan and the Company's 1996 Stock Incentive Plan, respectively, and several
stock option agreements were outstanding with exercise
44
<PAGE> 47
prices ranging from $1.00 to $9.00 per share, of which options to purchase
171,546 shares of Common Stock were exercisable within 60 days of June 30, 1996.
As of the date of this Prospectus, an additional 1,746,500 shares of Common
Stock were available for future option grants under the 1996 Plan and the Stock
Purchase Plan. See "Management -- Stock Option Plans" and Note 7 to Financial
Statements. A total of 302,206 shares of Common Stock subject to options and
warrants held by officers, directors and certain stockholders are subject to
lockup agreements in connection with the Offering. See "Underwriting. "
Certain of the Company's stockholders holding in the aggregate 2,357,168
shares of Common Stock and warrants to purchase an additional 156,918 shares of
Common Stock have demand and/or piggyback registration rights to require the
Company to file one or more registration statements to effect the registration
under the Securities Act of such shares, which would permit such holders to
resell such shares without complying with Rule 144. Registration and sale of
such shares could have an adverse effect on the trading price of the Common
Stock. The holders of such shares of Common Stock and warrants to purchase
Common Stock have waived their rights to have such shares included in the
registration statement of which this Prospectus is a part.
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by affiliates, beginning
90 days after the date of this Prospectus, subject to all provisions of Rule 144
except its two-year minimum holding period. The Company intends to file one or
more registration statements on Form S-8 under the Securities Act to register
shares of Common Stock subject to stock options.
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Risk Factors -- Shares Eligible for Future Sale."
45
<PAGE> 48
UNDERWRITING
<TABLE>
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Volpe, Welty & Company, have severally agreed to purchase from the Company
the following respective numbers of shares of Common Stock:
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.....................................................
Volpe, Welty & Company....................................................
Total................................................................... 2,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and its
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. The Representatives of the Underwriters have informed the Company that
the Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority. After the initial public offering of the
shares, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 330,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
46
<PAGE> 49
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Certain existing stockholders of the Company, including the Company's
executive officers and directors, who will own in the aggregate 5,781,841 shares
of Common Stock after the Offering, have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, directly or indirectly offer,
sell, contact to sell, make any short sale of, pledge, grant any option to
purchase or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them during the 180-day period following
the date of this Prospectus. The Company has agreed that it will not, without
the prior written consent of Hambrecht & Quist LLC, directly or indirectly
offer, sell, contract to sell, make any short sale, pledge or otherwise dispose
of any shares of Common Stock or any securities exchangeable for or convertible
into shares of Common Stock during the 180-day period, following the date of
this Prospectus, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its stock option and employee stock
purchase plans and under currently outstanding options and warrants. Sales of
such shares in the future could adversely affect the market price of the Common
Stock. Hambrecht & Quist LLC may, in its sole discretion, release any of the
shares subject to the lock-up at any time without notice. Hambrecht & Quist LLC
has no present intention to release any of the shares from the Lock-up
Agreements. It has been the practice of Hambrecht & Quist LLC to consider
releasing any such shares from lock-up agreements based on a variety of factors,
including the market price of the Common Stock, the volume of shares traded and
other market conditions.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price will be
prevailing market and economic conditions, revenues and earnings of the Company,
market valuations of other companies engaged in activities similar to those of
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's management
and other factors deemed relevant. Each of the Representatives has indicated
that it intends to make a market in the Company's Common Stock following this
Offering. However, none of the Representatives is required to make a market and
there can be no assurance that any Representative will continue to do so or that
an active public trading market will develop or be sustained.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Bingham, Dana & Gould LLP. Victor J. Paci, a partner of
Bingham, Dana & Gould LLP, is Assistant Secretary of the Company. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Hale and Dorr, Boston, Massachusetts.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
47
<PAGE> 50
GLOSSARY
ATLAS SYSTEM............... MediQual's proprietary CIM system, comprised of
five major components (a standardized retrospective
data repository, proprietary benchmarking
databases, embedded clinical knowledge,
comprehensive provider databases, and on-line
analytical processing) and consisting of three
integrated modules (Atlas Market View, Atlas
Resources, and Atlas Outcomes).
ATLAS MARKET VIEW........ A module of the Atlas System that provides
competitive assessments of physicians and hospitals
on their relative efficiency, effectiveness, and
appropriateness of care.
ATLAS RESOURCES.......... A module of the Atlas System that provides
management assessments of the efficiency and
resource utilization of clinical processes and
physicians.
ATLAS OUTCOMES........... A module of the Atlas System that expands on Atlas
Resources by incorporating additional databases and
applications, enabling comprehensive internal
assessments of clinical processes and providers.
CD-ROM..................... A storage medium for digital information.
CIM SERVICES............... Clinical Information Management services, including
analytic services for the management of various
diseases, data abstraction services, and
development of custom databases, that are provided
by MediQual to providers, payors, and suppliers.
CIM SYSTEM................. Clinical Information Management system that
collects patient encounter data from transaction
systems and paper-based records and facilitates
retrospective analysis.
ICD-9 CODING SYSTEM........ A coding system for diagnoses and medical
procedures.
MEDISGROUPS................ The initial version of MediQual's CIM system, which
was introduced in 1987 and discontinued in 1996.
OLTP SYSTEM................ On-line transaction processing system that
facilitates individual transactions, usually in
real time.
UB-92 DATA................. A Uniform Billing dataset, amended in 1992, that
includes ICD-9 codes, patient and physician
demographics, and payor data.
48
<PAGE> 51
MEDIQUAL SYSTEMS, INC.
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants............................................. F-2
Balance Sheets at December 31, 1994 and 1995 and June 30, 1996 (unaudited)........... F-3
Statements of Operations for the three years ended December 31, 1995 and for the
three months ended June 30, 1995 and 1996 (unaudited).............................. F-4
Statement of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the
six years ended December 31, 1995 and for the six months ended June 30, 1996
(unaudited)........................................................................ F-5
Statements of Cash Flows for the three years ended December 31, 1995 and for the six
months ended June 30, 1995 and 1996 (unaudited).................................... F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MediQual Systems, Inc.:
We have audited the accompanying balance sheets of MediQual Systems, Inc.
(a Delaware corporation) as of December 31, 1994 and 1995, and the related
statements of operations, redeemable preferred stock and stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 MediQual Systems, Inc. as of
December 31, 1994 and 1995, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 26, 1996 (except for the
matters discussed in Note 9 as
to which the date is June 19, 1996)
F-2
<PAGE> 53
MEDIQUAL SYSTEMS, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
DECEMBER 31, PROFORMA
--------------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 1,225,692 $ 1,006,477 $ 1,679,120 $ 1,679,120
Accounts receivable, less reserve for doubtful
accounts of $175,000 in 1994, $200,000 in 1995
and $175,000 in 1996............................ 1,146,917 1,025,358 1,453,124 1,453,124
Refundable income taxes........................... 211,000 -- -- --
Prepaid expenses.................................. 397,877 115,725 136,866 136,866
------------ ------------ ------------ ------------
Total current assets..................... 2,981,486 2,147,560 3,269,110 3,269,110
------------ ------------ ------------ ------------
Property and equipment, net....................... 1,687,611 950,402 796,335 796,335
Other assets...................................... 195,560 132,753 119,299 119,299
------------ ------------ ------------ ------------
$ 4,864,657 $ 3,230,715 $ 4,184,744 $ 4,184,744
============ ============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.................................. $ 372,446 $ 389,231 $ 418,401 $ 418,401
Accrued employee compensation and benefits........ 1,198,028 1,121,963 872,301 872,301
Accrued expenses.................................. 710,364 588,014 574,502 574,502
Deferred revenue.................................. 1,332,913 1,058,606 959,515 959,515
Current portion of long-term debt................. 482,829 414,172 156,747 156,747
------------ ------------ ------------ ------------
Total current liabilities................ 4,096,580 3,571,986 2,981,466 2,981,466
------------ ------------ ------------ ------------
Long-term debt, less current portion.............. 267,377 605,223 101,850 101,850
------------ ------------ ------------ ------------
Class A Redeemable preferred stock, nonvoting, no
par value -- 500 shares authorized, 229 shares
issued and outstanding (at redemption value).... 3,423,096 3,473,190 3,569,083 3,569,083
Class B Redeemable convertible preferred stock,
$.01 par value -- 6,500,000 shares authorized,
6,316,726 shares issued and outstanding (at
redemption value), no shares outstanding pro
forma........................................... 5,204,880 5,204,880 5,204,880 --
Class C Redeemable convertible preferred stock,
$.01 par value -- 2,100 shares authorized, 2,022
shares issued and outstanding (at redemption
value), no shares outstanding pro forma......... 2,358,043 2,602,839 2,734,607 --
------------ ------------ ------------ ------------
Total redeemable preferred stock......... 10,986,019 11,280,909 11,508,570 3,569,083
------------ ------------ ------------ ------------
Commitments (Notes 4 and 8)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value -- 7,000,000
shares authorized, no shares issued........... -- -- -- --
Common stock, $.001 par value -- 30,000,000 shares
authorized, 3,508,568, 3,523,662 shares and
3,880,776 shares issued at December 31, 1994 and
1995 and June 30, 1996; 6,064,306 shares issued
pro forma....................................... 3,508 3,523 3,881 6,064
Additional paid-in capital........................ 1,468,115 1,483,194 2,135,898 10,073,202
Accumulated deficit............................... (11,695,705) (13,452,883) (12,326,185) (12,326,185)
Treasury stock, at cost, 21,451 shares at December
31, 1994 and 1995 and 6,987 shares at June 30,
1996............................................ (59,714) (59,714) (19,213) (19,213)
Subscription receivable........................... (201,523) (201,523) (201,523) (201,523)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)..... (10,485,319) (12,227,403) (10,407,142) (2,467,655)
------------ ------------ ------------ ------------
$ 4,864,657 $ 3,230,715 $ 4,184,744 $ 4,184,744
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 54
<TABLE>
MEDIQUAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
System license fees........ $13,096,573 $11,609,205 $ 9,804,895 $ 4,786,910 $4,344,822
CIM services............... -- 475,166 1,168,944 500,308 1,362,304
----------- ----------- ----------- ----------- ----------
13,096,573 12,084,371 10,973,839 5,287,218 5,707,126
----------- ----------- ----------- ----------- ----------
Operating expenses:
Cost of revenues and
customer support........ 2,851,634 2,997,535 2,444,884 1,328,453 931,220
Marketing and
distribution............ 2,504,999 1,927,657 1,970,522 1,113,983 489,822
Research and development... 4,152,334 3,625,785 4,012,870 2,189,296 1,328,059
General and
administrative.......... 2,197,516 3,401,164 3,357,912 1,726,658 1,619,054
Restructuring charges
(credit)................ 1,623,157 -- 580,000 -- (101,784)
----------- ----------- ----------- ----------- ----------
Total operating
expenses......... 13,329,640 11,952,141 12,366,188 6,358,390 4,266,371
----------- ----------- ----------- ----------- ----------
Operating income (loss)...... (233,067) 132,230 (1,392,349) (1,071,172) 1,440,755
Interest expense............. 39,095 46,535 89,161 34,990 44,353
Interest (income) and other
(income) expense, net...... (94,462) (219,685) (19,222) (13,788) (142,642)
----------- ----------- ----------- ----------- ----------
Income (loss) before income
taxes...................... (177,700) 305,380 (1,462,288) (1,092,374) 1,539,044
Provision for income taxes... 8,000 22,500 -- -- 184,685
----------- ----------- ----------- ----------- ----------
Net income (loss)............ $ (185,700) $ 282,880 $(1,462,288) $(1,092,374) $1,354,359
=========== =========== =========== =========== ==========
Accretion of preferred stock
dividends.................. 204,971 392,091 294,890 119,376 227,661
----------- ----------- ----------- ----------- ----------
Net income (loss) applicable
to common stockholders..... $ (390,671) $ (109,211) $(1,757,178) $(1,211,750) $1,126,698
=========== =========== =========== =========== ==========
Pro forma net income (loss)
per share (unaudited)...... $ (0.21) $ .20
Pro forma weighted average
shares outstanding
(unaudited)................ 6,466,718 6,981,819
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 55
MEDIQUAL SYSTEMS, INC.
<TABLE>
STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
REDEEMABLE STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE --------------------------------
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- ------------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ---------- ------------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992....... 229 $3,184,077 6,316,726 $5,204,880 2,851,150 $2,851 $1,008,918
Sale of Class C preferred
stock, net of issuance costs
of $137,237.................. -- -- 2,022 2,000,000 -- -- (137,237)
Sale of common stock........... -- -- -- -- 333,229 333 270,045
Exercise of stock options...... -- -- -- -- 202,151 202 201,948
Net loss....................... -- -- -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 68,700 -- 136,271 -- -- --
--- ---------- --------- ---------- ---------- ------ ----------
BALANCE, DECEMBER 31, 1993....... 229 3,252,777 6,318,748 7,341,151 3,386,530 3,386 1,343,674
Exercise of stock options and
warrants..................... -- -- 122,038 122 124,441
Purchase of treasury stock..... -- -- -- -- --
Net income..................... -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 170,319 -- 221,772 -- -- --
--- ---------- --------- ---------- ---------- ------ ----------
BALANCE, DECEMBER 31, 1994....... 229 3,423,096 6,318,748 7,562,923 3,508,568 3,508 1,468,115
Exercise of stock options...... -- -- 15,094 15 15,079
Net loss....................... -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 50,094 -- 244,796 -- -- --
--- ---------- --------- ---------- ---------- ------ ----------
BALANCE, DECEMBER 31, 1995....... 229 3,473,190 6,318,748 7,807,719 3,523,662 3,523 1,483,194
Exercise of stock options...... -- -- -- -- 305,044 306 400,738
Exercise of convertible debt... 52,070 52 251,966
Sale of treasury stock......... -- -- -- -- --
Net income..................... -- -- -- -- -- -- --
Accretion of preferred stock
dividends.................... -- 95,893 -- 131,768 -- -- --
--- ---------- --------- ---------- ---------- ------ ----------
BALANCE, JUNE 30, 1996
(unaudited).................... 229 $3,569,083 6,318,748 $7,939,487 3,880,776 $3,881 $2,135,898
=== ========== ========= ========== ========== ====== ==========
<CAPTION>
TREASURY STOCK
ACCUMULATED ------------------- SUBSCRIPTION
DEFICIT SHARES AMOUNT RECEIVABLE TOTAL
------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1992....... $(11,195,823) -- $ -- $ -- $(10,184,054)
Sale of Class C preferred
stock, net of issuance costs
of $137,237.................. -- -- -- -- (137,237)
Sale of common stock........... -- -- -- (201,523) 68,855
Exercise of stock options...... -- -- -- -- 202,150
Net loss....................... (185,700) -- -- -- (185,700)
Accretion of preferred stock
dividends.................... (204,971) -- -- -- (204,971)
------------ -------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1993....... (11,586,494) -- -- (201,523) (10,440,957)
Exercise of stock options and
warrants..................... -- -- (59,714) -- 124,563
Purchase of treasury stock..... -- (21,451) -- -- (59,714)
Net income..................... 282,880 -- -- -- 282,880
Accretion of preferred stock
dividends.................... (392,091) -- -- -- (392,091)
------------ -------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1994....... (11,695,705) (21,451) (59,714) (201,523) (10,485,319)
Exercise of stock options...... -- -- -- -- 15,094
Net loss....................... (1,462,288) -- -- -- (1,462,288)
Accretion of preferred stock
dividends.................... (294,890) -- -- -- (294,890)
------------ -------- -------- ---------- ------------
BALANCE, DECEMBER 31, 1995....... (13,452,883) (21,451) (59,714) (201,523) (12,227,403)
Exercise of stock options...... -- -- -- -- 401,044
Exercise of convertible debt... 252,018
Sale of treasury stock......... -- 14,464 40,501 -- 40,501
Net income..................... 1,354,359 -- -- -- 1,354,359
Accretion of preferred stock
dividends.................... (227,661) -- -- -- (227,661)
------------ -------- -------- ---------- ------------
BALANCE, JUNE 30, 1996
(unaudited).................... $(12,326,185) (6,987) $(19,213) $ (201,523) $(10,407,142)
============ ======== ======== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 56
MEDIQUAL SYSTEMS, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (185,700) $ 282,880 $(1,462,288) $(1,092,374) $1,354,359
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation.................................. 324,564 700,074 786,022 393,011 242,095
Non-cash portion of restructuring charges
(credit) (Note 7)........................... 1,106,533 -- 132,485 -- (101,784)
Changes in current assets and liabilities:
Accounts receivable......................... 652,848 753,539 121,559 576,505 (427,766)
Prepaid expenses and refundable income
taxes.................................... 3,593 (49,366) 493,151 263,844 (21,141)
Accounts payable............................ 55,311 (172,897) 16,785 333,791 29,170
Accrued employee compensation and
benefits................................. 226,478 132,829 (76,065) (666,442) (249,662)
Accrued expenses............................ (632,992) (383,917) (122,350) (93,557) 89,387
Deferred revenue............................ 513,389 (1,893,954) (274,307) (435,337) (99,091)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities............................. 2,064,024 (630,812) (385,008) (720,559) 815,567
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (1,545,798) (909,548) (181,297) (137,744) (89,143)
(Increase) decrease in other assets............. (53,868) (51,624) 62,807 34,445 13,454
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities.... (1,599,666) (961,172) (118,490) (103,299) (75,689)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt................. -- 470,246 500,000 500,000 75,000
Repayments of long-term debt.................... (591,056) (118,832) (230,811) (114,470) (583,780)
Proceeds from exercise of stock options......... 202,150 124,563 15,094 13,250 401,044
Proceeds (payments) from sale (purchase) of
treasury stock................................ -- (59,714) -- -- 40,501
Proceeds from sale of common and preferred
stock......................................... 1,931,618 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities............................. 1,542,712 416,263 284,283 398,780 (67,235)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 2,007,070 (1,175,721) (219,215) (425,078) 672,643
Cash and cash equivalents, beginning of period.... 394,343 2,401,413 1,225,692 1,225,692 1,006,477
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period.......... $2,401,413 $1,225,692 $ 1,006,477 $ 800,614 $1,679,120
========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest...................................... $ 19,423 $ 41,564 $ 59,445 $ 12,119 $ 36,053
========== ========== ========== ========== ==========
Income taxes, net of refunds received......... $ 5,640 $ 174,425 $ (209,250) $ 1,750 $ 20,850
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 57
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) DESCRIPTION OF BUSINESS
MediQual Systems, Inc. (the Company) is a leading supplier of clinical
information management systems and services to the health care industry. The
Company's systems and services combine proprietary clinical knowledge with raw
patient encounter data to create valuable information that providers, payors and
suppliers use to monitor and enhance the effectiveness, efficiency and
appropriateness of care.
The Company is subject to certain risks, including but not limited to
dependence on the Atlas System for a majority of the Company's revenues,
dependence on continued access to data, dependence on systems development
introduction and enhancements, competition from other service providers, and
dependence on key personnel. The Company has also experienced a limited history
of profitability.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
significant accounting policies described below and elsewhere in these notes to
financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
In the opinion of the Company's management, the June 30, 1995 and 1996
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of results for
this interim period. The results of operations for the six months ended June 30,
1995 and 1996 are not necessarily indicative of the results to be expected for
the full year or for any future period.
Pro Forma Balance Sheet
Under the terms of the Company's agreements with the holders of the Class B
and Class C redeemable convertible preferred stock (See Note 5), all of such
preferred stock will be converted automatically into shares of common stock upon
the closing of the Company's proposed initial public offering. The pro forma
balance sheet reflects the assumed conversion of the redeemable convertible
preferred stock into common stock.
Cash and Cash Equivalents
The Company considers all highly liquid investments, if any, with an
original maturity of less than three months to be cash equivalents. Cash
equivalents consist mainly of money market funds.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, and trade
accounts receivable. The Company places its temporary cash investments in highly
rated financial institutions. The Company has not experienced any losses on
these investments to date. The Company has not experienced significant losses
related to receivables from individual customers or groups of customers in the
health care industry or by geographic area. Due to these factors, no additional
credit risk beyond amounts provided for collection losses is believed by
management to be inherent in the Company's accounts receivable.
F-7
<PAGE> 58
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, accounts payable and long-term obligations.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payables approximate fair value due to the short-term
nature of these instruments. The Company's long-term obligations, which bear
interest at a variable market rate, have a carrying amount that approximates
fair value. These long-term obligations, which carry a fixed rate of interest,
also approximate fair value, based on rates available to the Company for debt
with similar terms and remaining maturities.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation on a straight line basis over a three-to-five year estimated useful
life. Repairs and maintenance costs are charged to expense as incurred.
<TABLE>
Property and equipment consist of the following:
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Computer equipment.......................... $2,103,962 $2,051,921 $2,141,064
Furniture and fixtures...................... 385,624 270,369 270,369
Equipment under capital lease............... 204,149 204,149 204,149
Leasehold improvements...................... 19,253 19,253 19,253
---------- ---------- ----------
2,712,988 2,545,692 2,634,835
Less accumulated depreciation............... 1,025,377 1,595,290 1,838,500
---------- ---------- ----------
$1,687,611 $ 950,402 $ 796,335
========== ========== ==========
</TABLE>
Software Development Costs
Software development costs are considered for capitalization when
technological feasibility is established in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. The Company sells
software in a market that is subject to rapid technological change, new product
introductions and changing customer needs. Accordingly, the Company has
determined that it cannot determine technological feasibility until the
development state of the product is nearly complete. The time period during
which cost could be capitalized from the point of reaching technological
feasibility until the time of general product release is very short and,
consequently, the amounts that could be capitalized are not material to the
Company's financial position or results of operations. Therefore, the Company
charges all research and development expenses to operations in the period
incurred.
Other Assets
Other assets at December 31, 1994 and December 31, 1995 include restricted
cash of approximately $117,000 and $120,000, respectively, held in escrow in
connection with an operating lease.
Revenue Recognition
The Company licenses its systems pursuant to annual agreements that provide
for the payment of license fees at the beginning of the term. System license
fees cover software and database upgrades and enhancements and telephone
customer support. Renewal of these Agreements is subject to annual price
increases. Revenues from system licenses are recognized upon shipment of the
system to the customer or the anniversary of the original shipment if collection
is probable and remaining Company
F-8
<PAGE> 59
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
obligations are insignificant. The portion of license fees relating to system
maintenance is deferred and recognized over the annual maintenance period. CIM
service revenues, including analytical and data collection services are
recognized as the services are performed. Unrecognized amounts are recorded as
deferred revenue in the accompanying balance sheets.
Income Taxes
<TABLE>
The Company follows SFAS No. 109, Accounting for Income Taxes, by providing
for federal and state income taxes under the liability method. Deferred taxes
are determined based on the difference between the financial statement and tax
bases of assets and liabilities, as measured by the current statutory tax rates.
The Company's deferred income taxes as of December 31, were as follows:
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Tax assets:
Net operating loss carryforwards.......... $ 3,812,000 $ 4,137,000
Reserves not yet deductible for tax
purposes............................... 198,000 359,000
Deferred revenue.......................... 396,000 194,000
Federal tax credits....................... 204,000 204,000
----------- -----------
Total tax assets....................... 4,610,000 4,894,000
Tax liabilities:
Property basis differences................ (20,000) (88,000)
Other..................................... (34,000) (6,000)
----------- -----------
Total tax liabilities.................. (54,000) (94,000)
----------- -----------
Net tax asset.......................... 4,556,000 4,800,000
Less valuation allowance............... (4,556,000) (4,800,000)
----------- -----------
Amount recorded in financial
statements........................... $ -- $ --
=========== ===========
</TABLE>
The provision for income taxes in 1993 and 1994 represent minimum state
income taxes currently payable. At December 31, 1995, the Company had net
operating loss carryforwards for federal income tax purposes of $10,342,000
expiring through the year 2009. The Company also has available federal tax
credits of $204,000 expiring through the year 2003. Under SFAS No. 109, the
Company cannot recognize a deferred tax asset for the future benefit of its net
operating loss carryforwards unless it concludes that it is "more likely than
not" that the deferred tax asset would be realized. Due to its history of
operating losses, the Company has recorded a full valuation allowance against
its otherwise recognizable net deferred tax asset, in accordance with SFAS No.
109.
Section 382 of the Internal Revenue Code relates to the use of corporate
tax attributes following a change in ownership. Under this Section, a defined
ownership change can result from the issuance of new equity securities. The
Company's net operating loss and tax credit carryforwards available to be used
in any given year may be limited in the event of such ownership changes.
Pro Forma Net Income (Loss) Per Share
Pro forma net income (loss) per share is computed for each period based on
the weighted average number of common shares outstanding and dilutive common
stock equivalents. For purposes of this calculation, dilutive stock options are
considered common stock equivalents using the treasury stock method. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common and
common equivalent shares issued during the 12 month period prior to the date of
the initial filing of the Company's Registration Statement have been included in
the calculation, using the treasury stock method, as if they were outstanding
for all periods presented. Fair market value for the purpose
F-9
<PAGE> 60
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
of this calculation was assumed to be $10.00, which is the mid-point of the
assumed initial public offering price range. Also, all outstanding shares of
Class B and C Convertible Redeemable Preferred Stock, which will automatically
convert into common stock upon the closing of the Company's proposed initial
public offering, are assumed to be converted to common stock at the time of
issuance.
Pro forma net income (loss) per share also assumes the elimination of
preferred stock accretion and interest expense relating to the assumed preferred
stock redemption and debt repayment with the proceeds from the Company's
proposed public offering. Pro forma weighted average shares outstanding includes
the additional number of shares required to be issued in the proposed public
offering to generate enough net proceeds to redeem the Class A preferred stock
and repay all outstanding debt. Historical net income per share data have not
been presented as such information is not considered to be relevant or material.
(3) DEBT
<TABLE>
Long-term debt consisted of the following:
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Line of credit........................ $ -- $ 500,000 $ --
Equipment term note................... 418,717 261,970 183,597
Obligations under capital lease....... 79,471 5,407 --
Convertible debenture................. 252,018 252,018 --
Note payable to officer (Note 8)...... -- -- 75,000
-------- ---------- --------
750,206 1,019,395 258,597
Less current portion.................. 482,829 414,172 156,747
-------- ---------- --------
$267,377 $ 605,223 $101,850
======== ========== ========
</TABLE>
Line of Credit
The Company has a working capital line-of-credit agreement with a bank
expiring on January 5, 1997, unless renewed. Borrowings under the line of credit
are collateralized by substantially all of the Company's assets and may not
exceed the lesser of $500,000 or eligible accounts receivable. Interest is
payable monthly at the bank's prime rate (8.5% at December 31, 1994 and 8.25% at
December 31, 1995 and June 30, 1996) plus .5%, 2% and 2% at December 31, 1994,
December 31, 1995 and June 30, 1996, respectively.
On May 17, 1996, the bank expanded the line of credit facility to
$1,500,000, subject to eligible accounts receivable, at an interest rate of
prime plus 1%, reducing to prime upon the completion of a public offering,
maturing on January 5, 1997.
Equipment Term Note
Borrowings through June 30, 1994 under a previous equipment line of credit
converted to a term note, payable in 36 equal monthly installments of principal
beginning on July 5, 1994. Interest is payable monthly at the bank's prime rate
(8.5% at December 31, 1994 and 8.25% at December 31, 1995 and June 30, 1996)
plus 1.5%. Borrowings are secured by substantially all assets of the Company.
The line of credit and the equipment term note both have restrictive
covenants that require the Company to achieve certain levels of profitability
and tangible net worth and to meet certain financial ratios. At December 31,
1995, the Company was not in compliance with the profitability and tangible net
worth covenants, which were waived by the bank on April 25, 1996 for all past
failures.
F-10
<PAGE> 61
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Obligations Under Capital Lease
In connection with a capital lease obligation, the Company issued warrants
to the lessor to purchase 105,661 shares of the Company's Series 1987 Class B
convertible preferred stock, subject to certain antidilution provisions. The
warrants are exercisable at $.66 per share and expire in December 1996. As of
June 30, 1996, the cost of the equipment under capital lease of $204,149 had
been fully depreciated.
Convertible Debenture
In November 1991, in connection with the settlement of certain royalty
obligations with a former product development partner, the Company issued an 8%
convertible debenture with interest due quarterly, commencing on December 31,
1991 and issued an option to purchase 34,068 shares of common stock at an
exercise price of $4.84 per share to an affiliate of the holder of the
convertible debenture. The principal balance, plus any accrued interest, was due
on November 20, 1995. In June 1996, the note was converted into 52,070 shares of
common stock and the option was exercised.
<TABLE>
Required principal payments of debt as of December 31, 1995 for each of the
next two years are as follows:
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1996....................................................... $ 414,172
1997....................................................... 605,223
----------
$1,019,395
==========
</TABLE>
(4) COMMITMENTS
Operating Leases
<TABLE>
The Company leases its facilities and certain equipment under operating
leases that expire through March 1999. A multi-year facility lease has favorable
lease payments in the initial and early years of the lease. Total lease payments
are recognized on a straight-line basis over the lives of the leases with the
difference between payment amount and expense recognized as accrued rent in the
accompanying balance sheets. The future minimum annual lease payments at
December 31, 1995 are as follows:
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1996....................................................... $ 648,000
1997....................................................... 417,000
1998....................................................... 396,000
1999....................................................... 99,000
----------
$1,560,000
==========
</TABLE>
Total rent expense included in the accompanying statements of operations is
$656,000, $584,000 and $674,000 for the years ended December 31, 1993, 1994 and
1995, respectively, and $331,129 and $307,038 for the six months ended June 30,
1995 and 1996, respectively.
F-11
<PAGE> 62
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(5) REDEEMABLE PREFERRED STOCK
Class A Redeemable Preferred Stock
The following summarizes the relative powers, designations and rights of
the Class A preferred stock:
LIQUIDATION
Holders of Class A preferred stock are entitled to be paid $10,000 per
share plus accrued but unpaid dividends in the event of a liquidation or
dissolution of the Company before any amount is paid to common stockholders, but
after any distribution to Class B and Class C preferred stockholders.
DIVIDENDS
Holders of Class A preferred stock are entitled to receive quarterly
dividends from net profits, as defined, if any. Dividends are cumulative. At
December 31, 1995 and June 30, 1996, the Company had cumulative dividends in
arrears of $1,183,189 and $1,279,083, respectively, on the Class A preferred
stock.
REDEMPTION
The Class A preferred stock is redeemable on or after January 1, 1997 at
the option of the holder for $10,000 per share plus accrued dividends. Class A
preferred stock redemptions and dividends are payable only from one-third of
legally available funds of the Company, only after all Class C convertible
preferred stock redemptions have been paid. The Company will redeem the Class A
preferred stock upon completion of this Offering.
VOTING RIGHTS
Class A preferred stock is nonvoting.
Class B Redeemable Convertible Preferred Stock
The following summarizes the relative powers, designations and rights of
the Series 1986 and 1987 Class B convertible preferred stock:
LIQUIDATION
In the event of any liquidation or dissolution of the Company, the holders
of the Series 1986 and 1987 Class B convertible preferred stock shall be
entitled to receive $.70 and $2.00 per share, respectively, prior to any
distributions to the holders of Class A preferred stock or common stock but
after any distribution to the holders of the Class C convertible preferred
stock.
CONVERSION
Each share of Class B convertible preferred stock is convertible at the
option of the holder, or automatically in the event of a public stock offering,
as defined, into approximately one-fourth of a share of common stock, based on
original issue price. This conversion rate is adjusted upon the occurrence of
certain dilutive events.
F-12
<PAGE> 63
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
REDEMPTION
The Class B convertible preferred stock is redeemable in whole or in part
on or after January 1, 1997 at the option of the holders. The redemption price
for Series 1986 and 1987 convertible preferred stock is $.70 and $2.00 per
share, respectively, plus any accrued and unpaid dividends. Class B convertible
preferred stock redemptions and dividends are payable only from two-thirds of
legally available funds of the Company only after all Class C convertible
preferred stock redemptions have been paid.
DIVIDENDS
The Class B convertible preferred stockholders are entitled to any
dividends that may be declared on the common stock. The amount of the dividend
is equal to the dividend per common share multiplied by the number of common
shares that each preferred stockholder would receive upon conversion.
VOTING RIGHTS
Holders of Class B convertible preferred stock vote together with common
stockholders as one class, with special provisions for electing members to the
Board of Directors. Class B convertible preferred stockholders are entitled to
the number of votes that they would receive if they converted their Class B
convertible preferred stock into common stock at the applicable conversion rate.
Also, provided that at least 1,263,345 shares of the Class B convertible
preferred stock remain outstanding, the Company is restricted from taking
certain actions without the vote or written consent of the holders of a majority
of the Class B convertible preferred stock.
Class C Redeemable Convertible Preferred Stock
The following summarizes the relative powers, designations and rights of
the Class C convertible preferred stock:
LIQUIDATION
In the event of any liquidation or dissolution of the Company, the holders
of the Class C convertible preferred stock shall be entitled to receive
approximately $990.00 per share plus all accrued but unpaid dividends prior to
any distribution to the holders of Class A preferred stock, Class B convertible
preferred stock or common stock.
CONVERSION
Each share of Class C convertible preferred stock is convertible at the
option of the holder, or automatically in the event of a public offering, as
defined, into approximately 250 shares of common stock plus 50% of accrued and
unpaid dividends per share of Class C convertible preferred stock. This
conversion rate is adjusted upon the occurrence of certain dilutive events.
REDEMPTION
The Class C convertible preferred stock is redeemable in whole or in part
on or after January 1, 1997 at the option of the holders. The redemption price
for the Class C convertible preferred stock is $1,000 per share plus any accrued
and unpaid dividends. Class C convertible preferred stock redemptions and
dividends are payable from legally available funds of the Company prior to any
redemption of Class A and Class B preferred stock.
F-13
<PAGE> 64
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
DIVIDENDS
The Class C convertible preferred stockholders are entitled to receive
quarterly dividends. Dividends are cumulative at 2.5% per quarter of the Class C
convertible preferred stock liquidation value. At December 31, 1995 and June 30,
1996, the Company had cumulative dividends in arrears of $602,839 and $734,607,
respectively, on the Class C convertible preferred stock. Dividends on the Class
C convertible preferred stock shall be paid before any dividends for any other
class of stock.
VOTING RIGHTS
Holders of Class C convertible preferred stock vote together with common
stockholders as one class, with special provisions for electing members to the
Board of Directors. Class C convertible preferred stockholders are entitled to
the number of votes that they would receive if they converted their stock to
common stock. The Company is restricted from taking certain action without the
vote or written consent of the holders of a majority of the outstanding Class C
convertible preferred stock.
(6) STOCKHOLDERS' EQUITY
Common Stock
The Company has reserved 856,656 shares of common stock for issuance to
employees, directors and others pursuant to the granting of nonqualified stock
options under the Company's stock option plan (see below). The Company is also
required to reserve a sufficient number of shares to effect the conversion of
the Class B convertible preferred stock, Class C convertible preferred stock and
warrants (2,367,178 shares at June 30, 1996).
Subscription Receivable
Subscriptions receivable represents a note receivable from an officer for
$201,523 that was issued in connection with his purchase of 314,403 shares of
common stock in 1993. The note bears interest at 3.92% per year. In connection
with the employment agreement and incentive arrangement discussed in Note 8, the
note receivable will be forgiven upon completion of the Company's proposed
public offering at a minimum valuation, as defined,
Nonqualified Stock Option Plan
The Company maintains a 1987 Nonqualified Stock Option Plan (the "1987
Plan"). Options granted, prices and vesting periods are determined by the Board
of Directors. The majority of the grants vest ratably over 50 months. At June
30, 1996, 33,168 shares remained available for grants of options under the 1987
Plan. In May 1996, the Board of Directors of the Company terminated the 1987
Plan with respect to the granting of any further options thereunder.
F-14
<PAGE> 65
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The following table summarizes all employee stock option activity:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE RANGE
SHARES PER SHARE
--------- ------------------
<S> <C> <C>
Outstanding at December 31, 1993...................... 500,547 $1.00-1.40
Granted............................................. 21,250 2.80
Exercised........................................... (120,888 ) 1.00-2.80
Canceled............................................ (42,459 ) 1.00-2.80
--------
Outstanding at December 31, 1994...................... 358,450 1.00-2.80
Granted............................................. 97,200 1.00-2.80
Exercised........................................... (15,094 ) 1.00-2.80
Canceled............................................ (213,825 ) 1.00-2.80
--------
Outstanding at December 31, 1995...................... 226,731 1.00
Granted............................................. 448,687 1.00-9.00
Exercised........................................... (270,976 ) 1.00
Canceled............................................ (67,150 ) 1.00
--------
Outstanding at March 31, 1996......................... 337,292 1.00-9.00
--------
Exercisable at March 31, 1996......................... 163,948 $1.00-9.00
--------
--------
</TABLE>
Warrants
On April 29, 1993, the Company issued one warrant for each 10 shares of
Class B convertible preferred stock held by existing Class B convertible
preferred stockholders, or an aggregate of warrants to purchase 158,069 shares
of common stock. Each warrant has an exercise price of $.80 per share, the fair
market value of the common stock on the date of grant, as determined by the
Board of Directors. The exercise price is adjusted upon the occurrence of
certain dilutive events. The warrants are exercisable at the option of the
holder through April 29, 2003. Warrants to purchase 1,150 shares of common stock
were exercised in 1994.
(7) RESTRUCTURING CHARGES
In 1993, the Company recorded a $1,623,157 charge to consolidate all of the
Company's field operations and to write off all remaining capitalized software
costs related to discontinued products and obsolete equipment. In 1995, the
Company recorded a $580,000 charge to reflect a staff reduction of 15 research
and development employees, 1 general and administrative employee, 11 customer
support employees, and 4 sales employees, as well as office space consolidation
which occurred on December 13, 1995.
The components of the restructuring charges are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1995
---------- --------
<S> <C> <C>
Severance and benefits....................................... $ 376,267 $294,839
Obsolete fixed asset disposals and write-offs................ 800,656 112,986
Excess facility rent and office closings..................... 198,234 172,175
Unrealizable software development costs...................... 248,000 --
-------- --------
$1,623,157 $580,000
======== ========
</TABLE>
F-15
<PAGE> 66
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
At December 31, 1995, $292,600 and $153,000 was included in accrued
compensation and benefits and accrued expenses, respectively, related to
restructuring costs. At June 30, 1996, $50,892 was included in accrued expenses
related to the restructuring costs. During the six months ended June 30, 1996,
the Company was able to negotiate a favorable settlement for certain excess
leased facilities and reduced the related accrued liability by $101,784, which
has been recorded in the accompanying statement of operations as a restructuring
credit. The Company does not anticipate any further adjustments relating to the
restructuring effected in December 1995. Included in the 1993 and 1995
statements of cash flows as an adjustment to reconcile net loss to net cash
provided by (used in) operating activities is $1,106,533 and $132,485 related to
the asset write-offs and rent reserves, respectively.
(8) EMPLOYEE BENEFITS
401(k) Plan
The Company maintains a defined contribution plan under Section 401(k) of
the Internal Revenue Code. This plan allows employees to contribute up to 15% of
their compensation to the plan. Under the plan, the Company may, but is not
obligated to, match a portion of the employees' contributions up to a defined
maximum. There were no matching contributions in 1993, 1994 or 1995.
Employment Agreements
In January 1996, the Company and its chief executive officer entered into
an employment agreement and incentive arrangement. Pursuant to the agreement,
the officer received a note payable for $75,000 representing his 1995 incentive
pay. The note bears interest at 10% per year and is payable upon the earlier of
January 2, 1998, the officer's voluntary termination, or the sale of the
Company. The note is included in long-term debt at June 30, 1996.
Under the incentive arrangement, the chief executive officer received an
option to purchase up to 225,000 shares of common stock and a cash bonus of up
to $200,000. The cash bonus is contingent on completion of an initial public
offering at a minimum valuation. The option is exercisable at a price of $1.00
per share, the then fair market value of the common stock and is exercisable
immediately, subject to a right of the Company to repurchase such shares until
the earlier of five years of the date of grant or the closing of an initial
public offering or sale of the Company based on a specified valuation. The
officer exercised the option for 225,000 shares of common stock in full on March
29, 1996. The shares are subject to repurchase in accordance with the terms
noted above. The Company has accrued approximately $400,000 of compensation
expense as of June 30, 1996 in connection with the employment and incentive
plan.
The Company entered into stay agreements with certain key officers under
which the Company guarantees the officer who is a party thereto a severance
payment in an amount equal to such officer's twelve-month base salary in the
event that the officer's employment is terminated other than at such officer's
volition.
(9) SUBSEQUENT EVENTS
Recapitalization
On June 19, 1996, the stockholders of the Company approved a 1-for-4
reverse stock split of the Company's common stock. Accordingly, all share and
per share amounts have been adjusted to reflect the reverse stock split as
though it had occurred at the beginning of the initial period presented.
F-16
<PAGE> 67
MEDIQUAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1996 Stock Incentive Plan
In May 1996, the Company's Board of Directors and stockholders approved the
Company's 1996 Stock Incentive Plan (the "1996 Plan"), which provides for the
grant of incentive stock options, nonqualified stock options and restricted
stock awards to employees of the Company (including officers and employee
directors). A maximum of 1,500,000 shares are currently reserved for issuance
pursuant to the 1996 Plan. This maximum number of shares will increase,
effective as of January 1, 1998 and each January 1 thereafter during the term of
the plan, by an additional number of shares of Common Stock equal to ten percent
of the difference between (i) the total number of shares of Common Stock and
Common Stock equivalents issued and outstanding as of the close of business on
December 31 of the preceding year and (ii) the total number of shares of Common
Stock and Common Stock equivalents issued and outstanding as of the close of
business on December 31 of the year prior to such preceding year. No participant
in the 1996 Plan may in any year be granted stock options or awards with respect
to more than 500,000 shares of Common Stock, and no more than an aggregate of
3,000,000 shares of Common Stock may be issued pursuant to the exercise of
incentive stock options granted under the 1996 Plan. As of June 30, 1996,
options to purchase 53,500 shares of common stock at an exercise price of $9.00
per share had been granted under the 1996 Plan.
1996 Employee Stock Purchase Plan
In May 1996, the Company's Board of Directors approved the 1996 Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which enables eligible
employees to acquire shares of the Company's Common Stock through payroll
deductions. The Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. Offerings under the Stock Purchase Plan are planned to commence on
February 1 and August 1 of each year and to end on July 31 and January 31 of
each year. The initial offering period is intended to commence on the effective
date of the registration statement relating to this Offering and to end on
January 31, 1997, unless otherwise determined by the Board. During this offering
period, an eligible employee may select a rate of payroll deduction of up to 15%
of his or her compensation up to an aggregate total payroll deduction not to
exceed $12,500 in any offering period. The purchase price for the Company's
Common Stock purchased under the Stock Purchase Plan is 85% of the lesser of the
fair market value of the shares on the first day or the last day of the offering
period. A total of 300,000 shares of Common Stock have been reserved for
issuance under the Stock Purchase Plan.
F-17
<PAGE> 68
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH A SOLICITATION OR OFFER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Additional Information....................... 2
Prospectus Summary........................... 3
Risk Factors................................. 5
The Company.................................. 11
Use of Proceeds.............................. 11
Dividend Policy.............................. 11
Capitalization............................... 12
Dilution..................................... 13
Selected Financial Data...................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 15
Business..................................... 22
Management................................... 31
Certain Transactions......................... 38
Principal Stockholders....................... 39
Description of Capital Stock................. 41
Shares Eligible for Future Sale.............. 44
Underwriting................................. 46
Legal Matters................................ 47
Experts...................................... 47
Glossary..................................... 48
Index to Financial Statements................ F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
2,200,000 SHARES
[MEDIQUAL LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
HAMBRECHT & QUIST
VOLPE, WELTY & COMPANY
, 1996
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate (except for the Securities and Exchange
Commission Registration Fee, the NASD Filing Fee, and the Nasdaq National Market
Listing Fee) of the fees and expenses all of which are payable by the
Registrant, other than underwriting discounts and commissions, in connection
with the registration and sale of the Common Stock being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee..................... $ 9,597
NASD Fees............................................................... 3,283
Nasdaq National Market Listing Fee...................................... 38,140
Fees of Registrar and Transfer Agent.................................... *
Printing and Engraving.................................................. *
Legal Fees and Expenses (including Blue Sky Fees and Expenses).......... *
Accounting Fees and Expenses............................................ *
Miscellaneous........................................................... *
--------
Total................................................................. $500,000
========
</TABLE>
- ---------------
*To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
Article Seventh of the Amended and Restated Certificate of Incorporation of
the Company (the "Charter"), a copy of which is filed herein as Exhibit 3.1,
provides that no director shall be liable to the Company or to its stockholders
for breach of fiduciary duty as a director, other than (i) for breach of the
director's duty of loyalty, (ii) for acts or omissions not in good faith, (iii)
for any transaction from which the director derived an improper personal benefit
and (iv) under Section 174 of Title 8 of the Delaware General Corporation Law.
Article Ninth of the Charter provides for indemnification of all persons whom
the Company has the power to indemnify under law to the fullest extent permitted
by the Delaware General Corporation Law.
Article VIII of the Amended and Restated By-laws of the Company, a copy of
which is filed herein as Exhibit 3.2, provides for indemnification of officers
and directors of the Company and certain other persons against liabilities and
expenses incurred by any of them in certain stated proceedings and under certain
stated conditions.
Section 7(a) of the Underwriting Agreement between the Company and the
Underwriters, a copy of which is filed herein as Exhibit 1, provides for
indemnification by the Company of the Underwriters and each person, if any, who
controls any Underwriter, against certain liabilities and expenses, as stated
therein, which may include liabilities under the Securities Act of 1933. The
Underwriting Agreement also provides that the Underwriters shall similarly
indemnify the Company, its directors, officers, and controlling persons, as set
forth therein.
The Company intends to maintain insurance for the benefit of its directors
and officers insuring such persons against certain liabilities, including
liabilities under the securities laws.
II-1
<PAGE> 70
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Registrant has issued and sold the following unregistered securities, all share
numbers and per share prices of which have been adjusted (for purposes of this
Item 15) to reflect the proposed four-for-one reverse split of the Common Stock
which is expected to occur in June 1996.
On August 30, 1994, the Registrant issued an aggregate of 1,150 shares of
Common Stock to Robert J. Strasenburgh and Betty Strasenburgh for an aggregate
consideration of $920 upon exercise of outstanding warrants.
On March 29, 1996, the Registrant issued 8,357, 3,571, 1,785, and 750
shares of Common Stock valued at $1.00 per share to William C. Price, James
Corum, Elizabeth A. Endyke, and Diane M. Throop, respectively, in partial
payment of certain bonus payments owed by the Registrant to such persons, and
issued 225,000 shares of Common Stock to Eric A. Kriss upon the exercise of an
option granted pursuant to an incentive arrangement between the Registrant and
Mr. Kriss at a purchase price of $1.00 per share.
On June 19, 1996, the Registrant issued 25,000 and 9,068 shares of Common
Stock to The Fallon Foundation upon exercise of options at $4.84 and $1.00 per
share, respectively, and issued 52,069 shares of Common Stock to St. Vincent
Hospital, Inc. upon conversion of a debenture at a conversion price of
approximately $4.84 per share.
During the period from July 14, 1993 through June 30, 1996, the Registrant
issued an aggregate of 278,639 shares of Common Stock to directors, officers and
employees of the Registrant pursuant to the Company's 1987 Nonqualified Stock
Option Plan (the "1987 Plan") upon the exercise of options at prices ranging
from $1.00 to $1.40 per share for an aggregate consideration of $281,424. During
that period, the Registrant also granted options to directors, officers and
employees of the Registrant to purchase an aggregate of 302,150 shares of its
Common Stock pursuant to the 1987 Plan at exercise prices ranging from $1.00 to
$2.80 per share, all of which have been repriced at $1.00, and an aggregate of
53,500 shares of its Common Stock pursuant to the Company's 1996 Stock Incentive
Plan at an exercise price of $9.00 per share. On January 20, 1996, the
Registrant granted an option to The Fallon Foundation to purchase 9,068 shares
of Common Stock at an exercise price of $1.00 per share in connection with a
Settlement Agreement dated November 20, 1991.
No underwriters were involved in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from the
registration provisions of the Securities Act of 1933, as amended (the
"Securities Act"), set forth in Section 4(2) thereof relative to sales by an
issuer not including any public offering. All of the foregoing securities are
deemed to be restrictive securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
**1 Proposed Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated By-Laws of the Registrant.
*4 Specimen Certificate for shares of the Company's Common Stock.
5 Opinion of Bingham, Dana & Gould, LLP counsel to the Registrant, regarding the
legality of the shares of Common Stock.
10.1 1987 Nonqualified Stock Option Plan of the Registrant, as amended.
**10.2 Form of 1996 Stock Incentive Plan of the Registrant.
</TABLE>
II-2
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
**10.3 Form of 1996 Employee Stock Purchase Plan of the Registrant.
**10.4 Lease of Westborough Office Park Building Two, dated as of July 21, 1986,
between WRC Properties, Inc. and the Registrant (the "Lease").
**10.5 First Amendment to the Lease, dated as of September 22, 1987, between WRC
Properties, Inc. and the Registrant.
**10.6 Second Amendment to Amended and Restated Lease, dated as of July 1989, between
WRC Properties, Inc. and the Registrant.
**10.7 Third Amendment to Amended and Restated Lease, dated as of December 31, 1990,
between WRC Properties, Inc. and the Registrant.
**10.8 Fourth Amendment to Amended and Restated Lease, dated as of September 22, 1993,
between WRC Properties, Inc. and the Registrant.
**10.9 Fifth Amendment to Amended and Restated Lease, dated as of December 1993,
between WRC Properties, Inc. and the Registrant.
**10.10 Sixth Amendment to Amended and Restated Lease, dated as of April 30, 1996,
between WRC Properties, Inc. and the Registrant.
**10.11 Stock Purchase Agreement, dated March 31, 1984, between William D. Ryan and the
Registrant.
10.12 Form of Stock Purchase Agreement, dated as of August 4, 1986, among the
Registrant and the purchasers named therein, as amended, relating to the sale by
the Registrant of shares of Class B Convertible Preferred Stock.
10.13 Form of Stock Purchase Agreement, dated as of October 1987, among the Registrant
and the purchasers named therein, as amended, relating to the sale by the
Registrant of shares of Series 1987 Class B Convertible Preferred Stock.
10.14 Stock Purchase Agreement, dated as of April 1, 1993, among the Registrant and
the purchasers named therein (the "Purchasers"), as amended, relating to the
sale by the Registrant of shares of Class C Convertible Preferred Stock.
**10.15 Form of letter agreement, dated as of April 27, 1993, among the Registrant and
the Purchasers relating to possible issuance by the Registrant of additional
shares of Class C Convertible Preferred Stock.
**10.16 Registration Rights Agreement, dated as of April 27, 1993, among the Registrant,
the Purchasers and the Investors named therein.
10.17 Agreement of Shareholders, dated as of April 27, 1995, among the Registrant,
William D. Ryan, Charles M. Jacobs, Alan C. Brewster, and the Purchasers and the
Investors named therein, as amended.
**10.18 Executive Employment Agreement, dated as of March 29, 1993, between the
Registrant to Mr. Kriss, as amended.
**10.19 Promissory note in the principal amount of $201,523, dated March 29, 1993, made
by the Registrant to Mr. Kriss.
**10.20 Stock Purchase Agreement, dated as of March 29, 1993, between the Registrant and
Mr. Kriss, relating to the sale by the Registrant of shares of Common Stock.
**10.21 Letter agreement, dated April 3, 1995, between the Registrant and Mr. Kriss.
**10.22 Promissory note in the principal amount of $75,000, dated January 2, 1996, made
by the Registrant to Mr. Kriss.
**10.23 Letter agreement, dated as of January 20, 1996, between the Registrant and Mr.
Kriss.
**10.24 Common Stock Purchase Option, dated as of January 20, 1996, between the
Registrant and Mr. Kriss.
**10.25 Letter agreement, dated April 29, 1996, between the Registrant and Mr. Kriss.
**10.26 Form of Stay Agreement, dated July 14, 1995, between the Registrant and each of
Mr. Corum, Ms. Endyke, Mr. Price and Ms. Throop.
</TABLE>
II-3
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
10.27(a) Letter agreement, dated November 16, 1993, between the Registrant and Silicon
Valley Bank, relating to a $1,000,000 line of credit, and related instruments.
10.27(b) Letter agreement, dated November 16, 1993, between the Registrant and Silicon
Valley Bank, relating to a $1,500,000 line of credit, and related instrument.
10.28 Loan Modification Agreement, dated as of June 30, 1994, between the Registrant
and Silicon Valley Bank, relating to the Registrant's $1,000,000 of credit.
10.29 Loan Modification Agreement, dated as of May 5, 1995, between the Registrant and
Silicon Valley Bank, relating to the Registrant's $1,000,000 of credit.
10.30 Loan Modification Agreement, dated as of May 5, 1995, between the Registrant and
Silicon Valley Bank, relating to the Registrant's $1,500,000 of credit.
10.31 Loan Modification Agreement, dated as of January 5, 1996, between the Registrant
and Silicon Valley Bank, relating to the Registrant's lines of credit.
10.32 Loan Modification Agreement, dated as of May 24, 1996, between the Registrant
and Silicon Valley Bank, relating to the Registrant's lines of credit.
**+10.33 Letter agreement, dated February 28, 1996, between the Registrant and Ethicon
Endo-Surgery, Inc.
**+10.34 Marketing and License Agreement, dated March 22, 1996, between the Registrant
and SpaceLabs Medical, Inc.
**+10.35 Letter agreement, dated February 6, 1996, between the Registrant and Marquette
Electronics, Inc.
**10.36 Form of standard Software License of the Registrant.
10.37 Letter agreement, dated June 28, 1996, among the Registrant and the Purchasers,
terminating the letter agreement, dated April 27, 1993, among such parties.
11 Computation of income (loss) per common share.
23.1 Consent and opinion on consolidated financial statement schedules of Arthur
Andersen LLP, Independent Public Accountants.
23.2 Consent of Bingham, Dana & Gould LLP, counsel to the Registrant (included in
Exhibit 5.1).
**24 Power of Attorney (included in signature page to Registration Statement).
27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested.
(B) FINANCIAL STATEMENT SCHEDULE:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants on Supplementary Schedule................. S-1
Schedule II -- Valuation and Qualifying Accounts................................... S-2
</TABLE>
- ---------------
** Previously filed.
All other schedules are omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes thereto.
II-4
<PAGE> 73
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling the Registrant
pursuant to the foregoing provisions, the Company has been informed 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 Company of expenses incurred or paid
by a director, officer, or controlling person of the Company in the successful
defense of any action, suit, or proceeding) is asserted by such director,
officer, or controlling person, in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of competent
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 Company 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 Company 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.
(2) For purposes 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 the offering of securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) It will provide to 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.
II-5
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned thereunto duly authorized, in the
Town of Westborough and the Commonwealth of Massachusetts, on the eighth day of
July 1996:
MediQual Systems, Inc.
By
/s/ ERIC A. KRISS
----------------------------------
Eric A. Kriss
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------- ----------------------------------------- -------------
<C> <S> <C>
/s/ ERIC A. KRISS President, Chief Executive Officer and July 8, 1996
- ------------------------------------- Director (Principal Executive Officer)
Eric A. Kriss
/s/ WILLIAM C. PRICE Vice President and Chief Financial July 8, 1996
- ------------------------------------- Officer (Principal Financial Officer and
William C. Price Principal Accounting Officer)
* Director July 8, 1996
- -------------------------------------
Alan C. Brewster
* Director July 8, 1996
- -------------------------------------
David Dominik
* Director July 8, 1996
- -------------------------------------
Charles M. Jacobs
* Director July 8, 1996
- -------------------------------------
William D. Ryan
</TABLE>
*By
/s/ WILLIAM C. PRICE
William C. Price
as
Attorney-in-Fact
II-6
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTARY SCHEDULE
To MediQual Systems, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of MediQual Systems, Inc. as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995,
included in the Registration Statement, and have issued our report thereon dated
April 26, 1996 (except with respect to the matter discussed in Note 9, as to
which the date is June 19, 1996). Our audit was made for the purpose of forming
an opinion on those financial statements taken as a whole. The schedule listed
in Item 16(b) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein, in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
April 26, 1996 (except with respect
to the matter discussed in Note 9, as
to which the date is June 19, 1996)
S-1
<PAGE> 76
SCHEDULE II
MEDIQUAL SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ACCOUNTS BALANCE AT
BEGINNING OFFSET TO WRITTEN ACCOUNTS END OF
OF YEAR REVENUE OFF RECOVERED YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Allowance for Doubtful
Accounts................... $ 275,000 $ 367,812 $ 477,212 $ 34,400 $ 200,000
Year Ended December 31, 1994
Allowance for Doubtful
Accounts................... $ 200,000 $ 426,700 $ 475,188 $ 23,488 $ 175,000
Year Ended December 31, 1995
Allowance for Doubtful
Accounts................... $ 175,000 $ 570,530 $ 688,586 $ 143,056 $ 200,000
</TABLE>
S-2
<PAGE> 77
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
**1 Proposed Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
3.2 Amended and Restated By-Laws of the Registrant.
*4 Specimen Certificate for shares of the Company's Common Stock.
5 Opinion of Bingham, Dana & Gould, LLP counsel to the Registrant,
regarding the legality of the shares of Common Stock.
10.1 1987 Nonqualified Stock Option Plan of the Registrant, as amended.
**10.2 Form of 1996 Stock Incentive Plan of the Registrant.
**10.3 Form of 1996 Employee Stock Purchase Plan of the Registrant.
**10.4 Lease of Westborough Office Park Building Two, dated as of July 21,
1986, between WRC Properties, Inc. and the Registrant (the "Lease").
**10.5 First Amendment to the Lease, dated as of September 22, 1987, between
WRC Properties, Inc. and the Registrant.
**10.6 Second Amendment to Amended and Restated Lease, dated as of July 1989,
between WRC Properties, Inc. and the Registrant.
**10.7 Third Amendment to Amended and Restated Lease, dated as of December
31, 1990, between WRC Properties, Inc. and the Registrant.
**10.8 Fourth Amendment to Amended and Restated Lease, dated as of September
22, 1993, between WRC Properties, Inc. and the Registrant.
**10.9 Fifth Amendment to Amended and Restated Lease, dated as of December
1993, between WRC Properties, Inc. and the Registrant.
**10.10 Sixth Amendment to Amended and Restated Lease, dated as of April 30,
1996, between WRC Properties, Inc. and the Registrant.
**10.11 Stock Purchase Agreement, dated March 31, 1984, between William D.
Ryan and the Registrant.
10.12 Form of Stock Purchase Agreement, dated as of August 4, 1986, among
the Registrant and the purchasers named therein, as amended, relating
to the sale by the Registrant of shares of Class B Convertible
Preferred Stock.
10.13 Form of Stock Purchase Agreement, dated as of October 1987, among the
Registrant and the purchasers named therein, as amended, relating to
the sale by the Registrant of shares of Series 1987 Class B
Convertible Preferred Stock.
10.14 Stock Purchase Agreement, dated as of April 1, 1993, among the
Registrant and the purchasers named therein (the "Purchasers"), as
amended, relating to the sale by the Registrant of shares of Class C
Convertible Preferred Stock.
**10.15 Form of letter agreement, dated as of April 27, 1993, among the
Registrant and the Purchasers relating to possible issuance by the
Registrant of additional shares of Class C Convertible Preferred
Stock.
**10.16 Registration Rights Agreement, dated as of April 27, 1993, among the
Registrant, the Purchasers and the Investors named therein.
10.17 Agreement of Shareholders, dated as of April 27, 1995, among the
Registrant, William D. Ryan, Charles M. Jacobs, Alan C. Brewster, and
the Purchasers and the Investors named therein, as amended.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S> <C>
**10.18 Executive Employment Agreement, dated as of March 29, 1993, between
the Registrant to Mr. Kriss, as amended.
**10.19 Promissory note in the principal amount of $201,523, dated March 29,
1993, made by the Registrant to Mr. Kriss.
**10.20 Stock Purchase Agreement, dated as of March 29, 1993, between the
Registrant and Mr. Kriss, relating to the sale by the Registrant of
shares of Common Stock.
**10.21 Letter agreement, dated April 3, 1995, between the Registrant and Mr.
Kriss.
**10.22 Promissory note in the principal amount of $75,000, dated January 2,
1996, made by the Registrant to Mr. Kriss.
**10.23 Letter agreement, dated as of January 20, 1996, between the Registrant
and Mr. Kriss.
**10.24 Common Stock Purchase Option, dated as of January 20, 1996, between
the Registrant and Mr. Kriss.
**10.25 Letter agreement, dated April 29, 1996, between the Registrant and Mr.
Kriss.
**10.26 Form of Stay Agreement, dated July 14, 1995, between the Registrant
and each of Mr. Corum, Ms. Endyke, Mr. Price and Ms. Throop.
10.27(a) Letter agreement, dated November 16, 1993, between the Registrant and
Silicon Valley Bank, relating to a $1,000,000 line of credit, and
related instruments.
10.27(b) Letter agreement, dated November 16, 1993, between the Registrant and
Silicon Valley Bank, relating to a $1,500,000 line of credit, and
related instrument.
10.28 Loan Modification Agreement, dated as of June 30, 1994, between the
Registrant and Silicon Valley Bank, relating to the Registrant's
$1,000,000 of credit.
10.29 Loan Modification Agreement, dated as of May 5, 1995, between the
Registrant and Silicon Valley Bank, relating to the Registrant's
$1,000,000 of credit.
10.30 Loan Modification Agreement, dated as of May 5, 1995, between the
Registrant and Silicon Valley Bank, relating to the Registrant's
$1,500,000 of credit.
10.31 Loan Modification Agreement, dated as of January 5, 1996, between the
Registrant and Silicon Valley Bank, relating to the Registrant's lines
of credit.
10.32 Loan Modification Agreement, dated as of May 24, 1996, between the
Registrant and Silicon Valley Bank, relating to the Registrant's lines
of credit.
**+10.33 Letter agreement, dated February 28, 1996, between the Registrant and
Ethicon Endo-Surgery, Inc.
**+10.34 Marketing and License Agreement, dated March 22, 1996, between the
Registrant and SpaceLabs Medical, Inc.
**+10.35 Letter agreement, dated February 6, 1996, between the Registrant and
Marquette Electronics, Inc.
**10.36 Form of standard Software License of the Registrant.
10.37 Letter agreement, dated June 28, 1996, among the Registrant and the
Purchasers, terminating the letter agreement, dated April 27, 1993,
among such parties.
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------
<C> <S> <C>
11 Computation of income (loss) per common share.
23.1 Consent and opinion on consolidated financial statement schedules of
Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Bingham, Dana & Gould LLP, counsel to the Registrant
(included in Exhibit 5.1).
**24 Power of Attorney (included in signature page to Registration
Statement).
27 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested.
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
MEDIQUAL SYSTEMS, INC.
Incorporated pursuant to a Certificate of
Incorporation filed with the Secretary of State
of the State of Delaware on March 16, 1984
------------------------------------------
MediQual Systems, Inc. (the "Corporation"), a Delaware corporation, hereby
certifies that this Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Sections 228, 242, and 245 of
the General Corporation Law of the State of Delaware, and notice thereof has
been given in accordance with the provisions of Section 228 of the General
Corporation Law of the State of Delaware:
FIRST. The name of the Corporation is MEDIQUAL SYSTEMS, INC.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, State
of Delaware (Zip Code 19805). The name of its registered agent at such address
is The Prentice-Hall Corporation System, Inc.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 37,000,000 shares, consisting of:
30,000,000 shares of common stock, $.001 par value (the "Common Stock"
or the "Common Shares"); and
7,000,000 shares of preferred stock, $.01 par value (the "Preferred
Stock"), of which:
500 shares of Preferred Stock have been designated as
Class A Preferred Shares (the "Class A Preferred
Shares");
6,500,000 shares of Preferred Stock have been designated as
Class B Preferred Shares, (the "Class B Preferred
Shares"),
of which 5,714,286 Class B Preferred Shares have
been further designated as
<PAGE> 2
Series 1986 Class B Preferred Shares (the "Series
1986 Class B Preferred Shares"), and 785,714 Class
B Preferred Shares have been further designated as
Series 1987 Class B Preferred Shares (the "Series
1987 Class B Preferred Shares"); PROVIDED,
HOWEVER, that except as otherwise expressly
provided herein, the Series 1986 Class B Preferred
Stock and the Series 1987 Class B Preferred Stock
shall be treated for all purposes as the same
class of capital stock of the Corporation; and
2,500 shares of Preferred Stock have been designated as
Class C Preferred Shares (the "Class C Preferred
Shares").
Upon filing of this Amended and Restated Certificate of Incorporation, each
share of Common Stock issued and outstanding or held in treasury immediately
prior to such filing shall be combined into and reclassified as, and shall
become, one-fourth (1/4) of one fully paid and non-assessable share of Common
Stock. Until surrendered, the certificates formerly representing the shares of
Common Stock that have been combined and reclassified in accordance with the
foregoing shall cease to represent such combined and reclassified shares of
Common Stock and thereafter shall represent the shares of Common Stock that they
have been combined into and reclassified as in accordance with the foregoing.
The Class A Preferred Shares, the Class B Preferred Shares, and the Class C
Preferred Shares are herein sometimes referred to collectively as the
"Preference Shares."
Shares of Preferred Stock may be issued from time to time in one or more
series, each of such series to have such powers, designations, preferences, and
relative, participating, optional, or other special rights, if any, and such
qualifications and restrictions, if any, of such preferences and rights, as are
stated or expressed in the resolution or resolutions of the Board of Directors
providing for such series of Preferred Stock. Different series of Preferred
Stock shall not be construed to constitute different classes of shares for the
purposes of voting by classes unless expressly so provided in such resolution or
resolutions.
Authority is hereby granted to the Board of Directors from time to time to
issue the Preferred Stock in one or more series, and in connection with the
creation of any such series, by resolution or resolutions to determine and fix
the
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powers, designations, preferences, and relative, participating, optional, or
other special rights, if any, and the qualifications and restrictions, if any,
of such preferences and rights, including without limitation dividend rights,
conversion rights, voting rights (if any), redemption privileges, and
liquidation preferences, of such series of Preferred Stock (which need not be
uniform among series), all to the fullest extent now or hereafter permitted by
the General Corporation Law of Delaware. Without limiting the generality of the
foregoing, the resolution or resolutions providing for the creation or issuance
of any series of Preferred Stock may provide that such series shall be superior
to, rank equally with, or be junior to the Preferred Stock of any other series,
all to the fullest extent permitted by law. No resolution, vote, or consent of
the holders of the capital stock of the Corporation shall be required in
connection with the creation or issuance of any shares of any series of
Preferred Stock authorized by and complying with the conditions of this Amended
and Restated Certificate of Incorporation, the right to any such resolution,
vote, or consent being expressly waived by all present and future holders of the
capital stock of the Corporation.
At such time as no Class A Preferred Shares, Class B Preferred Shares, or
Class C Preferred Shares, respectively, are issued and outstanding, including
without limitation because all of such shares have been redeemed or converted
into shares of Common Stock or the right to receive the Redemption Price thereof
in accordance with this Amended and Restated Certificate of Incorporation, all
authorized shares of each such class and series of Preferred Stock,
automatically and without further action, shall be reclassified as authorized
but unissued shares of undesignated Preferred Stock of no particular class or
series, and any and all of such shares may thereafter be issued by the Board of
Directors of the Corporation in one or more series, and the terms of any such
series may be determined by the Board of Directors, as provided herein.
The following is a statement of the powers, designations, preferences, and
relative, participating, optional, or other special rights, if any, and the
qualifications and restrictions, if any, of such preferences and rights, of the
Common Stock and the Preference Shares, respectively:
1. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, (i) the holders of the Class C
Preferred Shares shall be entitled to be paid out of the assets of the
Corporation available for distribution to shareholders an amount equal to
$990.45 per Class C Preferred Share held plus all accrued and unpaid dividends
on such Class C Preferred Share held (the "Class C Liquidation Value"), before
any payment is made in respect of any other class or series of stock of the
Corporation, (ii) after the payment in full to the holders of the Class C
Preferred Shares of all amounts pursuant to clause (i) of this Section 1(a), the
holders of the Class B Preferred
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Shares shall be entitled to be paid out of the assets of the Corporation
remaining after payment of the preferential amounts to the holders of the Class
C Preferred Shares available for distribution to shareholders an amount equal to
$.70 per Series 1986 Class B Preferred Share held and $2.00 per Series 1987
Class B Preferred Share held, before any payment is made to any other class and
(iii) after the payment in full to the holders of the Class C Preferred Shares
and the Class B Preferred Shares of all amounts pursuant to clauses (i) and (ii)
of this Section 1(a), the holders of the shares of Class A Preferred Shares
outstanding shall be entitled to be paid out of such assets an amount equal to
$10,000.00 per Class A Preferred Share plus all accrued and unpaid dividends
thereon, before any payment shall be made to the holders of the Common Shares or
of any stock ranking on liquidation junior to the Preference Shares. If upon any
liquidation, dissolution or winding up of the Corporation, the assets available
for distribution to the holders of the Series C Preferred Shares shall be
insufficient to permit payment in full of the preferential amounts to which such
holders are entitled pursuant to clause (i) of this Section 1(a), then the
assets of the Corporation available for distribution to such holders shall be
distributed to such holders pro rata and in proportion to the relative
preferential amounts to which such holders are entitled. If upon any
liquidation, dissolution or winding up of the Corporation, the assets available
for distribution to the holders of the Series 1986 Class B Preferred Shares and
the Series 1987 Class B Preferred Shares shall be insufficient to permit payment
in full of the preferential amounts to which such holders are entitled pursuant
to clause (ii) of this Section 1(a), then the assets of the Corporation
remaining after payment in full of the preferential amounts to the holders of
the Class C Preferred Shares available for distribution to such holders shall be
distributed to such holders pro rata and in proportion to the relative
preferential amounts to which such holders are entitled. If upon any
liquidation, dissolution or winding up of the Corporation, the assets available
for distribution to the holders of Class A Preferred Shares shall be
insufficient to permit payment in full of the preferential amounts to which such
holders are entitled pursuant to clause (iii) of this Section 1(a), then the
assets of the Corporation remaining after payment in full of the preferential
amounts to the holders of the Class C Preferred Shares and the Class B Preferred
Shares shall be distributed to the holders of the Class A Preferred Shares pro
rata. After the holders of the Preference Shares shall have been paid in full
the amounts to which such holders are entitled, or funds necessary for such
payment shall have been set aside by the Corporation in trust for the account of
such holders so as to be available for such payment, any assets remaining
available for distribution shall be distributed to the holders of the Common
Shares and the holders of the Preference Shares shall not be entitled to share
therein. Each holder of the Class C Preferred Shares or Class B Preferred Shares
may elect, in lieu of receiving the preferential amounts pursuant to clauses (i)
and (ii) of this Section 1(a), to share with the holders of the Common Shares in
the assets remaining available for distribution after the payment of the
preferential amount to the other holders of Preference Shares, pro rata, as if
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such holder had converted such holder's Preference Shares immediately prior to
such liquidation, dissolution or winding up of the Corporation pursuant to this
Section 1.
(b) A consolidation of the Corporation or a merger in which the
Corporation is not the surviving corporation or a sale of all or substantially
all of the assets of the Corporation shall be regarded as a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of this Section 1; provided, however, that each holder of the Preference Shares
shall have the right to elect the benefits of the provisions of Section 4(j)
hereof in lieu of receiving payment in liquidation, dissolution or winding up of
the Corporation pursuant to this Section 1.
(c) In the event of a liquidation, dissolution or winding up of the
Corporation resulting in the availability of assets other than cash for
distribution to the holders of the Preference Shares, the holders of the
Preference Shares shall be entitled to a distribution of assets or cash and
assets equal in value to the preferential amounts stated in Section 1(a). In the
event that such distribution to the holders of the Preference Shares shall
include any assets other than cash, the Board of Directors shall first determine
the value of such assets for such purpose and shall notify all holders of the
Preference Shares of such determination. The value of such assets for purposes
of the distribution under this Section 1(c) shall be the value as determined by
the Board of Directors in good faith and with due care, unless the holders of a
majority in interest (measured in terms of their respective liquidation
preferences under Section 1(a)) of the outstanding Preference Shares shall
object thereto in writing within 15 days after the date of such notice. In the
event of such objection, the valuation of such assets for purposes of such
distribution shall be determined by arbitration in which (a) the objecting
shareholders shall name in their notice of objection one arbitrator, (b) the
Board of Directors shall name a second arbitrator within 15 days from the
receipt of such notice, (c) the two arbitrators thus selected shall select a
third arbitrator, and (d) the three arbitrators thus selected shall determine
the valuation of such assets for purposes of such distribution by majority vote.
The costs of such arbitration shall be borne by the Corporation and by the
holders of the Preference Shares (on a pro rata basis out of the assets
otherwise distributable to them) as follows: (i) if the valuation as determined
by the arbitrators does not exceed by at least 5% the valuation as determined by
the Board of Directors, the holders of the Preference Shares shall pay the costs
of the arbitrators, and (ii) otherwise, the Corporation shall bear the costs of
the arbitration.
<PAGE> 6
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2. Dividends.
----------
(a) Subject to the provisions of Section 4 hereof, the holders of the
Class C Preferred Shares shall be entitled to receive quarterly dividends when,
as and if declared by the Board of Directors, out of funds legally available
therefore, in an amount per share per quarter equal to 2.5% of the sum of the
Class C Liquidation Value ("Minimum Class C Dividends"). To the extent that such
dividends are not paid because there are no legally available funds or for any
other reason, such dividends shall accrue (but not compound) on a daily basis,
whether or not such dividends are declared. During any dividend period, the
Minimum Class C Dividends and all accrued and unpaid dividends on the Class C
Preferred Shares shall be paid before any dividends shall be paid upon, or set
apart for, any other class or series of stock.
(b) Subject to the prior and superior right of the holders of the Class C
Preferred Shares as described in Section 2(a) above, the holders of the Class A
Preferred Shares shall be entitled to receive quarterly dividends from the
surplus or net profits of the Corporation in an amount equal to one-quarter of
the prime interest rate in effect at Marine Midland Bank, N.A. on the payment
date multiplied by $10,000.00 per Class A Preferred Share ("Minimum Dividends")
when, in its discretion, the Board of Directors shall declare such dividends.
Dividends on the Class A Preferred Shares shall be cumulative. During any
dividend period the Minimum Dividends or any cumulated dividends on the Class A
Preferred Shares shall be payable before any dividends shall be paid upon, or
set apart for, the Class B Preferred Shares or the Common Shares.
(c) Except as provided in this Section 2, no dividends shall be declared
and set aside for any of the Preference Shares; provided, however, that in the
event the Board of Directors of the Corporation shall declare a dividend payable
upon the outstanding Common Shares, other than a dividend to which the
provisions of Section 4(f) or (g) apply, the holders of the Class B Preferred
Shares and Class C Preferred Shares shall be entitled to the same amount of
dividends per Class B Preferred Share and Class C Preferred Shares as would be
declared payable on the largest number of full Common Shares into which each
such Class B Preferred Share and Class C Preferred Shares, as the case may be,
could be converted pursuant to the provisions of Section 4 hereof, such number
determined as of the record date for the determination of holders of Common
Shares entitled to receive such dividend.
3. Ordinary Voting Rights; Election of Directors.
---------------------------------------------
(a) Except as otherwise required by law which cannot be waived, the Class
A Preferred Shares shall be non-voting stock.
<PAGE> 7
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(b) Except as otherwise expressly provided herein or as required by law,
the holder of each Class C Preferred Share and each Class B Preferred Share
shall be entitled to vote on all matters. Each Class C Preferred Share and each
Class B Preferred Share shall entitle the holder thereof to such number of votes
per share as shall equal the number of Common Shares into which each Class C
Preferred Share or each Class B Preferred Share, as the case may be, is then
convertible. Except as otherwise expressly provided herein (including without
limitation the provisions of Section 5 hereof) or as required by law, the
holders of the Class C Preferred Shares, the Class B Preferred Shares and the
Common Shares shall vote together as a single class on all matters.
(c) So long as at least 1,263,345 of the Class B Preferred Shares shall
remain outstanding, the holders of the Class B Preferred Shares shall have the
exclusive and special right to elect one director voting as a class separately
from all other classes of stock of the Corporation.
(d) The holders of the Class C Preferred Shares shall have the exclusive
and special right to elect one director voting as a class separately from all
other classes of stock of the Corporation.
4. CONVERSION. The holders of the Preference Shares shall have the
following conversion rights:
(a) The Class A Preferred Shares shall not be convertible into Common
Shares. Upon the closing of a Qualified Offering (as defined in Section 4(c)
hereof), each of the Class A Preferred Shares shall immediately and
automatically be converted into the right to receive from the Corporation, upon
surrender to the Corporation of the certificate representing such share, duly
indorsed for transfer or accompanied by duly executed instrument of transfer,
the Redemption Price (as defined in Section 5(a) hereof) of such share; and from
and after such closing, the certificates formerly representing Class A Preferred
Shares shall cease to represent such shares and thereafter shall represent only
the rights to receive the Redemption Price into which such shares have been
converted pursuant to this Section 4(a).
(b) Subject to and in compliance with the provisions of this Section 4,
any of the Class C Preferred Shares or the Class B Preferred Shares may, at the
option of the holder, be converted at any time or from time to time into fully
paid and non-assessable Common Shares. The number of Common Shares to which a
holder of the Class C Preferred Shares or Class B Preferred Shares shall be
entitled upon conversion shall be the product obtained by multiplying the
applicable Conversion Rate (determined as provided in Section 4(d)) by the
number of Class B Preferred Shares or Class C Preferred Shares, as the case may
be, being converted.
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(c) Each Class C Preferred Share and Class B Preferred Share outstanding
shall automatically be converted into the number of Common Shares into which
such Preference Share is convertible upon application of the then effective
Conversion Rate, (x) immediately upon the closing of an underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of capital stock of the
Corporation in which the aggregate gross proceeds received by the Corporation
from the sale of the shares equal or exceed $10,000,000 at a sale price to the
public of at least $6.00 per share (appropriately adjusted in the event of any
Extraordinary Common Shares Event, as hereinafter defined) (such underwritten
public offering is referred to herein as a "Qualified Offering"), (y) with
respect to the Class C Preferred Shares, once at least 80% of the Class C Shares
outstanding on the date on which any of the Class C Preferred Shares are first
issued have been converted into Common Shares or (z) with respect to the Class B
Preferred Shares, once at least 80% of the Class B Preferred Shares outstanding
on the date on which any of the Class C Preferred Shares are first issued have
been converted into Common Shares.
Upon the occurrence of the event specified in Section (4)(c), the
outstanding Class C Preferred Shares and Class B Preferred Shares shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent, provided, however, that the Corporation
shall not be obligated to issue certificates evidencing Common Shares issuable
upon such conversion unless certificates evidencing such Preference Shares are
either delivered to the Corporation or any transfer agent, as hereinafter
provided, or the holder notifies the Corporation or any transfer agent as
hereinafter provided, that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection therewith.
Upon the occurrence of the automatic conversion of all of the outstanding
Class C Preferred Shares and Class B Preferred Shares, the holders of the Class
C Preferred Shares and Class B Preferred Shares shall surrender the certificates
representing such shares at the office of the Corporation or of any transfer
agent for the Common Shares. Thereupon, there shall be issued and delivered to
each such holder, promptly at such office and in such holder's name as shown on
such surrendered certificate or certificates, a certificate or certificates for
the number of Common Shares into which the Preference Shares surrendered were
convertible on the date on which such automatic conversion occurred.
(d) The conversion rate in effect at any time (the "Conversion Rate") for
the Class C Preferred Shares shall equal the quotient obtained by dividing (i)
the sum of $1,000.00 plus one-half of the dividends per Class C Preferred Share
<PAGE> 9
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accrued and unpaid through the date of conversion by (ii) the applicable
Conversion Value, calculated as herein provided. The Conversion Rate for the
Series 1986 Class B Preferred Shares shall equal the quotient obtained by
dividing $.70 by the applicable Conversion Value, calculated as hereinafter
provided. The Conversion Rate for the Series 1987 Class B Preferred Shares shall
equal the quotient obtained by dividing $2.00 by the applicable Conversion
Value, calculated as hereinafter provided.
(e) The Conversion Value in effect upon the date of filing this Amended
and Restated Certificate of Incorporation, and until first adjusted in
accordance with Section 4(f) or 4(g) hereof, shall be $4.00 for the Class C
Preferred Shares, $2.80 for the Series 1986 Class B Preferred Shares and $7.92
for the Series 1987 Class B Preferred Shares.
(f) Upon the happening of an Extraordinary Common Shares Event, each
Conversion Value shall, simultaneously with the happening of such Extraordinary
Common Shares Event, be adjusted by dividing the then effective Conversion Value
by a fraction, the numerator of which shall be the number of Common Shares
outstanding immediately after such Extraordinary Common Shares Event and the
denominator of which shall be the number of Common Shares outstanding
immediately prior to such Extraordinary Common Shares Event, and the quotient so
obtained shall thereafter be the Conversion Value. Each Conversion Value, as so
adjusted shall be readjusted in the same manner upon the happening of any
successive Extraordinary Common Shares Event or Events.
(g) (i) Except as provided below in this subparagraph (i) of this Section
4(g), if at any time after filing of this Amended and Restated Certificate of
Incorporation the Corporation shall issue any additional Common Shares at a
price per share less than any Conversion Value in effect immediately prior to
such issuance, then each Conversion Value that is greater than such price per
share shall be reduced to an amount determined by multiplying such Conversion
Value by a fraction:
(A) the numerator of which shall be (a) the number of Common Shares
outstanding (excluding treasury shares) immediately prior to the issuance
of such additional Common Shares plus the number of Common Shares issuable
upon the conversion of the outstanding Preference Shares at the applicable
Conversion Value (prior to any resulting adjustment), plus (b) the number
of Common Shares which the net aggregate consideration received by the
Corporation for the total number of such additional Common Shares so issued
would purchase at the applicable Conversion Value (prior to any resulting
adjustment), and
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(B) the denominator of which shall be (a) the number of Common Shares
outstanding (excluding treasury shares) immediately prior to the issuance
of such additional Common Shares plus the number of Common Shares issuable
upon the conversion of the outstanding Preference Shares at the applicable
Conversion Value (prior to any resulting adjustment), plus (b) the number
of such additional Common Shares so issued.
The following shall not be deemed in any such case to be an issuance of
additional Common Shares and shall have no effect on the calculations
contemplated by this Section 4: (i) the Corporation's issuance from and after
April 27, 1993 to employees or directors of options to purchase up to an
additional 856,656 Common Shares pursuant to stock options issued to such
persons and approved by the Board of Directors, and the issuance of any Common
Shares upon exercise of such options, (ii) any capital stock of the Corporation
issued upon exercise of any options, warrants or other rights to acquire capital
stock of the Corporation outstanding on the date of the filing of this Amended
and Restated Certificate of Incorporation or the conversion or exchange of any
securities of the Corporation outstanding on the date of the filing of this
Amended and Restated Certificate of Incorporation convertible or exchangeable
for any capital stock of the Corporation, (iii) the issuance of any Common
Shares upon the conversion of the Class B Preferred Shares, and (iv) the
issuance of any Common Shares upon the conversion of the Class C Preferred
Shares or any increase in the Conversion Rate applicable to the Class C
Preferred Shares as a result of accruing dividends on such shares. The maximum
numbers of Common Shares that shall not be deemed to be an issuance of
additional shares pursuant to the foregoing shall be subject to appropriate
adjustment with respect to any as yet unissued shares in the event of any
Extraordinary Common Shares Event.
For purposes of this Section 4(g), if a part or all of the consideration
received by the Corporation in connection with the issuance of Common Shares or
the issuance of any of the securities described in paragraph (ii) of this
Section 4(g) consists of property other than cash, such consideration shall be
deemed to have the same value as is recorded on the books of the Corporation
with respect to receipt of such property so long as such recorded value was
determined reasonably and in good faith by the Board of Directors, and shall
otherwise be deemed to have a value equal to its fair market value. This Section
4(g) shall not apply under any of the circumstances which would constitute an
Extraordinary Common Shares Event.
(ii) For the purpose of this Section 4(g), and except as provided in
paragraph (g) (i) above, the issuance of any warrants, options or other
subscription or purchase rights with respect to Common Shares and the issuance
of any securities convertible into Common Shares (or the issuance of any
warrants, options or any rights with respect to such convertible securities)
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shall be deemed an issuance at such time of such Common Shares with respect to
the adjustment of any Conversion Value if the Net Consideration Per Share which
may be received by the Corporation for such Common Shares (as hereinafter
determined) shall be less than such Conversion Value at the time of such
issuance and, except as hereinafter provided, an adjustment in such Conversion
Value shall be made upon each such issuance in the manner provided in
subparagraph (i) of this Section 4(g) as if such Common Shares were issued at
such Net Consideration Per Share. No adjustment of any Conversion Value shall be
made under this Section 4(g) upon the issuance of any additional Common Shares
which are issued pursuant to the exercise of any warrants, options or other
subscription or purchase rights or pursuant to the exercise of any conversion or
exchange rights in any convertible securities if any adjustment shall previously
have been made upon the issuance of any such warrants, options or other rights.
If such warrants, options or other subscription or purchase rights with respect
to Common Shares or securities convertible into Common Shares by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the Net Consideration Per Share (as defined herein) payable to the Corporation,
or in the number of Common Shares issuable, upon the exercise, conversion or
exchange thereof (other than an increase or decrease resulting from the
anti-dilution provisions of such warrants, options, or other rights or
securities), the applicable Conversion Value computed upon the original issue
thereof, and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease. Any adjustment of any Conversion Value under this subparagraph (ii)
of this Section 4(g) which relates to warrants, options or other subscription or
purchase rights with respect to Common Shares shall be disregarded if, as, and
when such warrants, options or other subscription or purchase rights expire or
are canceled without being exercised, so that such Conversion Value effective
immediately upon such cancellation or expiration shall be equal to the
Conversion Value in effect at the time of the issuance of the expired or
canceled warrants, options or other subscription or purchase rights, with such
additional adjustments as would have been made to the applicable Conversion
Value had the expired or canceled warrants, options or other subscription or
purchase rights not been issued. For purposes of this subparagraph (ii), the
"Net Consideration Per Share" which may be received by the Corporation shall be
determined as follows:
(A) The Net Consideration Per Share shall mean the amount equal to (i)
the total amount of consideration, if any, received by the Corporation for
the issuance of such warrants, options, subscription or other purchase
rights or convertible securities, plus the minimum amount of consideration,
if any, payable to the Corporation upon exercise or conversion thereof,
divided by (ii) the aggregate number of Common Shares that would be issued
if all such warrants, options, subscription or
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other purchase rights or convertible securities were exercised or converted
at such Net Consideration Per Share.
(B) The Net Consideration Per Share which may be received by the
Corporation shall be determined in each instance as of the date of issuance
of warrants, options, subscription or other purchase rights or convertible
securities without giving effect to any possible future price adjustments
or rate adjustments which may be applicable with respect to such warrants,
options subscription or other purchase rights or convertible securities
(h) in the event the Corporation shall make or issue, or fix a record date
for the determination of holders of Common Shares entitled to receive, a
dividend or other distribution payable in securities of the Corporation other
than Common Shares, then and in each such event provisions shall be made so that
the holders of Class C Preferred Shares and the holders of Class B Preferred
Shares shall receive upon conversion thereof in addition to the number of Common
Shares receivable thereupon, the number of securities of the Corporation which
they would have received had their Class B Preferred Shares or Class C Preferred
Shares, as the case may be, been converted into Common Shares on the date of
such event and had they thereafter, during the period from the date of such
event to and including the Conversion Date (as that term is hereafter defined),
retained such securities receivable by them as aforesaid during such period,
giving application to all adjustments called for during such period under this
Section 4 with respect to the rights of the holders of the Preference Shares.
(i) If the Common Shares issuable upon the conversion of the Preference
Shares shall be changed into the same or different number of shares of any class
or classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares or stock dividend
provided for above, or a merger, consolidation or sale of assets provided for
elsewhere in this Section 4), then and in each such event the holder of each
Class C Preferred Share and each Class B Preferred Share shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such capital reorganization,
reclassification or other change, by holders of the number of Common Shares into
which such Class C Preferred Shares or Class B Preferred Shares, as the case may
be, might have been converted immediately prior to such capital reorganization,
reclassification or change, all subject to further adjustment as provided
herein.
(j) If at any time or from time to time there shall be a merger or
consolidation of the Corporation with or into another corporation or the sale of
all or substantially all of the Corporation's properties and assets to any other
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person, then, as a part of and as a condition to the effectiveness of such
merger consolidation or sale, lawful and adequate provision shall be made so
that the holders of the Class C Preferred Shares and the holders of the Class B
Preferred Shares shall thereafter be entitled to receive upon conversion of the
Class C Preferred Shares or Class B Preferred Shares, as the case may be, the
number of shares of stock or other securities or property of the Corporation or
of the successor corporation resulting from such merger or consolidation or
sale, which a holder of Common Shares deliverable upon conversion would have
received in connection with such merger, consolidation, or sale. In any such
case, appropriate provisions shall be made with respect to the rights of the
holders of the Class C Preferred Shares and the holders of the Class B Preferred
Shares after the merger, consolidation or sale to the end that the provisions of
this Section 4 (including without limitation provisions for adjustment of any
Conversion Value and the number of shares deliverable upon conversion of the
Class C Preferred Shares or the Class B Preferred Shares) shall thereafter be
applicable, as nearly as may be, with respect to any shares of stock, securities
or assets to be deliverable thereafter upon the conversion of the Class C
Preferred Shares or Class B Preferred Shares, as the case may be.
Each holder of Class C Preferred Shares and each holder of Class B
Preferred Shares upon the occurrence of a merger, consolidation or sale as such
events are more fully set forth in the first paragraph of this Section 4(j),
shall have the option of electing treatment of such holder's Class C Preferred
Shares or Class B Preferred Shares, as the case may be, under either this
Section 4(j) or, if applicable, Section 1(b) hereof, notice of which election
shall be submitted in writing to the Corporation at its principal offices no
later than the earlier of (i) 15 days after the date of the notice of such
merger, consolidation or sale delivered by the Corporation to such holder under
Section 9, or (ii) 15 days before the effective date of such event; provided
that such notice shall not in any event be required to be submitted earlier than
30 days before the effective date of such event.
(k) In each case of an adjustment or readjustment of any Conversion Rate,
the Corporation will furnish each holder of Class C Preferred Shares and each
holder of Class B Preferred Shares with a certificate, prepared by independent
public accountants of recognized national standing, showing such adjustment or
readjustment, and stating in detail the facts upon which such adjustment or
readjustment is based.
(l) To exercise its conversion privilege hereunder, a holder of Preference
Shares shall surrender the certificate or certificates representing the shares
being converted to the Corporation at its principal office, and shall give
written notice to the Corporation at that office that such holder elects to
convert such shares. Such notice shall also state the name or names (with
address or
<PAGE> 14
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addresses) in which the certificate or certificates for Common Shares issuable
upon such conversion shall be issued. The certificate or certificates for the
Preference Shares surrendered for conversion shall be accompanied by proper
assignment thereof to the Corporation or in blank. The date when such written
notice is received by the Corporation together with the certificate or
certificates representing the Preference Shares being converted shall be the
"Conversion Date". As promptly as practicable after the Conversion Date, the
Corporation shall issue and shall deliver to the holder of the Preference Shares
being converted, or on his written order, a certificate or certificates as such
holder may request for the number of full Common Shares issuable upon the
conversion of such Preference Shares in accordance with the provisions of this
Section 4, and cash as provided in Section 4(m) in respect of any fraction of a
Common Share issuable upon such conversion. Such conversion shall be deemed to
have been effected immediately prior to the close of business on the Conversion
Date, and at such time the rights of the holder as holder of the converted
Preference Shares shall cease and the person or persons in whose name or names
any certificate or certificates for Common Shares shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of the
Common Shares represented thereby. The Corporation shall not be required to pay
any transfer or other taxes by reason of issuance of such Common Shares in a
name or names other than the name of the holder of the Preference Shares
surrendered for conversion.
(m) No fractional Common Shares or scrip representing fractional shares
shall be issued upon conversion of Preference Shares. Instead of any fractional
Common Shares which would otherwise be issuable upon conversion of Preference
Shares, the Corporation shall pay to the holder of the Preference Shares
converted a cash adjustment in respect of such fraction in an amount equal to
the same fraction of: (i) in the event that such conversion occurs by reason of
a Qualified Offering, the per-share price at which Common Shares are offered by
the Corporation to the public in connection with such Qualified Offering, or
(ii) in any other case, the market price per Common Share (as determined in a
manner prescribed by the Board of Directors) at the close of business on the
Conversion Date.
(n) In the event some but not all of the Preference Shares represented by
a certificate or certificates surrendered by a holder are converted, the
Corporation shall execute and deliver to or on the order of the holder, at the
expense of the Corporation, a new certificate representing the number of
Preference Shares which were not converted.
(o) The Corporation shall at all times reserve and keep available out of
its authorized but unissued Common Shares, solely for the purpose of effecting
the conversion of the Preference Shares, such number of its Common Shares as
shall time to time be sufficient to effect the conversion of all outstanding
<PAGE> 15
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Preference Shares, and if at any time the number of authorized but unissued
Common Shares shall not be sufficient to effect the conversion of all then
outstanding Preference Shares, the Corporation shall take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued Common Shares to such number of shares as shall be sufficient for
such purpose.
(p) "Extraordinary Common Shares Event" shall mean the occurrence of any
of the following events after the date of filing of this Amended and Restated
Certificate of Incorporation: (i) the issuance of additional Common Shares as a
dividend or other distribution on outstanding Common Shares, (ii) the
subdivision of outstanding Common Shares into a greater number of Common Shares,
or (iii) the combination of outstanding Common Shares of any class into a
smaller number of Common Shares.
5. Redemption
----------
(a) As used in this Section 5, (i) "Redemption Price" means $10,000.00 per
share plus accrued and unpaid dividends in the case of the Class A Preferred
Shares, $.70 per share plus accrued and unpaid dividends in the case of the
Series 1986 Class B Preferred Shares, $2.00 per share plus accrued and unpaid
dividends in the case of the Series 1987 Class B Preferred Shares, and $990.45
per share plus accrued and unpaid dividends in the case of the Class C Preferred
Shares (in each case as appropriately adjusted for any stock splits, stock
dividends, combinations or similar recapitalizations affecting any of the
Preference Shares), and (ii) "Redemption Date" means any date on which a
redemption is to be made pursuant to Section 5(b).
(b) If (i) the Corporation shall at any time after January 1, 1997,
receive a written request from the holders of a majority of any class of
Preference Shares that the Corporation redeem all or any portion of the
Preference Shares held by such holders, or (ii) unless waived in writing by the
holders of a majority of the Class C Preferred Shares, upon the occurrence of an
"Organic Change" (as defined in Section 5(e) below), then, in either such case,
the Corporation shall promptly send a notice of redemption (the "Redemption
Notice") in accordance with Section 5(c) hereof offering to redeem all of the
Preference Shares then outstanding at the applicable Redemption Price. At least
15 days before the Redemption Date, written notice shall be mailed to the
Corporation, postage prepaid, by each holder of record of the Preference Shares
who wishes any such shares to be redeemed. The Redemption Notice shall specify
the number of shares of each class of Preference Shares held by the holder which
are requested to be redeemed by the Corporation. Except as specifically provided
in Section 4(a) hereof, and except as provided above with respect to the
occurrence of an Organic Change, no holder of Preference Shares shall have any
right to have any Preference Shares redeemed (or any rights in
<PAGE> 16
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respect of the Corporation's failure to redeem any Preference Shares) pursuant
to any redemption request delivered to the Corporation prior to January 1, 1997,
whether such request was or is made pursuant to the Corporation's Restated
Certificate of Incorporation, as in effect prior to the filing of this Amended
and Restated Certificate of Incorporation, or otherwise.
If the funds of the Corporation legally available for redemption of
Preference Shares on the Redemption Date referred to in the notice of redemption
pursuant to Section 5(c) are insufficient to redeem all of the Preference Shares
then outstanding and requested to be redeemed, those funds that are legally
available will be used first to redeem the maximum possible number of whole
shares of Class C Preferred Shares ratably among the holders of such class to
the extent of the Class C Preferred Shares which such holders desire to have
redeemed and then, if there remain any funds legally available for redemption of
the other Preference Shares, such funds will be used to redeem the maximum
possible number of whole shares of other Preference Shares as follows: The
Corporation shall redeem (A) that number of Series 1986 Class B Preferred Shares
which is determined by dividing 77% of the Redemption Amount available by the
Redemption Price for the Series 1986 Class B Preferred Shares ratably among the
holders of such Series and (B) that number of Series 1987 Class B Preferred
Shares which is determined by dividing 23% of the Redemption Amount available by
the Redemption Price for the Series 1987 Class B Preferred Shares ratably among
the holders of such Series. Shares so redeemed shall be redeemed pro rata from
holders of all Class B Preferred Shares to the extent of the Class B Preferred
Shares which such holders desire to have redeemed. The Redemption Amount
available shall be (x) the maximum amount legally available for the redemption
of the Preference Shares after payment of the full Redemption Price of all the
Class C Preferred Shares multiplied by (y) two-thirds. The remaining one-third
shall be used by the Corporation to redeem Class A Preferred Shares ratably
among the holders of such Class to the extent of the Class A Preferred Shares
which such holders desire to have redeemed. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
Preference Shares not yet redeemed because funds were not available, such funds
will be used, at the end of the next succeeding fiscal quarter, first to redeem
the balance of the outstanding shares of Class C Preferred Shares, the holders
of which had requested to have such shares redeemed, or such portion thereof for
which funds are legally available, and then to redeem the balance of the
outstanding Preference Shares, the holders of which had requested to have such
shares redeemed, or such portion thereof for which the funds are then legally
available as provided above in this Section 5(b).
(c) Notice of any redemption pursuant to this Section 5 shall be sent by
first class certified or registered mail, return receipt requested, postage
prepaid, to the holders of record of Preference Shares so to be redeemed at
their
<PAGE> 17
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respective addresses as the same shall appear on the books of the Corporation
and shall specify the Redemption Date. Such notice shall be mailed not less than
30 nor more than 60 days in advance of the applicable Redemption Date therefor.
Notwithstanding the foregoing, the Corporation's failure to give such notice
shall in no way affect its obligation to redeem the Preference Shares as
provided in Section 5(b) above. On the Redemption Date, the holders of record of
Preference Shares to be redeemed on such Redemption Date shall be entitled to
receive the Redemption Price therefor upon actual delivery to the Corporation or
its agent of the certificate(s) representing the shares to be redeemed. All
Preference Shares redeemed by the Corporation pursuant to this Section 5 shall
be retired by the Corporation and not reissued.
(d) Anything in this Section 5 to the contrary notwithstanding, the
holders of Class B and Class C Preferred Shares shall have the right,
exercisable at any time up to the close of business on the applicable Redemption
Date, to convert all or any part of such shares so called for redemption into
Common Shares pursuant to Section 4 hereof.
(e) An "Organic Change" shall be the occurrence of one or more of the
following events: (i) a change in the persons or entities or group (as that term
is used in Section l3(d)(3) of the Securities Exchange Act of 1934) of persons
or entities that beneficially own securities of the Corporation representing a
majority of the combined voting power of the outstanding securities of the
Corporation ordinarily having the right to vote in the election of directors,
(ii) a change in the persons or entities or group (as so defined) of persons or
entities and its designees that, by contract or otherwise, have the right to
elect a majority of the Board of Directors of the Corporation, (iii) any
consolidation of the Corporation or a merger in which the Corporation is not the
surviving corporation, (iv) a sale or lease of all or substantially all of the
assets of the Corporation or (v) a liquidation, dissolution or winding up of the
affairs of the Corporation; provided, however, that a Qualified Offering shall
not be considered an Organic Change.
6. Restrictions and Limitations on Certain Corporate Actions.
--------------------------------------------------------------
(a) So long as at least 1,263,345 of the Class B Preferred Shares remain
outstanding, the Corporation shall not without the vote or written consent by
the holders of a majority of the then outstanding Class B Preferred Shares; and
shall not without the vote or written consent by the holders of a majority of
the then outstanding Class C Preferred Shares:
(i) Redeem, purchase or otherwise acquire for value (or pay into or set
aside for a sinking fund for such purpose), any Preference Shares other than
pursuant to Section 5 hereof; or
<PAGE> 18
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(ii) Purchase, redeem or otherwise acquire (or pay into or set aside for a
sinking fund for such purpose) any of the Common Shares of the Corporation;
provided, however, that this restriction shall not apply to the repurchase of
Common Shares issued to directors, officers, consultants or employees pursuant
to stock purchase or stock option plans or subject to stock repurchase
agreements, in each case, if such repurchase is approved by the Board of
Directors, so long as the repurchase price paid by the Corporation does not
exceed the purchase price paid by such employee, or pursuant to restrictive
stock purchase agreements under which the Corporation has the option to
repurchase such shares upon the occurrence of certain events, including the
termination of employment; or
(iii) Authorize or issue, or obligate itself to issue any other equity
security senior to or on a parity with the Preference Shares as to liquidation
preferences, conversion rights, voting rights or otherwise; or
(iv) Increase the total number of authorized Preference Shares; or
(v) Authorize any merger or consolidation of the Corporation with or into
any other Corporation or entity or authorize the sale of substantially all of
the assets of the Corporation; or
(vi) Amend the Certificate of Incorporation or By-Laws of the Corporation;
or
(vii) Subject to the provisions of Section 7(b) hereof, increase the number
of directors of the Corporation to a number greater than seven.
7. Special Voting Rights for Class B and Class C Preferred Shares.
--------------------------------------------------------------
(a) If any one or more of the following events shall occur and be
continuing at any time: (i) if any amounts required to be paid pursuant to a
redemption under Section 5 hereof are not paid within 15 days after the dates
such payments are due; (ii) if the Corporation or any of its subsidiaries shall
(A) admit in writing its inability to pay its debts generally as they become
due, (B) file a petition or answer or consent seeking relief under the Federal
Bankruptcy Code, as now constituted or hereafter amended, or any other
applicable Federal or state bankruptcy or insolvency law or other similar law,
(C) consent to the institution of, proceedings under any law listed in (B)
above, or to the filing of any such petition or to the appointment or taking
possession of a receiver, liquidator, assignee, trustee, custodian (or other
similar official) of the Corporation or any subsidiary or of any substantial
part of their property, (D) fail generally to pay its debts as such debts become
due, or take an assignment
<PAGE> 19
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for the benefit of its creditors; (iii) if a decree or order shall be entered by
a court for relief in respect of the Corporation or any of its subsidiaries
under the Federal Bankruptcy Code, as now constituted or hereafter amended, or
any other applicable Federal or state bankruptcy or insolvency law or other
similar law, or appointing a receiver, liquidator, assignee, trustee (or similar
official) of the Corporation or any subsidiary or of any substantial part of
their property or ordering the winding-up or liquidation of their affairs and
such decree or order shall not be vacated or dismissed or set aside or stayed
within a period of 100 days from the date of entry thereof; (iv) if the
Corporation shall be in default under any agreement or instrument governing any
indebtedness equal to or exceeding $100,000 in unpaid principal amount under
circumstances which would permit the holder of such indebtedness, upon notice or
passage of time or both, to accelerate the payment thereof, then, and in each
and every case, the holders of (a) not less than 51% in interest of the Class C
Preferred Shares and (b) not less than 51% in interest of the Class B Preferred
Shares, each voting as a separate class, may, by vote at a meeting of
shareholders or by written notice to the Corporation, declare the Corporation to
be in default hereunder ("Event of Default"). After such an Event of Default
shall have been declared, the Corporation shall promptly notify each holder of
Preference Shares then outstanding that such holder shall be entitled to
redemption, subject to the provisions of this Section, of all or any part of
such holder's Preference Shares on the date 30 days following the date of such
notice. Any redemption under this Section 7(a) shall be at the applicable
Redemption Price, in the order of priority and otherwise as set forth in Section
5 hereof. To exercise its redemption option hereunder, a holder of Preference
Shares shall give the Corporation written notice specifying the number of shares
to be redeemed at least 10 days prior to the date fixed for redemption, and
shall present and surrender the certificate or certificates for such shares
(duly endorsed for transfer), to the Corporation at the principal office of the
Corporation and thereupon, subject to the priority set forth in Section 5(b)
hereof, the applicable Redemption Price of such shares shall be paid to, or to
the order of, the person whose name appears on such certificate or certificates
as the owner thereof. If the number of shares represented by the certificate or
certificates surrendered shall exceed the number of shares to be redeemed, the
Corporation shall issue and deliver to the person entitled thereto a certificate
or certificates representing the unredeemed balance of such shares.
(b) If an Event of Default is declared under Section 7(a) hereof, and if
at least 1,263,345 of the Class B Preferred, Shares or if any Class C Preferred
Shares remain outstanding following any redemptions under said Section 7(a), to
the extent permitted by law as relating to directorships, the holders of the
Class B Preferred Shares and Class C Preferred Shares shall have the right,
voting together as a class and separately from all other classes, to elect that
even number of additional directors which, not counting the directors elected by
the Class B Preferred Shares and Class C Preferred Shares pursuant to Section
<PAGE> 20
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3(c) and 3(d) hereof, would constitute a majority of the members of the
Corporation's Board of Directors, the remaining directors to be elected as
provided in Section 3 hereof. If and when such right of the holders of the Class
B Preferred Shares and Class C Preferred Shares becomes operative, the maximum
authorized number of members of the Board of Directors of the Corporation shall
automatically be increased to the extent necessary to create any vacancy to be
filled only by vote of the holders of the Class B Preferred Shares and/or the
Class C Preferred Shares then outstanding as hereinafter set forth. Whenever
such right hereunder shall become operative, such right shall be exercised
either by written consents, at special meetings or at any annual meeting of
shareholders held for the purposes of electing directors. In electing the
additional directors hereunder, one-half of such number of additional directors
shall be elected by vote of the holders of Class C Preferred Shares and one-half
of such number of additional directors shall be elected by vote of the holders
of Class B Preferred Shares. If no Class C Preferred Shares are then
outstanding, all of the additional directors will be elected by vote of the
holders of the Class B Preferred Shares. In electing the additional directors to
be elected pursuant to this Section 7, holders of the Class B Preferred Shares
and Class C Preferred Shares shall not be entitled to cumulative voting and
accordingly each such director shall be elected by a plurality vote.
(c) The right hereunder to elect the additional members of the Board of
Directors of the Corporation as aforesaid shall continue until such time as the
Event of Default shall have been cured, at which time the right to vote for
directors shall be as provided in Section 3 hereof (subject to becoming
operative again upon the occurrence of a subsequent Event of Default) and the
maximum authorized number of members of the Board of Directors of the
Corporation shall automatically be reduced to its former number if such number
was increased at the time when the voting rights hereunder became operative.
Upon any termination pursuant to this Section 7(c) of the right of the holders
of the Class B Preferred Shares and Class C Preferred Shares to vote for such
increased number of directors as herein above provided, the term of office of
any director then in office elected by the holders of Class B Preferred Shares
and Class C Preferred Shares pursuant to this Section 7(c) (but not a director
elected pursuant to a different Section) shall terminate immediately.
8. No Reissuance of Preference Shares. No Preference Share acquired by
the Corporation by reason of redemption, purchase, conversion or otherwise shall
be reissued, and all such shares shall be canceled, retired, and eliminated from
the shares which the Corporation shall be authorized to issue. The Corporation
may from time to time take such appropriate corporate action as may be necessary
to reduce the authorized number of Preference Shares accordingly.
<PAGE> 21
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9. Notices of Record Date. In the event (i) the Corporation establishes a
record date to determine the holders of any class of securities who are entitled
to receive any dividend or other distribution, or (ii) there is authorized any
capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation, or any transfer of all or substantially all of
the assets of the Corporation to any other corporation, or any other entity or
person, or any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, the Corporation shall mail to each holder of Preference
Shares at least twenty (20) days prior to the record date specified therein, a
notice specifying (a) the date of such record date for the purpose of such
dividend or distribution and a description of such dividend or distribution, (b)
the date on which any such capital reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding up is expected to
become effective and the record date set for the determination of shareholders
entitled to participate therein, (c) the time, if any, that is to be fixed, as
to when the holders of record of Common Shares or other securities shall be
entitled to exchange their shares of Common Shares or other securities for
securities or other property deliverable upon such capital reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up, and (d) in reasonable detail, information with respect to such
capital reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. Subject to the provisions of Section 6(vi) of Article FOURTH, and
subject to any other limitations that may from time to time be imposed by other
provisions of this Amended and Restated Certificate of Incorporation, by law, or
by the Corporation's by-laws, the Board of Directors of the Corporation is
expressly authorized to adopt, amend, or repeal the by-laws of the Corporation.
SEVENTH. No director of the Corporation shall be personally liable to the
Corporation or to any of its stockholders for monetary damages for breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability; provided, however, that to the extent required from time to time by
applicable law, this Article Seventh shall not eliminate or limit the liability
of a director, to the extent such liability is provided by applicable law, (i)
for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
Title 8 of the Delaware Code, or (iv) for any transaction from which the
director derived an improper personal benefit. No amendment to or repeal of this
Article Seventh shall apply to or have any effect on the liability or alleged
liability of any director for or
<PAGE> 22
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with respect to any acts or omissions of such director occurring prior to the
effective date of such amendment or repeal.
EIGHTH. Meetings of stockholders of the Corporation may be held within or
without the State of Delaware, as the by-laws may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the by-laws
of the Corporation. Elections of directors of the Corporation need not be by
written ballot unless the by-laws of the Corporation shall so provide.
NINTH. The Corporation shall, to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as it may be amended and
supplemented from time to time, indemnify any and all persons whom it shall have
the power to indemnify under law, including without limitation the persons
serving from time to time as directors of the Corporation, against any expenses,
liabilities, or other matters referred to in, covered by, or permitted by such
law. The indemnification provided for herein shall not be exclusive of any other
rights to which those seeking indemnification may be entitled under any by-law,
agreement vote of stockholders or disinterested directors, or otherwise, both as
to action or omission in their official capacities and as to action or omission
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. No
amendment to or repeal of this provision shall deprive any person of the
benefits hereof with respect to any act or omission occurring prior to such
amendment or repeal.
TENTH. Subject to the provisions of Section 6(vi) of Article FOURTH, the
Corporation reserves the right to amend or repeal any provision contained in
this Restated Certificate of Incorporation, in the manner now or hereafter
prescribed by statute. All rights conferred upon a stockholder herein are
granted subject to this express reservation.
ELEVENTH. The Board of Directors, when considering a tender offer or merger
or acquisition proposal, may take into account factors in addition to potential
economic benefits to stockholders, including without limitation (A) comparison
of the proposed consideration to be received by stockholders in relation to the
then current market price of the Corporation's capital stock, the estimated
current value of the Corporation in a freely negotiated transaction, and the
estimated future value of the Corporation as an independent entity and (B) the
impact of such a transaction on the employees, suppliers, and customers of the
Corporation and its effect on the communities in which the Corporation operates.
<PAGE> 23
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TWELFTH. Effective from and after the closing of the Corporation's first
Qualified Offering, any action required or permitted to be taken by the
stockholders of the Corporation may be taken only at a duly called annual or
special meeting of the stockholders, and not by written consent in lieu of such
a meeting, and special meetings of stockholders may be called only by the
Chairman of the Board of Directors, the President, or a majority of the Board of
Directors.
THIRTEENTH. Effective from and after the closing of the Corporation's first
Qualified Offering, the affirmative vote of the holders of at least 67% of the
outstanding voting stock of the Corporation (in addition to any separate class
vote that may in the future be required pursuant to the terms of any outstanding
Preferred Stock) shall be required to amend or repeal the provisions of Articles
FOURTH (to the extent it relates to the authority of the Board of Directors to
issue shares of Preferred Stock in one or more series, the terms of which may be
determined by the Board of Directors), SEVENTH, NINTH, ELEVENTH, TWELFTH, or
THIRTEENTH of this Certificate of Incorporation or to reduce the numbers of
authorized shares of Common Stock or Preferred Stock.
<PAGE> 24
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This Amended and Restated Certificate of Incorporation was duly adopted by
written consent of the Stockholders of the Corporation in accordance with
Section 228 of the General Corporation Law of Delaware, and written notice
thereof has been given as provided in that section.
Executed on June 19, 1996.
MEDIQUAL SYSTEMS, INC.
By /s/ William C. Price
-------------------------------------
Authorized Officer
<PAGE> 1
Exhibit 3.2
MEDIQUAL SYSTEMS, INC.
AMENDED AND RESTATED BY-LAWS
ARTICLE I. - GENERAL.
1.1. OFFICES. The registered office of MediQual Systems, Inc. (the
"Company") shall be in the City of Wilmington, County of New Castle, State of
Delaware. The Company may also have offices at such other places both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the Company may require.
1.2. SEAL. The seal, if any, of the Company shall be in the form of a
circle and shall have inscribed thereon the name of the Company, the year of its
organization and the words "Corporate Seal, Delaware."
1.3. FISCAL YEAR. The fiscal year of the Company shall be the period from
January 1 through December 31.
ARTICLE II. - STOCKHOLDERS.
---------------------------
2.1. PLACE OF MEETINGS. Each meeting of the stockholders shall be held
upon notice as hereinafter provided, at such place as the Board of Directors
shall have determined and as shall be stated in such notice.
2.2. ANNUAL MEETING. The annual meeting of the stockholders shall be held
each year on such date and at such time as the Board of Directors may determine.
At each annual meeting the stockholders entitled to vote shall elect such
members of the Board of Directors as are standing for election, by plurality
vote by ballot, and they may transact such other corporate business as may
properly be brought before the meeting. At the annual meeting any business may
be transacted, irrespective of whether the notice calling such meeting shall
have contained a reference thereto, except where notice is required by law, the
Company's Certificate of Incorporation, or these by-laws.
<PAGE> 2
2.3. QUORUM. At all meetings of the stockholders the holders of a majority
of the stock issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum requisite for the
transaction of business except as otherwise provided by law, the Company's
Certificate of Incorporation, or these by-laws. If, however, such majority shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or by proxy, by a
majority vote, shall have power to adjourn the meeting from time to time without
notice other than announcement at the meeting until the requisite amount of
voting stock shall be present. If the adjournment is for more than thirty (30)
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting. At such adjourned meeting, at which the
requisite amount of voting stock shall be represented, any business may be
transacted that might have been transacted if the meeting had been held as
originally called.
2.4. RIGHT TO VOTE; PROXIES. Subject to the provisions of the Company's
Certificate of Incorporation, each holder of a share or shares of capital stock
of the Company having the right to vote at any meeting shall be entitled to one
vote for each such share of stock held by him. Any stockholder entitled to vote
at any meeting of stockholders may vote either in person or by proxy, but no
proxy that is dated more than three years prior to the meeting at which it is
offered shall confer the right to vote thereat unless the proxy provides that it
shall be effective for a longer period. A proxy may be granted by a writing
executed by the stockholder or his authorized agent or by transmission or
authorization of transmission of a telegram, cablegram, or other means of
electronic transmission to the person who will be the holder of the proxy or to
a proxy solicitation firm, proxy support service organization, or like agent
duly authorized by the person who will be the holder of the proxy to receive
such transmission, subject to the conditions set forth in Section 212 of the
Delaware General Corporation Law, as it may be amended from time to time (the
"DGCL").
2.5. VOTING. At all meetings of stockholders, except as otherwise
expressly provided for by statute, the Company's Certificate of Incorporation,
or these by-laws, (i) in all matters other than the election of directors, the
affirmative vote of a majority of shares present in person or represented by
proxy at the meeting and entitled to vote on such matter shall be the act of the
stockholders and (ii) directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors.
2.6. NOTICE OF ANNUAL MEETINGS. Written notice of the annual meeting of
the stockholders shall be mailed to each stockholder entitled to vote thereat at
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such address as appears on the stock books of the Company at least ten (10) days
(and not more than sixty (60) days) prior to the meeting. It shall be the duty
of every stockholder to furnish to the Secretary of the Company or to the
transfer agent, if any, of the class of stock owned by him and his post-office
address, and to notify the Secretary of any change therein.
2.7. STOCKHOLDERS' LIST. A complete list of the stockholders entitled to
vote at any meeting of stockholders, arranged in alphabetical order and showing
the address of each stockholder, and the number of shares registered in the name
of each stockholder, shall be prepared by the Secretary and filed either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held, at least ten days before such meeting, and
shall at all times during the usual hours for business, and during the whole
time of said election, be open to the examination of any stockholder for a
purpose germane to the meeting.
2.8. SPECIAL MEETINGS. Special meetings of the stockholders for any
purpose or purposes, unless otherwise provided by statute, may be called only by
the Chairman of the Board of Directors, the President, or a majority of the
Board of Directors.
2.9. NOTICE OF SPECIAL MEETINGS. Written notice of a special meeting of
stockholders, stating the time and place and object thereof shall be mailed,
postage prepaid, not less than ten (10) nor more than sixty (60) days before
such meeting, to each stockholder entitled to vote thereat, at such address as
appears on the books of the Company. No business may be transacted at such
meeting except that referred to in said notice, or in a supplemental notice
given also in compliance with the provisions hereof, or such other business as
may be germane or supplementary to that stated in said notice or notices.
2.10. INSPECTORS.
1. One or more inspectors may be appointed by the Board of Directors
before or at any meeting of stockholders, or, if no such appointment shall
have been made, the presiding officer may make such appointment at the
meeting. At the meeting for which the inspector or inspectors are
appointed, he or they shall open and close the polls, receive and take
charge of the proxies and ballots, and decide all questions touching on the
qualifications of voters, the validity of proxies, and the acceptance and
rejection of votes. If any inspector previously appointed shall fail to
attend or refuse or be unable to serve, the presiding officer shall appoint
an inspector in his place.
2. At any time at which the Company has a class of voting stock that
is (i) listed on a national securities exchange, (ii) authorized for
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quotation on an inter-dealer quotation system of a registered national
securities association, or (iii) held of record by more than 2,000
stockholders, the provisions of Section 231 of the DGCL with respect to
inspectors of election and voting procedures shall apply, in lieu of the
provisions of paragraph 1 of this [section] 2.10.
2.11. STOCKHOLDERS' CONSENT IN LIEU OF MEETING. Unless otherwise provided
in the Company's Certificate of Incorporation:
(a) Prior to the closing of an underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933, as
amended, covering the offering and sale of capital stock of the Company (the
"IPO"): Any action required by law to be taken at any annual or special meeting
of stockholders of the Company, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
forth the action so taken, shall be signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted and shall be delivered to the Company by delivery
to its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Company having custody of the book in
which proceedings of meetings of stockholders are recorded. Delivery made to the
Company's registered office shall be by hand or by certified or registered mail,
return receipt requested. Every written consent shall bear the date of signature
of each stockholder who signs the consent and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
days of the earliest dated consent delivered in the manner required by this
[section] 2.11 to the Company, written consents signed by a sufficient number of
stockholders to take action are delivered to the Company by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the Company having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Company's registered office shall be by hand or by certified or registered mail,
return receipt requested. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
(b) From and after the closing of the IPO, unless otherwise provided in
the Company's Certificate of Incorporation: Any action required to be taken at
any annual or special meeting of stockholders of the Company, or any action that
may be taken at any annual or special meeting of such stockholders, may be taken
only at such a meeting, and not by written consent of stockholders.
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2.12. PROCEDURES. For nominations for the Board of Directors or for other
business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely written notice
thereof to the Secretary of the Company. To be timely, a notice of nominations
or other business to be brought before an annual meeting of stockholders must be
delivered to the Secretary not less than 120 nor more than 150 days prior to the
first anniversary of the date of the Company's proxy statement delivered to
stockholders in connection with the preceding year's annual meeting, or if the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary, or if no proxy statement was delivered to stockholders
by the Company in connection with the preceding year's annual meeting, such
notice must be delivered not earlier than 90 days prior to such annual meeting
and not later than the later of (i) 60 days prior to the annual meeting or (ii)
10 days following the date on which public announcement of the date of such
annual meeting is first made by the Company. With respect to special meetings of
stockholders, such notice must be delivered to the Secretary not more than 90
days prior to such meeting and not later than the later of (i) 60 days prior to
such meeting or (ii) 10 days following the date on which public announcement of
the date of such meeting is first made by the Company. Such notice must contain
the name and address of the stockholder delivering the notice and a statement
with respect to the amount of the Company's stock beneficially and/or legally
owned by such stockholder, the nature of any such beneficial ownership of such
stock, the beneficial ownership of any such stock legally held by such
stockholder but beneficially owned by one or more others, and the length of time
for which all such stock has been beneficially and/or legally owned by such
stockholder, and information about each nominee for election as a director
substantially equivalent to that which would be required in a proxy statement
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated by the Securities and Exchange Commission thereunder,
and/or a description of the proposed business to be brought before the meeting,
as the case may be.
ARTICLE III. - DIRECTORS.
-------------------------
3.1. NUMBER OF DIRECTORS.
(a) Except as otherwise provided by law, the Company's Certificate of
Incorporation, or these by-laws, the property and business of the Company shall
be managed by or under the direction of a board of not less than one nor more
than thirteen directors. Within the limits specified, the number of directors
shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting. Directors need not be stockholders,
residents of Delaware, or citizens of the United States.
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(b) The directors shall be elected by ballot at the annual meeting of the
stockholders. Members of the Board of Directors shall hold office until the
annual meeting of stockholders at which their respective successors are elected
and qualified or until their earlier death, incapacity, resignation, or removal.
Any director may resign at any time upon written notice to the Company. Except
as the DGCL may otherwise require, in the interim between annual meetings of
stockholders or special meetings of stockholders called for the election of
directors and/or for the removal of one or more directors and for the filling of
any vacancy in that connection, any vacancies in the Board of Directors,
including unfilled vacancies resulting from the removal of directors for cause,
may be filled by the vote of a majority of the remaining directors then in
office, although less than a quorum, or by the sole remaining director.
(c) If the office of any director becomes vacant by reason of death,
resignation, disqualification, removal, failure to elect, or otherwise, the
remaining directors, although more or less than a quorum, by a majority vote of
such remaining directors may elect a successor or successors who shall hold
office for the unexpired term.
3.2. CHANGE IN NUMBER OF DIRECTORS; VACANCIES. The maximum number of
directors may be increased by an amendment to these by-laws adopted by a
majority vote of the Board of Directors or by a majority vote of the capital
stock having voting power, and if the number of directors is so increased by
action of the Board of Directors or of the stockholders or otherwise, then the
additional directors may be elected in the manner provided above for the filling
of vacancies in the Board of Directors or at the annual meeting of stockholders
or at a special meeting called for that purpose.
3.3. RESIGNATION. Any director of the Company may resign at any time by
giving written notice to the Chairman of the Board, the President, or the
Secretary of the Company. Such resignation shall take effect at the time
specified therein, at the time of receipt if no time is specified therein and at
the time of acceptance if the effectiveness of such resignation is conditioned
upon its acceptance. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
3.4. REMOVAL. Any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
3.5. PLACE OF MEETINGS AND BOOKS. The Board of Directors may hold their
meetings and keep the books of the Company outside the State of Delaware, at
such places as they may from time to time determine.
3.6. GENERAL POWERS. In addition to the powers and authority expressly
conferred upon them by these by-laws, the board may exercise all such powers of
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the Company and do all such lawful acts and things as are not by statute or by
the Company's Certificate of Incorporation or by these by-laws directed or
required to be exercised or done by the stockholders.
3.7. EXECUTIVE COMMITTEE. There may be an executive committee of one or
more directors designated by resolution passed by a majority of the whole board.
The act of a majority of the members of such committee shall be the act of the
committee. Said committee may meet at stated times or on notice to all by any of
their own number, and shall have and may exercise those powers of the Board of
Directors in the management of the business affairs of the Company as are
provided by law and may authorize the seal of the Company to be affixed to all
papers that may require it. Vacancies in the membership of the committee shall
be filled by the Board of Directors at a regular meeting or at a special meeting
called for that purpose.
3.8. OTHER COMMITTEES. The Board of Directors may also designate one or
more committees in addition to the executive committee, by resolution or
resolutions passed by a majority of the whole board; such committee or
committees shall consist of one or more directors of the Company, and to the
extent provided in the resolution or resolutions designating them, shall have
and may exercise specific powers of the Board of Directors in the management of
the business and affairs of the Company to the extent permitted by statute and
shall have power to authorize the seal of the Company to be affixed to all
papers that may require it. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the Board
of Directors.
3.9. POWERS DENIED TO COMMITTEES. Committees of the Board of Directors
shall not, in any event, have any power or authority to amend the Company's
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
adopted by the Board of Directors as provided in Section 151(a) of the DGCL, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the Company or
the conversion into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other class or classes
of stock of the Company or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopt an
agreement of merger or consolidation, recommend to the stockholders the sale,
lease, or exchange of all or substantially all of the Company's property and
assets, recommend to the stockholders a dissolution of the Company or a
revocation of a dissolution, or to amend the by-laws of the Company. Further, no
committee of the Board of Directors shall have the power or authority to declare
a dividend, to authorize the issuance of stock, or to adopt a certificate of
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ownership and merger pursuant to Section 253 of the DGCL, unless the resolution
or resolutions designating such committee expressly so provides.
3.10. SUBSTITUTE COMMITTEE MEMBER. In the absence or on the
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of such absent or disqualified
member. Any committee shall keep regular minutes of its proceedings and report
the same to the board as may be required by the board.
3.11. COMPENSATION OF DIRECTORS. The Board of Directors shall have the
power to fix the compensation of directors and members of committees of the
Board. The directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for attendance at
each meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Company in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
3.12. ANNUAL MEETING. The newly elected board may meet at such place and
time as shall be fixed and announced by the presiding officer at the annual
meeting of stockholders, for the purpose of organization or otherwise, and no
further notice of such meeting shall be necessary to the newly elected directors
in order legally to constitute the meeting, provided a quorum shall be present,
or they may meet at such place and time as shall be stated in a notice given to
such directors two (2) days prior to such meeting, or as shall be fixed by the
consent in writing of all the directors.
3.13. REGULAR MEETINGS. Regular meetings of the board may be held without
notice at such time and place as shall from time to time be determined by the
board.
3.14. SPECIAL MEETINGS. Special meetings of the board may be called by the
Chairman of the Board, if any, or the President, on two (2) days notice to each
director, or such shorter period of time before the meeting as will nonetheless
be sufficient for the convenient assembly of the directors so notified; special
meetings shall be called by the Secretary in like manner and on like notice, on
the written request of two or more directors.
3.15. QUORUM. At all meetings of the Board of Directors, a majority of the
total number of directors shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically permitted or
provided by
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statute, or by the Company's Certificate of Incorporation, or by these by-laws.
If at any meeting of the board there shall be less than a quorum present, a
majority of those present may adjourn the meeting from time to time until a
quorum is obtained, and no further notice thereof need be given other than by
announcement at said meeting that shall be so adjourned.
3.16. TELEPHONIC PARTICIPATION IN MEETINGS. Members of the Board of
Directors or any committee designated by such board may participate in a meeting
of the board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
section shall constitute presence in person at such meeting.
3.17. ACTION BY CONSENT. Unless otherwise restricted by the Company's
Certificate of Incorporation or these by-laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if written consent thereto is signed by all
members of the board or of such committee as the case may be and such written
consent is filed with the minutes of proceedings of the board or committee.
ARTICLE IV. - OFFICERS.
-----------------------
4.1. SELECTION; STATUTORY OFFICERS. The officers of the Company shall be
chosen by the Board of Directors. There shall be a President, a Secretary, and a
Treasurer, and there may be a Chairman of the Board of Directors, one or more
Vice Presidents, one or more Assistant Secretaries, and one or more Assistant
Treasurers, as the Board of Directors may elect. Any number of offices may be
held by the same person, except that the offices of President and Secretary
shall not be held by the same person simultaneously.
4.2. TIME OF ELECTION. The officers above named shall be chosen by the
Board of Directors at its first meeting after each annual meeting of
stockholders. None of said officers need be a director.
4.3. ADDITIONAL OFFICERS. The board may appoint such other officers and
agents as it shall deem necessary, who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
4.4. TERMS OF OFFICE. Each officer of the Company shall hold office until
his successor is chosen and qualified, or until his earlier resignation or
removal. Any officer elected or appointed by the Board of Directors may be
removed at any time by the Board of Directors.
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4.5. COMPENSATION OF OFFICERS. The Board of Directors shall have power to
fix the compensation of all officers of the Company. It may authorize any
officer, upon whom the power of appointing subordinate officers may have been
conferred, to fix the compensation of such subordinate officers.
4.6. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors shall
preside at all meetings of the stockholders and directors, and shall have such
other duties as may be assigned to him from time to time by the Board of
Directors.
4.7. PRESIDENT. Unless the Board of Directors otherwise determines, the
President shall be the chief executive officer and head of the Company. Unless
there is a Chairman of the Board, the President shall preside at all meetings of
directors and stockholders. Under the supervision of the Board of Directors and
of the executive committee, the President shall have the general control and
management of its business and affairs, subject, however, to the right of the
Board of Directors and of the executive committee to confer any specific power,
except such as may be by statute exclusively conferred on the President, upon
any other officer or officers of the Company. The President shall perform and do
all acts and things incident to the position of President and such other duties
as may be assigned to him from time to time by the Board of Directors or the
executive committee.
4.8. VICE-PRESIDENTS. The Vice-Presidents shall perform such of the duties
of the President on behalf of the Company as may be respectively assigned to
them from time to time by the Board of Directors or by the executive committee
or by the President. The Board of Directors or the executive committee may
designate one of the Vice-Presidents as the Executive Vice-President, and in the
absence or inability of the President to act, such Executive Vice-President
shall have and possess all of the powers and discharge all of the duties of the
President, subject to the control of the board and of the executive committee.
4.9. TREASURER. The Treasurer shall have the care and custody of all the
funds and securities of the Company that may come into his hands as Treasurer,
and the power and authority to endorse checks, drafts and other instruments for
the payment of money for deposit or collection when necessary or proper and to
deposit the same to the credit of the Company in such bank or banks or
depository as the Board of Directors or the executive committee, or the officers
or agents to whom the Board of Directors or the executive committee may delegate
such authority, may designate, and he may endorse all commercial documents
requiring endorsements for or on behalf of the Company. He may sign all receipts
and vouchers for the payments made to the Company. He shall render an account of
his transactions to the Board of Directors or to the executive committee as
often as the board or the committee shall require the
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same. He shall enter regularly in the books to be kept by him for that purpose
full and adequate account of all moneys received and paid by him on account of
the Company. He shall perform all acts incident to the position of Treasurer,
subject to the control of the Board of Directors and of the executive committee.
He shall when requested, pursuant to vote of the Board of Directors or the
executive committee, give a bond to the Company conditioned for the faithful
performance of his duties, the expense of which bond shall be borne by the
Company.
4.10. SECRETARY. The Secretary shall keep the minutes of all meetings of
the Board of Directors and of the stockholders; he shall attend to the giving
and serving of all notices of the Company. Except as otherwise ordered by the
Board of Directors or the executive committee, he shall attest the seal of the
Company upon all contracts and instruments executed under such seal and shall
affix the seal of the Company thereto and to all certificates of shares of
capital stock of the Company. He shall have charge of the stock certificate
book, transfer book and stock ledger, and such other books and papers as the
Board of Directors or the executive committee may direct. He shall, in general,
perform all the duties of Secretary, subject to the control of the Board of
Directors and of the executive committee.
4.11. ASSISTANT SECRETARY. The Board of Directors or any two of the
officers of the Company acting jointly may appoint or remove one or more
Assistant Secretaries of the Company. Any Assistant Secretary upon his
appointment shall perform such duties of the Secretary, and also any and all
such other duties as the executive committee or the Board of Directors or the
President or the Executive Vice-President or the Treasurer or the Secretary may
designate.
4.12. ASSISTANT TREASURER. The Board of Directors or any two of the
officers of the Company acting jointly may appoint or remove one or more
Assistant Treasurers of the Company. Any Assistant Treasurer upon his
appointment shall perform such of the duties of the Treasurer, and also any and
all such other duties as the executive committee or the Board of Directors or
the President or the Executive Vice-President or the Treasurer or the Secretary
may designate.
4.13. SUBORDINATE OFFICERS. The Board of Directors may select such
subordinate officers as it may deem desirable. Each such officer shall hold
office for such period, have such authority, and perform such duties as the
Board of Directors may prescribe. The Board of Directors may, from time to time,
authorize any officer to appoint and remove subordinate officers and to
prescribe the powers and duties thereof.
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ARTICLE V. - STOCK.
-------------------
5.1. STOCK. Each stockholder shall be entitled to a certificate or
certificates of stock of the Company in such form as the Board of Directors may
from time to time prescribe. The certificates of stock of the Company shall be
numbered and shall be entered in the books of the Company as they are issued.
They shall certify the holder's name and number and class of shares and shall be
signed by both of (i) either the President or a Vice-President, and (ii) any one
of the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, and shall be sealed with the corporate seal of the Company. If such
certificate is countersigned (l) by a transfer agent other than the Company or
its employee, or, (2) by a registrar other than the Company or its employee, the
signature of the officers of the Company and the corporate seal may be
facsimiles. In case any officer or officers who shall have signed, or whose
facsimile signature or signatures shall have been used on, any such certificate
or certificates shall cease to be such officer or officers of the Company,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Company, such certificate or
certificates may nevertheless be adopted by the Company and be issued and
delivered as though the person or persons who signed such certificate or
certificates or whose facsimile signature shall have been used thereon had not
ceased to be such officer or officers of the Company.
5.2. FRACTIONAL SHARE INTERESTS. The Company may, but shall not be
required to, issue fractions of a share. If the Company does not issue fractions
of a share, it shall (i) arrange for the disposition of fractional interests by
those entitled thereto, (ii) pay in cash the fair value of fractions of a share
as of the time when those entitled to receive such fractions are determined, or
(iii) issue scrip or warrants in registered or bearer form that shall entitle
the holder to receive a certificate for a full share upon the surrender of such
scrip or warrants aggregating a full share. A certificate for a fractional share
shall, but scrip or warrants shall not unless otherwise provided therein,
entitle the holder to exercise voting rights, to receive dividends thereon, and
to participate in any of the assets of the Company in the event of liquidation.
The Board of Directors may cause scrip or warrants to be issued subject to the
conditions that they shall become void if not exchanged for certificates
representing full shares before a specified date, or subject to the conditions
that the shares for which scrip or warrants are exchangeable may be sold by the
Company and the proceeds thereof distributed to the holders of scrip or
warrants, or subject to any other conditions that the Board of Directors may
impose.
5.3. TRANSFERS OF STOCK. Subject to any transfer restrictions then in
force, the shares of stock of the Company shall be transferable only upon its
books by the holders thereof in person or by their duly authorized attorneys or
legal representatives and upon such transfer the old certificates shall be
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surrendered to the Company by the delivery thereof to the person in charge of
the stock and transfer books and ledgers or to such other person as the
directors may designate by whom they shall be canceled and new certificates
shall thereupon be issued. The Company shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person whether or not it shall
have express or other notice thereof save as expressly provided by the laws of
Delaware.
5.4. RECORD DATE. For the purpose of determining the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or the
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, that shall
not be more than sixty (60) days nor less than ten (10) days before the date of
such meeting, nor more than sixty (60) days prior to any other action. If no
such record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed; and
the record date for determining stockholders for any other purpose shall be at
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at any meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
5.5. TRANSFER AGENT AND REGISTRANT. The Board of Directors may appoint one
or more transfer agents or transfer clerks and one or more registrars and may
require all certificates of stock to bear the signature or signatures of any of
them.
5.6. DIVIDENDS.
1. Power to declare. Dividends upon the capital stock of the Company,
subject to the provisions of the Company's Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the
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<PAGE> 14
provisions of the Company's Certificate of Incorporation and the laws of
Delaware.
2. Reserves. Before payment of any dividend, there may be set aside
out of any funds of the Company available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Company, or
for such other purpose as the directors shall think conducive to the
interest of the Company, and the directors may modify or abolish any such
reserve in the manner in which it was created.
5.7. LOST, STOLEN, OR DESTROYED CERTIFICATES. No certificates for shares
of stock of the Company shall be issued in place of any certificate alleged to
have been lost, stolen, or destroyed, except upon production of such evidence of
the loss, theft, or destruction and upon indemnification of the Company and its
agents to such extent and in such manner as the Board of Directors may from time
to time prescribe.
5.8. INSPECTION OF BOOKS. The stockholders of the Company, by a majority
vote at any meeting of stockholders duly called, or in case the stockholders
shall fail to act, the Board of Directors shall have power from time to time to
determine whether and to what extent and at what times and places and under what
conditions and regulations the accounts and books of the Company (other than the
stock ledger) or any of them, shall be open to inspection of stockholders; and
no stockholder shall have any right to inspect any account or book or document
of the Company except as conferred by statute or authorized by the Board of
Directors or by a resolution of the stockholders.
ARTICLE VI. - MISCELLANEOUS MANAGEMENT PROVISIONS.
--------------------------------------------------
6.1. CHECKS, DRAFTS, AND NOTES. All checks, drafts, or orders for the
payment of money, and all notes and acceptances of the Company shall be signed
by such officer or officers, or such agent or agents, as the Board of Directors
may designate.
6.2. NOTICES.
1. Notices to directors may, and notices to stockholders shall, be in
writing and delivered personally or mailed to the directors or stockholders
at their addresses appearing on the books of the Company. Notice by mail
shall be deemed to be given at the time when the same shall be mailed.
Notice to directors may also be given by telegram, telecopy or orally, by
telephone or in person.
-14-
<PAGE> 15
2. Whenever any notice is required to be given under the provisions
of any applicable statute or of the Company's Certificate of Incorporation
or of these by-laws, a written waiver of notice, signed by the person or
persons entitled to said notice, whether before or after the time stated
therein or the meeting or action to which such notice relates, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting except when the person
attends a meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
6.3. CONFLICT OF INTEREST. No contract or transaction between the Company
and one or more of its directors or officers, or between the Company and any
other corporation, partnership, association, or other organization in which one
or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the board of or committee thereof that authorized the contract or transaction,
or solely because his or their votes are counted for such purpose, if: (i) the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee and the board or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders of the
Company entitled to vote thereon, and the contract or transaction as
specifically approved in good faith by vote of such stockholders; or (iii) the
contract or transaction is fair as to the Company as of the time it is
authorized, approved, or ratified, by the Board of Directors, a committee or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
that authorizes the contract or transaction.
6.4. VOTING OF SECURITIES OWNED BY THE COMPANY. Subject always to the
specific directions of the Board of Directors, (i) any shares or other
securities issued by any other corporation and owned or controlled by the
Company may be voted in person at any meeting of security holders of such other
corporation by the President of the Company if he is present at such meeting, or
in his absence by the Treasurer of the Company if he is present at such meeting,
and (ii) whenever, in the judgment of the President, it is desirable for the
Company to execute a proxy or written consent in respect to any shares or other
securities issued by any other corporation and owned by the Company, such proxy
or consent shall be executed in the name of the Company by the President,
without the necessity of any authorization by the Board of Directors, affixation
of corporate seal or countersignature or attestation by another officer,
provided
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<PAGE> 16
that if the President is unable to execute such proxy or consent by reason of
sickness, absence from the United States or other similar cause, the Treasurer
may execute such proxy or consent. Any person or persons designated in the
manner above stated as the proxy or proxies of the Company shall have full
right, power and authority to vote the shares or other securities issued by such
other corporation and owned by the Company the same as such shares or other
securities might be voted by the Company.
ARTICLE VII. - INDEMNIFICATION.
-------------------------------
7.1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of being or having been a director or officer of the
Company or serving or having served at the request of the Company as a director,
trustee, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (an "Indemnitee"), whether the basis of such proceeding is
alleged action or failure to act in an official capacity as a director, trustee,
officer, employee or agent or in any other capacity while serving as a director,
trustee, officer, employee or agent, shall be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than permitted prior thereto) (as used in this Article 7,
the "Delaware Law"), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such Indemnitee in
connection therewith and such indemnification shall continue as to an Indemnitee
who has ceased to be a director, trustee, officer, employee, or agent and shall
inure to the benefit of the Indemnitee's heirs, executors, and administrators;
provided, however, that, except as provided in [section]7.2 hereof with respect
to Proceedings to enforce rights to indemnification, the Company shall indemnify
any such Indemnitee in connection with a Proceeding (or part thereof) initiated
by such Indemnitee only if such Proceeding (or part thereof) was authorized by
the Board of Directors of the Company. The right to indemnification conferred in
this Article 7 shall be a contract right and shall include the right to be paid
by the Company the expenses (including attorneys' fees) incurred in defending
any such Proceeding in advance of its final disposition (an "Advancement of
Expenses"); provided, however, that, if the Delaware Law so requires, an
Advancement of Expenses incurred by an Indemnitee shall be made only upon
delivery to the Company of an undertaking (an "Undertaking"), by or on behalf of
such Indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (a "Final Adjudication") that such
-16-
<PAGE> 17
Indemnitee is not entitled to be indemnified for such expenses under this
Article 7 or otherwise.
7.2. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under [section] 7.1
hereof is not paid in full by thE Company within sixty days after a written
claim has been received by the Company, except in the case of a claim for an
Advancement of Expenses, in which case the applicable period shall be twenty
days, the Indemnitee may at any time thereafter bring suit against the Company
to recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Company to recover an Advancement of
Expenses pursuant to the terms of an Undertaking, the Indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the Indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the Indemnitee to enforce a right to an
Advancement of Expenses) it shall be a defense that, and (ii) in any suit by the
Company to recover an Advancement of Expenses pursuant to the terms of an
Undertaking the Company shall be entitled to recover such expenses upon a Final
Adjudication that, the Indemnitee has not met the applicable standard of conduct
set forth in the Delaware Law. Neither the failure of the Company (including its
Board of Directors, independent legal counsel, or its stockholders) to have made
a determination prior to the commencement of such suit that indemnification of
the Indemnitee is proper in the circumstances because the Indemnitee has met the
applicable standard of conduct set forth in the Delaware Law, nor an actual
determination by the Company (including its Board of Directors, independent
legal counsel, or its stockholders) that the Indemnitee has not met such
applicable standard of conduct, shall create a presumption that the Indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the Indemnitee, be a defense to such suit. In any suit brought by the
Indemnitee to enforce a right to indemnification or to an Advancement of
Expenses hereunder, or by the Company to recover an Advancement of Expenses
pursuant to the terms of an Undertaking, the burden of proving that the
Indemnitee is not entitled to be indemnified, or to such Advancement of
Expenses, under this Article 7 or otherwise shall be on the Company.
7.3. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the
Advancement of Expenses conferred in this Article 7 shall not be exclusive of
any other right that any person may have or hereafter acquire under any statute,
the Company's Certificate or Incorporation, by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
7.4. INSURANCE. The Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Company would have
the power
-17-
<PAGE> 18
to indemnify such person against such expense, liability or loss under this
Article 7 or under the Delaware Law.
7.5. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE COMPANY. The Company
may, to the extent authorized from time to time by the Board of Directors, grant
rights to indemnification, and to the Advancement of Expenses, to any employee
or agent of the Company to the fullest extent of the provisions of this Article
7 with respect to the indemnification and Advancement of Expenses of directors
and officers of the Company.
ARTICLE VIII. - AMENDMENTS.
---------------------------
8.1. AMENDMENTS. Subject always to any limitations imposed by the
Company's Certificate of Incorporation, from and after the closing of the IPO,
these By-Laws may be altered, amended, or repealed, or new By-Laws may be
adopted, only by (i) the affirmative vote of the holders of at least a majority
of the outstanding voting stock of the Company, provided, that the affirmative
vote of the holders of at least 67% of the outstanding voting stock of the
Company shall be required for any such alteration, amendment, repeal, or
adoption that would affect or be inconsistent with the provisions of Sections
2.11, 2.12, and this Section 8.1 (in each case, in addition to any separate
class vote that may be required pursuant to the terms of any then outstanding
preferred stock of the Company), or (ii) by resolution of the Board of Directors
duly adopted by not less than a majority of the directors then constituting the
full Board of Directors.
-18-
<PAGE> 1
Exhibit 5
Bingham, Dana & Gould LLP
150 Federal Street
Boston, MA 02110
Tel: 617-951-8000
Fax: 617-951-8736
July 8, 1996
MediQual Systems, Inc.
1900 West Park Drive
Westborough, MA 01581
Dear Sirs/Mesdames:
We have acted as counsel for MediQual Systems, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of 2,200,000 shares and an additional 330,000
shares which may be offered by the Company in order to cover over-allotments, if
any, of Common Stock, par value $.001 per share (the "Shares"), pursuant to a
Registration Statement on Form S-1 (as amended, the "Registration Statement"),
initially filed with the Securities Exchange Commission on May 31, 1996.
We have reviewed the corporate proceedings of the Company with respect to
the authorization of the the issuance of the Shares. We have also examined and
relied upon originals or copies, certified or otherwise identified or
authenticated to our satisfaction, of such corporate records, instruments,
agreements or other documents of the Company, and certificates of officers of
the Company as to certain factual matters, and have made such investigation of
law and have discussed with officers and representatives of the Company such
questions of fact, as we have deemed necessary or appropriate as a basis for the
opinions hereinafter expressed. In our examination, we have assumed the
genuineness of all signatures, the conformity to the originals of all documents
reviewed by us as copies, the authenticity and completeness of all original
documents reviewed by us in original or copy form and the legal competence of
each individual executing any document.
We have also assumed that an Underwriting Agreement substantially in the
form of Exhibit 1.1 to the Registration Statement, by and among the Company and
the underwriters named therein (the "Underwriting Agreement"), will have been
duly executed and delivered pursuant to the authorizing votes of the Board of
Directors of the Company and that the Shares will be sold and transferred only
upon the payment therefor as
<PAGE> 2
MediQual Systems, Inc.
July 8, 1996
Page 2
provided in the Underwriting Agreement. We have further assumed that the
registration requirements of the Act and all applicable requirements of state
laws regulating the sale of securities will have been duly satisfied.
This opinion is limited solely to the Delaware General Corporation Law as
applied by courts located in Delaware.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized, and when delivered and paid for in accordance
with the provisions of the Underwriting Agreement, will be validly issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
/s/ BINGHAM, DANA & GOULD LLP
<PAGE> 1
Exhibit 10.1
MEDIQUAL SYSTEMS, INC.
1987 NONQUALIFIED STOCK OPTION PLAN
1. Purpose. The purpose of the MediQual Systems, Inc. 1987
Nonqualified Stock Option Plan ("Plan"), as herein set forth, is to encourage
stock ownership by certain employees, consultants and directors of MediQual
Systems, Inc. ("Company") and its subsidiaries, to provide an incentive for such
employees, consultants and directors to expand and improve the profits and
prosperity of the Company and its subsidiaries, and to assist the Company and
its subsidiaries in attracting and retaining employees, consultants and
directors through the grant of options pursuant to this Plan ("Options") to
purchase shares of the Company's common stock ("Shares") and thereby share in
the Company's growth and profits.
2. Administration. The Board of Directors of the Company
("Board") shall appoint a committee, as may be constituted from time to time
("Committee"), comprised at any time of not fewer than three members who are
"disinterested persons" as defined in Rule 16b-3 of the Securities and Exchange
Commission. The Committee shall interpret this Plan, prescribe, amend and
rescind rules and regulations relating thereto and make all other determinations
necessary or advisable for the administration of this Plan. Any such action by
the Committee shall be final and conclusive on all persons having any interest
in the Shares to which such action relates. A majority of the members of the
Committee shall constitute a quorum and all determinations of the Committee
shall be made by a majority of its members. Any determination of the Committee
under this Plan may be made without notice of meeting of the Committee by a
writing signed by a majority of the Committee members. No member of the Board or
of the Committee shall be liable for any action taken or omitted, or
determination made, by him or her in good faith.
3. Eligibility. Options may be granted under this Plan only to
employees, consultants or directors of the Company or its subsidiaries who are
not, and were not at any time during the prior twelve-month period, members of
the Committee. The Committee shall determine, within the limits of the express
provisions of this Plan, those employees, consultants and directors of the
Company or any of its subsidiaries ("Optionees") to whom, and the time or times
at which, Options shall be granted. The Committee's determination to grant
Options to an Optionee in any year shall not require the Committee to so
designate such Optionee in any other year. The Committee shall also determine
the number of Shares to be subject to each Option, the duration of each Option,
the exercise price
<PAGE> 2
-2-
("Option price") under each Option, the time or times within which (during the
term of the Option) all or portions of each Option may be exercised and whether
cash or Shares or any combination thereof may be accepted in full or partial
payment upon exercise of an Option. The Committee shall consider such facts as
it deems pertinent in selecting Optionees and in determining the Options to be
granted to them, including without limitation: (i) the financial condition of
the Company and its subsidiaries; (ii) anticipated profits for the current or
future years; (iii) contributions of Optionees to the profitability and
development of the Company and its subsidiaries; and (iv) other compensation
provided to Optionees.
4. Option Exercise Price and Number of Shares.
(a) Individual Option Exercise Price and Number of
Shares. Each Option when granted shall state the number of Shares to which it
pertains and shall state the Option price for each Share.
(b) Total Number of Shares Available. Options may be
granted for a number of Shares not to exceed, in the aggregate, two million one
hundred thirty-five thousand four hundred (3,426,624) Shares ($0.001 par value),
except as such number of Shares shall be adjusted in accordance with the
provisions of Section 6 hereof. Such Shares may be either authorized but
unissued Shares or treasury Shares. In the event that any Option granted under
this Plan expires unexercised, or is surrendered by an Optionee for
cancellation, or is terminated or ceases to be exercisable for any other reason
without having been fully exercised, prior to the end of the period during which
Options may be granted under this Plan, the Shares theretofore subject to such
Option, or to the unexercised portion thereof, shall again become available for
new Options to be granted under this Plan to any eligible employee, consultant
or director of the Company or any of its subsidiaries (including the holder of
such former Option).
5. Period of Option and Certain Limitations on Right to Exercise.
Options granted pursuant to this Plan shall be authorized by the Committee and
shall be evidenced by agreements in such form as the Committee shall from time
to time approve. Such agreements shall comply with and be subject to the
following terms and conditions:
(a) General Period of Exercise. The terms of the Option
granted shall provide when the Option shall be exercisable. No Option may be
exercised for a fractional Share. No Option may be exercised more than ten (10)
years and one (1) day after the grant of the Option. By
<PAGE> 3
-3-
action of the Committee, the time any Option granted is exercisable may be
accelerated or modified as deemed appropriate, subject to Section 13. Unless the
Committee determines otherwise, Options need not be exercised in the order of
grant and may be exercised in any manner consistent with the Option grant.
(b) Termination of Option. In the event that any
Optionee shall cease to be an employee, consultant or director of the Company
or any of its subsidiaries for any reason other than death or disability, the
Optionee shall have the right, subject to the provisions of Section 5(a) and 6
hereof, to exercise such Optionee's Option at any time within forty-five (45)
days after the cessation of employment or service as a consultant or director,
or within such greater number of days as the Committee shall determine, but
only as to such number of Shares as to which the Optionee's Option was
exercisable at the date of such cessation of employment or service. If an
Optionee dies while in the employ of the Company or any of its subsidiaries or
while engaged to provide consulting services to the Company or any of its
subsidiaries or while serving as a director of the Company or any of its
subsidiaries, the Optionee's estate, personal representative or the person that
acquires the Optionee's Option by bequest or inheritance or by reason of the
Optionee's death shall have the right, subject to the provisions of this
Section 5(b) and Sections 6 and 9 hereof, to exercise the deceased Optionee's
Option at any time within one (1) year from the date of the Optionee's death,
but only as to the number of Shares as to which the deceased Optionee's Option
was exercisable on the date of the Optionee's death. If an Optionee ceases to
be an employee, consultant or director of the Company or any of its
subsidiaries because of a disability of the Optionee (within the meaning of
Section 105(d)(4) of the Internal Revenue Code of 1986, as amended), the
Optionee shall have the right, subject to the provisions of Section 5(a) and 6
hereof, to exercise such Optionee's Option at any time within three (3) months
after the cessation of employment or service as a consultant or director but
only as to such number of Shares as to which the Optionee's Option was
exercisable at the date of such cessation of employment or service. In any such
event, unless so exercised within the period as aforesaid, the Option shall
terminate. The time of cessation of employment or service and whether an
authorized leave of absence or absence on military or government service shall
constitute cessation of employment or service for the purpose of this Plan,
shall be determined by the Committee.
(c) Method of Exercise. Options may be exercised by
giving written notice to the Treasurer of the Company, stating the number of
Shares with respect to which the Option is being exercised and tendering payment
therefor. Payment for Shares generally shall be made in cash. To the extent
permitted by the Committee, payment for Shares may be made in cash or other
Shares or any combination thereof.
<PAGE> 4
-4-
6. Adjustments.
(a) Capital Adjustment. The aggregate number of Shares
with respect to which Options may be granted hereunder, the number of Shares
subject to each outstanding Option, and the Option price per Share for each such
Option, shall be appropriately adjusted, as the Committee may determine, for any
increase or decrease in the number of Shares resulting from a subdivision or
consolidation of Shares or any other capital adjustment whether through
reorganization, payment of a Share dividend or other increase or decrease in the
number of such Shares outstanding effected without receipt of consideration by
the Company
(b) Acceleration Upon Transactions. Subject to any
required action by the Company's stockholders, if the Company shall be a party
to a transaction involving a merger or consolidation (except a merger or
consolidation which does not require approval of the Company's stockholders
under the provisions of the General Corporation Law of the State of Delaware) or
a sale of all or substantially all of its assets or if the Company shall
dissolve or be liquidated (any such merger, consolidation, sale, dissolution or
liquidation being herein sometimes referred to as a "Transaction"), in addition
to the total number of Options already exercisable pursuant to the terms of the
Option grants, the following Options shall become immediately exercisable during
a period of not less than thirty (30) days preceding the effective date of the
Transaction:
(i) all unexercised Options which by their terms would
become exercisable on or before the ninetieth (90th) day after the
earlier of the date on which the Company enters into an agreement for,
or the closing of, the Transaction or the Company's adoption of the
plan of dissolution or liquidation (the date of such agreement, closing
or adoption of the plan being herein referred to as the "Applicable
Date"); and
(ii) fifty percent (50%) of all remaining Options which by
their terms would become exercisable after the ninetieth (90th) day
following the Applicable Date.
Notice of exercisability of the Options because of this provision shall
be given personally or shall be mailed, first-class postage prepaid, to all
holders of Options at least thirty (30) days prior to the effective date of the
Transaction. Such notice shall state the date the Transaction is expected to
become effective.
<PAGE> 5
-5-
(c) Applicability of Options Not Exercised. Cancelled or Otherwise
Provided For Upon a Transaction. Options not exercised pursuant to Section 6(b)
and not otherwise provided for pursuant to Section 6(b) shall terminate upon the
occurrence of a Transaction.
(d) Other Provision For Unexercisable and Unexercised Options in a
Transaction. In respect of a Transaction, any or all Options which are not
exercised (whether or not theretofore exercisable or becoming exercisable
pursuant to Section 6(b)) may be otherwise provided for (by any means, such as,
for example, cash payment, conversion into other property or securities or
otherwise as specified in the notice referred to in this sentence) as of the
effective date of the Transaction by the giving of not less than thirty (30)
days notice to the holders thereof of the Company's intention to so otherwise
provide for such Options as specified in such notice, all as of the effective
date of the Transaction.
7. Option Agreements. Each Optionee shall agree to such terms and
conditions in connection with the exercise of the Options granted, as the
Committee may deem appropriate. Option agreements need not be identical. The
certificates evidencing the Shares acquired upon exercise of an Option may bear
a legend referring to the terms and conditions contained in the respective
Option agreement and this Plan, and the Company may place a stop transfer order
with its transfer agent against the transfer of such Shares. If requested to do
so by the Committee at the time of exercise of an Option, each Optionee shall
execute a certificate indicating that he or she is purchasing the Shares under
such Option for investment and not with any present intention to sell the same.
8. Legal and Other Requirements. The obligation of the Company to
sell and deliver Shares under Options granted under this Plan shall be subject
to all applicable laws, regulations, rules and approvals, including, but not by
way of limitation, the effectiveness of a registration statement under the
Securities Act of 1933, if deemed necessary or appropriate by the Committee,
covering the Shares reserved for issuance upon exercise of Options. An Optionee
shall have no rights as a stockholder with respect to any Shares covered by an
Option granted to, or exercised by, such Optionee until the date of delivery of
a stock certificate to such Optionee for such Shares. Shares issued hereunder
may be legended as the Committee shall deem appropriate to reflect the
restrictions imposed under the Plan or by securities laws generally. No
adjustment other than pursuant to Section 6 hereof shall be made for dividends
or other rights for which the record date is prior to the date such stock
certificate is delivered.
<PAGE> 6
-6-
9. Nontransferability. During the lifetime of an Optionee, any
Option granted to such Optionee shall be exercisable only by the Optionee or the
Optionee's guardian or legal representative. No Option shall be assignable or
transferable, except by will or by the laws of descent and distribution. The
granting of an Option shall impose no obligation upon the Optionee to exercise
such Option.
10. Tax Withholding. The Company and its subsidiaries shall comply
with the obligations imposed on the Company and its subsidiaries under
applicable tax withholding laws, if any, with respect to Options granted
hereunder, Shares transferred upon exercise thereof, and the disposition of such
Shares thereafter, and shall be entitled to do any act or thing to effectuate
any such required compliance, including. without limitation, withholding from
amounts payable by the Company and its subsidiaries to an Optionee and including
making demand on an Optionee for the amounts required to be withheld.
11. No Contract of Employment. Neither the adoption of this Plan
nor the grant of any Option shall be deemed to obligate the Company or its
subsidiaries to continue the employment or service of any employee, consultant
or director of the Company or its subsidiaries for any particular period.
12. Indemnification of Committee. The members of the Committee
shall be indemnified by the Company to the fullest extent permitted by Delaware
law, the Company's Certificate of Incorporation and the Company's by-laws.
13. Amendment and Termination of Plan. The Company may amend this
Plan from time to time or terminate this Plan at any time, but no such action
shall reduce the number of the Shares subject to the then outstanding Options
granted to any Optionee or adversely to an Optionee change the terms and
conditions thereof without the Optionee's consent. However, except for the
adjustments expressly provided for herein, no amendment may be made solely by
Board action if the amendment would: (i) materially increase the benefits
accruing to Optionees under this Plan; (ii) materially increase the number of
Shares which may be issued under this Plan; or (iii) materially modify the
requirements as to eligibility for participation in this Plan.
<PAGE> 7
-7-
14. Effective Date of Plan. This Plan shall become effective upon
adoption by the Board; provided, however, that it shall be submitted for
approval by the holders of a majority of the outstanding Shares within twelve
(12) months thereafter, and Options granted prior to such stockholder approval
shall become null and void if such stockholder approval is not obtained.
<PAGE> 1
Exhibit 10.12
MEDIQUAL SYSTEMS, INC.
5,714,286 Shares of
Class B Convertible Preferred Stock
-------------------------------
STOCK PURCHASE AGREEMENT
-------------------------------
August 4, 1986
<PAGE> 2
MEDIQUAL SYSTEMS, INC.
Stock Purchase Agreement
August 4, 1986
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. TERMS OF PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Reserved Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. Sale and Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2. REPRESENTATIONS AND WARRANTIES OF COMPANY . . . . . . . . . . . . . . . . 2
2.1. Organization and Corporate Power . . . . . . . . . . . . . . . . . . . . . 2
2.2. Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4. Financial Statements & Backlog . . . . . . . . . . . . . . . . . . . . . . 5
2.5. Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . 6
2.6. Absence of Certain Developments . . . . . . . . . . . . . . . . . . . . . 7
2.7. Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.8. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.9. Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . 9
2.10. Patents; Trade Secrets; Employee Restrictions . . . . . . . . . . . . . . 10
2.11. Effect of Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.12. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.13. Offerees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.14. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.15. Information Supplied to Purchasers . . . . . . . . . . . . . . . . . . . . 14
2.16. Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 3. CONDITIONS OF PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.1. Certificate of Company . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.2. Opinion of Company Counsel . . . . . . . . . . . . . . . . . . . . . . . . 16
3.3. Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.4. Amendment of Articles of Incorporation . . . . . . . . . . . . . . . . . . 16
3.5. Amendment of By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.6. Shareholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
3.7. Termination of Voting Trust . . . . . . . . . . . . . . . . . . . . . . . 17
3.8. Amendment of Shareholder Agreement . . . . . . . . . . . . . . . . . . . . 17
3.9. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.10. Election of Director . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.11. All Proceedings Satisfactory . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4. COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.2. Budget and Operating Forecast . . . . . . . . . . . . . . . . . . . . . . 20
4.3. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.4. Payment of Taxes, Compliance with Laws, Etc. . . . . . . . . . . . . . . . 20
4.5. Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.6. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.7. Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.8. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . 23
4.9. Affiliated Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.10. Management Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.11. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.12. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.13. Board of Directors Meetings . . . . . . . . . . . . . . . . . . . . . . . 24
4.14. Right to Participate in Sales of Additional Securities . . . . . . . . . . 24
4.15. Shareholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.16. Distributions or Redemption of Capital Stock . . . . . . . . . . . . . . . 27
4.17. No Amendments to Articles of Organization or By-Laws . . . . . . . . . . . 27
4.18. Restrictions on Other Agreements . . . . . . . . . . . . . . . . . . . . . 28
4.19. Further Shares Issuable . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 5. REPRESENTATIONS AND WARRANTIES
OF REPURCHASERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6. REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.1. Optional Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.2. Required Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.3. Registrable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 35
6.4. Further Obligations of the Company . . . . . . . . . . . . . . . . . . . . 36
6.5. Form S-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6.6. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.7. Rule 144 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 40
6.8. Transfer of Registration Rights . . . . . . . . . . . . . . . . . . . . . 41
6.9. Granting of Registration Rights . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
7.1. Amendments, Waivers and Consents . . . . . . . . . . . . . . . . . . . . . 42
7.2. Survival of Covenants; Assignability of Rights . . . . . . . . . . . . . . 43
7.3. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.4. Section Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.5. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.6. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.7. Notices and Demands . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
7.8. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
7.9. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
Exhibits
Exhibit A - Purchasers
Exhibit B - Certificate of Amendment
Exhibit C - Form of Company Counsel Opinion
Exhibit D - Form of Shareholders Agreement
Exhibit E - Form of Confidentiality and Invention Agreement
Exhibit F - Intentionally Omitted
Exhibit G - Form of Amendment or Shareholder Agreement
Schedule Volume
Schedule 2.3.1 - Capitalization
Schedule 2.3.2 - Restrictions on Stock Transfer
Schedule 2.3.3 - Subsidiaries and Investments
Schedule 2.4 - Financial Statements and Backlog
Schedule 2.5 - Liabilities
Schedule 2.6 - Recent Developments
Schedule 2.7 - Title Matters
Schedule 2.8 - Intentionally Omitted
Schedule 2.9 - Contracts and Commitments
Schedule 2.10 - Intellectual Property Matters
Schedule 2.12 - Litigation
Schedule 2.13 - Intentionally Omitted
Schedule 4.9 - Affiliated Transactions
Schedule 4.11 - Use of Proceeds
(iii)
<PAGE> 5
AGREEMENT FOR PURCHASE AND SALE
OF CLASS B CONVERTIBLE PREFERRED STOCK OF
MEDIQUAL SYSTEMS, INC.
AGREEMENT made as of this fourth day of August, 1986 by and among
Mediqual Systems, Inc., a Delaware corporation (the "Company"), and the persons
named in Exhibit A hereto (collectively, the "Purchasers," and
each individually, a "Purchaser").
SECTION 1. TERMS OF PURCHASE
1.1. Description of Securities. The Company has authorized the issuance
and sale to the Purchasers of 5,714,286 shares (the "purchased Shares") of its
authorized but unissued Class B Convertible preferred Shares. $.01 par value
(the "Class B Preferred Shares"). for a purchase price of $.70 per purchased
Share
1.2. Reserved Shares. The Company will authorize and will
reserve. and covenants to continue to reserve, a sufficient number of shares of
the Common Shares, $.001 par value (the "Common Shares"), to satisfy the rights
of conversion of the holders of the purchased Shares. Any shares of Common
Shares or any successor class of stock of the Company hereafter issued or
issuable upon conversion of the purchased Shares are herein referred to as
"Conversion Shares," and the purchased Shares and the Conversion Shares are
herein collectively referred to as the "Securities."
1.3. Sale and Purchase. Subject to the terms and conditions herein set
forth. the Company shall issue and sell to each of the Purchasers. and each
Purchaser shall purchase from the Company the number of Purchased Shares set
forth opposite the name of such Purchaser in Column 2 of Exhibit A for the
aggregate purchase price set forth in Column 3 of Exhibit A.
1.4. Closing. A Closing (the "Closing") of the sale and
purchase of the Purchased Shares shall take place at the offices of Goodwin,
Procter & Hoar. located at Exchange Place Boston, Massachusetts. at 1:00 P.M.,
on August 4. 1986, or such other date, time and place as shall be mutually
agreed upon by the Company and the purchasers (the "Closing Date") At the
Closing the Company will deliver the Purchased Shares being acquired by each
Purchaser in the form of a certificate issued in such purchaser's name or in the
name of its nominee (of which the Purchaser shall notify the Company not less
than one (1) business day prior to the Closing). against payment of the purchase
price therefor by or on behalf of each Purchaser to the Company by certified or
bank cashier's check.
<PAGE> 6
-2-
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Purchasers to enter into this Agreement. the
Company hereby represents and warrants as follows:
2.1. Organization and Corporate Power. The Company is a corporation
duly organized. validly existing and in good standing under the laws of the
State of Delaware and is qualified to do business as a foreign corporation in
each jurisdiction where such qualification is required and failure to have such
qualification may have a material adverse effect on the Company The Company has
all required corporate power and authority to own its property. to carry on its
business as presently conducted or contemplated, to enter into and perform this
Agreement, and generally to carry out the transactions contemplated hereby The
copies of the Articles of Incorporation and By-Laws of the Company. as amended
to date, which have been furnished to counsel for the purchasers by the Company,
are correct and complete The Company is not in violation of any term of its
Articles of Incorporation or By-Laws, or any material agreement. instrument,
judgment, decree or order applicable to the Company the violation of which would
have a material adverse effect on the Company.
2.2. Authorization. This Agreement and the documents and instruments
executed pursuant hereto and referred to in Sections 3.6, 3.7 and 3.8 are valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws applicable to creditors' rights and
remedies and to the exercise of judicial' discretion in accordance with general
principles of equity and subject to any limitations on the enforcement of
indemnity obligations under applicable federal and state securities laws The
execution, delivery and performance of this Agreement and issuance of the Class
B preferred Shares and the Conversion Shares have been duly authorized by all
necessary corporate or other action of the Company.
2.3. Capitalization. The authorized and issued capital stock of the
Company and the consideration received and to be received therefor are as set
forth in Schedule 2.3.1 of the Schedule Volume delivered herewith (the "Schedule
Volume") All of the presently outstanding shares of capital stock of the Company
have been duly and validly authorized and issued and are fully paid and
non-assessable The Class B Preferred Shares have been duly and validly
authorized and, when delivered and paid for pursuant to this Agreement1 will be
validly issued, fully paid and non-assessable The relative rights preferences,
restrictions and other provisions relating to the Class B preferred Shares are
as set forth in Exhibit B attached hereto- The Company has authorized and
reserved for issuance upon conversion of the Class B preferred Shares not less
than 5,714,286 shares of its Common Shares, and the shares of Conversion Shares
issued upon such conversion
<PAGE> 7
-3-
will, upon such issuance, be validly authorized and issued, fully paid and
non-assessable. Except as provided above or in said Schedule 2.3.1, the Company
has not issued any other shares of its capital stock and there are no
outstanding warrants1 options or -other rights to purchase or acquire any of
such shares, nor any outstanding securities convertible into such shares or
outstanding warrants. options or other rights to acquire any such convertible
securities. There are no preemptive rights with respect to the issuance or sale
of the Company's capital stock, other than rights to which holders of Class B
Preferred Shares and Conversion Shares are entitled as set forth in Section 4.14
hereof Except as disclosed in Schedule 2.3.2 of the Schedule Volume, there are
no restrictions on the transfer of the Company's capital stock other than those
arising from federal and state securities laws Except as disclosed on Schedule
2.3.3 of the Schedule Volume, the Company has no subsidiaries or investments in
any other corporation, trust, partnership or business entity and is not a party
to any joint venture The outstanding shares of the capital stock of the Company
are held of record and beneficially by the persons identified in said Schedule
2.3.1 in the amounts indicated therein.
2.4. Financial Statements and Backlog. Included in Schedule 2.4
of the Schedule Volume are the following financial statements of the Company,
all of which statements (including the footnotes thereto) fairly present the
financial position of the Company on the dates of such statements and the
results of its operations for the periods covered thereby and have been prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods involved and prior periods:
An audited Balance Sheet as of December 31, 1985, and
Statements of Operations, Shareholders' Equity and Retained Earnings,
and Changes in Financial Position for the year then ended;
An unaudited Balance Sheet as of June 30, 1986, and Statements
of Operations, Shareholders' Equity and Retained Earnings, and Changes
in Financial position for the six-month period then ended
Included in Schedule 2.4 of the Schedule Volume is a detailed backlog of all
firm orders for the Company 5 products as of June 30, 1986 Except as disclosed
in said Schedule 2.4, the Company is not aware of any cancellation 'or proposed
cancellations with respect to the orders contained in the backlog and has no
reason to believe that all orders set forth therein will not be delivered on
schedule; nor is there any claim for refunds of monies already paid to the
Company, or any reason to believe such claims will be forthcoming
2.5. Absence of Undisclosed Liabilities. Except as and to the extent
reflected or reserved against in the latest balance sheet included in Schedule
2.4 of the Schedule Volume (including the footnotes thereto) except for
liabilities arising in the ordinary course of its business since the date of
said balance sheet, and except as
<PAGE> 8
-4-
to accrued or contingent liabilities arising out of the facts disclosed in
Schedule 2.5 of the Schedule Volume, the Company does not have and has not
assumed any material accrued or contingent liability arising out of any
transaction or state of facts existing prior to the date hereof in any case
where the material facts or circumstances giving rise to such liability are
known to the Company or in the exercise of reasonable diligence should have been
known to the Company (whether such liability is accrued to become due,
contingent, or otherwise and whether or not such liability relates to any
predecessor business of the Company).
2.6. Absence of Certain Developments. Except as specifically disclosed
in Schedule 2.6 of the Schedule Volume, since the date of the latest balance
sheet included in Schedule 2.4 of the Schedule Volume, there has been (i) no
material adverse change in the condition, financial or otherwise, of the Company
or in the assets, liabilities, properties or business of the Company, (ii) no
declaration, setting aside or payment of any dividend or other distribution with
respect to, or any direct or indirect redemption or acquisition of, any of the
capital stock of the Company, (iii) no waiver of any valuable right of the
Company or the cancellation of any debt or claim held by the Company, (iv) no
loan by the Company to any officer, director, employee or stockholder of the
Company, or any agreement or commitment therefor, (v) no increase, direct or
indirect, in the compensation paid or payable to any officer, director, employee
or agent of the Company which increase is in excess of an annual rate of $5,000,
(vi) no loss, destruction or damage to any property of the Company, whether or
not insured, in excess of $10,000 in the aggregate, (vii) no labor trouble
involving the Company where the consequence of such labor trouble may be
materially adverse with respect to the Company, and no material change in the
personnel of the Company or the terms and conditions of their employment, and
(viii) no acquisition or disposition of any assets (or any contract or
arrangement therefor), nor any other transaction by the Company otherwise than
for fair value in the ordinary course of business.
2.7. Title to Properties. The Company has good and marketable title to
all of its tangible properties and assets free and clear of all liens,
restrictions or encumbrances, except as specifically disclosed in Schedule 2.7
of-the Schedule Volume or in the financial statements and the footnotes thereto
included in Schedule 2.4 of the Schedule Volume The Company owns no real
property. All machinery and equipment included in such properties which is
necessary to the business of the Company is in reasonable working condition, and
all leases of real or personal property to which the Company is a party are
fully effective and afford the Company peaceful and undisturbed possession of
the subject matter of the lease To its best knowledge, the Company is not in
violation of any zoning, building or safety ordinance, regulation or requirement
or other law or regulation applicable to the operation of its owned or leased
tangible properties, nor has it received any notice of violation with which it
has not complied, in any case in which the consequences of such violation if
asserted by the applicable regulatory authority would be materially adverse with
respect to the Company. For purposes of this Agreement, "tangible
<PAGE> 9
-5-
properties" specifically excludes patent, trademark, copyright, trade secret and
other proprietary rights.
2.8. Tax Matters. All federal, state, county and local taxes, and all
applicable taxes owed to foreign jurisdictions, due and payable by the Company
have been paid The provisions for taxes on the latest balance sheet included in
Schedule 2.4 of the Schedule Volume are sufficient for the payment of all
accrued and unpaid federal, state, county and local taxes of the Company and any
applicable taxes owing to any foreign jurisdiction, whether or not assessed or
disputed as of the date of said balance sheet There exist no unpaid assessments
of federal income taxes nor any basis for the assessment of additional federal
income taxes on the Company for any fiscal period. The federal income tax
returns of the Company have not been audited by the Internal Revenue Service,
and no notice of audit has been received. The Company has duly filed all
federal, state, county and local tax returns required to have been filed by it
and there are in effect no waivers of applicable statutes of limitations with
respect to taxes for any year.
2.9. Contracts and Commitments. The Company does not have and has not
assumed any contract, obligation or commitment which involves a potential
commitment in excess of $10,000 or which is otherwise material and not entered
into in the ordinary course of business, and does not have any employment
contracts; stock redemption or purchase agreements; financing agreements;
licenses; distributor. sales representative or OEM agreements; agreements with
officers, directors, employees or shareholders of the Company or persons or
organizations related to or affiliated with any such persons; leases; agreements
relating to the licensing, distribution, development, purchase or sale of
software; or pension, profit-sharing, retirement or stock option plans, except
in each case as are described in Schedule 2.9 of the Schedule Volume, and copies
of which have been delivered to counsel for the Purchasers. Except as described
in said Schedule 2.9, (i) the Company is not in default under any material
contract, obligation or commitment, and (ii) without limiting the generality of
the foregoing, there are no outstanding claims by any customer of the Company
with respect to delivery or performance of the Company's products and (iii) all
receivables booked with respect to the sale of Company 5 products are valid and
enforceable receivables without offset The Company has no knowledge of any facts
or circumstances which are likely to cause any of the foregoing contracts,
obligations or commitments to have a materially adverse effect upon the business
or finances of the Company. The Company does not have and never has had any
government contracts or subcontracts.
2.10. Patents; Trade Secrets; Employee Restrictions. Except as set
forth in Schedule 2.10 of the Schedule Volume, the Company has exclusive
ownership of, or exclusive license to use, all patent, copyright, trademark,
trade secret or other proprietary rights used or to be used its business as
presently conducted or contemplated Except as disclosed in Schedule 4.9 hereto,
the Company has not used, and does not use or contemplate making use of, any
patent, copyright,
<PAGE> 10
-6-
trademark, trade secret or other proprietary information or rights of Interqual,
Inc. The Company owns no issued patents or patent applications. Except as set
forth in Schedule 2.10 of the Schedule Volume, the Company to the best of its
knowledge owns or has a license to use, free and clear of other claims or rights
of others, all trade secrets, manufacturing processes, hardware designs,
programming processes, software and other information required for or incident
to its products or its business as presently conducted or contemplated To the
best knowledge of the Company the Company is not infringing, and its planned
operations will not infringe, any patent, copyright, trademark or other
proprietary right of any other person and the Company is not making unauthorized
use of any confidential information or trade secrets of any person, including
without limitation any former employer of any of its past or present employees.
Neither the Company nor, to the best knowledge of the Company, any of the
Company's employees have any agreements or arrangements with former employers of
such employees relating to confidential information or trade secrets of such
employers To the best knowledge of the Company, the activities of the Company's
employees on behalf of the Company do not violate any agreements or arrangements
which any such employees have with former employers. To the best knowledge of
the Company, no other person is infringing any patent, copyright, trademark,
trade secret or other proprietary right of the Company.
2.11. Effect of Transactions. The execution, delivery and performance
by the Company of this Agreement and the Shareholders Agreement, and the
adoption of the Certificate of Amendment in accordance with Exhibit B, will not
conflict with or result in any default under any material contract obligation,
commitment, charter provision, by-law or corporate restriction of the Company or
the creation of any lien, charge or encumbrance of any nature upon any of the
properties or assets of the Company except pursuant to this Agreement or the
transactions contemplated hereby The Company's execution and delivery of this
Agreement and its performance of the transactions contemplated hereby will not
violate any material instrument, agreement, judgment, decree, order, statute,
rule or regulation of any federal, state or local government or agency
applicable to the Company the violation of which would have a material adverse
effect on the Company.
2.12. Litigation. Except as set forth in Schedule 2.12 of the Schedule
Volume, there is no litigation or governmental proceeding or investigation
pending against the Company. To the best knowledge of the Company, there is no
such litigation proceeding or investigation threatened against the Company, or
which is pending or threatened affecting any of the Company's properties or
assets, or is pending or threatened against any officer or key employee of the
Company, or is pending or threatened and has a reasonable possibility of calling
into question the validity, or materially hindering the enforceability or
performance, of this Agreement or any action taken or to be taken pursuant
hereto; nor, except as disclosed in Schedule 2.12 to the Schedule Volume, to the
best knowledge of the Company, has there occurred any event or does there exist
any condition on the basis of which any
<PAGE> 11
-7-
such litigation, proceeding or investigation might properly be instituted with
any substantial chance of a recovery which would be materially adverse to the
Company.
2.13. Offerees. Neither the Company, nor anyone acting on its behalf,
has in the past or will hereafter sell, offer for sale or solicit offers to buy
any of the Securities so as to bring the offer, issuance or sale of the
Purchased Shares or the Conversion Shares, as contemplated by this Agreement1
within the provisions of Section 5 of the Securities Act of 1933, as amended The
Company has complied and will comply with all applicable state "blue-sky" or
securities laws in connection with the issuance and sale of its Common Shares,
Class B Preferred Shares and other securities heretofore and upon the closing of
this Agreement.
2.14. Business. The Company has all necessary franchises, permits,
licenses and other rights and privileges necessary to permit it to own its
property and to conduct its present business The Company is not in violation,
and its planned business as heretofore described to the purchasers in writing
will not put the Company in violation1 of any material law, regulation,
authorization or order of any public authority relevant to the ownership of its
properties or the carrying on of its business The Company does not know of any
facts or circumstances (including without limitation expressions or other
indications of the attitude of the concerned governmental agencies or officials)
which are materially adverse with respect to any of the foregoing matters.
2.15. Information Supplied to Purchasers. Neither (i) this Agreement or
the Schedule Volume, (ii) the Business Plan and Information Package, each dated
April, 1986, in each case as supplemented by this Agreement and the Schedule
Volume, nor (iii) any document or certificate furnished to the Purchasers by or
on behalf of the Company pursuant to Section 3.1 or 3.10 of this Agreement,
contains or will contain at the time of its delivery any untrue statement of a
material fact, and this Agreement, the Schedule Volume, and said other documents
and certificates, do not omit to state a material fact necessary in order to
make the statements contained herein and therein not misleading. There is no
material fact relating to the business, prospects, operations, affairs or
conditions of the Company which adversely affects or in the future may in the
reasonable business judgment of the Company (so far as the Company may now
foresee based upon facts now known to the' Company) materially adversely affect
the same which has not been set forth in this Agreement or in the other
documents furnished to the Purchasers by or on behalf of the Company prior to or
on the date hereof The forecasts and projections of future financial results
contained in said Business Plan and said Information Package are based upon
information available to the Company as of the date on which such forecasts or
projections were made and upon reasonable inferences from such information, but
may be subject to revision in the event of changes in the facts and
circumstances upon which such forecasts and projections are based which could
not reasonably have been foreseen at the date on which such forecasts or
projections were made.
<PAGE> 12
-8-
2.16. Brokerage. Except for the finder's fee to be paid to Newbury,
Piret & Company, Inc. with respect to the transactions contemplated by this
Agreement, there are no valid claims for brokerage commissions, finder's fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of the
Company.
SECTION 3. CONDITIONS OF PURCHASE
The purchasers' obligation to purchase and pay for the Purchased Shares
shall be subject to compliance by the Company with their agreements herein
contained and to the fulfillment on or before and at the Closing Date of the
following conditions:
3.1. Certificate of Company. The representations and warranties of the
Company contained in this Agreement, including but not limited to the
representations and warranties made in Section 2, shall be true and correct in
all material respects with the same force and effect as though such
representations and warranties had been made on and as of the Closing Date; each
of the conditions hereafter specified in this Section 3 shall have been
satisfied; and on the Closing Date a certificate to such effect executed by the
President of the Company shall be delivered to the Purchasers.
3.2. Opinion of Company Counsel. The Purchasers shall have received
from counsel for the Company, Messrs. Altheimer & Gray their favorable opinion,
dated the Closing Date, substantially in the form attached hereto as Exhibit C.
3.3. Authorization. The Board of Directors of the Company shall have
duly adopted resolutions in form satisfactory to the Purchasers authorizing the
Company to consummate the transactions contemplated hereby in accordance with
the terms hereof, and the Purchasers shall have received a duly executed
certificate of the Secretary or an Assistant Secretary of the Company setting
forth a copy of such resolutions and such other matters as may be reasonably
requested by the Purchasers
3.4. Amendment of Certificate of Incorporation. The Certificate of
Incorporation of the Company shall have been amended by the shareholders of the
Company as set forth in Exhibit B hereto to create and to authorize the issuance
of the Class B Preferred Shares and to state the terms thereof and the revised
terms applicable to the Class A Preferred Shares.
3.5. Amendment of By-Laws The Board of Directors of the Company shall
have adopted a resolution making certain restrictions on the transfer of the
Common Shares of the Company contained in Section 5 of Article V thereof
inapplicable to the Class B preferred Shares and the Conversion Shares.
<PAGE> 13
-9-
3.6. Shareholders Agreement. The Company and certain shareholders of
the Company shall have executed and delivered a Shareholders Agreement with the
Purchasers in the form of Exhibit D.
3.7. Termination of Voting Trust. The Voting Trust dated April 9, 1984,
as amended, shall have been effectively terminated in writing by the parties
thereto.
3.8. Amendment of Shareholder Agreement. The Shareholder Agreement
dated April 9, 1984, as amended, shall have been amended by a written amendment
in the form of Exhibit G hereto.
3.9. Use of Proceeds. The Company shall have reached agreement with
certain parties identified on Schedule 4.11 attached hereto relating to
disbursement of funds and other transactions described therein in accordance
with the terms of said Schedule 4.11
3.10. Election of Director. The Company shall have caused the election
to its Board of Directors of Robert W. Daly as nominee of the Purchasers, who
shall be deemed the representative of the Class B preferred Shares hereunder
while serving as a Director of the Company elected by their vote
3.11. All Proceedings Satisfactory. All corporate and other proceedings
taken prior to or at the Closing in connection with the transactions
contemplated by this Agreement, and all documents and evidences incident
thereto, shall be reasonably satisfactory in form and substance to the
Purchasers, and the Purchasers shall receive such copies thereof and other
materials (certified, if requested) as they may reasonably request in connection
therewith. The issuance and sale of the Purchased Shares to the Purchasers shall
be made in conformity with all applicable state and federal securities laws.
SECTION 4. COVENANTS OF THE COMPANY
The Company shall comply, and shall cause any direct or indirect
subsidiaries of the Company to comply, with the following covenants, except as
shall otherwise be agreed pursuant to a written consent of a majority in
interest of the Purchasers delivered in accordance with Section 7.1, and until
(i) the Company has redeemed at least 4,571,429 of the Class B Preferred Shares
issued as of August 4, 1986 or Conversion Shares or (ii) such time as the
Company completes its first public offering of its Common Shares pursuant to a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") in which (a) the sale price to the public is at least $1.50
per share (appropriately adjusted for stock splits, stock dividends' and the
like), and (b) aggregate gross proceeds to the Company from the sale of the
shares are at least $7,000,000 (a "Substantial Public Offering"). All references
to "the Company in this Section 4 shall be deemed to refer to the
<PAGE> 14
-10-
Company and its direct and indirect subsidiaries, if applicable on a
consolidated basis.
4.1. Financial Statements. The Company will maintain a system of
accounts in accordance with generally accepted accounting principles, keep full
and complete financial records and furnish to the Purchasers, subject to the
provisions of Section 7.5 hereof, the following reports: (a) within ninety (90)
days after the end of each fiscal year, a copy of the balance sheet of the
Company as at the end of such year, together with a statement of income and
retained earnings of the Company for such year, certified by Arthur Anderson &
Co. or other independent public accountants of recognized standing reasonably
satisfactory to the Purchasers, prepared in accordance with generally accepted
accounting principles and practices consistently applied; (b) within thirty (30)
days after August 4, 1986 and after the end of each month thereafter an
unaudited balance sheet of the Company as at the end of such month and an
unaudited statement of income and retained earnings for the Company for such
month and for the year to date, together with a brief written discussion and
analysis by management of such monthly and annual financial statements; and (c)
such other financial information as the Purchasers may reasonably request,
including without limitation, certificates of the principal financial officer of
the Company concerning compliance with the covenants of the Company under this
Section 4 of the Agreement when requested by a majority in interest of the
Purchasers.
4.2. Budget and Operating Forecast The management of the Company will
prepare and submit to the Board of Directors of the Company a budget for each
fiscal year of the Company at least 30 days prior to the beginning of such
fiscal year together with management's written discussion and analysis of such
budget The budget shall be accepted as the budget for such fiscal year when it
has been approved by a majority of the full Board of Directors of the Company
The management of the Company shall review the budget periodically and shall
advise the Board of Directors of all changes therein and all material deviations
therefrom.
4.3. Conduct of Business. The Company will continue to engage
principally in the business now conducted by it or businesses reasonably related
to such business. The Company will keep in full force and effect its corporate
existence and all patents and other intellectual property rights used or
necessary in its business and, consistent with the disclosures made on Schedule
2.14 to the Schedule Volume, comply with all applicable laws and regulations in
the conduct of its business- The Company shall use its best efforts to cause
each key employee of the Company to execute confidentiality and invention
agreements substantially in the form of Exhibit E. with such reasonable changes
therein as may be deemed appropriate by the Board of Directors
4.4. Payment of Taxes, Compliance with Laws, etc. The Company will pay
and discharge all lawful taxes, assessments and governmental charges or levies
<PAGE> 15
-11-
imposed upon it or upon its income or property before the same shall become in
default, as well as all lawful claims for labor, materials and supplies which,
if not paid when due, might become a lien or charge upon its property or any
part thereof; provided, however. that the Company shall not be required to pay
and discharge any such tax, assessment, charge, levy, or claim so long as the
validity thereof is being contested by the Company in good faith by appropriate
proceedings and an adequate reserve therefor has been established on its books
The Company will comply with all applicable laws and regulations in the conduct
of its business.
4.5. Adverse Changes. The management of the Company will promptly
advise the Board of Directors and each Director of any event which represents a
material adverse change in the condition or business, financial or otherwise, of
the Company, and of each suit or proceeding commenced or threatened against the
Company which, if adversely determined, would result in such a material adverse
change The management of the Company will also promptly advise the Board of
Directors and each Director of any violations of the covenants made herein.
4.6. Insurance. The Company will keep its insurable properties insured
by financially sound and reputable insurers against the perils of liability,
casualty, fire and extended coverage in amounts of coverage at least equal to
those customarily maintained by companies in the same or a similar business of
similar size, to the extent that such insurance is available on reasonable
terms. The Company will also maintain with such insurers insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner customary for corporations engaged in the same or a similar business of
similar size, to the extent such insurance is available on reasonable terms.
4.7. Life Insurance. The Company shall obtain and maintain a key-man
term life insurance policy on the life of its Chief Executive Officer in the
amount of $1,000,000, payable to a trust for the benefit of the Purchasers or
the then holders of the Class B preferred Shares In the event of the death of
the Chief Executive Officer, the then holders of the Class B Preferred Shares
may, within 30 days of notice of such death and upon the vote of at least 51% in
interest of the then holders of the Class B preferred Shares, elect to require
the Company to redeem on a pro rata basis 1,428,571 shares of the Class B
Preferred Shares at the price of $.70 per share, with the proceeds of the
insurance applied as payment for such shares under the terms of the
Shareholders' Agreement attached as Exhibit D hereto If the purchasers choose
not to redeem such Class B Preferred Shares, the insurance proceeds shall be
paid to the Company. The Company will not borrow against said policy and will
not cause or permit any assignment of the proceeds of said policy to be made or
otherwise alter or impair any of the rights or values of such policy.
4.8. Maintenance of Properties. The Company will maintain all
properties used or useful in the conduct of its business in reasonably good
repair, working order
<PAGE> 16
-12-
and condition as necessary to permit such business to be properly and
advantageously conducted
4.9. Affiliated Transactions. All transactions by and between the
Company and any officer, key employee or stockholder of the Company, or persons
controlled by or affiliated with such officer, key employee or stockholder,
including without limitation Interqual, Inc., shall be conducted on an
arm's-length basis, shall be on terms and conditions no less favorable to the
Company than could be obtained from nonrelated persons and shall be approved in
advance by the Board of Directors, after full disclosure of the terms thereof.
Certain such transactions are described on Schedule 4.9 hereto.
4.10. Management Compensation. Compensation paid by the Company to its
management will be reasonably comparable to compensation paid to management in
companies of similar size, of similar maturity, and in similar industries.
4.11. Use of Proceeds. The Company shall use the proceeds of the sale
of the Purchased Shares substantially as set forth in Schedule 4.11 attached
hereto. Pending use for the above described purpose, said proceeds shall be
temporarily invested in short-term interest bearing securities, including U.S.
Government securities, shares of money market mutual funds and certificates of
deposit and similar instruments of federally or state-chartered banks.
4.12. Inspection. The Company shall, during business hours and upon
reasonable notice, permit authorized representatives of the Purchasers to visit
and inspect any of the properties of the Company, including its books of account
(and to make copies thereof and take extracts therefrom), and to discuss its
affairs, finances and accounts with its officers, administrative employees and
independent accountants, all at such reasonable times and as often as may be
reasonably requested and subject to the provisions of Section 7.5 hereof.
4.13. Board of Directors Meetings. The Company shall ensure that
meetings of its Board of Directors are held at least six times each year and at
intervals of not more than three months- The Certificate of Incorporation or
By-Laws of the Company shall at all times during which any nominee of the
purchasers serves as director of the Company provide for indemnification of the
directors to the fullest extent permitted under applicable state law. The
Company will use its best efforts to obtain and maintain director's and
officer's liability insurance providing coverage for such director of at least
$1,000,000 per occurrence to the extent such insurance is available on
reasonable terms.
4.14. Right to participate in Sales of Additional Securities. If the
Company at any time wishes to sell any shares of capital stock of the Company,
or bonds, certificates of indebtedness, debentures or other securities
convertible into capital stock of the Company or options, warrants or rights
carrying any rights to purchase
<PAGE> 17
-13-
capital stock or convertible securities of the Company to a third party, other
than in connection with a Substantial Public Offering, the Company will submit a
written offer to the Purchasers identifying the third party to whom such stock,
securities, options, warrants or rights are proposed to be sold, and the terms
of the proposed sale, and offering to the Purchasers the opportunity to purchase
their proportionate share of such securities on terms and conditions, including
price, not less favorable to the Purchasers than those on which the Company
proposes to sell such securities to any other purchaser Each purchaser shall
have the right to purchase his proportionate share of such securities based on
the ratio which the Common Stock of the Company owned or obtainable by said
purchaser upon conversion of any Preferred Shares owned by him bears to all the
issued and outstanding shares of Common Shares of the Company (including all
such shares issuable upon conversion of then issued and outstanding Preferred
Shares)~ Any Purchaser may transfer its right to be offered any such opportunity
to (i) any affiliate, as that term is defined in the Investment Company Act of
1940, as amended, of a Purchaser, or (ii) any owner of an investment account
which is managed or advised by a purchaser, or by TA Associates or any such
affiliate thereof The Company's offer to the Purchasers shall remain open and
irrevocable for a period of thirty (30) days. Any shares so offered to the
Purchasers which are not purchased pursuant to such offer may be sold by the
Company to the purchaser originally named in the offer to the Purchasers on the
same terms contained in such offer at any time within 180 days following the
date of such offer, but may not be sold to any other person or after such 180
day period without renewed compliance with this Section 4.14 Notwithstanding the
above, the Company may issue up to 1,650,000 shares of Common Shares of the
Company to employees or directors pursuant to stock options heretofore or
hereafter issued with the approval of the Board of Directors of the Company and
300,000 shares of Common Stock pursuant to a Mediqual Option Agreement dated
January 5, 1986 between the Company and various optionees party to such
agreement.
4.15. Shareholders Agreement. At or before the Closing the Company will
enter into with the Purchasers and certain shareholders named therein an
agreement in the form attached hereto as Exhibit D (the "Shareholders
Agreement") The Company agrees that it will diligently enforce all of its rights
under the Shareholders Agreement and confidentiality and invention agreements
with key employees referred to in Section 4,3, and that it will not waive or
release any such rights or consent to any amendment of any such agreement
without the written consent of a majority in interest of the Purchasers then
holding Purchased Shares or Conversion Shares.
4.16. Distributions or Redemption of Capital Stock. Except as otherwise
expressly provided herein or in Exhibit B, the Company will not declare or pay
any dividends (other than a dividend payable in shares of its Common Shares) or
make any distributions of cash, property or securities of the Company with
respect to any shares of its Common Shares or any other class of its stock, or
directly or indirectly redeem, purchase, or otherwise acquire for a
consideration any shares of its Common Shares or any other class of its stock
(other than repurchases of shares from
<PAGE> 18
-14-
employees pursuant to the terms of any Incentive Stock Option Plans adopted by
the Company and approved by the Director elected by the Class B Preferred
Shares).
4.17. No Amendments to Articles of Incorporation or By-Laws. Except as
provided in this Section 4.17, the Company will not make any amendment to its
Articles of Incorporation or its By-Laws without the consent of the majority in
interest of the Class B preferred Shares and Conversion Shares. Notwithstanding
any contrary provision of this Agreement, the Company may issue, and the then
holders of the Class B Preferred Shares agree to vote to authorize, a class of
preferred stock which is subordinated with respect to rights upon liquidation,
dissolution or winding up, dividends, voting rights and redemption to the Class
B preferred Shares if the proceeds from the sale of such stock are used solely
to redeem the Class B preferred Shares.
4.18. Restrictions on Other Agreements. The Company will not enter into
any agreement with any party which would restrict the payments due the holders
of Class B Preferred Shares upon the mandatory redemption thereof or grant any
right relating to the registration of its Common Shares superior to or on a
parity with the rights granted to the Purchasers pursuant to Section 6 hereof.
4.19. Further Shares Issuable. In the event that the Company shall
issue to James A. Block ("Block") any of its Common Shares or any warrants,
options or other rights to purchase Common Shares other than for consideration
at least equal to $.70 per share, the Company agrees to issue, without further
consideration, to each of the Purchasers or the then holder of such Purchaser's
shares such Purchaser's pro rata portion of an aggregate of .3212 Common Shares
for every Common Share or right to purchase a Common Share issued to Block Such
Common Shares shall upon issue be duly authorized, validly issued fully paid and
non-assessable and shall be treated as Purchased Shares for purposes of Sections
1.2, 2, 4, 5, 6 and 7 of this Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF PURCHASERS
It is the understanding of the Company, and each Purchaser hereby
severally represents and warrants to the Company with respect to such
Purchaser's purchase of Securities hereunder, that:
A. The execution, delivery and performance of this Agreement and the
documents and instruments executed pursuant hereto have been duly authorized by
all necessary action on the part of the Purchaser, and this Agreement
constitutes the valid legal and binding agreement of the Purchaser, enforceable
in accordance with its terms.
<PAGE> 19
-15-
B. The Purchaser is acquiring the Securities for its own account, for
investment, and not with a view to any "distribution" thereof within the meaning
of the Securities Act of 1933 as amended (the "Securities Act").
C. The Purchaser understands that it may have to bear the economic risk
of its investment in the Company for an indefinite period of time because,
among other reasons, the Securities have not been registered under the
Securities Act or "blue sky" or securities laws of any other jurisdiction and
therefore cannot be disposed of unless such Securities are subsequently
registered under the Securities Act (and such "blue sky" or securities laws, if
applicable) or exemptions from such registration under the Securities Act (and
such "blue sky" or securities laws, if applicable) are available. The Purchaser
acknowledges and understands that, except as provided in Section 6 hereof, it
has no independent right to require the Company to register the Securities- The
Purchaser is aware that the Company may not accomplish a public offering of its
stock. The Purchaser further understands that the Company may, as a condition to
the transfer of any of the Securities, require that the request for transfer be
accompanied by opinion of counsel, in form and substance satisfactory to the
Company, to the effect that the proposed transfer does not result in violation
of the Securities Act, unless such transfer is covered by an effective
registration statement under the Securities Act The Purchaser understands that
each certificate representing the Securities will bear the following legend or
one substantially similar thereto:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended. These shares have been
acquired for investment and not with a view to distribution or resale,
and may not be offered, sold, mortgaged, pledged, hypothecated or
otherwise transferred or disposed of without an effective registration
statement for such shares under the Securities Act of 1933, as amended,
and applicable state securities laws, or an opinion of counsel
satisfactory to the corporation that such registration is not required.
D. The Purchaser has knowledge and experience in financial and business
matters and in the making of venture capital investments, is capable of
evaluating the merits and risks of an investment in the Company, is able to bear
the economic risk of loss of its entire investment in the Company, has been
granted the opportunity to make a thorough investigation of the affairs of the
Company and to question, to the extent deemed necessary and appropriate, the
officers, directors, employees agents and stockholders of the Company to verify
the information contained herein or otherwise furnished by the Company, and to
evaluate the merits and risks of the investment described herein, and has
availed itself of such opportunity either directly or through its authorized
representative.
E. The Purchaser has been advised that the Securities have not been and
are not being registered under the Securities Act or under the "blue sky" laws
of any
<PAGE> 20
-16-
jurisdiction and that the Company in issuing the Purchased Shares is relying
upon, among other things, the representations and warranties of each Purchaser
contained in this Article 5 in concluding that each such issuance is a-"private
offering" under Section 4(2) of the Securities Act and does not require
compliance with the registration provisions of the Securities Act The Purchaser
acknowledges that neither the Company nor any person acting on behalf of the
Company has offered to sell the Purchased Shares to the Purchaser by means of
any form of general advertising.
F. There are no valid claims for brokerage commissions, finder's fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of such
Purchaser.
SECTION 6. REGISTRATION RIGHTS
6.1. Optional Registrations. If at any time or times after the date
hereof, the Company shall determine to register any of its Common Shares or
securities convertible into or exchangeable or exercisable for Common Shares
under the Securities Act (whether in connection with a public offering of
securities by the Company (a "primary offering"), a public offering thereof by
stockholders (a "secondary offering"), or both, but not in connection with a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 or any other similar rule of the Securities and
Exchange Commission (the "Commission") under the Securities Act is applicable),
the Company will promptly give written notice thereof to the holders of
Registrable Securities (as hereinafter defined) then outstanding (the
"Holders"), and will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which the Holders may request in a
writing delivered to the Company within 15 days after the notice given by the
Company; provided, however, that in the case of the registration of Common
Shares by the Company in connection with an underwritten public offering. it
shall not be required to register Registrable Securities of the Holders in
excess of the amount. if any, of Common Shares which the principal underwriter
of an underwritten offering shall reasonably and in good faith agree in writing
to include in such offering (the "Secondary Shares"). If any Registrable
Securities of Holders who have requested participation are not included for the
foregoing reason: (i) if William D. Ryan and affiliates ("Ryan") and holders of
Common Shares other than the Holders have held capital stock of the Company for
less than two years for purposes of Rule 144(d), then the Company will permit
Holders who have requested participation to participate in such offering prior
to permitting participation by Ryan or such other holders, and (ii) if Ryan,
such other holders and the Holders have held capital stock of the Company for
more than two years, then the Company will permit the Holders of Registrable
Securities who have requested participation to participate in the offering
collectively as to not more than fifty percent of the Secondary Shares and
individually in proportion to the number of shares of Common Shares owned or
<PAGE> 21
-17-
obtainable by them upon exercise of rights with respect to other securities
owned by them, the remaining fifty percent of the Secondary Shares to be made up
of not more than (i) sixty percent shares held by Ryan and (ii) forty percent
shares held by other holders of Common Shares If the Company includes in such a
registration any securities to be offered by it, all expenses of registration
and offering shall be borne by the Company, except that the Holders shall bear
underwriting commissions and transfer taxes on shares being sold by such Holders
If the registration under this Section 6.1 is exclusively a secondary offering,
as defined in this Section the Holders shall bear their proportionate share of
the expenses of the registration and offering (provided all stockholders
registering shares thereunder bear their proportionate share of expenses),
except expenses which the Company would have incurred whether or not
registration was attempted, including, without limitation, the expense of
preparing normal audited or unaudited financial statements or summaries
consistent with this Agreement or applicable Commission filings Without in any
way limiting the types of registrations to which this Section 6.1 shall apply,
in the event that the Company shall effect a "shelf registration" under Rule 415
promulgated under the Securities Act, or any other similar rule or regulation
("Rule 415"), the Company shall take all necessary action, including, without
limitation the filing of post-effective amendments, to permit the Purchasers to
include their shares in such registration in accordance with the terms of this
Section 6.1, provided that the Company shall not be required to maintain the
effectiveness of such shelf registration beyond the latest date that the
prospectus prepared in connection herewith continues to comply with Section
10(3) of the Securities Act, unless the Company shall have prepared an amended
prospectus complying with said Section 10(3) for its own use or the use of any
other person selling under such shelf registration.
6.2. Required Registrations. If at any two (2) occasions after August
4, 1987, one or more of the Holders of an aggregate of not less than a majority
of the Registrable Securities then outstanding, including any Common Shares
issued or issuable upon conversion of the purchased Shares then outstanding,
shall notify the Company in writing that he or they intend to offer or cause to
be offered for public sale all or any portion of their Registrable Securities,
the Company will notify all of the Holders of Registrable Securities who would
be entitled to notice of a proposed registration under Section 6.1 of such
notification Upon the written request of any such Holder after receipt from the
Company of such notification, the Company will use its best efforts to cause
such of the Registrable Securities as may be requested by any Holders (including
the Holder or Holders giving the initial notice of intent to register hereunder)
to be registered under the Securities Act in accordance with the terms of this
Section 6.2. All expenses of such registrations and offerings shall be borne by
the Company, except that the Holders shall bear underwriting commissions,
transfer taxes of shares being sold by the Holders and the expense of any
special audit of the Company 5 financial statements if the notice requesting
registration does not reasonably permit the use of existing or contemplated
audited statements.
<PAGE> 22
-18-
6.3. Registrable Securities. For the purposes of this Section 6, the
term "Registrable Securities" shall mean any shares of Common Shares owned by a
Purchaser or issuable upon conversion of Class B Preferred Shares, and any
Common Shares issued or issuable with respect to such Class B Preferred Shares'
'or Common Shares by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganizations.
6.4. Further Obligations of the Company. Whenever under the preceding
sections of this Section 6 the Company is required hereunder to register Common
Shares, it agrees that it shall also do the following:
(i) Use its best efforts to diligently prepare for filing with
the Commission a registration statement and such amendments and
supplements to said registration statement and the prospectus used in
connection therewith as may be necessary to keep said registration
statement effective and to comply with the provisions of the Securities
Act with respect to the sale of securities covered by said registration
statement for the period necessary to complete the proposed public
offering;
(ii) Furnish to each selling Holder such copies of each
preliminary and final prospectus and such other documents as such
Holder may reasonably request to facilitate the public offering of his
Common Shares;
(iii) Enter into any underwriting agreement with provisions
reasonably required by the proposed underwriter for the selling
Holders, if any; and
(iv) Use its best efforts to register or qualify the Common
Shares covered by said registration statement under the securities or
"blue-sky" laws of such jurisdictions as any selling Holder may
reasonably request, provided that the Company shall not be required to
register or qualify the Common Shares in any states in which it is not
now qualified to do business and which would require it to so qualify
or to subject itself to general service of process in order to so
register or qualify the Common Shares.
6.5. Form S-3. If the Company becomes eligible to use Form S-3 under
the Securities Act or a comparable successor form, the Company shall use its
best efforts to continue to qualify at all times for registration on Form S-3 or
such successor form The Holders of an aggregate of not less than fifteen percent
(15%) of Registrable Securities shall have the right to request and have
effected not more than one registration per year of shares of Registrable
Securities on Form S-3 or such successor form for a public offering of shares of
Registrable Securities having an aggregate proposed offering price of not less
than $250,000 (such requests shall be in writing and shall state the number of
shares of Registrable Securities to be disposed of and the intended method of
disposition of such shares by such Holder or Holders)
<PAGE> 23
-19-
The Company shall not be required to cause a registration statement requested
pursuant to this Section 6.5 to become effective prior to 90 days following the
effective date of a registration statement initiated by the Company, if the
request for registration has been received by the Company subsequent to the
giving of written notice by the Company, made in good faith, to the Holders of
Registrable Securities to the effect that the Company is commencing to prepare a
Company-initiated registration statement (other than a registration effected
solely to implement an employee benefit plan or a transaction to which Rule 145
or any other similar rule of the Commission under the Securities Act is
applicable); provided, however, that the Company shall use its
best efforts to achieve such effectiveness promptly following such 90-day period
if the request pursuant to this Section 6.5 has been made prior to the
expiration of such 90-day period The Company shall give notice to all Holders of
Registrable Securities of the receipt of a request for registration pursuant to
this Section 6.5 and shall provide a reasonable opportunity for such Holders to
participate in the registration Subject to the foregoing, the Company will use
its best efforts to effect promptly the registration of all shares of Common
Shares on Form 5-3 or such successor form to the extent requested by the Holder
or Holders thereof for purposes of disposition. If so requested by any Holder in
connection with a registration under this Section 6.5, the Company shall take
such steps as are required to register such Holder's Registrable Securities for
sale on a delayed or continuous basis under Rule 415, and to keep such
registration effective until all of such Holder's Registrable Securities
registered thereunder are sold, provided that the Company may terminate any such
shelf registration upon the commencement of any public offering of securities of
the Company pursuant to a firm commitment underwriting if in the opinion of the
underwriters for such public offering the continued effectiveness of such shelf
registration would interfere with the sale of such securities in such public
offering All expenses incurred in connection with a registration requested
pursuant to this Section 6.5, including, without limitation, all registration,
qualifications, printing, and accounting fees, and fees and disbursements of
counsel for the selling Holder or Holders of Registrable Securities and counsel
for the Company, shall be borne pro rata by the Holder or Holders participating
in the registration pursuant to this Section 6.5 on the basis of the amount of
securities so registered Notwithstanding the foregoing, the Company shall not be
required to effect a registration under this Section 6.5 if, in the unqualified
opinion of counsel for the Company, which counsel and opinion shall be
acceptable to the holders of Registrable Securities, such holders of Registrable
Securities may then sell all Registrable Securities proposed to be sold in the
manner proposed to be sold without registration under the Act.
6.6. Indemnification. Incident to any registration statement referred
to in this Section 6, and subject to applicable law, the Company will indemnify
each underwriter, each Holder of Registrable Securities so registered, and each
person controlling any of them against all claims, losses. damages and
liabilities, including legal and other expenses reasonably incurred in
investigating or defending against the same, arising out of any untrue statement
of a material fact contained therein, or any
<PAGE> 24
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omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arising out of any
violation by the Company of the Securities Act, any state securities or
"blue-sky" laws or any rule or regulation thereunder in connection with such
registration, except insofar as the same may have been caused by an untrue
statement or omission based upon information furnished in writing to the Company
by such Holder expressly for use therein, and with respect to such untrue
statement or omission in the information furnished in writing to the Company by
such Holder, such Holder will indemnify the underwriters, the Company, its
directors and officers, the other Holders and each person controlling any of
them against any losses, claims, damages, expenses or liabilities to which any
of them may become subject to the same extent.
6.7. Rule 144 Requirements. If the Company becomes subject to the
reporting requirements of either Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Company will use its best efforts to file with the
Commission such information as the Commission may require under either of said
Sections; and in such event, the Company shall use its best efforts to take all
action as may be required as a condition to the availability of Rule 144 under
the Securities Act (or any successor exemptive rule hereinafter in effect). The
Company shall furnish to any Holder of Registrable Securities upon request a
written statement executed by the Company as to the steps it has taken to comply
with the current public information requirement of Rule 144.
6.8. Transfer of Registration Rights. The registration rights of the
Holders under this Section 6 may be transferred only to transferees of
Registrable Securities, which transferees shall be (i) a Holder, (ii) an
affiliate, as that term is defined in the Investment Company Act of 1940, of a
Holder (including a partner of such Holder), or (iii) a party which acquires at
least five thousand (5,000) Class B Preferred Shares (or such lesser number of
Class B Preferred Shares which constitutes the total number of such shares
purchased by such Holder under this Agreement) or an equivalent amount (as
adjusted for stock splits, stock dividends, reclassifications, recapitalizations
or other similar events) of Registrable Securities, or a combination of Class B
Preferred Shares and Registrable Securities having an equivalent aggregate
amount Each such transferee shall be deemed to be a "Holder" for purposes of
this Section 6.
6.9. Granting of Registration Rights. The Company shall not, without
the prior written consent of a majority in interest of the Purchasers, grant any
rights to any persons to register any shares of capital stock or other
securities of the Company if such rights could reasonably be expected to
conflict with, or be superior to or on parity with, the rights of the Holders of
Registrable Securities granted pursuant to this Agreement.
<PAGE> 25
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SECTION 7. GENERAL
7.1. Amendments, Waivers and Consents. For the purposes of this
Agreement and all agreements, documents and instruments executed pursuant
hereto, except as otherwise specifically set forth herein or therein no course
of dealing between the Company and any Purchaser and no delay on the part of any
party hereto in exercising any rights hereunder or thereunder shall operate as a
waiver of the rights hereof and thereof. No covenant or other provision hereof
or thereof may be waived otherwise than by a written instrument signed by the
party so waiving such covenant or other provision; provided, however, that
except as otherwise provided herein or therein, changes in or additions to, and
any consents required by this Agreement may be made, and compliance with any
term, covenant, condition or provision set forth herein may be omitted or waived
(either generally or in a particular instance and either retroactively or
prospectively) by a consent or consents in writing signed by the holders of at
least a majority in interest of the Purchased Shares and (in the case of a
change or addition to this Agreement) the Company Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any Securities purchased under this Agreement at the time outstanding (including
Securities into which Securities have been converted), each future holder of all
Securities, and the Company.
7.2. Survival of Covenants; Assignability of Rights. All covenants,
agreements, representations and warranties of the Company made herein and in the
certificates, lists, exhibits schedules or other written information delivered
or furnished to any Purchaser in connection herewith shall be deemed material
and to have been relied upon by such Purchaser, and, except as provided
otherwise in this Agreement, shall survive the delivery of the Purchased Shares,
and shall bind the Company's successors and assigns. whether so expressed or
not, and, except as provided otherwise in this Agreement, all such covenants,
agreements, representations and warranties shall inure to the benefit of the
Purchasers' successors and assigns and to transferees of the Securities, whether
so expressed or not.
7.3. Governing Law. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, the laws of the
Commonwealth of Massachusetts.
7.4. Section Headings. The descriptive headings in this Agreement have
been inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provision thereof or hereof.
7.5. Confidentiality. Each Purchaser agrees to hold confidential all
information furnished to such Purchaser by the Company under this Agreement
which the Company identifies as confidential or proprietary or which such
Purchaser should have reasonably concluded was confidential, except for
information which (a) is known to the public or becomes so known without breach
by such Purchaser of
<PAGE> 26
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its obligation of confidentiality hereunder, (b) is disclosed to such Purchaser
on a nonconfidential basis by a third party who is not in breach of an
obligation of confidentiality in making such disclosure, or which was known to
such Purchaser prior to its being furnished to such Purchaser by the Company
hereunder.
7.6. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which when so executed and delivered shall be
taken to be an original; but such counterparts shall together constitute but one
and the same document.
7.7. Notices and Demands. Any notice or demand which, by any provision
of this Agreement or any agreement, document or instrument executed pursuant
hereto or thereto except as otherwise provided therein, is required or provided
to be given shall be deemed to have been sufficiently given or served for all
purposes three days after being sent by certified or registered mail, postage
and charges prepaid, to the following addresses: if to the Company, at the
Company's address as shown on the signature page hereof, or at any other address
designated by the Company to each of the Purchasers in writing; if to a
Purchaser, at its mailing address as shown on Exhibit A hereto, or at any other
address designated by such Purchaser to the Company in writing; and if to an
assignee of a Purchaser. to its address as designated to the Company in writing.
7.8. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity,- and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions or this Agreement.
7.9. Expenses. The Company shall pay all reasonable costs and expenses
that it incurs with respect to the negotiation execution, delivery and
performance of this Agreement, and the Purchasers shall pay all costs and
expenses that they incur with respect to the negotiation, execution, delivery
and performance of this Agreement, except that upon the Closing pursuant to this
Agreement the Company shall reimburse the Purchasers for reasonable legal fees,
expenses, and disbursements of Messrs. Goodwin, Procter & Hoar, special counsel
for the Purchasers, incurred in connection with the negotiation, execution,
delivery and performance of this Agreement.
<PAGE> 27
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as a
sealed instrument as of the day and year first above written
MEDIQUAL SYSTEMS, INC
By:
--------------------------
President
Address:
1900 West Park Drive
Westborough, MA 01581
<PAGE> 28
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PURCHASERS
ADVENT V LIMITED PARTNERSHIP ADVENT CHESTNUT II LIMITED
PARTNERSHIP
By: TA Associates V, General Partner By: TA Associates IV, General Partner
By: By:
---------------------------------- ----------------------------------
ADVANT INDUSTRIAL LIMITED DESIFTA, S.A.
PARTNERSHIP
By: TA Associates V, General Partner By: TA Associates V, Attorney-in-Fact
By: By:
---------------------------------- ----------------------------------
CHESTNUT CAPITAL TA INVESTORS
INTERNATIONALII
By: TA Associates V, General Partner By: TA Associates V, General Partner
By: By:
---------------------------------- ----------------------------------
ADVENT ATLANTIC & PACIFIC MICI MEDICAL SEED FUND -
LIMITED PARTNERSHIP LIMITED PARTNERS
By: TA Associates V, General Partner By: Timothy Maudlin, General Partner
By: By:
---------------------------------- ----------------------------------
<PAGE> 1
Exhibit 10.13
MEDIQUAL SYSTEMS, INC.
602,440 Shares of
Series 1987 Class B Convertible Preferred Stock
-----------------------------
STOCK PURCHASE AGREEMENT
-----------------------------
October, 1987
<PAGE> 2
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MEDIQUAL SYSTEMS, INC.
Stock Purchase Agreement
October, 1987
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Section 1. TERMS OF PURCHASE
1.1 Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.2 Reserved Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.3 Sale and Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.4 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 2 REPRESENTATIONS AND WARRANTIES OF COMPANY
2.1 Organization and Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . .
2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.4 Financial Statements & Backlog . . . . . . . . . . . . . . . . . . . . . . . . . .
2.5 Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . .
2.6 Absence of Certain Developments . . . . . . . . . . . . . . . . . . . . . . . . .
2.7 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.8 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.9 Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.10 Patents; Trade Secrets; Employee Restrictions . . . . . . . . . . . . . . . . . .
2.11 Effect of Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.13 Offerees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.14 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.15 Information Supplied to Purchasers . . . . . . . . . . . . . . . . . . . . . . .
2.16 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 3 CONDITIONS OF PURCHASE
3.1 Certificate of Company
3.2 Opinion of Company Counsel
3.3 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.4 Amendment of Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . .
3.5 Amendment of By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.6 Agreement of Shareholders
</TABLE>
<PAGE> 3
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<TABLE>
<S> <C>
3.7 All Proceedings Satisfactory . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 4 COVENANTS OF THE COMPANY
4.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2 Budget and Operating Forecast . . . . . . . . . . . . . . . . . . . . . . . . . .
4.3 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4 Payment of Taxes, compliance with Laws. Etc
4.5 Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.7 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.8 Affiliated Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.9 Management Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.11 Board of Directors Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.12 Right to Participate in Sales of Additional Securities . . . . . . . . . . . . . .
4 13 Shareholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 14 Distributions or Redemption of capital Stock
4.15 No Amendments to Articles of Organization or By-Laws . . . . . . . . . . . . . . .
4.16 Restrictions on Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . .
4.17 Further Shares Issuable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 5 REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Section 6 REGISTRATION RIGHTS
6.1 Optional Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2 Required Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3 Registrable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4 Further Obligations of the Company . . . . . . . . . . . . . . . . . . . . . . . .
6.5 Form 8-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.7 Rule 144 Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.8 Transfer of Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . .
6.9 Granting of Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . .
Section 7 GENERAL
7.1 Amendments, Waivers and Consents . . . . . . . . . . . . . . . . . . . . . . . . .
7.2 Survival of Covenants: Assignability of Rights . . . . . . . . . . . . . . . . .
7.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.4 Section Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE> 4
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<TABLE>
<S> <C>
7.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.7 Notices and Demands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.10 Purchaser Questionnaire . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE> 5
-5-
Exhibits
Exhibit A - Purchasers
Exhibit B - Certificate of Amendment
Exhibit C - Form of Company counsel Opinion
Exhibit D - Form of Agreement of Shareholders
Exhibit E - Form of Confidential Purchaser Questionnaire
Schedule Volume
Schedule 2.3.1 - Capitalization
Schedule 2.3.2 - Restrictions on Stock Transfer
Schedule 2.3.3 - Subsidiaries and Investments
Schedule 2.4 - Financial Statements & Backlog
Schedule 2.5 - Liabilities
Schedule 2.6 - Recent Developments
Schedule 2.7 - Title Matters
Schedule 2.8 - Tax Matters
Schedule 2.9 - Contracts and Commitments
Schedule 2.10 - Intellectual Property Matters
Schedule 2.12 - Litigation
Schedule 2.13 - Other Offerees
Schedule 4.9 - Affiliated Transactions
Schedule 4.11 - Use of Proceeds
<PAGE> 6
-6-
AGREEMENT FOR PURCHASE AND SALE
OF SERIES 1987 CLASS B CONVERTIBLE PREFERRED STOCK OF
MEDIQUAL SYSTEMS, INC.
AGREEMENT made as of this ______ day of October, 1987 by and among
MediQual Systems, Inc., a Delaware corporation (the "Company"), and the persons
named in Exhibit A hereto (collectively, the "Purchasers", and each
individually, a "Purchaser").
SECTION 1. TERMS OF PURCHASE
1.1 Description of Securities The Company has authorized the issuance
and sale to the Purchasers of 602,440 shares (the "Purchased Shares") of its
authorized but unissued Series 1987 Class S Preferred Stock, $.01 par value (the
"1987 Class B shares"), for a purchase price of $2.00 per Purchased Share (The
1987 Class B Shares and the Series 1986 class B Preferred Stock, $.01 par value,
of the Company are herein referred to collectively as the "Class B Preferred
Shares".
1.2 Reserved Shares The Company will authorize and will reserve, and
covenants to continue to reserve, a sufficient number of shares of the Common
Shares, $.001 par value (the "Common Shares"), to satisfy the rights of
conversion of the holders of the Purchased Shares Any shares of Common Shares or
any successor class of stock of the Company hereafter issued or issuable upon
conversion of the Class B Preferred Shares are herein referred to as "Conversion
Shares," and the Class B Preferred Shares and the conversion Shares are herein
collectively referred to as the "Securities."
<PAGE> 7
-7-
1.3 Sale and Purchase. Subject to the terms and conditions herein set
forth, the Company shall issue and sell to each of the purchasers, and each
purchaser shall purchase from the Company, the number of purchased shares set
forth opposite the name of such purchaser in Column 2 of Exhibit A for the
aggregate purchase price set forth in Column 3 of Exhibit A.
1.4 Closing. A Closing (the "Closing") of the sale and purchase of the
purchased Shares shall take place at the offices of Goodwin, Procter & Hoar,
located at Exchange Place Boston, Massachusetts, at ___________ on October __ ,
1987, or such other date, time and place as shall be mutually agreed upon by the
Company and the purchasers (the "Closing Date"). At the Closing the Company will
deliver the purchased Shares being acquired by each purchaser in the form of a
certificate issued in such purchaser's name or in the name of its nominee (of
which the purchaser shall notify the Company not less than one (1) business day
prior to the Closing), against payment of the purchase price therefor by or on
behalf of each Purchaser to the Company by certified or bank cashier's check or
as otherwise set forth in Column 3 of Exhibit A.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the purchasers to enter into this Agreement, the
Company hereby represents and warrants as follows:
2.1 Organization and Corporate Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is qualified to do business as a foreign corporation in each
jurisdiction where such qualification is
<PAGE> 8
-8-
required and failure to have such qualification may have a material adverse
effect on the Company The Company has all required corporate power and authority
to own its property, to carry on its business as presently conducted or
contemplated, to enter into and perform this Agreement, and generally to carry
out the transactions center-plated hereby The copies of the Articles of
Incorporation and By-Laws of the Company, as amended to date, which have been
furnished to counsel for the Purchasers by the Company, are correct and
complete. The Company is not in violation of any term of its Articles of
Incorporation or By-Laws, or any material agreement, instrument, judgment,
decree or order applicable to the Company the violation of which would have a
material adverse effect on the Company.
2.2 Authorization This Agreement and the documents and instruments
executed pursuant hereto and referred to in Section 3.6 are valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms subject to applicable bankruptcy, insolvency, reorganization
moratorium and other laws applicable to creditors' rights and remedies and to
the exercise of judicial discretion in accordance with general principles of
equity and subject to any limitations on the enforcement of indemnity
obligations under applicable federal and state securities laws. The execution.
delivery and performance of this Agreement and issuance of the Purchased Shares
and the conversion Shares issuable in respect thereof have been duly authorized
by all necessary corporate or other action of the Company.
2.3 Capitalization. The authorized and issued capital stock of the
Company and the consideration received and to be received therefor are as
<PAGE> 9
-9-
set forth in Schedule 2.3.1 of the Schedule Volume delivered herewith (the
"Schedule Volume"). All of the presently outstanding shares of capital stock of
the Company have been duly and validly authorized and issued and are fully paid
and non-assessable. The purchased Shares have been duly and validly authorized
and, when delivered and paid for pursuant to this Agreement, will be validly
issued, fully paid and non-assessable The relative rights, preferences
restrictions and other provisions relating to the Class B preferred Shares are
as set forth in Exhibit B attached hereto. The Company has authorized
and reserved for issuance upon conversion of the purchased Shares not less than
602,440 shares of its Common Shares, and the conversion shares issued upon such
conversion will, upon such issuance, be validly authorized and issued, fully
paid and non-assessable. Except as provided above or in said Schedule 2.3.1, the
Company has not issued any other shares of its capital stock and there are no
outstanding warrants, options or other rights to purchase or acquire any of such
shares, nor any outstanding securities convertible into such shares or
outstanding warrants, options or other rights to acquire any such convertible
securities. There are no preemptive rights with respect to the issuance or sale
of the Company 5 capital stock, other than rights to which holders of Class B
Preferred Shares and Conversion Shares are entitled as set forth in Section 4.12
hereof and in Section 4.14 of that certain Stock Purchase Agreement dated as of
August 4, 1986 among the Company and certain of the Purchasers named therein
Except as disclosed in schedule 2.3.2 of the schedule Volume, there are no
restrictions on the transfer of the Company's capital stock other than those
arising from federal and state securities laws. Except as disclosed on schedule
2.3.3 of the
<PAGE> 10
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Schedule Volume, the Company has no subsidiaries or investments in any other
corporation trust, partnership or business entity and is not a party to any
joint venture The outstanding shares of the capital stock of the Company are
held of record and beneficially by the persons identified in said Schedule 2.3.1
in the amounts indicated therein.
2.4 Financial Statements and Backlog Included in Schedule 2.4 of the
Schedule Volume are the following financial statements of the Company, all of
which statements (including the footnotes thereto) fairly present the financial
position of the Company on the dates of such statements and the results of its
operations for the periods covered thereby and have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved and prior periods:
An audited Balance Sheet as of December 31, 1986, and Statements of
Operations, Shareholders' Equity and Retained Earnings, and Changes in Financial
Position for the year then ended;
An unaudited Balance Sheet as of August 31, 1987, and Statements of
Operations, Shareholders' Equity and Retained Earnings, and Changes in Financial
Position for the six-month period then ended. Included in Schedule 2.4 of the
Schedule Volume is a detailed backlog of all firm orders for the Company's
products as of August 31, 1987. Except as disclosed in said Schedule 2.4, the
Company is not aware of any cancellation or proposed cancellations with respect
to the orders contained in the backlog and has no reason to believe that all
orders set forth therein will not be delivered on schedule; nor is there any
material claim
<PAGE> 11
-11-
for refunds of monies already paid to the Company, or any reason to believe such
claims will be forthcoming.
2.5 Absence of Undisclosed Liabilities Except as and to the extent
reflected or reserved against in the latest balance sheet included in schedule
2.4 of the Schedule Volume (including the footnotes thereto), except for
liabilities arising in the ordinary course of its business since the date of
said balance sheet, and except as to accrued or contingent liabilities arising
out of the facts disclosed in Schedule 2.5 of the Schedule Volume, the Company
does not have and has not assumed any material accrued or contingent liability
arising out of any transaction or state of facts existing prior to the date
hereof in any case where the material facts or circumstances giving rise to such
liability are known to the Company or in the exercise of reasonable diligence
should have been known to the Company (whether such liability is accrued, to
become due contingent, or otherwise and whether or not such liability relates to
any predecessor business of the Company).
2.6 Absence of Certain Developments. Except as specifically disclosed
in schedule 2.6 of the Schedule Volume, since the date of the latest balance
sheet included in Schedule 2.4 of the schedule Volume, there has been (i) no
material adverse change in the condition, financial or otherwise, of the Company
or in the assets, liabilities, properties or business of the Company, (ii) no
declaration, setting aside or payment of any dividend or other distribution with
respect to, or any direct or indirect redemption or acquisition of, any of the
capital stock of the Company, (iii) no waiver of any valuable right of the
Company or the cancellation of any debt or claim held by the Company, (iv) no
loan by the Company to
<PAGE> 12
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any officer, director, employee or stockholder of the Company, or any agreement
or commitment therefor, (v) no increase, direct or indirect, in the compensation
paid or payable to any officer, director. employee or agent of the Company which
increase is in excess of an annual rate of $5,000, (vi) no loss, destruction or
damage to any property of the Company, whether or not insured, in excess of
$10,000 in the aggregate, (vii) no labor trouble involving the Company where the
consequence of such labor trouble may be materially adverse with respect to the
Company. and no material change in the personnel of the Company or the terms and
conditions of their employment, and (viii) no acquisition or disposition of any
assets (or any contract or arrangement therefor), nor any other transaction by
the Company otherwise than for fair value in the ordinary course of business.
2.7 Title to Properties The Company has good and marketable title to
all of its tangible properties and assets free and clear of all liens,
restrictions or encumbrances, except as specifically disclosed in Schedule 2.7
of the Schedule Volume or in the financial statements and the footnotes thereto
included in Schedule 2.4 of the Schedule Volume. The Company owns no real
property. All machinery and equipment included in such properties which is
necessary to the business of the Company is in reasonable working condition, and
all leases of real or personal property to which the Company is a party are
fully effective and afford the Company peaceful and undisturbed possession of
the subject matter of the lease. To its best knowledge, the Company is not in
violation of any zoning. building or safety ordinance, regulation or requirement
or other law or regulation applicable to the operation of its owned or leased
<PAGE> 13
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tangible properties, nor has it received any notice of violation with which it
has not complied, in any case in which the consequences of such violation if
asserted by the applicable regulatory authority would be materially adverse with
respect to the Company- For purposes of this Agreement, "tangible properties"
specifically excludes patent, trademark. copyright, trade secret and other
proprietary rights.
2.8 Tax Matters. All federal, state, county and local taxes, and all
applicable taxes owed to foreign jurisdictions. due and payable by the Company
have been paid The provisions for taxes on the latest balance sheet included in
Schedule 2.4 of the Schedule Volume are sufficient for the payment of all
accrued and unpaid federal, state. county and local taxes of the Company and any
applicable taxes owing to any foreign jurisdiction, whether or not assessed or
disputed as of the date of said balance sheet. There exist no unpaid assessments
of federal income taxes nor any basis for the assessment of additional federal
income taxes on the Company for any fiscal period. The federal income tax
returns of the Company have not been audited by the Internal Revenue Service,
and no notice of audit has been received. The Company has duly filed all
federal, state, county and local tax returns required to have been filed by it
and there are in effect no waivers of applicable statutes of limitations with
respect to taxes for any year.
2.9 Contracts and Commitments The Company does not have and has not
assumed any contract, obligation or commitment which involves a potential
commitment in excess of $10,000 or which is otherwise material and not entered
into in the ordinary course of business, and does not have any employment
contracts; stock redemption
<PAGE> 14
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or purchase agreements; financing agreements; licenses; distributor, sales
representative or OEM agreements; agreements with officers, directors, employees
or shareholders of the Company or persons or organizations related to or
affiliated with any such persons; leases; agreements relating to the licensing,
distribution, development, purchase or sale of software; or pension,
profit-sharing retirement or stock option plans, except in each case as are
described in Schedule 2.9 of the schedule Volume. Except as described in said
Schedule 2.9, (i) the Company is not in default under any material contract,
obligation or commitment, and (ii) without limiting the generality of the
foregoing, there are no outstanding claims by any customer of the Company with
respect to delivery or performance of the Company's products and (iii) all
receivables booked with respect to the sale of Company's products are valid and
enforceable receivables without offset. The Company has no knowledge of any
facts or circumstances which are likely to cause any of the foregoing contracts,
obligations or commitments to have a materially adverse effect upon the business
or finances of the Company. The Company does not have and never has had any
government contracts or subcontracts.
2.10 Patents; Trade Secrets; Employee Restrictions. Except as set forth
in Schedule 2.10 of the Schedule Volume, the Company has exclusive ownership of,
or exclusive license to use, all patent, copyright, trademark, trade secret or
other proprietary rights used or to be used its business as presently conducted
or contemplated. Except as disclosed in Schedule 4.9 hereto, the Company has not
used, and does not use or contemplate making use of, any patent, copyright,
trademark, trade secret or other proprietary information or rights of Interqual,
Inc. The Company owns
<PAGE> 15
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no issued patents or patent applications. Except as set forth in Schedule 2.10
of the Schedule Volume, the Company to the best of its knowledge owns or has a
license to use, free and clear of other claims or rights of others, all trade
secrets, manufacturing processes, hardware designs, programming processes
software and other information required for or incident to its products or its
business as presently conducted or contemplated. To the best knowledge of the
Company the Company is not infringing, and its planned operations will not
infringe, any patent, copyright trademark or other proprietary right of any
other person and the Company is not making unauthorized use of any confidential
information or trade secrets of any person, including without limitation any
former employer of any of its past or present employees. Neither the Company
nor, to the best knowledge of the Company, any of the Company 5 employees have
any agreements or arrangements with former employers of such employees relating
to confidential information or trade secrets of such employers. To the best
knowledge of the Company, the activities of the Company's employees on behalf of
the Company do not violate any agreements or arrangements which any such
employees have with former employers To the best knowledge of the Company, no
other person is infringing any patent, copyright, trademark, trade secret or
other proprietary right of the Company.
2.11 Effect of Transactions. The execution, delivery and performance by
the Company of this Agreement and the Shareholders Agreement, and the adoption
of the Certificate of Amendment in accordance with Exhibit B will not conflict
with or result in any default under any material contract, obligation,
commitment, charter provision,
<PAGE> 16
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by-law or corporate restriction of the Company or the creation of any lien,
charge or encumbrance of any nature upon any of the properties or assets of the
Company except pursuant to this Agreement or the transactions contemplated
hereby. The Company's execution and delivery of this Agreement and its
performance of the transactions contemplated hereby will not violate any
material instrument, agreement, judgment, decree, order, statute, rule or
regulation of any federal, state or local government or agency applicable to the
Company the violation of which would have a material adverse effect on the
Company.
2.12 Litigation. Except as set forth in Schedule 2.12 of the schedule
Volume, there is no litigation or governmental proceeding or investigation
pending against the Company. To the best knowledge of the Company, there is no
such litigation, proceeding or investigation threatened against the Company, or
which is pending or threatened affecting any of the Company's properties or
assets, or is pending or threatened against any officer or key employee of the
Company, or is pending or threatened and has a reasonable possibility of calling
into question the validity, or materially hindering the enforceability or
performance, of this Agreement or any action taken or to be taken pursuant
hereto; nor, except as disclosed in Schedule 2.12 to the Schedule Volume, to the
best knowledge of the Company, has there occurred any event or does there exist
any condition on the basis of which any such litigation, proceeding or
investigation might properly be instituted with any substantial chance of a
recovery which would be materially adverse to the Company.
<PAGE> 17
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2.13 Offerees. Neither the Company, nor anyone acting on its behalf,
has in the past or will hereafter sell, offer for sale or solicit offers to buy
any of the Securities so as to bring the offer, issuance or sale of the
Purchased Shares or the Conversion Shares, as contemplated by this Agreement
within the provisions of Section 5 of the Securities Act of 1933, as amended.
The Company has complied and will comply with all applicable state "blue-sky" or
securities laws in connection with the issuance and sale of its Common Shares
Class B Preferred Shares and other securities heretofore and upon the closing of
this Agreement.
2.14 Business. The Company has all necessary franchises, permits,
licenses and other rights and privileges necessary to permit it to own its
property and to conduct its present business The Company is not in violation,
and its planned business as heretofore described to the purchasers in writing
will not put the Company in violation, of any material law regulation,
authorization or order of any public authority relevant to the ownership of its
properties or the carrying on of its business. The Company does not know of any
facts or circumstances (including without limitation expressions or other
indications of the attitude of the concerned governmental agencies or officials)
which are materially adverse with respect to any of the foregoing matters.
2.15 Information Supplied to Purchasers. Neither (i) this Agreement or
the schedule Volume, (ii) the Business Plan dated June 1987, as supplemented by
this Agreement and the Schedule Volume, nor (iii) any document or certificate
furnished to the purchasers by or on behalf of the Company pursuant to Section
3.1 or 3.7 of this Agreement, contains or will contain at the time of its
delivery any untrue statement of
<PAGE> 18
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a material fact, and this Agreement, the Schedule Volume, and said other
documents and certificates, a not omit to state a material fact necessary in
order to make the statements contained herein and therein not misleading. There
is no material fact relating to the business, prospects, operations, affairs or
conditions of the Company which adversely affects or in the future may in the
reasonable business judgment of the Company (so far as the Company may now
foresee based upon facts now known to the Company) materially adversely affect
the same which has not been set forth in this Agreement or in the other
documents furnished to the Purchasers by or on behalf of the Company prior to or
on the date hereof The forecasts and projections of future financial results
contained in said Business Plan are based upon information available to the
Company as of the date on which such forecasts or projections were made and upon
reasonable inferences from such information, but may be subject to revision in
the event of changes in the facts and circumstances upon which such forecasts
and projections are based which could not reasonably have been foreseen at the
date on which such forecasts or projections were made.
2.16 Brokerage. There are no valid claims for brokerage commissions,
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of the Company.
SECTION 3 CONDITIONS OF PURCHASE
The Purchasers' obligation to purchase and pay for the Purchased Shares
shall be subject to compliance by the Company with their
<PAGE> 19
-19-
agreements herein contained and to the fulfillment on or before and at the
Closing Date of the following conditions:
3.1 Certificate of Company The representations and warranties of the
Company contained in this Agreement, including but not limited to the
representations and warranties made in Section 2, shall be true and correct in
all material respects with the same force and effect as though such
representations and warranties had been made on and as of the closing Date; each
of the conditions hereafter specified in this Section 3 shall have been
satisfied; and on the closing Date a certificate to such effect executed by the
Chairman of the Board of the Company shall be delivered to the purchasers.
3.2 Opinion of Company Counsel. The purchasers shall have received from
counsel for the Company, Messrs. Altheimer & Gray their favorable opinion, dated
the closing Date, substantially in the form attached hereto as Exhibit C.
3.3 Authorization. The Board of Directors of the Company shall have
duly adopted resolutions in form satisfactory to the purchasers authorizing the
Company to consummate the transactions contemplated hereby in accordance with
the terms hereof and the Purchasers shall have received a duly executed
certificate of the Secretary or an Assistant Secretary of the Company setting
forth a copy of such resolutions and such other matters as may be reasonably
requested by the purchasers
3.4 Amendment of certificate of Incorporation. The Certificate of
Incorporation of the Company shall have been amended by the shareholders of the
Company as set forth in Exhibit B hereto.
<PAGE> 20
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3.5 Amendment of By-Laws The Board of Directors of the Company shall
have adopted a resolution making certain restrictions on the transfer of the
Common Shares of the Company contained in Section 5 of Article V thereof
inapplicable to the Purchased Shares and the Conversion Shares.
3.6 Agreement of Shareholders The Company and certain of its
shareholders shall have executed and delivered to the purchasers an Agreement of
Shareholders in the form of Exhibit D hereto.
3.7 All Proceedings Satisfactory. All corporate and other proceedings
taken prior to or at the Closing in connection with the transactions
contemplated by this Agreement, and all documents and evidences incident
thereto, shall be reasonably satisfactory in form and substance to the
Purchasers. and the Purchasers shall receive such copies thereof and other
materials (certified, if requested) as they may reasonably request in connection
therewith. The issuance and sale of the Purchased Shares to the Purchasers shall
be made in conformity with all applicable state and federal securities laws.
SECTION 4. COVENANTS OF THE COMPANY
The Company shall comply, and shall cause any direct or indirect
subsidiaries of the Company to comply, with the following covenants, except as
shall otherwise be agreed pursuant to a written consent of a majority in
interest of the holders of the Class B Preferred Shares and conversion Shares
delivered in accordance with Section 7.1, and until (i) the Company has redeemed
at least 80% of the Class B Preferred Shares or Conversion Shares or (ii) such
time as the Company completes
<PAGE> 21
-21-
its first public offering of its Common Shares pursuant to a registration
statement under the Securities Act of 1933, as amended (the "Securities Act") in
which (a) the sale price to the public is at least $1.50 per share
(appropriately adjusted for stock splits, stock dividends and the like), and (b)
aggregate gross proceeds to the Company from the sale of the shares are at least
$7,000,000 (a "substantial Public offering"). All references to "the Company" in
this Section 4 shall be deemed to refer to the Company and its direct and
indirect subsidiaries, if applicable on a consolidated basis.
4.1 Financial Statements. The Company will maintain a system of
accounts in accordance with generally accepted accounting principles, keep full
and complete financial records and furnish to the purchasers, subject to the
provisions of Section 7.5 hereof, within ninety (90) days after the end of each
fiscal year, a copy of the balance sheet of the Company as at the end of such
year, together with a statement of income and retained earnings of the Company
for such year, certified by Arthur Anderson & Co. or other independent public
accountants of recognized standing reasonably satisfactory to the purchasers,
prepared in accordance with generally accepted accounting principles and
practices consistently applied.
4.2 Budget and Operating Forecast. The management of the Company will
prepare and submit to the Board of Directors of the Company a budget for each
fiscal year of the Company at least 30 days prior to the beginning of such
fiscal year together with management's written discussion and analysis of such
budget. The budget shall be accepted as the budget for such fiscal year when it
has been approved by a
<PAGE> 22
-22-
majority of the full Board of Directors of the Company. The management of the
Company shall review the budget periodically and shall advise the Board of
Directors of all changes therein and all material deviations therefrom.
4.3 Conduct of Business. The Company will continue to engage
principally in the business now conducted by it or businesses reasonably related
to such business The Company will keep in full force and effect its corporate
existence and all patents and other intellectual property rights used or
necessary in its business and, consistent with the disclosures made on Schedule
2.14 to the schedule Volume, comply with all applicable laws and regulations in
the conduct of its business. The Company shall use its best efforts to cause
each key employee of the Company to execute confidentiality and invention
agreements.
4.4 Payment of Taxes, compliance with Laws, etc. The Company will pay
and discharge all lawful taxes, assessments and governmental charges or levies
imposed upon it or upon its income or property before the same shall become in
default, as well as all lawful claims for labor, materials and supplies which,
if not paid when due, might become a lien or charge upon its property or any
part thereof; provided, however, that the Company shall not be required to pay
and discharge any such tax, assessment, charge, levy, or claim so long as the
validity thereof is being contested by the Company in good faith by appropriate
proceedings and an adequate reserve therefor has been established on its books-
The Company will comply with all applicable laws and regulations in the conduct
of its business.
<PAGE> 23
-23-
4.5 Adverse Changes. The management of the Company will promptly advise
the Board of Directors and each Director of any event which represents a
material adverse change in the condition or business, financial or otherwise, of
the Company, and of each suit or proceeding commenced or threatened against the
Company which, if adversely determined. would result in such a material adverse
change. The management of the Company will also promptly advise the Board of
Directors and each Director of any violations of the covenants made herein.
4.6 Insurance. The Company will keep its insurable properties insured
by financially sound and reputable insurers against the perils of liability,
casualty, fire and extended coverage in amounts of coverage at least equal to
those customarily maintained by companies in the same or a similar business of
similar size, to the extent that such insurance is available on reasonable terms
The Company will also maintain with such insurers insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner customary for corporations engaged in the same or a similar business of
similar size, to the extent such insurance is available on reasonable terms.
4.7 Maintenance of Properties. The Company will maintain all properties
used or useful in the conduct of its business in reasonably good repair, working
order and condition as necessary to permit such business to be properly and
advantageously conducted.
4.8 Affiliated Transactions. All transactions by and between the
Company and any officer, key employee or stockholder of the Company. or persons
controlled by or affiliated with such officer, key employee or
<PAGE> 24
-24-
stockholder, including without limitation Interqual, Inc. shall be conducted on
an arm's-length basis, shall be on terms and conditions no less favorable to the
Company than could be obtained from nonrelated persons and shall be approved in
advance by the Board of Directors, after full disclosure of the terms thereof.
4.9 Management Compensation. Compensation paid by the Company to its
management will be reasonably comparable to compensation paid to management in
companies of similar size, of similar maturity, and in similar industries.
4.10 Use of Proceeds. The Company shall use the proceeds of the sale of
the Purchased Shares for general corporate purposes.
4.11 Board of Directors Meetings. So long as at least 631,673 Class B
Preferred Shares are outstanding, the Company shall use its best efforts to
cause one nominee of the holders of the Class B Preferred Shares, who shall be
designated by a majority in interest of the holders of the Class B Preferred
Shares, to be recommended to the Stockholders of the Company for election as a
director at all meetings of Stockholders, or consents in lieu thereof, for such
purpose. The Company shall ensure that meetings of its Board of Directors are
held at least six times each year and at intervals of not more than three
months. The certificate of Incorporation or By-Laws of the Company shall at all
times during which any nominee of the purchasers serves as director of the
Company provide for indemnification of the directors to the fullest extent
permitted under applicable state law. The Company will use its best efforts to
obtain and maintain director's and officer's liability insurance providing
coverage for
<PAGE> 25
-25-
such director of at least $1,000,000 per occurrence, to the extent such
insurance is available on reasonable terms.
4.12 Right to Participate in Sales of Additional Securities. If the
Company at any time wishes to sell any shares of capital stock of the Company,
or bonds. certificates of indebtedness, debentures or other securities
convertible into capital stock of the Company or options, warrants or rights
carrying any rights to purchase capital stock or convertible securities of the
Company to a third party, other than in connection with a Substantial Public
offering, the Company will submit a written offer to the purchasers identifying
the third party to whom such stock, securities, options, warrants or rights are
proposed to be sold, and the terms of the proposed sale, and offering to the
purchasers the opportunity to purchase their proportionate share of such
securities on terms and conditions. including price, not less favorable to the
purchasers than those on which the Company proposes to sell such securities to
any other purchaser. Each purchaser shall have the right to purchase his
proportionate share of such securities based on the ratio which the Common Stock
of the Company owned or obtainable by said purchaser upon conversion of any
preferred Shares owned by him bears to all the issued and outstanding shares of
Common Shares of the Company (including all such shares issuable upon conversion
of then issued and outstanding preferred Shares). Any purchaser may transfer its
right to be offered any such opportunity to (i) any affiliate. as that term is
defined in the Investment Company Act of 1940, as amended of a purchaser, or
(ii) any owner of an investment account which is managed or advised by a
Purchaser, or by TA Associates or any such affiliate thereof. The
<PAGE> 26
-26-
Company's offer to the Purchasers shall remain open and irrevocable for a period
of thirty (30) days. Any shares so offered to the purchasers which are not
purchased pursuant to such offer may be sold by the Company to the purchaser
originally named in the offer to the Purchasers on the same terms contained in
such offer at any time within 180 days following the date of such offer, but may
not be sold to any other person or after such 180 day period without renewed
compliance with this Section 4.14. Notwithstanding the above, the Company may
issue up to 2,135,492 shares of Common Shares of the Company to employees or
directors pursuant to stock options heretofore or hereafter issued with the
approval of the Board of Directors of the Company and 300,000 shares of Common
stock pursuant to a Mediqual Option Agreement dated January 5, 1986 between the
Company and various optionees party to such agreement.
4.13 Agreement of shareholders. At or before the Closing. the Company
will enter into with the purchasers and certain shareholders named therein an
agreement in the form attached hereto as Exhibit D (the "Agreement of
shareholders"). The Company agrees that it will diligently enforce all of its
rights under the Agreement of Shareholders and confidentiality and invention
agreements with key employees referred to in Section 4.3, and that it will not
waive or release any such rights or consent to any amendment of any such
agreement without the written consent of a majority in interest of the holders
of the Class B preferred Shares or Conversion Shares with respect thereto.
4.14 Distributions or Redemption of Capital Stock. Except as otherwise
expressly provided herein or in Exhibit B, the Company will not declare or pay
any dividends (other than a dividend payable in shares of
<PAGE> 27
-27-
its Common Shares) or make any distributions of cash, property or securities of
the Company with respect to any shares of its Common Shares or any other class
of its stock, or directly or indirectly redeem, purchase, or otherwise acquire
for a consideration any shares of its Common Shares or any other class of its
stock (other than repurchases of shares from employees pursuant to the terms of
any Incentive Stock Option Plans adopted by the Company and approved by the
Director elected by the Class B Preferred Shares).
4.15 No Amendments to Articles of Incorporation or By-Laws. Except as
provided in this Section 4.17, the Company will not make any amendment to its
Articles of Incorporation or its By-Laws without the consent of the majority in
interest of the Class B Preferred Shares and Conversion Shares. Notwithstanding
any contrary provision of this Agreement, the Company may issue and the then
holders of the Class B Preferred Shares agree to vote to authorize, a class of
preferred stock which is subordinated with respect to rights upon liquidation.
dissolution or winding up, dividends, voting rights and redemption to the Class
B Preferred Shares if the proceeds from the sale of such stock are used solely
to redeem the Class B Preferred Shares.
4.16 Restrictions on Other Agreements. The Company will not enter into
any agreement with any party which would restrict the payments due the holders
of Class B Preferred Shares upon the mandatory redemption thereof or grant any
right relating to the registration of its Common Shares superior to or on a
parity with the rights granted to the Purchasers pursuant to Section 6 hereof.
<PAGE> 28
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4.17 Further Shares Issuable- In the event that the Company shall issue
to James A. Block ("Block") any of its Common Shares or any warrants, options or
other rights to purchase Common Shares other than for consideration at least
equal to $2.00 per share the Company agrees to issue, without further
consideration, to each of the Purchasers or the then holder of such purchaser's
shares such purchaser's pro rata portion of an aggregate of . ____ Common Shares
for every Common Share or right to purchase a Common Share issued to Block. Such
Common Shares shall upon issue be duly authorized, validly issued, fully paid
and non-assessable and shall be treated as purchased Shares for purposes of
Sections 1.2, 2, 4, 5, 6 and 7 of this Agreement.
SECTION 5 REPRESENTATIONS AND WARRANTIES OF PURCHASERS
It is the understanding of the Company, and each purchaser hereby
severally represents and warrants to the Company with respect to such
Purchaser's purchase of Securities hereunder, that:
A. The execution, delivery and performance of this Agreement and the
documents and instruments executed pursuant hereto have been duly authorized by
all necessary action on the part of the Purchaser. and this Agreement
constitutes the valid legal and binding agreement of the Purchaser, enforceable
in accordance with its terms.
B. The purchaser is acquiring the Securities for its own account, for
investment, and not with a view to any "distribution" thereof within the meaning
of the Securities Act of 1933 as amended (the "Securities Act") -
C. The Purchaser understands that it may have to bear the economic risk
of its investment in the Company for an indefinite period of
<PAGE> 29
-29-
time because, among other reasons, the Securities have not been registered under
the securities Act or "blue sky" or securities laws of any other jurisdiction
and therefore cannot be disposed of unless such Securities are subsequently
registered under the securities Act (and such "blue sky" or securities laws, if
applicable) or exemptions from such registration under the Securities Act (and
such "blue sky" or securities laws, if applicable) are available. The Purchaser
acknowledges and understands that, except as provided in Section 6 hereof, it
has no independent right to require the Company to register the Securities. The
Purchaser is aware that the Company may not accomplish a public offering of its
stock. The purchaser further understands that the Company may, as a condition to
the transfer of any of the Securities, require that the request for transfer be
accompanied by opinion of counsel. in form and substance satisfactory to the
Company, to the effect that the proposed transfer does not result in violation
of the Securities Act, unless such transfer is covered by an effective
registration statement under the Securities Act The Purchaser understands that
each certificate representing the Securities will bear the following legend or
one substantially similar thereto:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended. These shares have been
acquired for investment and not with a view to distribution or resale,
and may not be offered, sold, mortgaged, pledged, hypothecated or
otherwise transferred or disposed of without an effective registration
statement for such shares under the Securities Act of 1933, as amended,
and applicable state securities laws, or an opinion of counsel
satisfactory to the corporation that such registration is not required
D. The Purchaser has knowledge and experience in financial and business
matters and in the making of venture capital investments, is
<PAGE> 30
-30-
capable of evaluating the merits and risks of an investment in the Company, is
able to bear the economic risk of loss of its entire investment in the Company,
has been granted the opportunity to make a thorough investigation of the affairs
of the Company and to question, to the extent deemed necessary and appropriate,
the officers, directors, employees. agents and stockholders of the Company to
verify the information contained herein or otherwise furnished by the Company,
and to evaluate the merits and risks of the investment described herein, and has
availed itself of such opportunity either directly or through its authorized
representative.
E. The Purchaser has been advised that the Securities have not been and
are not being registered under the Securities Act or under the "blue sky" laws
of any jurisdiction and that the Company in issuing the purchased Shares is
relying upon, among other things, the representations and warranties of each
Purchaser contained in this Article 5 in concluding that each such issuance is a
"private offering" under Section 4(2) of the Securities Act and does not require
compliance with the registration provisions of the Securities Act The Purchaser
acknowledges that neither the Company nor any person acting on behalf of the
Company has offered to sell the Purchased Shares to the purchaser by means of
any form of general advertising.
F. There are no valid claims for brokerage commissions finder's fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of such
Purchaser.
<PAGE> 31
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SECTION 6 REGISTRATION RIGHTS
6.1 Optional Registrations. If at any time or times after the date
hereof, the Company shall determine to register any of its Common Shares or
securities convertible into or exchangeable or exercisable for Common Shares
under the Securities Act (whether in connection with a public offering of
securities by the Company (a "primary offering"), a public offering thereof by
stockholders (a "secondary offering"), or both, but not in connection with a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 or any other similar rule of the securities and
Exchange Commission (the "commission") under the Securities Act is applicable),
the Company will promptly give written notice thereof to the holders of
Registrable Securities (as hereinafter defined) then outstanding (the
"Holders"), and will use its best efforts to effect the registration under the
securities Act of all Registrable Securities which the Holders may request in a
writing delivered to the Company within 15 days after the notice given by the
Company; provided, however, that in the case of the registration of Common
Shares by the Company in connection with an underwritten public offering, it
shall not be required to register Registrable securities of the Holders in
excess of the amount, if any, of Common Shares which the principal underwriter
of an underwritten offering shall reasonably and in good faith agree in writing
to include in such offering (the "Secondary Shares"). If any Registrable
securities of Holders who have requested participation are not included for the
foregoing reason: (i) if William D. Ryan and affiliates ("Ryan") and holders of
Common Shares other than the Holders have held capital stock of the Company for
less than two years for purposes of Rule
<PAGE> 32
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144(d), then the Company will permit Holders who have requested participation to
participate in such offering prior to permitting participation by Ryan or such
other holders, and (ii) if Ryan, such other holders and the Holders have held
capital stock of the Company for more than two years, then the Company will
permit the Holders of Registrable securities who have requested participation to
participate in the offering collectively as to not more than fifty percent of
the Secondary Shares and individually in proportion to the number of shares of
Common Shares owned or obtainable by them upon exercise of rights with respect
to other securities owned by them, the remaining fifty percent of the Secondary
Shares to be made up of not more than (i) sixty percent shares held by Ryan and
(ii) forty percent shares held by other holders of Common Shares- If the Company
includes in such a registration any securities to be offered by it, all expenses
of registration and offering shall be borne by the Company. except that the
Holders shall bear underwriting commissions and transfer taxes on shares being
sold by such Holders If the registration under this Section 6.1 is exclusively a
secondary offering, as defined in this Section the Holders shall bear their
proportionate share of the expenses of the registration and offering (provided
all stockholders registering shares thereunder bear their proportionate share of
expenses), except expenses which the Company would have incurred whether or not
registration was attempted, including, without limitation, the expense of
preparing normal audited or unaudited financial statements or summaries
consistent with this Agreement or applicable Commission filings. Without in any
way limiting the types of registrations to which this Section 6.1 shall apply,
in the event that the Company shall effect a
<PAGE> 33
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"shelf registration" under Rule 415 promulgated under the Securities Act, or any
other similar rule or regulation ("Rule 415"), the Company shall take all
necessary action. including, without limitation, the filing of post-effective
amendments, to permit the Purchasers to include their shares in such
registration in accordance with the terms of this Section 6.1, provided that the
Company shall not be required to maintain the effectiveness of such shelf
registration beyond the latest date that the prospectus prepared in connection
herewith continues to comply with Section 10(3) of the securities Act, unless
the Company shall have prepared an amended prospectus complying with said
Section 10(3) for its own use or the use of any other person selling under such
shelf registration.
6.2 Required Registrations. If at any two (2) occasions after the
Closing Date, one or more of the Holders of an aggregate of not less than a
majority of the Registrable Securities then outstanding, including any Common
Shares issued or issuable upon conversion of the purchased Shares then
outstanding, shall notify the Company in writing that he or they intend to offer
or cause to be offered for public sale all or any portion of their Registrable
Securities, the Company will notify all of the Holders of Registrable Securities
who would be entitled to notice of a proposed registration under Section 6.1 of
such notification. Upon the written request of any such Holder after receipt
from the Company of such notification, the Company will use its best efforts to
cause such of the Registrable Securities as may be requested by any Holders
(including the Holder or Holders giving the initial notice of intent to register
hereunder) to be registered under the Securities Act in accordance with the
terms of
<PAGE> 34
-34-
this Section 6.2. All expenses of such registrations and offerings shall be
borne by the Company, except that the Holders shall bear underwriting
commissions, transfer taxes of shares being sold by the Holders and the expense
of any special audit of the Company's financial statements if the notice
requesting registration does not reasonably permit the use of existing or
contemplated audited statements.
6.3 Registrable Securities. For the purposes of this Section 6, the
term "Registrable Securities" shall mean any shares of Common Shares owned by a
Purchaser or issuable upon conversion of Class B Preferred Shares, and any
Common Shares issued or issuable with respect to such Class B Preferred Shares
or Common Shares by way of a stock dividend or stock split or in connection with
a combination of shares, recapitalization, merger, consolidation or other
reorganizations.
6.4 Further Obligations of the Company. Whenever under the preceding
sections of this Section 6 the Company is required hereunder to register Common
Shares, it agrees that it shall also do the following;
(i) Use its best efforts to diligently prepare for filing with the
Commission a registration statement and such amendments and supplements to said
registration statement and the prospectus used in connection therewith as may be
necessary to keep said registration statement effective and to comply with the
provisions of the Securities Act with respect to the sale of securities covered
by said registration statement for the period necessary to complete the proposed
public offering;
<PAGE> 35
-35-
(ii) Furnish to each selling Holder such copies of each preliminary and
final prospectus and such other documents as such Holder may reasonably request
to facilitate the public offering of his Common Shares;
(iii) Enter into any underwriting agreement with provisions reasonably
required by the proposed underwriter for the selling Holders, if any; and
(iv) Use its best efforts to register or qualify the Common Shares
covered by said registration statement under the securities or "blue-sky" laws
of such jurisdictions as any selling Holder may reasonably request, provided
that the Company shall not be required to register or qualify the Common Shares
in any states in which it is not now qualified to do business and which would
require it to so qualify or to subject itself to general service of process in
order to so register or qualify the Common Shares
6.5 Form S-3 If the Company becomes eligible to use Form S-3 under the
Securities Act or a comparable successor form. the Company shall use its best
efforts to continue to qualify at all times for registration on Form S-3 or such
successor form. The Holders of an aggregate of not less than fifteen percent
(15%) of Registrable Securities shall have the right to request and have
effected not more than one registration per year of shares of Registrable
Securities on Form S-3 or such successor form for a public offering of shares of
Registrable Securities having an aggregate proposed offering price of not less
than $250,000 (such requests shall be in writing and shall state the number of
shares of Registrable Securities to be disposed of and the intended method of
disposition of such shares by such Holder or Holders). The Company shall not be
required to cause a
<PAGE> 36
-36-
registration statement requested pursuant to this Section 6.5 to become
effective prior to 90 days following the effective date of a registration
statement initiated by the Company, if the request for registration has been
received by the Company subsequent to the giving of written notice by the
Company. made in good faith, to the Holders of Registrable Securities to the
effect that the Company is commencing to prepare a company-initiated
registration statement (other than a registration effected solely to implement
an employee benefit plan or a transaction to which Rule 145 or any other similar
rule of the commission under the securities Act is applicable); provided,
however, that the Company shall use its best efforts to achieve such
effectiveness promptly following such 90-day period if the request pursuant to
this Section 6.5 has been made prior to the expiration of such 90-day period.
The Company shall give notice to all Holders of Registrable Securities of the
receipt of a request for registration pursuant to this Section 6.5 and shall
provide a reasonable opportunity for such Holders to participate in the
registration Subject to the foregoing, the Company will use its best efforts to
effect promptly the registration of all shares of Common Shares on Form S-3 or
such successor form to the extent requested by the Holder or Holders thereof for
purposes of disposition. If so requested by any Holder in connection with a
registration under this Section 6.5, the Company shall take such steps as are
required to register such Holder's Registrable securities for sale on a delayed
or continuous basis under Rule 415, and to keep such registration effective
until all of such Holder's Registrable Securities registered thereunder are
sold, provided that the Company may terminate any such shelf registration upon
the commencement of any
<PAGE> 37
-37-
public offering of securities of the Company pursuant to a firm commitment
underwriting if in the opinion of the underwriters for such public offering the
continued effectiveness of such shelf registration would interfere with the sale
of such securities in such public offering. All expenses incurred in connection
with a registration requested pursuant to this Section 6.5, including, without
limitation. all registration, qualifications, printing, and accounting fees, and
fees and disbursements of counsel for the selling Holder or Holders of
Registrable Securities and counsel for the Company, shall be borne pro rata by
the Holder or Holders participating in the registration pursuant to this Section
6.5 on the basis of the amount of securities so registered. Notwithstanding the
foregoing, the Company shall not be required to effect a registration under this
Section 6.5 if, in the unqualified opinion of counsel for the Company, which
counsel and opinion shall be acceptable to the holders of Registrable
Securities, such holders of Registrable Securities may then sell all Registrable
Securities proposed to be sold in the manner proposed to be sold without
registration under the Act.
6.6 Indemnification. Incident to any registration statement referred to
in this Section 6, and subject to applicable law, the Company will indemnify
each underwriter, each Holder of Registrable Securities so registered, and each
person controlling any of them against all claims, losses, damages and
liabilities, including legal and other expenses reasonably incurred in
investigating or defending against the same, arising out of any untrue statement
of a material fact contained therein, or any omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or
<PAGE> 38
-38-
arising out of any violation by the Company of the securities Act, any state
securities or "blue-sky" laws or any rule or regulation thereunder in connection
with such registration, except insofar as the same may have been caused by an
untrue statement or omission based upon information furnished in writing to the
Company by such Holder expressly for use therein, and with respect to such
untrue statement or omission in the information furnished in writing to the
Company by such Holder, such Holder will indemnify the underwriters, the
Company, its directors and officers, the other Holders and each person
controlling any of them against any losses, claims, damages, expenses or
liabilities to which any of them may become subject to the same extent.
6.7 Rule 144 Requirements. If the Company becomes subject to the
reporting requirements of either Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Company will use its best efforts to file with the
commission such information as the Commission may require under either of said
Sections; and in such event, the Company shall use its best efforts to take all
action as may be required as a condition to the availability of Rule 144 under
the Securities Act (or any successor exemptive rule hereinafter in effect). The
Company shall furnish to any Holder of Registrable securities upon request a
written statement executed by the Company as to the steps it has taken to comply
with the current public information requirement of Rule 144.
6.8 Transfer of Registration Rights. The registration rights of the
Holders under this Section 6 may be transferred only to transferees of
Registrable securities, which transferees shall be (i) a Holder, (ii) an
affiliate, as that term is defined in the Investment Company Act of 1940,
<PAGE> 39
-39-
of a Holder (including a partner of such Holder), or (iii) a party which
acquires at least five thousand (5,000) Class B preferred shares (or such lesser
number of Class B preferred Shares which constitutes the total number of such
shares purchased by such Holder under this Agreement) or an equivalent amount
(as adjusted for stock splits, stock dividends, reclassifications
recapitalizations or other similar events) of Registrable Securities, or a
combination of Class B Preferred shares and Registrable Securities having an
equivalent aggregate amount. Each such transferee shall be deemed to be a
"Holder" for purposes of this Section 6.
6.9 Granting of Registration Rights. The Company shall not, without the
prior written consent of a majority in interest of the holders of Class B
preferred Shares and Conversion Shares, grant any rights to any persons to
register any shares of capital stock or other securities of the Company if such
rights could reasonably be expected to conflict with or be superior to or on
parity with, the rights of the Holders of Registrable securities granted
pursuant to this Agreement.
SECTION 7. GENERAL
7.1 Amendments, Waivers and Consents For the purposes of this Agreement
and all agreements. documents and instruments executed pursuant hereto, except
as otherwise specifically set forth herein or therein no course of dealing
between the Company and any Purchaser and no delay on the part of any party
hereto in exercising any rights hereunder or thereunder shall operate as a
waiver of the rights hereof and thereof. No covenant or other provision hereof
or thereof may be waived otherwise than by a written instrument signed by the
party so waiving such covenant or other provision; provided, however, that
except as
<PAGE> 40
-40-
otherwise provided herein or therein, changes in or additions to, and any
consents required by this Agreement may be made, and compliance with any term,
covenant, condition or provision set forth herein may be omitted or waived
(either generally or in a particular instance and either retroactively or
prospectively) by a consent or consents in writing signed by the holders of at
least a majority in interest of the holders of Class B preferred shares and
conversion Shares and (in the case of a change or addition to this Agreement)
the Company Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any securities purchased under this
Agreement at the time outstanding (including securities into which Securities
have been converted). each future holder of all Securities, and the Company.
7.2 Survival of Covenants; Assignability of Rights. All covenants,
agreements, representations and warranties of the Company made herein and in the
certificates, lists, exhibits, schedules or other written information delivered
or furnished to any purchaser in connection herewith shall be deemed material
and to have been relied upon by such purchaser, and, except as provided
otherwise in this Agreement, shall survive the delivery of the purchased Shares,
and shall bind the Company's successors and assigns. whether so expressed or
not. and, except as provided otherwise in this Agreement, all such covenants,
agreements. representations and warranties shall inure to the benefit of the
purchasers' successors and assigns and to transferees of the Securities, whether
so expressed or not.
<PAGE> 41
-41-
7.3 Governing Law. This Agreement shall be deemed to be a contract made
under, and shall be construed in accordance with the laws of the Commonwealth of
Massachusetts.
7.4 Section Headings. The descriptive headings in this Agreement have
been inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provision thereof or hereof.
7.5 Confidentiality. Each purchaser agrees to hold confidential all
information furnished to such purchaser by the Company under this Agreement
which the Company identifies as confidential or proprietary or which such
purchaser should have reasonably concluded was confidential, except for
information which (a) is known to the public or becomes so known without breach
by such purchaser of its obligation of confidentiality hereunder, (b) is
disclosed to such purchaser on a nonconfidential basis by a third party who is
not in breach of an obligation of nonconfidentiality in making such disclosure,
or which was known to such Purchaser prior to its being furnished to such
Purchaser by the Company hereunder.
7.6 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which when so executed and delivered shall be
taken to be an original; but such counterparts shall together constitute but one
and the same document.
7.7 Notices and Demands. Any notice or demand which, by any provision
of this Agreement or any agreement, document or instrument executed pursuant
hereto or thereto, except as otherwise provided therein, is required or provided
to be given shall be deemed to have been
<PAGE> 42
-42-
sufficiently given or served for all purposes three days after being sent by
certified or registered mail postage and charges prepaid, to the following
addresses: if to the Company, at the Company's address as shown on the signature
page hereof, or at any other address designated by the Company to each of the
Purchasers in writing; if to a purchaser, at its mailing address as shown on
Exhibit A hereto. or at any other address designated by such purchaser to the
Company in writing; and if to an assignee of a Purchaser to its address as
designated to the Company in writing.
7.8 Severability Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions or this Agreement.
7.9 Expenses. The Company shall pay all reasonable costs and expenses
that it incurs with respect to the negotiation, execution, delivery and
performance of this Agreement, and the Purchasers shall pay all costs and
expenses that they incur with respect to the negotiation, execution, delivery
and performance of this Agreement.
7.10 Purchaser Questionnaire. On or prior to the closing Date, the
purchasers whose names are set forth on Exhibit A under the heading "Individual
purchasers" shall complete execute and deliver to the Company a Confidential
Purchaser Questionnaire in the form thereof attached as Exhibit E hereto.
<PAGE> 43
-43-
IN WITNESS WHEREOF, the undersigned have executed this Agreement as a
sealed instrument as of the day and year first above written.
MEDIQUAL SYSTEMS, INC.
By:
--------------------------
Chairman of the Board
Address.
1900 West Park Drive
Westborough. MA 01581
<PAGE> 44
-44-
EXHIBIT A
PURCHASERS
Number of Class B Aggregate Purchase
Preferred Shares Price of Class B
Name and Address Purchased Preferred Shares
BLUE CROSS-BLUE SHIELD
OF MINNESOTA, INC.
Individual Purchasers:
[to be inserted]
TA Purchasers:
ADVENT V LIMITED PARTNERSHIP
c/c TA Associates
45 Milk Street
Boston, MA 02109
ADVENT INDUSTRIAL LIMITED
PARTNERSHIP
c/c TA Associates
45 Milk Street
Boston, MA 02109
CHESTNUT CAPITAL
INTERNATIONAL II
c/o TA Associates
45 Milk street Boston, MA 02109
ADVENT CHESTNUT II
PARTNERSHIP
c/c TA Associates
45 Milk Street
Boston, MA 02109
<PAGE> 45
-45-
DESIFTA, S.A.
c/o TA Associates
45 Milk Street Boston, MA 02109
TA INVESTORS
c/o TA Associates
45 Milk Street
Boston, MA 02109
MICI MEDICAL SEED FUND
a Limited Partnership
c/o Medical Innovation
Capital, Inc.
Suite 400
1201 Marquette Avenue
Minneapolis, MN 55403
ADVENT ATLANTIC & PACIFIC
LIMITED PARTNERSHIP
c/c TA Associates
45 Milk Street
Boston, MA 02109
<PAGE> 1
10.14
MEDIQUAL SYSTEMS, INC.
2,000 Shares of
Class C Convertible Preferred Stock
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
- --------------------------------------------------------------------------------
April 1, 1993
<PAGE> 2
MEDIQUAL SYSTEMS, INC.
Stock Purchase Agreement
April 1, 1993
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. TERMS OF PURCHASE.......................................................... 1
1.1. Description of Securities.................................................. 1
1.2. Reserved Shares............................................................ 1
1.3. Sale and Purchase.......................................................... 1
1.4. Closing.................................................................... 2
SECTION 2. REPRESENTATIONS AND WARRANTIES OF
THE COMPANY.............................................................. 2
2.1. Organization and Corporate Power........................................... 2
2.2. Authorization.............................................................. 3
2.3. Capitalization............................................................. 3
2.4. Financial Statements and Backlog........................................... 4
2.5. Absence of Undisclosed Liabilities......................................... 4
2.6. Absence of Certain Developments............................................ 4
2.7. Title to Properties........................................................ 5
2.8. Tax Matters................................................................ 5
2.9. Contracts and Commitments.................................................. 6
2.10. No Defaults................................................................ 6
2.11. Patents; Trade Secrets; Employee Restrictions.............................. 7
2.12. Effect of Transactions..................................................... 7
2.13. Litigation................................................................. 8
2.14. Offerees................................................................... 8
2.15. Business................................................................... 8
2.16. Information Supplied to Purchasers......................................... 8
2.17. Brokerage.................................................................. 9
SECTION 3. CONDITIONS OF PURCHASE..................................................... 9
3.1. Certificate of Company..................................................... 9
3.2. Opinion of Company Counsel................................................. 10
3.3. Authorization.............................................................. 10
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
3.4. Amendment and Restatement of Certificate
of Incorporation......................................................... 10
3.5. Agreement of Shareholders; Registration Rights
Agreement................................................................ 10
3.6. All Proceedings Satisfactory............................................... 10
3.7. Waivers and Consents....................................................... 10
3.8. Purchase of Common Stock................................................... 11
3.9. Due Diligence.............................................................. 11
3.10. Termination of Agreements.................................................. 11
SECTION 4. COVENANTS OF THE COMPANY................................................... 11
4.1. Financial Statements....................................................... 12
4.2. Budget and Operating Forecast and Monthly
Financial Statements..................................................... 12
4.3. Conduct of Business........................................................ 13
4.4. Payment of Taxes, Compliance with Laws, etc................................ 13
4.5. Adverse Changes............................................................ 13
4.6. Insurance.................................................................. 13
4.7. Maintenance of Properties.................................................. 14
4.8. Affiliated Transactions.................................................... 14
4.9. Management Compensation.................................................... 14
4.10. Use of Proceeds............................................................ 14
4.11. Board of Directors meetings................................................ 14
4.12. Right to Participate in Sales of Additional Securities..................... 14
4.13. Agreement of Shareholders.................................................. 16
4.14. Distributions or Redemption of Capital Stock............................... 16
4.15. No Amendments to Certificate of Incorporation or
By-Laws.................................................................. 16
4.16. Restrictions on Other Agreements........................................... 16
SECTION 5. REPRESENTATIONS AND WARRANTIES OF
PURCHASERS............................................................... 16
SECTION 6. GENERAL.................................................................... 18
6.1. Amendments, Waivers and Consents........................................... 18
6.2. Survival of Covenants; Assignability of Rights............................. 18
6.3. Governing Law.............................................................. 18
6.4. Section Headings........................................................... 19
6.5. Counterparts............................................................... 19
6.6. Notices and Demands........................................................ 19
6.7. Severability............................................................... 19
6.8. Expenses................................................................... 20
</TABLE>
-ii-
<PAGE> 4
AGREEMENT FOR PURCHASE AND SALE
OF CLASS C CONVERTIBLE PREFERRED STOCK OF
MEDIQUAL SYSTEMS, INC.
AGREEMENT made as of this 1st day of April, 1993 by and among MediQual
Systems, Inc., a Delaware corporation (the "Company"), and the persons named in
Exhibit A hereto (collectively, the "Purchasers," and each individually, a
"Purchaser").
SECTION 1. TERMS OF PURCHASE
1.1. Description of Securities. The Company has authorized the issuance
and sale to the Purchasers of the greater of (i) 2,000 shares (such shares, or
such greater number of shares determined in accordance with sections 1.1(i)
hereof are referred to herein as the "Purchased Shares") of its authorized but
unissued Class C Preferred Stock, $.01 par value (the "Class C Preferred
Shares") and (ii) that number of shares of Class C Preferred Stock which would
at the time of purchase, on an as-converted basis, equal 8.83006% of the
outstanding Common Stock, $.001 par value (the "Common Stock"), assuming the
conversion and exercise of all securities convertible into or exercisable for
Common Shares including the Purchased Shares but excluding Common Shares issued
to Eric Kriss and Warrants to purchase up to 632,275 Common Shares issued to
holders of the Company's Class B Preferred Stock, $0.01 par value), in either
case for an aggregate purchase price of $2,000,000 for all the Purchased Shares.
Simultaneously, the Purchasers will purchase 1,107,611 Common Shares which have
previously been issued and outstanding and options to acquire an additional
1,107,611 such shares.
1.2. Reserved Shares. The Company will authorize and will reserve, and
covenants to continue to reserve, a sufficient number of shares of the Common
Shares to satisfy the rights of conversion of the holders of the Purchased
Shares. Any shares of Common Shares or any successor class of stock of the
Company hereafter issued or issuable upon conversion of the Class C Preferred
Shares are herein referred to as "Conversion Shares," and the Class C Preferred
Shares and the Conversion Shares are herein collectively referred to as the
"Securities."
1.3. Sale and Purchase. Subject to the terms and conditions herein set
forth, the Company shall issue and sell to each of the Purchasers, and each
Purchaser shall purchase from the Company, (i) the number of Purchased Shares
set forth opposite the name of such Purchaser in Column 2 of Exhibit A or, (ii)
if more than 2,000 Purchased
<PAGE> 5
-2-
Shares are sold to the Purchasers pursuant to Section 1.1(ii) above, each
Purchaser shall purchase such Purchased Shares pro rata, based on the numbers
set forth opposite such Purchaser's name in Column 2 of Exhibit A, in either
such case, for the aggregate purchase price set forth in Column 3 of Exhibit A.
1.4. Closing. A Closing (the "Closing") of the sale and purchase of the
Purchased Shares shall take place at the offices of Ropes & Gray, located at One
International Place, Boston, Massachusetts, at 10:00 a.m. on April 30, 1993, or
such other date, time and place as shall be mutually agreed upon by the Company
and the Purchasers (the "Closing Date"). If the Closing does not occur on or
before April 30, 1993 or at such later date agreed upon by the parties hereto,
due to the conditions in Section 3 hereof not being met to the satisfaction of
the Purchasers or waived by the Purchasers in their sole discretion with no
obligation to do so, this Agreement shall terminate and be of no further force
and effect and the parties hereto shall have no further obligations to each
other. At the Closing the Company will deliver the Purchased Shares being
acquired by each Purchaser in the form of a certificate issued in such
Purchaser's name or in the name of its nominee (of which the Purchaser shall
notify the Company not less than three (3) business days prior to the Closing)
against payment of the purchase price therefor by or on behalf of each Purchaser
to the Company by certified or bank cashier's check or by wire transfer.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Purchasers to enter into this Agreement and
purchase the Purchased Shares hereunder and to purchase the Common Shares and
options described under Section 1.1 hereof, the Company hereby represents and
warrants that, except as disclosed in the Schedule Volume delivered herewith
(the "Schedule Volume"):
2.1. Organization and Corporate Power. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and is qualified to do business as a foreign corporation in
each jurisdiction where such qualification is required and failure to have such
qualification may have a material adverse effect on the Company. The Company has
all required corporate power and authority to own its property, to carry on its
business as presently conducted or contemplated, to enter into and perform this
Agreement and generally to carry out the transactions contemplated hereby. The
copies of the Certificate of Incorporation and By-Laws of the
<PAGE> 6
-3-
Company, as amended to date, which have been furnished to counsel for the
Purchasers by the Company, are correct and complete. The Company is not in
violation of any of its Certificate of Incorporation or By-Laws, or any material
agreement, instrument, judgment, decree or order applicable to the Company the
violation of which would have a material adverse effect on the Company.
2.2. Authorization. This Agreement is, and the documents and
instruments to be executed pursuant hereto and referred to in Section 3.6, upon
execution and delivery thereof by the Company and the other parties thereto,
will be valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and other laws applicable to creditors'
rights and remedies and to the exercise of judicial discretion in accordance
with general principles of equity and subject to any limitations on the
enforcement of indemnity obligations under applicable federal and state
securities laws. The execution, delivery and performance of this Agreement and
issuance of the Purchased Shares and the Conversion Shares issuable in respect
thereof have been duly authorized by all necessary corporate or other action of
the Company.
2.3. Capitalization. The authorized and issued capital stock of the
Company and the consideration received and to be received therefor are as set
forth in Schedule 2.3.1 of the Schedule Volume. All of the presently outstanding
shares of capital stock of the Company have been duly and validly authorized and
issued and are fully paid and non-assessable. As of the Closing Date, the
Purchased Shares will be duly and validly authorized and, when delivered and
paid for pursuant to this Agreement, will be validly issued, fully paid and
non-assessable. As of the Closing Date, the relative rights, preferences,
restrictions and other provisions relating to the Class C Preferred Shares will
be as set forth in Exhibit B attached hereto. As of the Closing Date, the
Company will have authorized and reserved for issuance upon conversion of the
Purchased Shares sufficient shares of its Common Shares, and the Conversion
Shares issued upon such conversion will, upon such issuance, be validly
authorized and issued, fully paid and non-assessable. The Company has reserved
sufficient Common Shares for issuance upon the exercise or conversion of all
outstanding securities exercisable for or convertible into Common Shares and
such number of reserved shares is sufficient. Except as provided above or in
said Schedule 2.3.1, the Company has not issued any of its shares of its capital
stock and there are no outstanding warrants, options or other rights to purchase
or acquire any of such shares, nor any outstanding securities convertible into
such shares or outstanding warrants, options or other rights to acquire any such
<PAGE> 7
-4-
convertible securities. There are no preemptive rights with respect to the
issuance or sale of the Company's capital stock, other than rights to which
holders of Class C Preferred Shares and Conversion Shares are entitled as set
forth in Section 4.12 hereof. There are no restrictions on the transfer of the
Company's capital stock other than those arising from federal and state
securities laws. The Company has no subsidiaries or investments in any other
corporation, trust, partnership or business entity and is not a party to any
joint venture. Other than as set forth in the Registration Rights Agreement
attached hereto as Exhibit E, there are no existing rights with respect to
registration under the Securities Act of 1933, as amended, of any securities of
the Company. The outstanding shares of the capital stock of the Company are held
of record and beneficially by the persons identified in Schedule 2.3.1 in the
Schedule Volume in the amounts indicated therein.
2.4. Financial Statements and Backlog. Included in Schedule 2.4 of the
Schedule Volume are (i) an audited balance sheet as of December 31, 1992 and
statement of income and cash flow for the year then ended and (ii) an unaudited
balance sheet as of February 1993 and statement of income and cash flow for such
two month period, which statements (including the footnotes thereto) fairly
present the financial position of the Company on the dates of such statements
and the results of its operations for the periods covered thereby and have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved and prior periods;
provided, however, that the unaudited financials are subject to year-end
adjustments which in the aggregate will not be material and may not contain all
footnotes required under generally accepted accounting principles. Included in
Schedule 2.4 of the Schedule Volume is a detailed backlog of all firm orders for
the Company's products as of February 28, 1993. The Company is not aware of any
cancellation or proposed cancellations with respect to the orders contained in
the backlog and has no reason to believe that all orders set forth therein will
not be delivered on schedule; nor is there any material claim for refunds of
monies already paid to the Company, or any reason to believe such claims will be
forthcoming.
2.5. Absence of Undisclosed Liabilities. Except as and to the extent
reflected or reserved against in the latest balance sheet included in Schedule
2.4 of the Schedule Volume (including the footnotes thereto), except for
liabilities arising in the ordinary course of its business since the date of
said balance sheet, the Company does not have and has not assumed any material
accrued or contingent liability arising out of any transaction or state of facts
existing prior to the date hereof in any case where the material facts or
circumstances giving rise to such liability are
<PAGE> 8
-5-
known to the Company or in the exercise of reasonable diligence should have been
known to the Company (whether such liability is accrued, to become due,
contingent, or otherwise and whether or not such liability relates to any
predecessor business of the Company).
2.6. Absence of Certain Developments. Since the date of the latest
balance sheet included in Schedule 2.4 of the Schedule Volume, there has been
(i) no material adverse change in the condition, financial or otherwise, of the
Company or in the assets, liabilities, properties or business of the Company,
(ii) no declaration, setting aside or payment of any dividend or other
distribution with respect to, or any direct or indirect redemption or
acquisition of, any of the capital stock of the Company, (iii) no waiver of any
valuable right of the Company or the cancellation of any debt or claim held by
the Company, (iv) no loan by the Company to any officer, director, employee or
stockholder of the Company, or any agreement or commitment therefor, (v) no
increase, direct or indirect, in the compensation paid or payable to any
officer, director, employee or agent of the Company which increase is in excess
of an annual rate of $5,000, (vi) no loss, destruction or damage to any property
of the Company, whether or not insured, in excess of $10,000 in the aggregate,
(vii) no labor trouble involving the Company where the consequence of such labor
trouble may be materially adverse with respect to the Company, and no material
change in the personnel of the Company or the terms and conditions of their
employment, and (viii) no acquisition or disposition of any assets (or any
contract or arrangement therefor), nor any other transaction by the Company
otherwise than for fair value in the ordinary course of business.
2.7. Title to Properties. The Company has good and marketable title to
all of its tangible properties and assets free and clear of all liens,
restrictions or encumbrances, except as specifically disclosed in Schedule 2.7
of the Schedule Volume or in the financial statements and the footnotes thereto
included in Schedule 2.4 of the Schedule Volume. The Company owns no real
property. All machinery and equipment included in such properties which is
necessary to the business of the Company is in reasonable working condition, and
all leases of real or personal property to which the Company is a party are
fully effective and afford the Company peaceful and undisturbed possession of
the subject matter of the lease and the Company is not in default under any such
lease, which default could cause a materially adverse effect on the properties,
assets or business of the Company. To its best knowledge the Company is not in
violation of any zoning, building or safety ordinance, regulation or requirement
or other law or regulation applicable to it or to the operation of its owned or
leased tangible properties. The Company has not received
<PAGE> 9
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any notice of violation with which it has not complied, in any case in which the
consequences of such violation if asserted by the applicable regulatory
authority would be materially adverse with respect to the Company. For purposes
of this Agreement, "tangible properties" specifically excludes patent,
trademark, copyright, trade secret and other proprietary rights.
2.8. Tax Matters. All federal, state, county and local taxes, and all
applicable taxes owed to foreign jurisdictions, due and payable by the Company
have been paid. The provisions for taxes on the latest balance sheet included in
Schedule 2.4 of the Schedule Volume are sufficient for the payment of all
accrued and unpaid federal, state, county and local taxes of the Company and any
applicable taxes owing to any foreign jurisdiction, as of the date of said
balance sheet, whether or not assessed or disputed. There exist no unpaid
assessments of federal income taxes nor any basis for the assessment of
additional federal income taxes on the Company for any fiscal period. The
federal income tax returns of the Company have not been audited by the Internal
Revenue Service, and no notice of audit has been received. The Company has duly
filed all federal, state, county and local tax returns required to have been
filed by it and there are in effect no waivers of applicable statutes of
limitations with respect to taxes for any year.
2.9. Contracts and Commitments. The Company does not have and has not
assumed any contract, obligation or commitment which involves a potential
commitment in excess of $10,000 or which is otherwise material and not entered
into in the ordinary course of business, including any employment contracts;
stock redemption or purchase agreements; financing agreements; licenses;
distributor, sales representative or OEM agreements; agreements with officers,
directors, employees or shareholders of the Company or persons or organizations
related to or affiliated with any such persons; leases; agreements relating to
the licensing, distribution, development, purchase or sale of software; or
pension, profit-sharing, retirement, stock option or other employee benefit
plans.
2.10. No Defaults. The Company is not in default or in noncompliance
(i) under any contract, obligation or commitment or under its Certificate of
Incorporation or by-laws, each as amended to date, or (ii) with respect to any
order, writ, injunction or decree of any court or any federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which default or noncompliance could cause
a materially adverse effect on the properties, assets or business of the
Company. There exists no condition,
<PAGE> 10
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event or act which after notice, lapse of time, or both, could constitute such a
default under any of the foregoing. To the best of the Company's knowledge, no
third party is in default under any contract or other instrument, document, or
agreement to which the Company is a party or by which it or any of its property
is affected, which default may have a material adverse effect on the Company's
properties or assets or the business of the Company as presently conducted or
proposed to be conducted. Without limiting the generality of the foregoing,
there are no outstanding claims by any customer of the Company with respect to
delivery or performance of the Company's products and all receivables booked
with respect to the sale of Company's products are valid and enforceable
receivables without offset. The Company has no knowledge of any facts or
circumstances which are likely to cause any of the foregoing contracts,
obligations or commitments to have a materially adverse effect upon the business
or finances of the Company. The Company does not have and never has had any
government contracts or subcontracts.
2.11. Patents; Trade Secrets; Employee Restrictions. The Company has
exclusive ownership of, or exclusive license to use, all patent, copyright,
trademark, trade secret or other proprietary rights used or to be used its
business as presently conducted or contemplated. The Company has not used, and
does not use or contemplate making use of, any patent, copyright, trademark,
trade secret or other proprietary information or rights of Interqual, Inc. The
Company owns no issued patents or patent applications. The Company to the best
of its knowledge owns or has a license to use, free and clear of other claims or
rights of others, all trade secrets, manufacturing processes, hardware designs,
programming processes, software and other information required for or incident
to its products or its business as presently conducted or contemplated. The
Company is not infringing, and its planned operations will not infringe, any
patent, copyright, trademark or other proprietary right of any other person or
entity and the Company is not making unauthorized use of any confidential
information or trade secrets of any person or entity, including without
limitation any former employer of any of its past or present employees. Neither
the Company nor, to the best of the Company's knowledge, any of the Company's
employees have any agreements or arrangements with former employers of such
employees relating to confidential information or trade secrets of such
employers. To the best of the Company's knowledge, the activities of the
Company's employees on behalf of the Company do not violate any agreements or
arrangements which any such employees have with former employers. To the best
knowledge of the Company, no other person is infringing any patent, copyright,
trademark, trade secret or other proprietary right of the Company.
<PAGE> 11
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2.12. Effect of Transactions. The execution, delivery and performance
by the Company of this Agreement and the Agreement of Shareholders (as
hereinafter defined), and the amendment and restatement of the Certificate of
Amendment in accordance with Exhibit B, will not conflict with or result in any
default under any material contract, obligation, commitment, charter provision,
by-law or corporate restriction of the Company or the creation of any lien,
charge or encumbrance of any nature upon any of the properties or assets of the
Company except pursuant to this Agreement or the transactions contemplated
hereby. The Company's execution and delivery of this Agreement and its
performance of the transactions contemplated hereby will not violate any
material instrument, agreement, judgment, decree, order, statute, rule or
regulation of any federal, state or local government or agency applicable to the
Company, the violation of which might have a material adverse effect on the
Company.
2.13. Litigation. There is no litigation or governmental proceeding or
investigation pending against the Company. To the best knowledge of the Company,
there is no such litigation, proceeding or investigation threatened against the
Company, or which is pending or threatened affecting any of the Company's
properties or assets, or is pending or threatened against any officer or key
employee of the Company, or is pending or threatened and has a reasonable
possibility of calling into question the validity, or materially hindering the
enforceability or performance, of this Agreement or any action taken or to be
taken pursuant hereto; nor, except as disclosed in Schedule 2.13 to the Schedule
Volume, to the best knowledge of the Company, has there occurred any event or
does there exist any condition on the basis of which any such litigation,
proceeding or investigation might properly be instituted with any substantial
chance of a recovery which may be materially adverse to the Company.
2.14. Offerees. Neither the Company, nor anyone acting on its behalf,
has in the past or will hereafter sell, offer for sale or solicit offers to buy
any of the Securities so as to bring the offer, issuance or sale of the
Purchased Shares or the Conversion Shares, as contemplated by this Agreement,
within the provisions of Section 5 of the Securities Act of 1933, as amended.
Assuming that the Purchasers' representations and warranties contained in
Section 5 of this Agreement are true and correct, the offer, issuance and sale
of the Purchased Shares are and the Conversion Shares (assuming no change in
applicable law) will be exempt from the registration and prospectus delivery
requirements of the 1933 Act, and will at the time of issuance have been
registered or qualified (or
<PAGE> 12
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will be at the time of issuance exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state blue sky and securities laws. The Company has complied with all applicable
state "blue-sky" and securities laws in connection with the issuance and sale of
all other securities issued by the Company.
2.15. Business. The Company has all necessary franchises, permits,
licenses and other rights and privileges necessary to permit it to own its
property and to conduct its present business. The Company is not in violation,
and its planned business will not put the Company in violation, of any material
law, regulation, authorization or order of any public authority relevant to the
ownership of its properties or the carrying on of its business. The Company does
not know of any facts or circumstances (including without limitation expressions
or other indications of the attitude of the concerned governmental agencies or
officials) which are materially adverse with respect to any of the foregoing
matters.
2.16. Information Supplied to Purchasers. Neither (i) this Agreement or
the Schedule Volume, (ii) the Business Plan delivered to the Purchasers, as
supplemented by this Agreement and the Schedule Volume, nor (iii) any agreement,
certificate or other document furnished to the Purchasers by or on behalf of the
Company in connection with this Agreement and the transactions contemplated
hereby, contains or will contain at the time of its delivery any untrue
statement of a material fact, and this Agreement, the Schedule Volume, and said
other documents and certificates, do not omit to state a material fact necessary
in order to make the statements contained herein and therein not misleading.
There is no material fact relating to the business, prospects, operations,
affairs or conditions of the Company which adversely affects or in the future
may in the reasonable business judgment of the Company (so far as the Company
may now foresee based upon facts now known to the Company) materially adversely
affect the same which has not been set forth in this Agreement or in the other
documents set forth above furnished to the Purchasers by or on behalf of the
Company prior to or on the date hereof. The forecasts and projections of future
financial results contained in said Business Plan are based upon information
available to the Company as of the date on which such forecasts or projections
were made and upon reasonable inferences from such information, but may be
subject to revision in the event of changes in the facts and circumstances upon
which such forecasts and projections are based which could not reasonably have
been foreseen at the date on which such forecasts or projections were made.
<PAGE> 13
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2.17. Brokerage. There are no valid claims for brokerage commissions,
finder's fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of the Company.
SECTION 3. CONDITIONS OF PURCHASE
The Purchasers' obligation to purchase and pay for the Purchased Shares
shall be subject to compliance by the Company with its agreements herein
contained and to the fulfillment on or before and at the Closing Date of the
following conditions:
3.1. Certificate of Company. The representations and warranties of the
Company contained in this Agreement, including but not limited to the
representations and warranties made in Section 2, shall be true and correct in
all material respects with the same force and effect as though such
representations and warranties had been made on and as of the Closing Date; each
of the conditions hereafter specified in this Section 3 (other than those
specified in Sections 3.8 and 3.9) shall have been satisfied; and on the Closing
Date a certificate to such effect executed by the Chairman of the Board of the
Company shall be delivered to the Purchasers.
3.2. Opinion of Company Counsel. The Purchasers shall have received
from Burns & Levinson and Bingham, Dana & Gould, counsels for the Company, their
favorable opinions, dated the Closing Date, substantially in the forms attached
hereto as Exhibit C.
3.3. Authorization. The Board of Directors and shareholders of the
Company shall have duly adopted resolutions in form satisfactory to the
Purchasers authorizing the Company to consummate the transactions contemplated
hereby in accordance with the terms hereof, and the Purchasers shall have
received a duly executed certificate of the Secretary or an Assistant Secretary
of the Company setting forth a copy of such resolutions and such other matters
as may be reasonably requested by the Purchasers.
3.4. Amendment and Restatement of Certificate of Incorporation. The
Amendment and Restatement of the Certificate of Incorporation of the Company as
set forth in Exhibit B hereto shall have been duly approved by the shareholders
of the Company and filed with the Secretary of State of Delaware and shall
provide that none of the Company's Class A or Class B Preferred Shares shall be
redeemable before April 1, 1995.
<PAGE> 14
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3.5. Agreement of Shareholders; Registration Rights Agreement. The
Company and certain of its shareholders shall have executed and delivered to the
Purchasers an Agreement of Shareholders in the form of Exhibit D hereto (the
"Agreement of Shareholders") and the Registration Rights Agreement substantially
in the form of Exhibit E hereto.
3.6. All Proceedings Satisfactory. All corporate and other proceedings
taken prior to or at the Closing in connection with the transactions
contemplated by this Agreement, and all documents and evidences incident thereto
shall be reasonably satisfactory in form and substance to the Purchasers, and
the Purchasers shall receive such copies thereof and other materials (certified,
if requested) as they may reasonably request in connection therewith. The
issuance and sale of the Purchased Shares to the Purchasers shall be made in
conformity with all applicable state and federal securities laws.
3.7. Waivers and Consents. All holders of securities of the Company
that (i) have preemptive rights with respect to the issuance of the Purchased
Shares, the Conversion Shares or any other securities to be issued in connection
with the transactions contemplated hereby or (ii) have the benefit of
anti-dilution provisions which would cause a change in the number of securities
issuable upon exercise of conversion thereof or a change in the consideration to
be paid on such exercise or conversion as a result of the transactions
contemplated hereby, shall have waived such preemptive rights and anti-dilution
provisions with respect to the transactions contemplated hereby.
3.8. Purchase of Common Stock. The Purchasers shall pursuant to one or
more agreements with holders of Common Shares of the Company (the "Common Shares
and Option Agreements"), simultaneously with the purchase of the Purchased
shares hereunder, purchase at least 2,500,000 Common Shares of the Company.
3.9. Due Diligence. The Purchasers shall have completed an accounting
and legal due diligence investigation, including a review of the Schedule
Volume, and shall be satisfied with the results of such investigation.
3.10. Termination of Agreements. Each of the following agreements, as
amended to date, shall have been terminated:
3.10.1. The "Come Along" Stock Option Agreement dated April
19, 1991 between the Company and Charles M. Jacobs;
<PAGE> 15
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3.10.2. The Voting Agreement dated April 19, 1991 among
Charles M. Jacobs, William D. Ryan and the other persons named on the
signature pages thereof;
3.10.3. The Shareholder Agreement dated April 9, 1984 among
the Company, William D. Ryan and the other shareholders named therein;
and
3.10.4. The Agreement Among Certain Shareholders dated August
4, 1986 Charles M. Jacobs, Alan C. Brewster, M.D. and William D. Ryan.
SECTION 4. COVENANTS OF THE COMPANY
The Company shall comply, and shall cause any direct or indirect
subsidiaries of the Company to comply, with the following covenants, except as
shall otherwise be agreed pursuant to a written consent of a majority in
interest of the holders of the Class C Preferred Shares and Conversion Shares
delivered in accordance with Section 6.1, and until (i) the Company has redeemed
at least 80% of the Class C Preferred Shares or (ii) such time as the Company
completes its first public offering of its Common Shares pursuant to a
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") in which (a) the sale price to the public is at least $1.50
per share (appropriately adjusted for stock splits, stock dividends and the
like), and (b) aggregate gross proceeds to the Company from the sale of the
shares are at least $10,000,000 (a "Substantial Public Offering"). All
references to "the Company" in this Section 4 shall be deemed to refer to the
Company and its direct and indirect subsidiaries, if applicable on a
consolidated basis.
4.1. Financial Statements. The Company will maintain a system of
accounts in accordance with generally accepted accounting principles, keep full
and complete financial records and furnish to the Purchasers, subject to the
provisions of Section 6.5 hereof, (i) within ninety (90) days after the end of
each fiscal year, a copy of the balance sheet of the Company as at the end of
such year, together with a statement of income and cash flows of the Company for
such year, certified by Arthur Anderson & Co. or other independent public
accountants of recognized national standing reasonably satisfactory to the
Purchasers, prepared in accordance with generally accepted accounting principles
and practices consistently applied, (ii) within forty-five (45) days after the
end of each of the first three quarters of each fiscal year, a copy of the
balance sheet of the Company as of the end of such quarter and statements of
income and
<PAGE> 16
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of cash flows of the Company for the fiscal quarter and for the portion of the
fiscal year ending on the last day of such quarter, each of the foregoing
balance sheets and statements to set forth in comparative form the corresponding
figures for the same period of the prior fiscal year, to be in reasonable detail
(provided, however, such financial statements may not contain all footnotes
required under generally accepted accounting principles) and to be certified,
subject to normal year-end audit adjustments, by the chief financial officer of
the Company that to the best of his knowledge they are true and accurate in all
material respects as of their dates, (iii) within 20 days of receipt by the
Company, any management letters from the Company's accountants and (iv) copies
of all financial statements and reports which the Company shall send to its
stockholders or file with the Securities and Exchange Commission or any stock
exchange on which any securities of the Company may be listed.
4.2. Budget and Operating Forecast and Monthly Financial Statements.
The management of the Company will prepare and submit to the Board of Directors
of the Company a budget for each fiscal year of the Company at least 30 days
prior to the beginning of such fiscal year, together with management's written
discussion and analysis of such budget. The budget shall be accepted as the
budget for such fiscal year when it has been approved by a majority of the full
Board of Directors of the Company. The management of the Company shall review
the budget monthly and shall advise the Purchasers and the Board of Directors of
all material changes therein and all material deviations therefrom. The Company
will furnish to each Purchaser within thirty (30) days after the end of each
month, other than the last month of any fiscal quarter or of the fiscal year of
the Company, a copy of the balance sheet of the Company as of the end of such
month and consolidated statements of income and of cash flows of the Company for
such month, each of the foregoing balance sheets and statements to set forth in
comparative form the corresponding figures for the prior fiscal period, to be in
reasonable detail, to be prepared in accordance with generally accepted
accounting principles, consistently applied, and to be certified, subject to
normal year-end audit adjustments, by the principal financial officer of the
Company that to the best of his knowledge they are true and accurate in all
material respects as of their dates.
4.3. Conduct of Business. The Company will continue to engage
principally in the business now conducted by it or businesses reasonably related
to such business. The Company will keep in full force and effect its corporate
existence and all patents and other intellectual property rights used or
necessary in its business and, consistent with the disclosures made on Schedule
2.15 to the Schedule Volume, comply with
<PAGE> 17
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all applicable laws and regulations in the conduct of its business. The Company
shall cause each key employee of the Company to execute confidentiality and
invention agreements.
4.4. Payment of Taxes, Compliance with Laws, etc. The Company will pay
and discharge all lawful taxes, assessments and governmental charges or levies
imposed upon it or upon its income or property before the same shall become in
default, as well as all lawful claims for labor, materials and supplies which,
if not paid when due, might become a lien or charge upon its property or any
part thereof; provided, however, that the Company shall not be required to pay
and discharge any such tax, assessment, charge, levy, or claim so long as the
validity thereof is being contested by the Company in good faith by appropriate
proceedings and an adequate reserve therefor has been established on its books.
The Company will comply with all applicable laws and regulations in the conduct
of its business.
4.5. Adverse Changes. The management of the Company will promptly
advise the Board of Directors and each Purchaser of any event which represents a
material adverse change in the condition or business, financial or otherwise, of
the Company, and of each suit or proceeding commenced or threatened against the
Company which, if adversely determined, would result in such a material adverse
change. The management of the Company will also promptly advise the Board of
Directors and each Purchaser of any violations of the covenants made herein.
4.6. Insurance. The Company will keep its insurable properties insured
by financially sound and reputable insurers against the perils of liability,
casualty, fire and extended coverage in amounts of coverage at least equal to
those customarily maintained by companies in the same or a similar business of
similar size, to the extent that such insurance is available on reasonable
terms. The Company will also maintain with such insurers insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner customary for corporations engaged in the same or a similar business of
similar size, to the extent such insurance is available on reasonable terms.
4.7. Maintenance of Properties. The Company will maintain all
properties used or useful in the conduct of its business in reasonably good
repair, working order and condition as necessary to permit such business to be
properly and advantageously conducted.
<PAGE> 18
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4.8. Affiliated Transactions. All transactions by and between the
Company and any officer, key employee or stockholder of the Company, or persons
controlled by or affiliated with such officer, key employee or stockholder shall
be conducted on an arm's-length basis, shall be on terms and conditions no less
favorable to the Company than could be obtained from nonrelated persons and
shall be approved in advance by the Board of Directors, after full disclosure of
the terms thereof.
4.9. Management Compensation. Compensation paid by the Company to its
management will be reasonably comparable to compensation paid to management in
companies of similar size, of similar maturity, and in similar industries and
approved by the Board of Directors.
4.10. Use of Proceeds. The Company shall use the proceeds of the sale
of the Purchased Shares for general corporate purposes.
4.11. Board of Directors meetings. The Company shall use its best
efforts to cause one nominee of the holders of the Class C Preferred Shares, who
shall be designated by a majority in interest of the holders of the Class C
Preferred Shares, to be recommended to the stockholders of the Company for
election as a director at all meetings of stockholders, or consents in lieu
thereof, for such purpose. The Company shall ensure that meetings of its Board
of Directors are held at least six times each year and at intervals of not more
than three months. The Certificate of Incorporation or By-Laws of the Company
shall at all times during which any nominee of the Purchasers serves as director
of the Company provide for exculpation and indemnification of the directors to
the fullest extent permitted under applicable state law. The Company will use
its best efforts to obtain and maintain director's and officer's liability
insurance providing coverage for such director of at least $1,000,000 per
occurrence, to the extent such insurance is available on reasonable terms.
4.1.2. Right to Participate in Sales of Additional Securities. If the
Company at any time wishes to sell any shares of capital stock of the Company,
or bonds, certificates of indebtedness, debentures or other securities
convertible into capital stock of the Company or options, warrants or rights
carrying any rights to purchase capital stock or convertible securities of the
Company to a third party, other than in connection with a Substantial Public
Offering, the Company will submit a written offer to the Purchasers identifying
the third party to whom such stock, securities, options, warrants or rights are
proposed to be sold, and the terms of the proposed sale, and offering to the
Purchasers the opportunity to purchase their proportionate share of such
securities on
<PAGE> 19
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terms and conditions, including price, not less favorable to the
Purchasers than those on which the Company proposes to sell such securities to
any other purchaser. Each Purchaser shall have the right to purchase his
proportionate share of such securities based on the ratio which the Common
Shares of the Company owned by said Purchaser (including all shares issuable
upon conversion of any capital stock of the Company) bears to all the issued and
outstanding shares of Common Shares of the Company (including, all such shares
issuable upon conversion of then issued and outstanding capital stock of the
Company). Each Purchaser which purchases his entire proportionate share pursuant
to the preceding sentence shall have the right to purchase his proportionate
share of the securities offered to, but not purchased by, other Purchasers based
on the ratio which the Common Shares of the Company owned by said Purchaser
(including all shares issuable upon conversion of any capital stock of the
Company) bears to all the Common Shares of the Company owned or obtainable upon
conversion of the Class C Preferred Shares held by all Purchasers which purchase
their entire proportionate share pursuant to the preceding sentence. The
Company's offer to the Purchasers shall remain open and irrevocable for a period
of thirty (30) days. Any shares so offered to the Purchasers which are not
purchased pursuant to such offer may be sold by the Company to the purchaser
originally named in the offer to the Purchasers on the same terms contained in
such offer at any time within 180 days following the date of such offer, but may
not be sold to any other person or entity or after such 180-day period without
renewed compliance with this Section 4.14. Notwithstanding the above, the
Company may issue (i) up to 3,426,624 shares of Common Shares of the Company to
employees or directors pursuant to stock options heretofore issued or hereafter
issued with the approval of the Board of Directors of the Company, (ii) any
securities on the exercise or conversion of any securities exercisable for or
convertible into other securities of the Company which are described in Schedule
2.3.1 of the Schedule Volume (iii) to Erik Kriss Common Shares in an amount not
in excess of 5% of the number of Common Shares outstanding, on a fully diluted
basis, after taking into account the issuance of such shares, the Purchased
Shares hereunder and Warrants issued to holders of the Company's Class B
Preferred Stock to purchase up to 632,275 Common Shares.
4.13. Agreement of Shareholders. The Company agrees that it will
diligently enforce all of its rights under the Agreement of Shareholders and
confidentiality and invention agreements with key employees referred to in
Section 4.3, and that it will not waive or release any such rights or consent to
any amendment of any such agreement without the written consent of a majority in
interest of the holders of the Class C Preferred Shares or Conversion Shares
with respect thereto.
<PAGE> 20
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4.14. Distributions or Redemption of Capital Stock. Except as otherwise
expressly provided herein or in Exhibit B, the Company will not declare or pay
any dividends (other than a dividend payable in shares of its Common Shares) or
make any distributions of cash, property or securities of the Company with
respect to any shares of its Common Shares or any other class of its stock, or
directly or indirectly redeem, purchase, or otherwise acquire for a
consideration any shares of its Common Shares or any other class of its stock
(other than repurchases approved by the Director elected by the Class C
Preferred Shares) of shares from directors, officers, consultants and employees
pursuant to the terms of any equity incentive plans adopted by the Company.
4.15. No Amendments to Certificate of Incorporation or By-Laws. The
Company will not make any amendment to its Certificate of Incorporation or its
By-Laws without the consent of the majority in interest of the Class C Preferred
Shares and Conversion Shares (on an as-converted basis).
4.16. Restrictions on Other Agreements. The Company will not enter into
any agreement with any party which would restrict the payments due the holders
of Class C Preferred Shares upon the mandatory redemption thereof or grant any
right relating to the registration of its Common Shares superior to or on a
parity with the rights granted to the Purchasers pursuant to the Registration
Rights Agreement attached hereto as Exhibit E.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF PURCHASERS
It is the understanding of the Company, and each Purchaser hereby
severally represents and warrants to the Company with respect to such
Purchaser's purchase of Securities hereunder, that:
5.1. The execution, delivery and performance of this Agreement and the
documents and instruments executed pursuant hereto have been duly authorized by
all necessary action on the part of the Purchaser, and this Agreement
constitutes the valid, legal and binding agreement of the Purchaser, enforceable
in accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws applicable to creditors' rights and
remedies and general principles of equity.
<PAGE> 21
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5.2. The Purchaser was not organized for the purpose of making an
investment in the Company and the Purchaser is an "accredited investor" as such
term is defined under Rule 501 under the Securities Act. A substantial portion
of the Purchaser's business activities consist of investing, purchasing, selling
or trading in securities issued by others and its investment decisions are made
by persons having such knowledge and experience in business and financial
matters as to be capable of evaluating the merits and risk of the investment
contemplated hereby. The Purchaser has total assets in excess of $5 million.
5.3. The Purchaser is acquiring the Securities for its own account, for
investment, and not with a view to any "distribution" thereof within the meaning
of the Securities Act.
5.4. The Purchaser understands that the Company may, as a condition to
the transfer of any of the Securities, require that the request for transfer be
accompanied by opinion of counsel, in form and substance satisfactory to the
Company, to the effect that the proposed transfer does not result in violation
of the Securities Act, unless such transfer is covered by an effective
registration statement under the Securities Act or by Rule 144(k) of the
Securities Act. The Purchaser understands that each certificate representing the
Securities will bear the following legend or one substantially similar thereto:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended. These
shares may not be offered, sold, mortgaged, pledged,
hypothecated or otherwise transferred or disposed of, unless
sold pursuant to Rule 144(k) of the Securities Act of 1993, as
amended, without an effective registration statement for such
shares under the Securities Act of 1933, as amended, and
applicable state securities laws, or an opinion of counsel
satisfactory to the corporation that such registration is not
required.
5.5. The Purchaser has been advised that the Securities have not been
and are not being registered under the Securities Act and that the Company in
issuing the Purchased Shares is relying upon, among other things, the
representations and warranties of each Purchaser contained in this Article 5 in
concluding that the offer and sale of the Purchased Shares shall be exempt from
the provisions of Section 5 of the Securities Act.
<PAGE> 22
-19-
5.6. There are no valid claims for brokerage commissions, finder's fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of such
Purchaser other than Link Resources.
SECTION 6. GENERAL
6.1. Amendments, Waivers and Consents. For the purposes of this
Agreement and all agreements, documents and instruments executed pursuant
hereto, except as otherwise specifically set forth herein or therein, no course
of dealing between the Company and any Purchaser and no delay on the part of any
party hereto in exercising any rights hereunder or thereunder shall operate as a
waiver of the rights hereof and thereof. No covenant or other provision hereof
or thereof may be waived otherwise than by a written instrument signed by the
party so waiving such covenant or other provision; provided, however, that
except as otherwise provided herein or therein, changes in or additions to, and
any consents required by this Agreement may be made, and compliance with any
term, covenant, condition or provision set forth herein may be omitted or waived
(either generally or in a particular instance and either retroactively or
prospectively) by a consent or consents in writing signed by the holders of at
least a majority in interest of the holders of Class C Preferred Shares (on an
as-converted basis) and Conversion Shares and (in the case of a change or
addition to this Agreement) the Company. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Securities purchased under this Agreement at the time outstanding (including
Securities into which Securities have been converted), each future holder of all
Securities, and the Company.
6.2. Survival of Covenants; Assignability of Rights. All covenants,
agreements, representations and warranties of the Company made herein and in the
certificates, lists, exhibits, schedules or other written information delivered
or furnished to any Purchaser in connection herewith shall be deemed material
and to have been relied upon by such Purchaser, and, except as provided
otherwise in this Agreement, shall survive the delivery of the Purchased Shares,
and shall bind the Company's successors and assigns, whether so expressed or
not, and, except as provided otherwise in this Agreement, all such covenants,
agreements, representations and warranties shall inure to the benefit of the
Purchasers' successors and assigns and to transferees of the Securities, whether
so expressed or not.
<PAGE> 23
-20-
6.3. Governing Law. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, the laws of The
Commonwealth of Massachusetts.
6.4. Section Headings. The descriptive headings in this Agreement have
been inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provision thereof or hereof.
6.5. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which when so executed and delivered shall be
taken to be an original; but such counterparts shall together constitute but one
and the same document.
6.6. Notices and Demands. All notices, requests, payments, instructions
or other documents to be given hereunder shall be in writing or by written
telecommunication, and shall be deemed to have been duly given if (i) delivered
personally (effective upon delivery), (ii) mailed by certified mail, return
receipt requested, postage prepaid (effective five business days after
dispatch), (iii) sent by a reputable, established courier service that
guarantees next business day delivery (effective the next business day), or (iv)
sent by telecopier followed within 24 hours by confirmation by one of the
foregoing methods (effective upon receipt of the telecopy in complete, readable
form), addressed as follows (or to such other address as the recipient may have
furnished for the purpose pursuant to this Section 6.6):
(A) if to the Company, to the address shown on the signature page
hereto;
with a copy to: Bingham Dana & Gould
150 Federal Street
Boston, MA 02110
Attn: Victor Paci
(B) if to a Purchaser, to its address shown on Exhibit A hereto; and
with a copy to: Ropes & Gray
One International Place
Boston, MA 02110
Attn: Mary E. Weber
<PAGE> 24
-21-
(C) if to a permitted assignee of a Purchaser, to its address as
designated to the Company in writing (or if none, to the last address of the
Assignor given to the Company pursuant to this Section 6.6).
6.7. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions or this Agreement.
6.8. Expenses. At the closing the Company shall pay all reasonable
costs and expenses incurred by the Purchasers with respect to the negotiation,
execution, delivery and performance of this Agreement and any related documents
including, without limitation, the Purchasers' attorneys' fees and expenses and
up to $30,000 of any fees and expenses of Link Resources.
6.9. Termination of Section 4. If the Company's Stock Purchase
Agreements dated August 4, 1986 and October 13, 1987 are amended to provide that
the Company will not be required to comply with the covenants contained in
Section 4 of each of such agreements, the Company shall not be required to
comply with the covenants contained in Section 4 herein at any time when all
Purchased Shares shall have been converted into Common Shares.
[The remainder of this page has been intentionally left blank]
<PAGE> 25
-22-
IN WITNESS WHEREOF, the undersigned have executed this Agreement as a
sealed instrument as of the day and year first above written.
MEDIQUAL SYSTEMS, INC.
By: /s/ Eric Kriss
-----------------------------------
Title: President and Chief Executive Officer
Address:
1900 West Park Drive
Westborough, MA 01581
INFORMATION PARTNERS CAPITAL
FUND, L.P.
By Information Partners
By: /s/ David Dominik
-----------------------------------
Title: General Partner
BCIP ASSOCIATES
By: /s/ David Dominik
-----------------------------------
Title: General Partner
BCIP TRUST ASSOCIATES, L.P.
By: /s/ David Dominik
-----------------------------------
Title: General Partner
<PAGE> 1
EXHIBIT 10.17
AGREEMENT OF SHAREHOLDERS
This AGREEMENT dated as of the 27th day of April, 1993, by and among
MediQual Systems, Inc., a Delaware corporation (the "Company"), William D. Ryan,
Charles M. Jacobs and Alan C. Brewster, M.D. (the "Shareholders"), those persons
whose names are set forth on Exhibit B hereto (the "Purchasers") and those
persons whose names are set forth on Exhibit C hereto (the "Investors")
WHEREAS, each of the Shareholders owns that number of shares of common
stock, $.001 par value (the "Common Shares") or of Class A Preferred Shares, no
par value (the "Class A Preferred Shares") set forth next to his name on Exhibit
A. For purposes of this Agreement, the term "Shares" shall mean and include all
shares of Common Shares or capital stock or other securities convertible into or
exchangeable or exercisable for Common Shares of the Company Owned by any
Shareholder, whether presently held or hereafter acquired, including, without
limitation, any shares, securities or other rights received as the result of any
stocksplit, stock dividend or other capital reorganization of the Company;
WHEREAS, pursuant to the Class C Convertible Preferred Stock Purchase
Agreement dated as of April 1, 1993 (the "Class C Purchase Agreement") among the
Company and the Purchasers, the Purchasers on the date hereof have purchased
shares of the Company's Class C Preferred Shares, $.01 par value (the "Class C
Preferred Shares") and have also acquired 1,107,611 shares of the Company's
Common Shares (the "Purchase Common Shares") and options (the "Options") to
purchase up to 1,107,611 additional Common Shares (the "Option Shares" and
together with the Purchase Common shares, the "Purchased Shares");
WHEREAS, the Investors have previously acquired an aggregate of
6,316,726 shares of the Class B Convertible Preferred Shares, $. 01 par value
(the "Class B Preferred Shares"), of the Company pursuant to certain Stock
Purchase Agreements dated as of August 4, 1986 and October 13, 1987 (the "Stock
Purchase Agreement"); and
WHEREAS, the Company, the Shareholders, the Purchasers and the
Investors have reached agreement with respect to other matters as hereinafter
provided;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other valuable consideration, the receipt and
<PAGE> 2
2
sufficiency of which is hereby acknowledged, the Company, the Shareholders, the
Purchasers and the Investors hereby agree as follows:
1. Right of Participation in Sales by Shareholders. If at any time any
Shareholder wishes to sell, assign or transfer any or all of the Shares owned by
him to a third party (a "Transferee"), he shall deliver a written notice (the
"Notice") to all the Purchasers and Investors stating the identity of the
proposed buyer or transferee, the number of Shares proposed to be sold or
transferred, the agreed terms of the sale or transfer and any other material
facts relating to the sale or transfer. Upon receipt of the Notice, each
Purchaser and Investor shall have the right to require, as a condition to such
sale or disposition, that the Transferee purchase from said Purchaser or
Investor, as the case may be, at the same price per Share and on the same terms
and conditions as provided in the Notice that number of Common Shares owned
(after giving effect to any conversion and exercise of Class B Preferred Shares,
Class C Preferred Shares and/or Options) by said Purchaser or Investor, as the
case may be, equal to the number of Shares offered by such Shareholder pursuant
to the Notice multiplied by a fraction the numerator of which shall be equal to
the sum of (i) the number of Common Shares owned by said Purchaser or Investor,
as the case may be, (ii) the number of Common Shares into which Class B
Preferred Shares and Class C Preferred Shares held by such Purchaser or
Investor, as the case may be, are convertible at the date of the Notice and
(iii) the number of Common Shares for which the options owned by said Purchaser
may be exercised at the date of the Notice and the denominator of which shall be
equal to the sum of (i) the aggregate number of Common Shares owned by all
Purchasers, Investors and said Shareholder, (ii) the aggregate number of Common
Shares into which all Class B Preferred Shares and Class C Preferred Shares held
by the Purchasers and Investors are convertible on the date of such offer and
(iii) the aggregate number of Common Shares for which all Options held by the
Purchasers are exercisable on the date of such offer. Each Purchaser and
Investor wishing so to participate in any such sale or disposition shall notify
the Shareholder of such intention as soon as practicable after receipt of the
Notice, and in any event within 30 days after receipt thereof. In the event that
a Purchaser or Investor shall elect to participate in such sale or disposition,
such Purchaser or Investor, as the case may be, shall individually give notice
of such election to the Shareholder in accordance with the provisions of Section
5. The provisions of this Section 1 shall not apply (i) to the sale of any
Shares by a Shareholder to a Purchaser, an Investor or a Qualified Transferee,
(ii) the sale by Mr. Jacobs and Mr. Brewster of up to ten percent each of their
shares currently owned to present shareholders of the Company or (iii) the sale
by Mr. Ryan of any shares currently owned to present shareholders of
<PAGE> 3
3
the Company. Present shareholders of the Company shall include (a) those listed
on Schedule 2.3.1 to the Class C Purchase Agreement and (b) any Purchaser. For
purposes of this Section 1, the price applicable to any security which is
convertible into or exchangeable or exercisable for shares of Common Shares
shall be the same as the price applicable to the number of shares into or for
which such security may be converted, exchanged or exercised.
For purposes of this Section 1, a Qualified Transferee shall mean any
person who is (i) a Purchaser, (ii) an Investor, (iii) any affiliate, as that
term is defined in the Investment Company Act of 1940, as amended, of a
Purchaser or Investor, or (iv) the owner of an investment account which is
managed or advised by a Purchaser, an Investor, TA Associates or any affiliate
thereof.
2. Permitted Transfers by Shareholders. Anything herein to the contrary
notwithstanding, the provisions of section 1 shall not apply to: (a) any
transfer of Shares by a Shareholder by gift or bequest or through inheritance
to, or for the benefit of, the spouse or issue of such Shareholder; (b) any
transfer of not more than 50% of a Shareholder's Shares by a Shareholder to such
Shareholder's spouse or former spouse pursuant to a divorce settlement or
decree; (c) any transfer of Shares by a Shareholder to a trust in respect of
which he serves as trustee, provided that the trust instrument governing said
trust shall provide that such Shareholder, as trustee, shall retain sole and
exclusive control over the voting and disposition of said Shares until the
termination of this Agreement; (d) any sale or transfer of Shares to the
Company; and (e) any sale of Common Shares in a public offering pursuant to a
registration statement filed by the Company with the Securities and Exchange
Commission. In the event of any such transfer pursuant to subsection (a), (b) or
(c) of this Section 2, the transferee of the Shares shall hold the Shares so
acquired with all the rights conferred by, and subject to all the restrictions
imposed by, this Agreement.
3. Company to Enforce Rights. The Company covenants and agrees with the
Purchasers (i) that it will diligently enforce all of its rights under a certain
Stock Agreement dated March 3, 1984, as amended, by and among the Company and
Ryan, (ii) that it will not waive or release any of such rights or consent to
any amendment of such agreements without the written consent of a majority in
interest of the then holders of (a) the Class B Preferred Shares (on an
as-converted basis) and shares issuable upon conversion of the Class B Preferred
Shares and (b) the Class C Preferred Shares (on an as-converted basis) and
shares issuable upon conversion of the Class C Preferred Shares, and (iii) that,
if a majority in
<PAGE> 4
4
interest of such holders of Class B Preferred Shares and a majority in interest
of such holders of Class C Preferred Shares so request in writing, the Company
will exercise any rights it may have to purchase Shares under such agreements
and that it will promptly offer any Shares so acquired to the Purchasers and
Investors, who jointly and severally agree to acquire their pro rata portion of
such Shares.
4. Termination. This Agreement, and the respective rights and
obligations of the parties hereto, shall terminate upon the completion of the
Company's initial public offering pursuant to a registration statement under the
Securities Act of 1933 in which (a) the price per share of Common Shares of the
Company sold in the offering is at least $1.50 per share (subject to adjustment
for intervening stock splits, stock dividends and the like) and (b) aggregate
gross proceeds to the Company from the sale of such shares are at least
$10,000,000.
5. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given when delivered or mailed by first
class, registered or certified mail (air mail if to or from outside the United
States) postage prepaid, if to a Shareholder at his address set forth in Exhibit
A hereof, if to any Purchaser, at its respective address set forth on Exhibit B,
and if to any Investor, at its respective address set forth on Exhibit C or to
such other address as the addressee shall have furnished to the other parties
hereto in the manner prescribed by this Section 5.
6. Shareholders' Lockup Agreement. Each Shareholder hereby agrees in
connection with the company's initial public offering, upon the request of the
Company or the principal underwriter managing the public offering, not to sell,
make any short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any Shares now owned or hereafter acquired by him without the prior
written consent of the Company or such underwriter, as the case may be, for such
period of time (not to exceed ninety (90) days) from the effective date of such
registration as the Company or the underwriter may specify.
7. Specific Performance. The rights of the parties under this Agreement
are unique and, accordingly, the parties shall, in addition to such other
remedies as may be available to any of them at law or in equity, have the right
to enforce their rights hereunder by actions for specific performance to the
extent permitted by law.
<PAGE> 5
5
8. Legend. The certificates representing the Shares shall bear on their
face a legend indicating the existence of the restrictions imposed hereby.
9. Entire-Agreement; Termination of Prior Agreements. This Agreement
constitutes the entire agreement among the parties with respect to the subject
matter hereof and supersedes all prior agreements and understandings between
them or any of them as to such subject matter, including, without limitation
that certain Agreement of Shareholders dated as of October 13, 1987 among the
Company and certain of the Investors and that certain Shareholders' Agreement
dated as of August 4, 1986 among the Company and certain of the Investors, each
of which agreements is hereby terminated.
10. Waivers and Further Agreements. Any of the provisions of this
Agreement which operate for the benefit of the Purchasers may be waived with the
written consent of (a) Purchasers holding a majority of the issued and
outstanding Class C Preferred Shares (including shares of Common Shares into
which any such shares may have been converted) on an as-converted basis then
held or deemed to be held by all Purchasers and (b) Investors holding a majority
of the issued and outstanding Class B Preferred Shares (including shares of
Common Shares into which any such shares may have been converted) on an
as-converted basis then held or deemed to be held by all Investors. Any waiver
by any party of a breach of any provision of this Agreement shall not operate or
be construed as a waiver of any subsequent breach of that provision or of any
other provision hereof. Each of the parties hereto agrees to execute all such
further instruments and documents and to take all such further action as any
other party may reasonably require in order to effectuate the terms and purposes
of this Agreement.
11. Amendments. Except as otherwise expressly provided herein, this
Agreement may not be amended except by an instrument in writing executed by (a)
Purchasers holding a majority of the issued and outstanding Class C Preferred
Shares (including shares of Common Shares into which any such shares may have
been converted) on an as-converted basis then held or deemed to be held by all
Purchasers, (b) Investors holding a majority of the issued and outstanding Class
B Preferred Shares (including shares of Common Shares into which any such shares
may have been converted) on an as-converted basis then held or deemed to be held
by all Investors, (c) the holders of a majority of the Common Shares subject to
this Agreement and (d) the Company.
<PAGE> 6
6
12. Assignment; Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, legal representatives, successors and permitted transferees,
except as may be expressly provided otherwise herein.
13. Severability. In case any one or more of the provisions contained
in this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement and such invalid, illegal
and unenforceable provision shall be reformed and construed so that it will be
valid, legal, and enforceable to the maximum extent permitted by law.
14. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. Section Headings. The headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
16. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as a
sealed instrument as of the day and year first above written.
MEDIQUAL SYSTEMS, INC.
By: /s/ William C. Price
--------------------
Vice President
<PAGE> 7
7
PURCHASERS
INFORMATION PARTNERS
CAPITAL FUND, L.P.
By Information Partners
By: /s/ David Dominik
---------------------------
Title: General Partner
BCIP ASSOCIATES
By: /s/ David Dominik
---------------------------
Title: General Partner
BCIP TRUST ASSOCIATES, L.P.
By: /s/ David Dominik
---------------------------
Title: General Partner
<PAGE> 8
8
ADVENT V LIMITED ADVENT CHESTNUT II
PARTNERSHIP LIMITED PARTNERSHIP
By: TA Associates V, General By: TA Associates IV, General
Partner Partner
DESIFTA, S.A.
ADVENT ATLANTIC & PACIFIC By: TA Associates V,
LIMITED PARTNERSHIP Attorney-in-Fact
By: TA Associates V, General
Partner
By: /s/ Robert Daly
By /s/ Robert Daly ---------------------
----------------------
TA INVESTORS
CHESTNUT CAPITAL
INTERNATIONAL II
By: TA Associates V, General
Partner By: /s/ Robert Daly
---------------------
Attorney-in-Fact
By /s/ Robert Daly
----------------------
MICI MEDICAL SEED FUND,
a Limited Partnership
ADVENT INDUSTRIAL
LIMITED PARTNERSHIP
By: TA Associates V, General
Partner By:
---------------------
Timothy Maudlin, President
of its General Partner
By: /s/ Robert Daly
---------------------
BLUE CROSS-BLUE SHIELD OF
MINNESOTA, INC.
By:
---------------------
Title:
<PAGE> 9
9
SHAREHOLDERS
/s/ William D. Ryan
- ----------------------------
William D. Ryan
- ----------------------------
Alan C. Brewster, M.D.
- ----------------------------
Charles M. Jacobs
<PAGE> 10
10
EXHIBIT A
SHAREHOLDERS
<TABLE>
<CAPTION>
Name and Address Number of Shares
- ---------------- ----------------
<S> <C>
William D. Ryan 2,863,333 Common
1640 Midtown Tower 199 Class A Preferred
Rochester, NY 14604
Alan C. Brewster, M.D. 1,469,806 Common
14 South Street
Grafton, MA 01519
Charles M. Jacobs 1,625,000 Common
1900 West Park Drive
Westborough, MA 01581
</TABLE>
<PAGE> 11
11
EXHIBIT B
PURCHASERS
<TABLE>
<CAPTION>
Number of Class C
Preferred Shares
Name and Address Purchased
- ---------------- ---------
<S> <C>
Information Partners Capital 1,870.35
Fund, L.P.
Two Copley Place
Boston, MA 02110
Attn: David Dominik
BCIP Associates 47.64
Two Copley Place
Boston, MA 02110
Attn: David Dominik
BCIP Trust Associates, L.P. 104.01
Two Copley Place
Boston, MA 02110
Attn: David Dominik
</TABLE>
<PAGE> 12
12
INVESTORS
Number of Class B
Preferred Shares
Name and Address Purchased
Blue Cross-Blue Shield
of Minnesota, Inc.
3535 Blue Cross Road
St. Paul, MN 55164
Ernest Brophy
140 Allens Creek Road
Rochester, NY 14618
Clark Wackerman
- ----------------------------
- ----------------------------
John W. Handy
- ----------------------------
- ----------------------------
Ralph Peek
c/o MQ-Roc, Inc.
150 West Broad Street
Rochester, NY 14614
E. Anthony Wilson
- ----------------------------
- ----------------------------
Maryann B. Henderson
- ----------------------------
- ----------------------------
Patricia C. Norris
- ----------------------------
- ----------------------------
Robert J. Strasenburgh
- ----------------------------
- ----------------------------
<PAGE> 13
13
Betty Strasenburgh
- ----------------------------
- ----------------------------
Anthony J. Calderone
- ----------------------------
- ----------------------------
Robert W. Mead
- ----------------------------
- ----------------------------
Daniel J. Morgan
- ----------------------------
- ----------------------------
John J. Dorschel
- ----------------------------
- ----------------------------
TA Purchasers:
ADVENT V LIMITED PARTNERSHIP
c/o TA Associates
45 Milk Street
Boston, MA 02109
ADVENT INDUSTRIAL LIMITED
PARTNERSHIP
c/o TA Associates
45 Milk Street
Boston, MA 02109
CHESTNUT CAPITAL INTERNATIONAL II
c/o TA Associates
45 Milk Street
Boston, MA 02109
ADVENT CHESTNUT II LIMITED
PARTNERSHIP
c/o TA Associates
45 Milk Street
Boston, MA 02109
<PAGE> 14
14
DESIFTA, S.A.
c/o TA Associates
45 Milk Street
Boston, MA 02109
TA INVESTORS
c/o TA Associates
45 Milk Street
Boston, MA 02109
MICI MEDICAL SEED FUND, a
Limited Partnership
c/o Medical Innovation Capital, Inc.
Suite 400
1201 Marquette Avenue
Minneapolis, MN 55403
ADVENT ATLANTIC & PACIFIC
LIMITED PARTNERSHIP
c/o TA Associates
45 Milk Street
Boston, MA 02109
<PAGE> 1
Exhibit 10.27(a)
Silicon Valley Bank 45 William Street, Suite 120, Wellesley, MA 02181
617-431-9901
November 16, 1993
Mr. William Price
Vice President, Finance
Mediqual Systems, Inc.
1900 West Park Drive, Suite 120
Westborough, MA 01581
Dear Bill:
We are pleased to inform you that Silicon Valley Bank ("Bank") has approved
a fixed asset line of credit of $1,000,000 for the use of Mediqual Systems, Inc.
(the "Company") subject to the following terms and to the Bank's periodic
review. Drawings under this line will be permitted through 6/30/94, at which
time the line will convert to a term loan. Repayment will be scheduled such that
the amount outstanding at the end of this drawdown period shall be repaid in 36
equal monthly installments of principal beginning on 7/5/94. The commitment
shall not become effective unless and until an executed copy of this letter
together with all necessary accompanying documentation as well as the facility
fee described below has been returned to the Bank, which must take place within
21 days from the date of this letter.
Borrowings under the equipment line shall be secured by all corporate
assets, except for specific assets financed elsewhere. The maximum available
borrowings under this line will be the lesser of $1,000,000 or an 80% advance
rate against the invoice price of approved equipment purchased after 6/1/93, not
including software, taxes, shipping costs, and installation fees. You agree to
provide the Bank with copies of these invoices.
Borrowings under this line shall bear interest at a rate per annum equal to
the Prime Rate plus 1 1/2%. The "Prime Rate" means the rate from time to time
announced and made effective by the Bank as its Prime Rate. The Company's
borrowing rate shall change as the Prime Rate changes. A facility fee of $4,000
as well as any out-of-pocket expenses incurred by the Bank in connection with
establishment of this credit facility must be paid at the time the documents are
returned to the Bank. Interest will be charged monthly in arrears and is
calculated on the basis of a 360-day year. The Bank shall be authorized to debit
the Company's principal account or any other account maintained by the Company
with the Bank for any principal, interest or fees associated with the Company's
credit facility without prior notice.
Any advances hereunder or renewal hereof will be made only if in the
opinion of the Bank there exists no default under any loan documentation
executed by you with the Bank. A default is defined in the accompanying
Promissory Note dated November 16, 1993.
<PAGE> 2
Page 2
The Bank reserves the right to have performed from time to time an
examination of the Company's books and records by an agent of the Bank. The
Company agrees to pay for the cost of this examination, which will be capped at
$2,000.
So long as this commitment remains outstanding, the Company agrees to
maintain the following covenants as well as any other covenants:
1. PROFITABILITY - (Tested Quarterly)
To report annual net income of not less than $2,000,000 in FY94.
To not report two consecutive loss quarters, and no one loss quarter in
excess of $500,000.
2. MINIMUM EQUITY - (Tested Monthly) Have a minimum Tangible Capital Base
(TCB) of:
($3,000,000) from 9/30/93 through 7/30/94:
($2,000,000) from 7/31/94 through 10/30/94;
($1,500,000) from 10/31/94 through 1/30/95;
($1,000,000) from 1/31/95 and thereafter.
TCB is defined as Stockholders' Equity plus Subordinated Debt (debt which
is formally subordinated to the Bank) less intangibles (including but not
limited to Goodwill, Capitalized Software and Excess Purchase Costs).
3. LIQUIDITY - (Tested Monthly) Minimum cash plus net accounts receivable
greater than total Bank borrowings outstanding.
4. Not directly or indirectly pledge, grant, create or permit to exist any
security interest, lien or other encumbrance upon any of the Company's assets
except in favor of the Bank, except for specific assets financed elsewhere.
5. To provide the Bank with duplicate unaudited monthly financial
statements prepared in accordance with generally accepted accounting principles
and duplicate audited annual (consolidated and consolidating) financial
statements certified by public accountants to be received 25 and 90 days
respectively after the close of the period.
6. To provide the Bank with a copy of the annual management letter provided
by the Company's auditors and with copies of all legal process served upon the
Company.
7. Maintain adequate fire and liability insurance satisfactory to the Bank,
a copy of which shall be forwarded to the Bank.
8. Not to participate in any merger or consolidation or to pay any
dividends without the Bank's consent.
9. Not to dispose of any material assets other than in the ordinary course
of business without the Bank's consent.
<PAGE> 3
Page 3
10. To file all tax returns and to pay all taxes due.
11. Not to invest in any speculative securities other than instruments
acceptable to the Bank.
12. Not to incur indebtedness for borrowed money, except for either a)
indebtedness to Silicon Valley Bank or b) indebtedness incurred for the purchase
or lease of equipment in an aggregate amount not exceeding $500,000 at any given
point in time.
13. Not to be in material default of any other loan agreement with any
other lender.
14. To remain a duly organized corporation under the laws of Delaware, and
not to file for protection under the Bankruptcy Code.
15. All legal fees incurred will be for the account of the Borrower.
16. To reimburse the Bank for any reasonable expenses incurred by the Bank
to enforce the terms of this obligation.
17. Prior to closing you agree to provide the Bank with Articles of
Incorporation and a Certificate of Good Standing from the appropriate state
authorities.
If the Bank waives any rights under this Agreement, it will not affect any
future action the Bank may wish to take. This Agreement shall be binding upon
any of the Company's successors in interest. The laws of the Commonwealth of
Massachusetts shall apply to this Agreement.
It is our understanding that the Company will consider the Silicon Valley
Bank to be its primary Bank. Among other things, the Company agrees to use its
Silicon Valley Bank account as its primary disbursement account and to maintain
a reasonable portion of its excess funds in Silicon Valley Bank money market
accounts or certificates of deposit.
We are delighted to expand our relationship with Mediqual Systems and look
forward to many successful years of working together.
Sincerely,
/s/ Mark Pasculano
Mark Pasculano
Assistant Vice President
Technology Division
enclosures:
1. Promissory Note
2. Security Documents
3. Certificate of Compliance
4. Other ancillary forms and documents
<PAGE> 4
Page 4
Agreed and Accepted this 16th day of Dec., 1993.
By: /s/ William C. Price
--------------------
Title: CFO
-----------------
<PAGE> 5
PROMISSORY NOTE
================================================================================
Borrower: MEDIQUAL SYSTEMS, INC. Lender: SILICON VALLEY BANK
1900 West Park Drive, Suite 120 Loan Production Office
Westborough, MA 01581 Wellesley Office Park
45 William Street, Suite 170
Wellesley, MA 02181
===============================================================================
<TABLE>
<S> <C> <C>
Principal Amount: $1,000,000.00 Initial Rate: 7.500% Date of Note: November 16, 1993
</TABLE>
PROMISE TO PAY. MEDIQUAL SYSTEMS, INC. ("Borrower") promises to pay to SILICON
VALLEY BANK, a California bank with a loan production office in Wellesley,
Massachusetts ("Lender"), or order, in lawful money of the United States of
America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00) or
so much as may be outstanding, together with interest on the unpaid outstanding
principal balance of each advance. Interest shall be calculated from the date of
each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in accordance with the following payment
schedule:
Borrower shall make regular monthly payments of accrued unpaid interest
beginning December 5, 1993, and all subsequent interest payments are due on
the same day of each month after until June 5, 1994. In additional to the
monthly interest payments, and beginning as of July 5, 1994, Borrower will
make even payments of principal equivalent to 1/36th of the outstanding
principal balance of this Note as of June 30, 1994. The final payment due
on June 5, 1997 will be for all outstanding principal and accrued unpaid
interest.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at 3000
Lakeside Drive, Santa Clara, California 95054. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each time the prime rate is adjusted by
Silicon Valley Bank. The Index currently is 6.000% per annum. The interest rate
to be applied to the unpaid principal balance of this Note will be at a rate of
1.500 percentage points over the Index, resulting in an initial rate of 7.500%
per annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
<PAGE> 6
Page 2
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments under the payment schedule.
Rather, they will reduce the principal balance due and may result in Borrower
making fewer payments.
INSOLVENT. Insolvent is defined as failing to pay debts as they become due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to perform promptly at the time
strictly in the manner provided in this Note or any agreement related to this
Note, or in any other agreement or loan Borrower has with Lender and such
failure to perform continues for 10 days following notice from Lender to
Borrower. (c) Borrower defaults under any loan, extension of credit, security
agreement, purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's property
or Borrower's ability to repay this Note or perform Borrower's obligations under
this Note or any of the Related Documents and such failure to perform continues
for 10 days following notice from Lender to Borrower. (d) Any representation or
statement made or furnished to Lender by Borrower or on Borrower's behalf is
false or misleading in any material respect. (e) Borrower becomes insolvent, a
receiver is appointed for any part of Borrower's property, Borrower makes an
assignment for the benefit of creditors, or any proceeding is commenced either
by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any
creditor other than Bank tries to take any of Borrower's property on or in which
Lender has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (g) Any of the events described in this default
section occurs with respect to any guarantor of this Note.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 3 percentage points over the Index, and (b) add
any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate). The interest rate will not exceed the maximum rate permitted by
applicable law. At Borrower's expense, Lender may hire or pay someone else to
help collect this Note if Borrower does not pay. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will pay
any court costs, in addition to all other sums provided by law.
LINE OF CREDIT. This Note evidences a revolving line of credit until June 30,
1994 only. Advances under this Note, as well as directions for payment from
Borrower's accounts, may be requested orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing.
<PAGE> 7
Page 3
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time absent manifest error may be evidenced by endorsements on this Note
or by Lender's internal records, including daily computer print-outs. Lender
will have no obligation to advance funds under this Note if: (a) Borrower or any
guarantor is in default under the terms of this Note or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; or (d) Borrower has applied funds provided pursuant
to this Note for purposes other than those authorized by Lender.
REQUEST TO DEBIT ACCOUNTS. Borrower will regularly deposit all funds received
from its business activities in accounts maintained by Borrower at Silicon
Valley Bank. Borrower hereby requests and authorizes Lender to debit any of
Borrower's accounts with Lender, specifically, without limitation, Account
Number ____________, for payments of interest and principal due on the loan and
any other obligations owing by Borrower to Lender. Lender will notify Borrower
of all debits which Lender makes against Borrower's accounts.
ADVANCE RATE. Funds shall be advanced under this Note according to an advance
rate, as determined by Lender, defined as follows: Eighty percent (80%) of
invoice amounts on equipment purchased after June 1, 1993. Borrower shall
provide Lender with copies of invoices at the time of each advance request.
RELATED DOCUMENTS. Any documents relating to this credit or any other
relationship between Borrower and Lender.
LETTER AGREEMENT. This Note is subject to and shall be governed by all the terms
and conditions of the Business Loan Agreement dated November 16, 1993 between
Borrower and Lender, which Business Loan Agreement is incorporated herein by
reference. Notwithstanding the foregoing, the paragraph entitled "Borrowing Base
Formula" does not apply and accordingly, advances under this Note shall be made
pursuant to its availability under the Advance Rate as herein provided.
LOAN FEE. This Note is subject to a loan fee in the amount of Four
Thousand and 00/100 Dollars ($4,000.00).
WAIVERS AND GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its
rights or remedies under this Note without losing them. Borrower and any other
person who signs, guarantees or endorses this Note, to the extent allowed by
law, waive presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. To the extent
permitted by applicable law, all such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
<PAGE> 8
Page 4
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. THIS NOTE IS
EXECUTED UNDER SEAL. BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MEDIQUAL SYSTEMS, INC.
By: /s/ William C. Price
--------------------
Name: William C. Price , Title: CFO
------------------ -----
===============================================================================
Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off. Ver.
3.16d(c) 1993 CFI ProServices, Inc. All rights reserved. [MA-D20 MEDIQ2.LN
G1.OVL]
<PAGE> 9
COMMERCIAL SECURITY AGREEMENT
================================================================================
Borrower: MEDIQUAL SYSTEMS, INC. Lender: SILICON VALLEY BANK
1900 West Park Drive, Suite 120 Loan Production Office
Westborough, MA 01581 Wellesley Office Park
45 William Street, Suite 170
Wellesley, MA 02181
===============================================================================
THIS COMMERCIAL SECURITY AGREEMENT is entered into between MEDIQUAL SYSTEMS,
INC. (referred to below as "Grantor"); and SILICON VALLEY BANK (referred to
below as "Lender"). For valuable consideration, Grantor grants to Lender a
security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement
together with all exhibits and schedules attached to the Commercial
Security Agreement from time to time, if any, as amended from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
INVENTORY, CHATTEL PAPER, ACCOUNTS, CONTRACT RIGHTS, DEPOSIT ACCOUNTS,
DOCUMENTS, INSTRUMENTS, EQUIPMENT, GENERAL INTANGIBLES AND FIXTURES
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, contract rights, general intangibles, instruments,
rents, monies, payments, and all other rights, arising out of a sale,
lease, or other disposition of any of the property describe in this
Collateral section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all
<PAGE> 10
-2-
computer software required to utilize, create, maintain, and process
any such records or data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include any of the
Events of Default set forth below in section titled "Events of Default."
GRANTOR. The word "Grantor" means MEDIQUAL SYSTEMS, INC., its successors
and assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation, each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
LENDER. The word "Lender" means SILICON VALLEY BANK, its successors and
assigns.
NOTE. The word "Note" means the notes, letters of credits or credit
agreements in any principal amount from Borrower to Lender, together with
all renewals of, extensions of, modifications of, refinancings of,
consolidations of and substitutions for the notes or credit agreements.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
guaranties, security agreements, mortgages, deeds of trust, and all other
instruments, agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and continuation
of the perfection of Lender's security interest in the Collateral. Grantor
promptly will notify Lender before any change in Grantor's name including
any change to the assumed business names of Grantor. THIS IS A CONTINUING
SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART
OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME
GRANTOR MAY NOT BE INDEBTED TO LENDER. This Security Agreement will be
cancelled if at maturity, all indebtedness to Lender is paid in full.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
<PAGE> 11
-3-
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, contract rights, chattel paper, or general intangibles, the
Collateral is enforceable in accordance with its terms, is genuine, and
complies with applicable laws concerning form, content and manner of
preparation and execution, and all persons appearing to be obligated on the
Collateral have authority and capacity to contract and are in fact
obligated as they appear to be on the Collateral.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or the extent the
Collateral consists of intangible property such as accounts, the records
concerning the Collateral) at Grantor's address shown above, or at such
other locations as are acceptable to Lender. Except in the ordinary course
of its business, including the sales of inventory, Grantor shall not remove
the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the Commonwealth of Massachusetts, without the prior written
consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the securities interests granted under this Agreement.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of
inventory, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
<PAGE> 12
-4-
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, it use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances and regulations of all governmental authorities
applicable to the production, disposition, or use of the Collateral.
Grantor may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate appeals,
so long as Lender's interest in the Collateral, in Lender's opinion, is not
jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conversation and Recovery Act, 49 U.S.C. Section 6901,
et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup of other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
<PAGE> 13
-5-
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. In connection with all
policies covering assets in which Lender holds or is offered a security
interest, Grantor will provide Lender with such loss payable or other
endorsements as Lender may require. If Grantor at any time fails to obtain
or maintain any insurance as required under this Agreement, Lender may (but
shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if it so chooses "single interest insurance," which
will cover only Lender's interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due the reserve funds are insufficient,
Grantor shall upon demand pay any deficiency to Lender. The reserve funds
shall be held by Lender as a general deposit and shall constitute a
non-interest-bearing account which Lender may satisfy by payment of the
insurance premiums required to be paid by Grantor as they become due.
Lender does not hold the reserve funds in trust for Grantor, and Lender is
not the agent of Grantor for payment of insurance premiums required to be
paid by Grantor. The responsibility for the payment of premiums shall
remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer, (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in
<PAGE> 14
-6-
such Collateral. If Lender at any time has possession of any Collateral, whether
before or after an Event of Default, Lender shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral if Lender
takes such action for that purpose as Grantor shall request or as Lender, in
Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
Collateral.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor, and such failure to perform continues for 10 days following notice
from Lender to Borrower.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement is
false or misleading in any material respect, either now or at the time made
or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other
<PAGE> 15
-7-
collateral securing the Indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Massachusetts Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, chooses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in
<PAGE> 16
-8-
the name of Grantor, receive, open and dispose of mail addressed to
Grantor; change any address to which mail and payments are to be sent; and
endorse notes, checks, drafts, money orders, documents of title,
instruments and items pertaining to payment, shipment, or storage of any
Collateral. To facilitate collection, Lender may notify account debtors and
obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have any may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alternation or
amendment.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing and shall be effective when actually delivered or when
deposited with a nationally
<PAGE> 17
-9-
recognized overnight courier or deposited in the United States mail, first
class, postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Grantor, notice to any Grantor will constitute notice to all Grantors.
For notice purposes, Grantor agrees to keep Lender informed at all times of
Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, only after an Event of Default, with full
power of substitution to do the following: (a) to demand, collect, receive,
receipt for, sue and recover all sums of money or other property which may
now or hereafter become due, owing or payable from the Collateral; (b) to
execute, sign and endorses any and all claims, instruments, receipts,
checks, drafts or warrants issued in payment for the Collateral; (c) to
settle or compromise any and all claims arising under the Collateral, and,
in the place and stead of Grantor, to execute and deliver its release and
settlement for the claim; and (d) to file any claim or claims or to take
any action or institute or take part in any proceedings, either in its own
name or in the name of Grantor, or otherwise, which in the discretion of
Lender may seem to be necessary or advisable. This power is given as
security for the Indebtedness, and the authority hereby conferred is and
shall be irrevocable and shall remain in full force and effect until
renounced by Lender.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provisions invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a wavier of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
ADDITIONAL PROVISIONS. If any law is passed that requires additional action on
the part of Lender, Borrower shall fully cooperate with Lender in complying with
the law and accordingly, shall reimburse Lender for all costs and expenses which
Lender incurs to comply with the law.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS.
<PAGE> 18
-10-
THIS AGREEMENT IS DATED NOVEMBER 16, 1993. THIS COMMERCIAL SECURITY AGREEMENT IS
EXECUTED UNDER SEAL.
GRANTOR:
MEDIQUAL SYSTEMS, INC.
By: /s/ William C. Price
--------------------
Name: William C. Price, Title: CFO
------------------ ---
<PAGE> 1
Exhibit 10.27(b)
Silicon Valley Bank 45 William Street, Suite 120, Wellesley, MA 02181
617-431-9901
November 16, 1993
Mr. William Price
Vice President, Finance
Mediqual Systems, Inc.
1900 West Park Drive, Suite 120
Westborough, MA 01581
Dear Bill:
We are pleased to inform you that Silicon Valley Bank ("Bank") has approved
a working capital line of credit of $1,500,000 for the use of Mediqual Systems,
Inc. (the "Company") subject to the following terms and to the Bank's periodic
review. Unless renewed, this line will expire on May 5, 1995. This commitment
shall not become effective unless and until an executed copy of this letter
together with all necessary accompanying documentation as well as the facility
fee described below has been returned to the Bank, which must take place within
21 days from the date of this letter.
Borrowings under the working capital line shall be secured by a first
security interest in the Company's accounts receivable, inventory, and
machinery, equipment, except for specific assets financed elsewhere, and all
other assets and all monies and all other property in our possession which the
Bank may use to pay the Company's obligations.
Borrowings under this line shall bear interest at a rate per annum equal to
the Prime Rate plus 1/2%. The "Prime Rate" means the rate from time to time
announced and made effective by the Bank as its Prime Rate. The Company's
borrowing rate shall change as the Prime Rate changes. A facility fee of $4,000
(plus $3,500 if Company borrows under the line) as well as any out-of-pocket
expenses incurred by the Bank in connection with establishment of this credit
facility must be paid at the time the documents are returned to the Bank. All
interest will be charged monthly in arrears and will be calculated on the basis
of a 360-day year. The Bank shall be authorized to debit the Company's principal
account or any other account maintained by the Company with the Bank for any
principal, interest or fees associated with the Company's credit facility
without prior notice.
The maximum available borrowings including outstanding letters of credit
under this line will be the lesser of $1,500,000 or 80% of all of the Company's
eligible domestic trade accounts receivable within 90 days from invoice date. A
definition of eligible A/R accompanies this letter.
In order to monitor availability, the Bank asks that the Company submit
within 15 days of each month-end duplicate Borrowing Base Certificates (BBC), an
accounts receivable aging, within 25 days of each month-end duplicate income
statements and balance sheets, and duplicate Certificates of Compliance. The BBC
indicates the
<PAGE> 2
Page 2
Company's borrowing availability and the Certificate of Compliance asks you to
confirm that the Company is in compliance with the financial covenants and asks
you to further represent that you have no knowledge of any impending
circumstances which would take the Company out of compliance. Any advances
hereunder or renewal hereof will be made only if there exists no default under
any loan documentation executed by the Company with the Bank. A default is
defined in the accompanying Promissory Note dated November 16, 1993.
The Bank reserves the right to have performed from time to time an
examination of the Company's books and records by an agent of the Bank. The
Company agrees to pay for the cost of this examination, which will be capped at
$2,000.
So long as this commitment remains outstanding, the Company agrees to
maintain the following covenants as well as any other covenants listed in the
(accompanying) Promissory Note dated November 16, 1993:
1. PROFITABILITY - (Tested Quarterly)
To report annual net income of not less than $2,000,000 in FY94.
To not report two consecutive loss quarters, and no one loss quarter in
excess of $500,000.
2. MINIMUM EQUITY - (Tested Monthly) Have a minimum Tangible Capital Base
(TCB) of:
($3,000,000) from 9/30/93 through 7/30/94;
($2,000,000) from 7/31/94 through 10/30/94;
($1,500,000) from 10/31/94 through 1/30/95;
($1,000,000) from 1/31/95 and thereafter.
TCB is defined as Stockholders' Equity plus Subordinated Debt (debt which
is formally subordinated to the Bank) less intangibles (including but not
limited to Goodwill, Capitalized Software and Excess Purchase Costs).
3. LIQUIDITY - (Tested Monthly) Minimum cash plus net accounts receivable
greater then total Bank borrowings outstanding.
4. Not directly or indirectly pledge, grant, create or permit to exist any
security interest, lien or other encumbrance upon any of the Company's assets
except in favor of the Bank, except for specific assets financed elsewhere.
5. To provide the Bank with duplicate unaudited monthly financial
statements prepared in accordance with generally accepted accounting principles
and duplicate audited annual (consolidated and consolidating) financial
statements certified by public accountants to be received 25 and 90 days
respectively after the close of the period.
6. To provide the Bank with a copy of the annual management letter provided
by the Company's auditors and with copies of all legal process served upon the
Company.
<PAGE> 3
Page 3
7. Maintain adequate fire and liability insurance satisfactory to the Bank,
a copy of which shall be forwarded to the Bank.
8. Not to participate in any merger or consolidation or to pay any
dividends without the Bank's consent.
9. Not to dispose of any material assets other than in the ordinary course
of business without the Bank's consent.
10. To file all tax returns and to pay all taxes due.
11. Not to invest in any speculative securities other than instruments
acceptable to the Bank.
12. Not to incur indebtedness for borrowed money, except for either a)
indebtedness to Silicon Valley Bank or b) indebtedness incurred for the purchase
or lease of equipment in an aggregate amount not exceeding $500,000 at any given
point in time.
13. Not to be in material default of any other loan agreement with any
other lender.
14. To remain a duly organized corporation under the laws of Delaware, and
not to file for protection under the Bankruptcy Code.
15. All legal fees incurred will be for the account of the Borrower.
16. To reimburse the Bank for any reasonable expenses incurred by the Bank
to enforce the terms of this obligation.
17. Prior to closing you agree to provide the Bank with Articles of
Incorporation and a Certificate of Good Standing from the appropriate state
authorities.
If the Bank waives any rights under this Agreement, it will not affect any
future action the Bank may wish to take. This Agreement shall be binding upon
any of the Company's successors in interest. The laws of the Commonwealth of
Massachusetts shall apply to this Agreement.
It is our understanding that the Company will consider the Silicon Valley
Bank to be its primary Bank. Among other things, the Company agrees to use its
Silicon Valley Bank account as its primary disbursement account and to maintain
a reasonable portion of its excess funds in Silicon Valley Bank money market
accounts or certificates of deposit.
<PAGE> 4
Page 4
We are delighted to expand our relationship with Mediqual Systems and
look forward to many successful years of working together.
Sincerely,
/s/ Mark Pasculano
Mark Pasculano
Assistant Vice President
Technology Division
enclosures:
1. Borrowing Base Certificate and Certificate of Compliance
2. Promissory Note
3. Security Documents
4. Other ancillary forms and documents
Agreed and Accepted this 16th day of Dec., 1993.
By: /s/ William C. Price
------------------------
Title: CFO
------------------------
<PAGE> 5
ELIGIBLE DOMESTIC ACCOUNTS RECEIVABLE
"ELIGIBLE DOMESTIC ACCOUNTS RECEIVABLE" means an account receivable owing,
to the Borrower which met the following specifications at the time it came into
existence and continues to meet the same until it is collected in full:
(a) The account is not more than 90 days from the date of the invoice
thereof.
(b) The account arose from the performance of services or an outright sale
or licensing of goods by Borrower, such goods have been shipped to the account
debtor, and Borrower has possession of, or has delivered to Bank, shipping and
delivery receipts evidencing such shipment.
(c) The account is not subject to any prior assignment, claim, lien, or
security interest, and the Borrower will not make any further assignment thereof
or create any further security interest therein, nor permit the Borrower's right
therein to be reached by attachment, levy garnishment or other judicial process.
(d) The account is not subject to set-off, credit, allowance or adjustment
by the account debtor, except discount allowed for prompt payment, and the
account debtor has not contested his liability thereon and has not returned any
of the goods from the sale from which the account arose.
(e) The account arose in the ordinary course of Borrower's business and did
not arise from the performance of services or a sale of goods to a supplier or
employee of the Borrower.
(f) No notice of bankruptcy or insolvency of the account debtor has been
received by or is known to the Borrower.
(g) The Bank has not notified the Borrower that the account or account
debtor is unsatisfactory on the basis of the account debtor's financial
condition, operating performance, or credit history.
(h) Not more than 50% of the aggregate receivables of the account debtor
are over ninety (90) days from invoice.
(i) The aggregate accounts receivables from the account debtor do not
exceed 25% of the total Eligible Receivables of the Borrower; that portion of
the account over the 25% level will be disqualified.
(j) The account debtor is not a Subsidiary of the Borrower or an officer or
employee of the Borrower or a Subsidiary.
<PAGE> 6
Page 2
(k) The account debtor is a person or entity located in the United States
or Canada and the account arose out of services rendered or goods delivered in
the United States or Canada.
<PAGE> 7
PROMISSORY NOTE
================================================================================
Borrower: MEDIQUAL SYSTEMS, INC. Lender: SILICON VALLEY BANK
1900 West Park Drive, Suite 120 Loan Production Office
Westborough, MA 01581 Wellesley Office Park
45 William Street, Suite 170
Wellesley, MA 02181
===============================================================================
<TABLE>
<S> <C> <C>
Principal Amount: $1,500,000.00 Initial Rate: 6.500% Date of Note: November 16, 1993
</TABLE>
PROMISE TO PAY. MEDIQUAL SYSTEMS, INC. ("Borrower") promises to pay to SILICON
VALLEY BANK, a California bank with a loan production office in Wellesley,
Massachusetts ("Lender"), or order, in lawful money of the United States of
America, the principal amount of One Million Five Hundred Thousand & 00/100
Dollars ($1,500,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on May 5, 1995. In addition, Borrower will pay
regular monthly payments of accrued unpaid interest beginning December 5, 1993,
and all subsequent interest payments are due on the same day of each month after
that. Interest on this Note is computed on a 365/360 simple interest basis; that
is, by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at 3000
Lakeside Drive, Santa Clara, California 95054. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each time the prime rate is adjusted by
Silicon Valley Bank. The Index currently is 6.000% per annum. The interest rate
to be applied to the unpaid principal balance of this Note will be at a rate of
0.500 percentage points over the Index, resulting in an initial rate of 6.500%
per annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to perform promptly at the time
and strictly in the manner provided in this
<PAGE> 8
11-16-93 PROMISSORY NOTE Page 2
(Continued)
================================================================================
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other agreement,
in favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect. (e) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (f) Any creditor tries to take any of Borrower's property on or
in which Lender has a lien or security interest. This includes a garnishment of
any of Borrower's accounts with Lender. (g) Any of the events described in this
default section occurs with respect to any guarantor of this Note.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, do one or both of the following: (a) increase the variable
interest rate on this Note to 3 percentage points over the Index, and (b) add
any unpaid accrued interest to principal and such sum will bear interest
therefrom until paid at the rate provided in this Note (including any increased
rate). The interest rate will not exceed the maximum rate permitted by
applicable law. Lender may hire or pay someone else to help collect this Note if
Borrower does not pay. Borrower also will pay Lender that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law, Borrower
also will pay any court costs, in addition to all other sums provided by law.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note, as well as directions for payment from Borrower's accounts, may be
requested orally or in writing by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; or (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender.
REQUEST TO DEBIT ACCOUNTS. Borrower will regularly deposit all funds received
from its business activities in accounts maintained by Borrower at Silicon
Valley Bank. Borrower hereby requests and authorizes Lender to debit any of
Borrower's accounts with Lender, specifically, without limitation, Account
Number ____________, for payments of interest and principal due on the loan and
any other obligations owing by Borrower to Lender. Lender will
<PAGE> 9
11-16-93 PROMISSORY NOTE Page 3
(Continued)
================================================================================
notify Borrower of all debits which Lender makes against Borrower's accounts.
Any such debits against Borrower's accounts in no way shall be deemed a set-off.
LETTER AGREEMENT. This Note is subject to and shall be governed by all the terms
and conditions of the Business Loan Agreement dated November 16, 1993 between
Borrower and Lender, which Business Loan Agreement is incorporated herein by
reference.
LOAN FEE. This Note is subject to a loan fee in the amount of Four Thousand and
00/100 Dollars ($4,000.00) plus all out-of-pocket expenses. In addition,
Borrower shall pay to Lender Three Thousand Five Hundred and 00/100 Dollars
($3,500.00) at the initial advance against this Note ("Usage Fee") which Usage
Fee shall be due and payable on or prior to Lender making the initial advance.
WAIVERS AND GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its
rights or remedies under this Note without losing them. Borrower and any other
person who signs, guarantees or endorses this Note, to the extent allowed by
law, waive presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. To the extent
permitted by applicable law, all such parties agree that Lender may renew or
extend (repeatedly and for any length of time) this loan, or release any party
or guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. THIS NOTE IS
EXECUTED UNDER SEAL. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES
RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MEDIQUAL SYSTEMS, INC.
By: /s/ William C. Price
--------------------
Name: William C. Price, Title: CFO
------------------ ---
===============================================================================
Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off. Ver.
3.16d(c) 1993 CFI ProServices, Inc. All rights reserved. [MA-D20 MEDIQ1.LN
G1.OVL]
<PAGE> 1
Exhibit 10.28
LOAN MODIFICATION AGREEMENT
---------------------------
This Loan Modification Agreement is entered into as of June 30, 1994, by
and between MediQual Systems, Inc. (the "Borrower") whose address is 1900 West
Park Drive, Suite 120, Westborough, MA 01581 and Silicon Valley Bank, a
California-chartered bank ("Lender"), with its principal place of business at
3000 Lakeside Drive, Santa Clara, CA 95054 and with a loan production office
located at Wellesley Office Park, 45 William Street, Suite 170, Wellesley, MA
02181, doing business under the name "Silicon Valley East."
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated November 16, 1993, in the
original principal among of One Million and 00/100 Dollars ($1,000,000.00) (the
"Note"). The Note, together with other promissory notes from Borrower to Lender,
is governed by the terms of a Letter Agreement, dated November 16, 1993, between
Borrower and Lender, as such agreement may be amended from time to time (the
"Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured by a
Commercial Security Agreement, dated November 16, 1993 (the "Security
Agreement").
Hereinafter, the above-described security documents, together with all
other documents securing payment of the Note (and other notes executed by
Borrower in favor of Lender) shall be referred to as the "Security Documents."
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO NOTE AND LOAN AGREEMENT.
1. Borrower will pay regular monthly payments of accrued unpaid
interest beginning July 5, 1994, and all subsequent interest
payments are due on the same day of each month after that until
August 31, 1994. The outstanding principal balance on August 31,
1994 will be payable in even payments of principal plus interest
<PAGE> 2
-2-
for thirty-six (36) months, due on the fifth day of each month
beginning September 5, 1994. The final payment due on August 5,
1997, will be for all outstanding principal and accrued unpaid
interest.
2. The first sentence of the paragraph entitled "Line of Credit" is
hereby deleted and replaced with the following: This Note
evidences a straight line of credit until August 31, 1994.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of this date, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties and agreements, as
set forth in the Existing Loan Documents. Except as expressly modified pursuant
to this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Lender's agreements to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Lender to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Lender and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Lender in writing. No maker, endorser
or guarantor will be released by virtue of this Loan Modification Agreement. The
terms of this paragraph apply not only to this Loan Modification Agreement, but
also to all subsequent loan modification agreements.
<PAGE> 3
-3-
7. JURISDICTION/VENUE. Borrower accepts for itself and in connection with
its properties, unconditionally, the nonexclusive jurisdiction of any state or
federal court of competent jurisdiction in the State of California in any
action, suit or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement.
8. COUNTERSIGNATURE. This Loan Modification Agreement shall become
effective only when it shall have been executed by Borrower and Lender
(provided, however, in no event shall this Loan Modification Agreement become
effective until signed by an officer of Lender in California).
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER:
MEDIQUAL SYSTEMS, INC.
By: /s/ William C. Price
-------------------------
Name: William C. Price
------------------------
Title: Chief Financial Officer
------------------------
LENDER:
SILICON VALLEY BANK, doing
business as SILICON VALLEY EAST
By: /s/ Mark Pasculano
-------------------------
Name: Mark Pasculano
------------------------
Title: A.V.P.
------------------------
SILICON VALLEY BANK
By: /s/ E. Guleb
-------------------------
Name: E. Guleb
------------------------
Title: Operations Officer
------------------------
(Signed at San Jose, California)
<PAGE> 1
Exhibit 10.29
LOAN MODIFICATION AGREEMENT
---------------------------
This Loan Modification Agreement is entered into as of May 5, 1995, by and
between MediQual Systems, Inc. (the "Borrower") whose address is 1900 West Park
Drive, Suite 120, Westborough, MA 01581 and Silicon Valley Bank, a
California-chartered bank ("Lender"), with its principal place of business at
3000 Lakeside Drive, Santa Clara, CA 95054 and with a loan production office
located at Wellesley Office Park, 45 William Street, Suite 170, Wellesley, MA
02181, doing business under the name "Silicon Valley East."
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated November 16, 1993, in the original
principal among of One Million and 00/100 Dollars ($1,000,000.00) (the "Note").
The Note, together with other promissory notes from Borrower to Lender, is
governed by the terms of a Letter Agreement, dated November 16, 1993, between
Borrower and Lender, as such agreement may be amended from time to time (the
"Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured by a
Commercial Security Agreement, dated November 16, 1993.
Hereinafter, the above-described security documents, together with all
other documents securing payment of the Note (and other notes executed by
Borrower in favor of Lender) shall be referred to as the "Security Documents."
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO NOTE.
1. Payable in one payment of all outstanding principal plus all
accrued unpaid interest on July 5, 1995 ("Maturity"). In
addition, Borrower will pay regular monthly payments of accrued
unpaid interest due as of each payment date, beginning June 5,
1995, and all
<PAGE> 2
subsequent interest payments are due on the same day of each
month thereafter.
2. Notwithstanding the principal amount of the Note, the line shall
be capped at $500,000.00 until Maturity. Accordingly, advances
under the Note may not, at any time, exceed $500,000.00.
3. The interest rate to be applied to the unpaid principal balance
of the Note is hereby increased, effective as of the date hereof,
to one (1.000) percentage point over Lender's Index.
B. MODIFICATION(S) TO LOAN AGREEMENT.
1. Notwithstanding that the Loan Agreement provides for delivery of
Borrower's CPA audited financial statements within ninety (90)
days after the end of each fiscal year, for the fiscal year
ending 1994, Borrower shall have until July 5, 1995 to deliver
such financial statements.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of One
Thousand and 00/100 Dollars ($1,000.00) (the "Loan Fee").
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of this date, it has no defenses against the obligations
to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Lender is
relying upon Borrower's representations, warranties and agreements, as set forth
in the Existing Loan Documents. Except as expressly modified pursuant to this
Loan Modification Agreement, the terms of the Existing Loan Documents remain
unchanged and in full force and effect. Lender's agreements to modifications to
the existing Indebtedness pursuant to this Loan Modification Agreement in no way
shall obligate Lender to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall
<PAGE> 3
constitute a satisfaction of the Indebtedness. It is the intention of Lender and
Borrower to retain as liable parties all makers and endorsers of Existing Loan
Documents, unless the party is expressly released by Lender in writing. No
maker, endorser or guarantor will be released by virtue of this Loan
Modification Agreement. The terms of this paragraph apply not only to this Loan
Modification Agreement, but also to all subsequent loan modification agreements.
8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its
properties, unconditionally, the nonexclusive jurisdiction of any state or
federal court of competent jurisdiction in the State of California in any
action, suit or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement.
9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective
only when it shall have been executed by Borrower and Lender (provided, however,
in no event shall this Loan Modification Agreement become effective until signed
by an officer of Lender in California).
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER:
MEDIQUAL SYSTEMS, INC.
By: /s/ Eric Kriss
----------------------------
Name: Eric Kriss
---------------------------
Title: CEO
---------------------------
LENDER:
SILICON VALLEY BANK, doing
business as SILICON VALLEY EAST
By: /s/ Mark Pasculano
------------------------------
Name: Mark Pasculano
-----------------------------
Title: Assistance Vice President
-----------------------------
<PAGE> 4
SILICON VALLEY BANK
By: /s/ Florence G. Knisley
---------------------------------
Name: Florence G. Knisley
--------------------------------
Title: Operations Officer/AVP
--------------------------------
(Signed at San Jose, California)
<PAGE> 1
Exhibit 10.30
LOAN MODIFICATION AGREEMENT
---------------------------
This Loan Modification Agreement is entered into as of May 5, 1995, by and
between Mediqual Systems, Inc. ("Borrower") whose address is 1900 West Park
Drive, Suite 250, Westboro, MA 01581 and Silicon Valley Bank, a
California-chartered bank ("Lender"), with its principal place of business at
3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office
located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, MA
02181, doing business under the name "Silicon Valley East".
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated November 16, 1993 in the
original principal amount of One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00) (the "Note"). The Note, together with other promissory
notes from the Borrower to Lender, is governed by the terms of a Letter
Agreement, dated November 16, 1993, between Borrower and Lender, as such
agreement may be amended from time to time (the "Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured by a
Commercial Security Agreement, dated November 16, 1993.
Hereinafter, the above-described security documents, together with all
other documents securing payment of the Notes (and other notes executed by
Borrower in favor of Lender) shall be referred to as the "Security Documents".
Hereinafter, the Security Documents, together with ail other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO NOTE.
1. Payable in one payment of all outstanding principal plus all
accrued unpaid interest on January 5, 1996 ("Maturity Date"). In
addition, Borrower will pay regular monthly payments of accrued
unpaid interest due as of each payment date, beginning June 5,
1995,
<PAGE> 2
-2-
and all subsequent interest payments are due on the same day of
each month thereafter.
2. The principal amount of the Note is hereby decreased to Five
Hundred Thousand and 00/100 Dollars ($500,000.00).
3. The interest rate to be applied to the unpaid principal balance
of the Note is hereby increased, effective as of September 11,
1995, to Two (2.000) percentage point over Lender's index.
B. MODIFICATION(S) TO LOAN AGREEMENT.
1. Borrower shall now provide to Lender, not later than fifteen (15)
days after and as of the 1st and 15h of each week, with a
Borowing Base Certificate and aged lists of accounts receivable,
and not later than thirty (30) days after the end of each month
with duplicate compliance certificate and monthly financial
statements.
2. The maximum available borrowing under the Note shall be: the
lesser of (a) $500,000.00 or (b) seventy percent (70%) of
eligible domestic trade accounts receivable within 90 days from
the invoice date.
3. The following paragraphs are hereby amended to read as follows:
1. PROFITABILITY - (Tested Quarterly)
Borrower to report positive net income for the quarter ending
September 30, 1995 and thereafter.
2. MINIMUM EQUITY - (Tested Monthly)
Maintain a minimum Tangible Capital Base (TCB) of ($600,000.00).
TCB is defined as Stockholders' Equity plus Subordinated Debt
(debt which is formally subordinated to the lender) less
intangibles (including but not limited to Goodwill, Capitalized
Software and Excess Purchase Costs) less deferred revenues.
3. LIQUIDITY - (Tested Monthly)
<PAGE> 3
-3-
Maintain a minimum cash plus availability under the
borrowing base calculation, not to be restricted by the
amount of the Note to exceed the outstanding amounts of the
equipment term debt.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount
of Two Thousand Five Hundred and 00/100 Dollars ($2,500.00) (the "Loan Fee).
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that, as of this date, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying
the existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released by
Lender in writing. No maker, endorser, or guarantor will be released by virtue
of this Loan Modification Agreement. The terms of this Paragraph apply not only
to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
<PAGE> 4
-4-
8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with
its properties, unconditionally, the non-exclusive jurisdiction of any state or
federal court of competent jurisdiction in the State of California in
any action, suit, or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement.
9. COUNTERSIGNATURE. This Loan Modification Agreement shall become
effective only when it shall have been executed by Borrower and Lender
(provided, however, in no event shall this Loan Modification Agreement become
effective until signed by an officer of Lender in California).
10. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER:
MEDIQUAL SYSTEMS, INC.
By: /s/ William C. Price
--------------------------
Name: William C. Price
--------------------------
Title: CFO
--------------------------
LENDER:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ Mark Pasculano
--------------------------
Name: Mark Pasculano
--------------------------
Title: A.V.P.
--------------------------
SILICON VALLEY BANK
By: /s/ Florence G. Knisley
--------------------------
Name: Florence G. Knisley
--------------------------
<PAGE> 5
-5-
Title: AVP/Supervisor
--------------------------
(Signed at San Jose, California)
<PAGE> 1
Exhibit 10.31
LOAN MODIFICATION AGREEMENT
---------------------------
This Loan Modification Agreement is entered into as of January 5, 1996, by
and between MediQual Systems, Inc. (the "Borrower") whose address is 1900 West
Park Drive, Suite 120, Westborough, MA 01581 and Silicon Valley Bank, a
California-chartered bank ("Lender"), with its principal place of business at
3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office
located at Wellesley Office Park, 45 William Street, Suite 170, Wellesley, MA
02181, doing business under the name "Silicon Valley East."
1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated November 16, 1993, in the
original principal among of One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00) (the "Working Capital Line"), and a Promissory Note, dated
November 16, 1993 in the original principal amount of One Million and 00/100
Dollars ($1,000,000.00) (the "Term Note") (collectively, the "Notes"). The
Working Capital Line has been modified pursuant to two Loan Modification
Agreements dated May 5, 1995 pursuant to which, among other things, the
principal amount of the Working Capital Line was decreased to Five Hundred
Thousand and 00/100 Dollars ($500,000.00). The Term Note has been modified
pursuant to a Loan Modification Agreement dated June 30, 1994. The Notes,
together with other promissory notes from Borrower to Lender, are governed by
the terms of a Letter Agreement, dated November 16, 1993, between Borrower and
Lender, as such agreement may be amended from time to time (the "Loan
Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL. Repayment of the Indebtedness is secured by a
Security Agreement, dated November 16, 1993.
Hereinafter, the above-described security documents, together with all
other documents securing payment of the Notes (and other notes executed by
Borrower in favor of Lender) shall be referred to as the "Security Documents."
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
<PAGE> 2
-2-
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO WORKING CAPITAL LINE.
1. Payable in one payment of all outstanding principal plus all
accrued unpaid interest on January 4, 1997 ("Maturity Date"). In
addition, Borrower will pay regular monthly payments of accrued
unpaid interest due as of each payment date, beginning February
4, 1996, and all subsequent interest payments are due on the same
day of each month thereafter.
B. MODIFICATION(S) TO LOAN AGREEMENT.
1. The paragraph entitled "1. Profitability" is hereby amended in
its entirety, to read as follows:
Borrower shall achieve minimum net operating income of
$250,000.00, on a quarterly basis, with allowance for a net
operating loss for the quarter ending March 31, 1996 not to
exceed $50,000.00.
2. The numbered paragraph 2 entitled "Minimum Equity" is hereby
amended in its entirety, to read as follows:
Borrower shall maintain, on a monthly basis, a maximum negative
Tangible Capital Base (TCB) of ($800,000.00), decreasing to
($400,000.00) as of the month ending June 30, 1996, further
decreasing to $1.00 as of the month ending September 30, 1996,
and thereafter.
3. The numbered paragraph 3 entitled "Liquidity" is hereby amended
in its entirety, to read as follows:
Borrower shall maintain, on a monthly basis, availability under
the borrowing base greater than the outstanding balance of the
Term Note.
4. The following paragraph is hereby incorporated into the Loan
Agreement.
ADJUSTED QUICK RATIO. Borrower shall maintain, on a monthly
basis, a minimum quick ratio of 0.50 to 1.00, increasing to 0.90
to 1.00 as of the month ending September 30, 1996, and
thereafter. Adjusted quick
<PAGE> 3
-3-
ratio shall mean cash plus cash equivalents plus net accounts
receivable divided by total current liabilities. For purposes of
calculation, deferred revenue shall be excluded from the adjusted
quick ratio.
5. The paragraph beginning with the words, "The maximum available
borrowings . . ." is hereby amended, to read as follows:
The maximum available borrowings, including outstanding letters
of credit under the Working Capital Line, will be the lesser of
(a) $500,000.00 or (b) seventy percent (70%) of eligible domestic
accounts receivables within 90 days from the date of invoice
(defined as 60 days and under from the Borrower's agings).
6. The paragraph beginning with the words, "In order to monitor . .
." is hereby amended, to read as follows:
In order to monitor availability, Borrower shall provide Lender
with, as soon as available, but in no event later than ten (10)
days after filing, Borrower's corporate tax returns, and as soon
as available, but in no event later than thirty (30) days after
the end of each month, Borrower's balance sheet and profit and
loss statement for the period ended, together with a Compliance
Certificate, prepared by Borrower and certified as correct to be
best knowledge and belief by Borrower's chief financial officer
or other officer or person acceptable to Lender. Notwithstanding
the foregoing, in the event Lender's accounts receivable audit of
Borrower's books and records is deemed satisfactory to Lender,
Borrower will not be required to provide copies of such tax
returns. All financial reports required to be provided under this
Agreement shall be prepared in accordance with generally accepted
accounting principles applied on a consistent basis, and
certified by Borrower as being true and correct.
Borrower shall provide Lender with, as soon as available, but in
no event later than the 15th day of each month, a borrowing base
certificate and accounts receivable aging, dated the first of the
month. Up to three (3) accounts receivable audits to be performed
by Lender's agent, on an annual basis. Borrower's deposit
<PAGE> 4
-4-
account will be debited for the audit expense and a notification
will be mailed to Borrower.
Additionally, the Borrowing Base Certificate is to be calculated
from the accounts receivable balance as of the first of each
month.
4. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of
Two Thousand Five Hundred and 00/100 Dollars ($2,500.00) plus all out-of-pocket
expenses (the "Loan Fee").
5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
6. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has
no defenses against the obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying
the existing Indebtedness, Lender is relying upon Borrower's representations,
warranties and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released by
Lender in writing. No maker, endorser or guarantor will be released by virtue of
this Loan Modification Agreement. The terms of this paragraph apply not only to
this Loan Modification Agreement, but also to all subsequent loan modification
agreements.
8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with
its properties, unconditionally, the nonexclusive jurisdiction of any state or
federal court of competent jurisdiction in the State of California in any
action, suit or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement; provided, however, that if for any
reason Lender cannot avail itself of the courts of the Commonwealth of
Massachusetts, then venue shall lie in Santa Clara County, California.
<PAGE> 5
-5-
9. COUNTERSIGNATURE. This Loan Modification Agreement shall become
effective only when it shall have been executed by Borrower and Lender
(provided, however, in no event shall this Loan Modification Agreement become
effective until signed by an officer of Lender in California).
10. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER:
MEDIQUAL SYSTEMS, INC.
By: /s/ William C. Price
--------------------
Name: William C. Price
--------------------
Title: CFO
--------------------
LENDER:
SILICON VALLEY BANK, doing
business as SILICON VALLEY EAST
By: /s/ Mark Pasculano
--------------------
Name: Mark Pasculano
--------------------
Title: Vice President
--------------------
SILICON VALLEY BANK
By: /s/ G. Linvill
--------------------
Name: G. Linvill
--------------------
Title: VP
--------------------
(Signed at Santa Clara County, CA)
<PAGE> 1
Exhibit 10.32
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of May 24, 1996, by and
between Mediqual Systems, Inc. ("Borrower") whose address is 1900 West Park
Drive, Suite 250, Westboro, MA 01581 and Silicon Valley Bank, a
California-chartered bank ("Lender"), with its principal place of business at
3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office
located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, MA
02181, doing business under the name "Silicon Valley East".
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated November 16, 1993 in the original
principal amount of One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00) (the "Working Capital Line"), and a Promissory Note, dated
November 16, 1993 in the original principal amount of One Million and 00/100
Dollars ($1,000,000.00) (the "Term Note") (collectively, the 'Notes"). The
Working Capital Line has been modified pursuant to two Loan Modification
Agreements dated May 5, 1995 pursuant to which, among other thing, the principal
amount of the Working Capital Line was decreased to Five Hundred Thousand and
00/100 Dollars ($500,000.00) and a Loan Modification Agreement dated January 5,
1996. The Term Note has been modified pursuant to a Loan Modification Agreement
dated June 30, 1994. The Notes, together with other promissory notes from
Borrower to Lender, are governed by the terms of a Letter Agreement, dated
November 16, 1993, between Borrower and Lender, as such agreement may be amended
from time to time (the "Loan Agreement'). Capitalized terms used but not
otherwise defined herein shall have the same meaning as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured by a
Commercial Security Agreement, dated November 16, 1993.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Notes (and other notes executed by Borrower in
favor of Lender) shall be referred to as the "Security Documents". Hereinafter,
the Security Documents, together with ail other documents evidencing or securing
the Indebtedness shall be referred to as the "Existing Loan Documents."
<PAGE> 2
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION(S) TO WORKING CAPITAL LINE.
1. The principal amount of the Note is hereby increased to One
Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00).
2. The interest rate to be applied to the unpaid principal balance
of the Note is hereby decreased, effective as of this date, to
one (1.00) percentage point over the Lender's current Index.
Notwithstanding the foregoing, the interest rate shall be further
decreased to a rate equal to the Lender's current Index upon
Borrower's successful completion of an initial public offering
(IPO). Such interest rate change shall take effect the first day
of the month following Lender's receipt of Borrower's financial
statements showing Borrower has complied with the foregoing
criteria.
B. MODIFICATION(S) TO LOAN AGREEMENT.
1. The paragraph entitled "1. Profitability" is hereby amended in
its entirety, to read as follows:
Borrower shall achieve minimum net operating income of
$250,000.00, on a quarterly basis.
2. The numbered paragraph 2. entitled "Minimum Equity" is hereby
amended in its entirety, to read as follows:
Beginning with the month ended March 31, 1996, Borrower shall
maintain, on a monthly basis, a maximum Tangible Capital Base
(TCB) of ($100,000.00), increasing to a minimum TCB of $1.00 as
of the month ending June 30, 1996, and thereafter. Beginning with
the month ending June 30, 1996, TCB shall include 50% of net
income, effective on net income earned for the quarter ending
June 30, 1996. Furthermore, upon Borrower's successful completion
of an IPO, the Tangible Capital Base calculation shall include
50% of the IPO proceeds.
3. The numbered paragraph 3. entitled "Liquidity" is hereby amended
in its entirety, to read as follows:
<PAGE> 3
Borrower shall maintain, on a monthly basis, availability under
the borrowing base greater than the outstanding balance of the
Term Note. Notwithstanding the foregoing, upon Borrower's
successful completion of an IPO, availability under the borrowing
base shall exclude the outstanding balance of the Term Note.
4. The paragraph beginning with the words "To provide the Bank with
duplicate unaudited . . ." is hereby amended in its entirety, to
read as follows:
Provide Lender with, as soon as available, but in no event later
than ninety (90) days after the end of each fiscal year,
Borrower's financial statements for the year ended, audited by a
certified public accountant satisfactory to Lender, and as soon
as available, but in no event later than thirty (30) days after
the end of each month, Borrower's balance sheet and profit and
loss statement for the period ended, together with a Compliance
Certificate, prepared by Borrower and certified as correct to the
best knowledge and belief by Borrowers chief financial officer or
other officer or person acceptable to Lender. All financial
reports required to be provided under this Agreement shall be
prepared in accordance with generally accepted accounting
principles applied on a consistent basis, and certified by
Borrower as being true and correct, Notwithstanding the
foregoing, upon filing by Borrower for an IPO, Borrower shall
deliver its fiscal year end 1995 financial statements to Lender.
Following the completion of the IPO. Borrower shall deliver its
interim financial statements to Lender within forty-five (45)
days after each quarter end.
5. The paragraph entitled "Adjusted Quick Ratio" is hereby amended
in its entirety, to read as follows:
Borrower shall maintain, on a monthly basis, a minimum quick
ratio of 0.65 to 1.00, increasing to 0.90 to 1.00 beginning with
the month ending October 31, 1996, and thereafter. Adjusted quick
ratio shall mean cash plus cash equivalents plus net accounts
receivable divided by total current liabilities. For purpose of
calculation, deferred revenue shall be excluded from the adjusted
quick ratio.
6. The paragraph beginning with the words "The maximum available
borrowings. . ." is hereby amended, to read as follows:
<PAGE> 4
The maximum available borrowings, including outstanding letters
of credit under the Working Capital Line will be the lesser of
(a) $1,500,000.00 or (b) seventy-five percent (75%) of eligible
domestic accounts receivables within 90 days from date of invoice
(defined as 60 days and under from the Borrower's agings).
4. PAYMENT OF LOAN FEE. Borrower shall pay Lender a fee in the amount of Two
Thousand Five Hundred and 00/100 Dollars ($2,500.00) plus all out-of-pocket
expenses (the "Loan Fee").
5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
6. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the
existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released by
Lender in writing. No maker, endorser, or guarantor will be released by virtue
of this Loan Modification Agreement. The terms of this Paragraph apply not only
to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its
properties, unconditionally, the non-exclusive jurisdiction of any state or
federal court of competent jurisdiction in the Commonwealth of Massachusetts in
any action, suit, or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement; provided, however, that if for any
reason Lender cannot avail itself of the courts of the Commonwealth of
Massachusetts, then venue shall lie in Santa Clara County, California.
9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective
only when it shall have been executed by Borrower and Lender (provided,
<PAGE> 5
however, in no event shall this Loan Modification Agreement become effective
until signed by an officer of Lender in California).
10. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: LENDER:
MEDIQUAL SYSTEMS, INC. SILICON VALLEY BANK, doing
business as SILICON VALLEY
EAST
By: /s/ William C. Price By: /s/ Mark Pasculano
--------------------- ------------------
Name: William C. Price Name: Mark Pasculano
------------------- ----------------
Title: CFO Title: VP
------------------- ----------------
SILICON VALLEY BANK
By: /s/ Julie Haga
------------------
Name: Julie Haga
------------------
Title: VP
------------------
(Signed at Santa Clara County, CA)
<PAGE> 1
Exhibit 10.37
MEDIQUAL SYSTEMS, INC.
1900 WEST PARK DRIVE
WESTBOROUGH, MASSACHUSETTS 01581
June 28, 1996
To the Purchasers Listed on Exhibit A
of that certain Class C Convertible Preferred
Stock Purchase Agreement
dated as of April 1, 1993
c/o Information Partners Capital Fund L.P.
Two Copley Place
Boston, Massachusetts 02116
RE: LETTER AGREEMENT
Ladies and Gentlemen:
MediQual Systems, Inc. (the "Company") and you are parties to a letter
agreement dated as of April 27, 1993 (the "1993 Letter Agreement"), entered into
in connection with the stock purchase agreement referred to above.
The Company is planning to make an initial public offering (the "IPO") of
shares of its Common Stock effected pursuant to a registration statement on Form
S-1 filed under the Securities Act of 1933, as amended, which IPO would benefit
each of you, in your respective capacities as stockholders of the Company. The
Company's registration statement in connection with the IPO must contain
detailed information as to the Company's capitalization. Accordingly, it is
desirable to achieve certainty with respect to the Company's capitalization.
You understand and acknowledge that the proposed IPO may not occur, either
because the Company decides not to engage in the IPO or for other reasons.
Nevertheless, to induce the Company to proceed with the IPO, each of you hereby
agrees that the 1993 Letter Agreement and all of your rights and the Company's
obligations thereunder are hereby terminated, effective as of the closing of the
IPO; provided, that this letter agreement shall be wholly void if the closing of
the IPO does not occur on or before October 15, 1996.
<PAGE> 2
-2-
Please sign this letter below to indicate your agreement with the
foregoing.
Very truly yours,
MEDIQUAL SYSTEMS, INC.
By /s/ William C. Price
--------------------------------------
Name: William C. Price
Title: Chief Financial Officer
AGREED TO AND ACCEPTED:
INFORMATION PARTNERS
CAPITAL FUND, L.P.
By: Information Partners
By *
--------------------------------
BCIP ASSOCIATES
By *
--------------------------------
BCIP TRUST ASSOCIATES, L.P.
By *
--------------------------------
* By /s/ David Dominik
--------------------------
David Dominik
General Partner
<PAGE> 1
EXHIBIT 11
MEDIQUAL SYSTEMS, INC.
STATEMENT RE: PRO FORMA EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------------
<S> <C> <C>
Net income (loss)............................................. $(1,757,178) $1,126,698
Accretion of preferred stock dividends........................ 294,890 227,661
Interest expense.............................................. 89,161 44,353
------------ ----------
Pro forma net income (loss).............................. $(1,373,127) $1,398,712
=========== ==========
Weighted average common shares outstanding.................... 3,517,605 3,671,136
Assumed Conversion of Class B and Class C Convertible
Preferred Stock............................................. 2,151,596 2,175,243
Common stock and stock options issued after June 1, 1995,
pursuant to the treasury stock method....................... 414,749 414,749
Common stock equivalents outstanding, pursuant to the treasury
stock method................................................ -- 337,923
Common shares assumed to be issued in proposed initial public
offering in order to redeem Class A Redeemable Preferred
Stock and outstanding debt.................................. 382,768 382,768
---------- ----------
Pro forma weighted average number of common and common
equivalent shares outstanding............................... 6,466,718 6,981,819
=========== ==========
Per share amount......................................... $ (0.21) $ 0.20
========== ================
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
July 8, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 1,006,477 1,679,120
<SECURITIES> 0 0
<RECEIVABLES> 1,025,358 1,453,124
<ALLOWANCES> 200,000 175,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,147,560 3,269,110
<PP&E> 2,545,692 2,634,835
<DEPRECIATION> 1,595,290 1,838,500
<TOTAL-ASSETS> 3,230,715 4,184,744
<CURRENT-LIABILITIES> 3,571,986 2,981,466
<BONDS> 605,223 101,850
11,280,909 11,508,570
0 0
<COMMON> 3,523 3,881
<OTHER-SE> (12,230,926) (10,411,023)
<TOTAL-LIABILITY-AND-EQUITY> 3,230,715 4,184,744
<SALES> 0 0
<TOTAL-REVENUES> 10,973,839 5,707,126
<CGS> 0 0
<TOTAL-COSTS> 12,366,188 4,266,371
<OTHER-EXPENSES> (19,222) (142,642)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 89,161 44,353
<INCOME-PRETAX> (1,462,288) 1,539,044
<INCOME-TAX> 0 184,685
<INCOME-CONTINUING> (1,462,288) 1,354,359
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,757,178) 1,126,698
<EPS-PRIMARY> 0 0
<EPS-DILUTED> (0.21) 0.20
</TABLE>
