<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1997.
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MEDICODE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
UTAH (PRIOR TO 7371 87-0459623
REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
REINCORPORATION)
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
MEDICODE, INC.
5225 WILEY POST WAY, SUITE 500
SALT LAKE CITY, UTAH 84116
(801) 536-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
EUGENE SANTA CATTARINA
CHIEF EXECUTIVE OFFICER
MEDICODE, INC.
5225 WILEY POST WAY, SUITE 500
SALT LAKE CITY, UTAH 84116
(801) 536-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
CHRISTOPHER D. MITCHELL RICHARD A. FINK
YOICHIRO TAKU NORA L. GIBSON
VADIM STEPANCHENKO DAVID R. GILBERT
JON P. LAYMAN BROBECK, PHLEGER & HARRISON LLP
ROBERT L. CHASTAIN 4675 MACARTHUR COURT
WILSON SONSINI GOODRICH & ROSATI NEWPORT BEACH, CALIFORNIA 92660
PROFESSIONAL CORPORATION (714) 752-7535
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If 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 a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value per share....... $ $25,300,000 $7,667
</TABLE>
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(1) Includes shares which the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o).
---------------
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1997
(LOGO OF MEDICODE APPEARS HERE)
SHARES
COMMON STOCK
Of the shares of Common Stock offered hereby, shares are being issued
and sold by Medicode, Inc. ("Medicode" or the "Company") and shares are
being sold by the Selling Stock- holders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. 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 of the Common Stock will be between $
and $ per share. See "Underwriting" for information relating to the method
of determining the initial public offering price.
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
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Total(2).................... $ $ $ $
</TABLE>
================================================================================
(1) Before deducting expenses payable by the Company, estimated at $ .
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively.
-----------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
The date of this Prospectus is , 1997
<PAGE>
GRAPHICS
[TO BE FILED BY AMENDMENT]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR
THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY 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, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, (25 DAYS FROM 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 DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................................................... 4
Risk Factors........................................................... 6
The Company............................................................ 13
Use of Proceeds........................................................ 13
Dividend Policy........................................................ 13
Capitalization......................................................... 14
Dilution............................................................... 15
Selected Consolidated Financial Data................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 17
Business............................................................... 23
Management............................................................. 33
Certain Transactions................................................... 40
Principal and Selling Stockholders..................................... 41
Description of Capital Stock........................................... 44
Shares Eligible for Future Sale........................................ 46
Underwriting........................................................... 48
Legal Matters.......................................................... 49
Experts................................................................ 49
Additional Information................................................. 50
Index to Financial Statements.......................................... F-1
</TABLE>
----------------
Medicode, ClaimsManager System, Claims Edit System, CareTrends,
Comprehensive Healthcare Payment System, Medical Bill Advisor, Allowed Medical
and PowerTrak System are trademarks of the Company. Trade names and trademarks
of other companies appearing in this Prospectus are the property of their
respective holders.
3
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information, including "Risk Factors," and the Consolidated Financial
Statements and Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Medicode is a leading provider of health care information products which
reduce administrative costs associated with the reimbursement process, control
clinical costs and increase the efficiency of the health care delivery process.
The Company's products are used by payors, providers and self-insured employers
to (i) accurately code and measure utilization of health care services, (ii)
screen and edit claims for accuracy, consistency and compliance, (iii)
efficiently evaluate, negotiate and implement provider payment arrangements,
and (iv) track and analyze all aspects of care for a particular medical
condition from initial diagnosis to treatment. The foundation for Medicode's
solutions is its proprietary database of over 500 million geographically
dispersed ambulatory patient care records, which is leveraged through the
Company's clinical and technical expertise in data collection, mapping and
analysis.
Health care payors have attempted to achieve cost savings by shifting to
providers an increasing portion of the financial risk associated with care
delivery, generally under capitated payment arrangements. These initiatives
have increased the necessity for reliable clinical and financial data in the
health care delivery and payment system. The pursuit of administrative savings
has led to the implementation of systems and knowledge bases designed to
streamline administrative processes and financial transactions. Clinical cost
containment efforts have focused on assessing the appropriateness of care and
the reasonableness of provider charges, requiring standardized pricing
guidelines and comparative databases and decision support tools. More recent
care reengineering efforts require systems to capture and compare the outcomes
of various treatment paths and standardize best treatment practices.
Medicode's products are designed to provide solutions for administrative cost
reduction, clinical cost containment and care reengineering. The Company's
syndicated data products include proprietary coding source books and reference
materials used by medical providers and payors to code medical procedures
performed and other various non-proprietary titles which the Company resells.
Approximately 80,000 customers have purchased one or more of the Company's
syndicated data products in the last three years. The Company's benchmarking
database products include databases of usual, customary and reasonable charges
for specific procedures in particular geographic areas and state-mandated
workers' compensation fee schedules which are currently licensed to over 1,300
customers. The Company's clinical editing software includes products for
enhancing data accuracy, consistency and compliance and decision support tools
which are currently licensed to over 170 customers.
The Company's product development strategy leverages its proprietary patient
encounter database which the Company regularly updates through the addition of
data contributed by customers. The Company's products under development
include: Allowed Medical, which will enable customers to evaluate payor-allowed
charges by geographic region to determine more accurately the amount which will
actually be paid for specific procedures; CareTrends, which will track a
patient's entire course of treatment for a particular condition enabling
customers to assess utilization and referral patterns and enhance clinical
practice guidelines based on demonstrated outcomes; and the PowerTrak System,
which will apply managed care analysis guidelines and decision support to
enable comprehensive medical management of workers' compensation and automobile
insurance claims.
The Company's growth strategy is to: (i) leverage its approximately 80,000
current customers by cross-selling additional higher value, higher margin
products; (ii) target additional underpenetrated customer segments such as
providers assuming financial risk, self-insured employers and workers'
compensation and automobile insurers; (iii) target larger customers with
significant operating budgets and more complex information system needs; (iv)
continue to emphasize repeat and recurring revenue from customers who have
previously purchased similar products from the Company; and (v) pursue the
acquisition of complementary businesses, products or technologies.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company. shares
Common Stock Offered by the Selling
Stockholders....................... shares
Common Stock Outstanding after the
Offering........................... shares(1)
Use of Proceeds..................... For working capital and other general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Sym-
bol................................ MECD
</TABLE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DA-
TA:
Revenue.......................... $21,035 $25,699 $32,618 $11,811 $13,989
Cost of revenue.................. 7,173 9,164 11,053 3,313 4,027
Selling, general and administra-
tive............................ 10,774 11,947 13,735 5,865 6,768
Research and development......... 3,141 4,335 5,214 2,963 2,765
Operating income (loss).......... (53) 253 2,616 (330) 429
Net income (loss)................ (112) 48 1,629 (230) 281
Pro forma net income per
share(2)........................ $ 0.30 $ 0.05
Shares used in computing pro
forma net income per share(2)... 5,375 5,402
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------
ACTUAL PRO FORMA (3) AS ADJUSTED(3)(4)
------ ------------- -----------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equiv-
alents............. $5,191 $ $
Working capital..... 1,128
Total assets........ 9,606
Long-term liabili-
ties, less current
portion............ 172
Stockholders' equi-
ty................. 2,472
</TABLE>
- --------
(1) Based upon shares outstanding as of June 30, 1997. Excludes (i) 1,002,192
shares issuable upon exercise of options outstanding at a weighted average
exercise price of $1.55 per share, (ii) 200,000 shares reserved for future
issuance under the Company's Employee Stock Purchase Plan (the "Purchase
Plan") and (iii) 750,000 shares reserved for future issuance under the
Company's stock option plans. See "Capitalization," "Management -- Stock
Plans" and "Description of Capital Stock."
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net income (loss) per share.
(3) Pro forma and as adjusted stockholders' equity assumes the conversion of
all outstanding shares of Preferred Stock into Common Stock and the
exercise of outstanding warrants to purchase 723,326 shares of Common Stock
upon the completion of this offering.
(4) As adjusted to reflect the sale of the shares of Common Stock offered
by the Company hereby at an assumed public offering price of $ per share
and the receipt of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
Except as otherwise indicated, all information in this Prospectus assumes (i)
the reincorporation of the Company from Utah to Delaware which will be
effective prior to the completion of this offering, (ii) the filing of the
Company's Restated Certificate of Incorporation authorizing a class of
undesignated Preferred Stock, to be effective upon the completion of this
offering, (iii) the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the completion of this offering, (iv) the exercise of
outstanding warrants to purchase 723,326 shares of Common Stock upon the
completion of this offering, (v) a -for- forward stock split of the
Company's Common Stock to be effected prior to the completion of this offering,
and (vi) no exercise of the Underwriters' over-allotment option. See
"Description of Capital Stock" and "Underwriting."
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Prospectus. 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 hereby.
SEASONALITY; POTENTIAL FLUCTUATIONS IN FUTURE QUARTERLY OPERATING RESULTS
The Company has historically experienced, and expects to continue to
experience, a seasonal pattern in its results of operations. Revenue and net
income in the fourth quarter have been significantly higher than in the other
quarters due to the nature of the Company's syndicated data business. The
Company's syndicated data products, which represented 48.5% of total revenue
in 1996, incorporate coding reference data from regulatory agencies and
professional associations which is updated annually and typically released in
the third quarter. As a result, the Company ships a majority of its syndicated
data products in the fourth quarter and, to a lesser extent, the ensuing first
quarter. While the Company's revenue is seasonal, its operating expense levels
are relatively fixed throughout the year and, to a large degree, are based on
anticipated revenue. As a result, any failure of the Company to achieve its
anticipated revenue in the fourth quarter would adversely affect its results
of operations for the year. In addition, the combination of seasonality in
revenue and fixed expenses has historically produced, and may in the future
produce, reduced operating results and in certain cases operating losses in
the second and third quarters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In addition to seasonality, the Company's quarterly operating results have
varied significantly in the past and are likely to vary substantially in the
future. Operating results for a particular quarter could be adversely affected
by factors such as the availability or delays in release of updated coding
reference data from regulatory agencies and professional associations; failure
of customers to renew licenses for the Company's benchmarking database or
software products; delays or price increases by the Company's suppliers,
printers and third-party product manufacturers; announcements of new products
by the Company or its competitors; discontinuation of any of the Company's
products and services; the loss of customers due to consolidation in the
health care industry; the timing of revenue recognition; customer budgeting
cycles and changes in customer budgets; changes in product mix; investments by
the Company in marketing, sales, research and development and administrative
personnel necessary to support the Company's anticipated operations; marketing
and sales promotional activities; changes in the length of the sales cycle for
the Company's products; software defects and other quality factors; excess
inventory charges associated with syndicated data products that remain unsold
at the end of the selling season; and general economic conditions. The
Company's operating results for any particular quarterly or annual period may
not be indicative of results for future periods.
As a result of any or all of the foregoing factors, the Company believes
that quarter-to-quarter comparisons of its results of operations should not be
relied upon as indications of future performance. In addition, due to the
foregoing or other factors, it is possible that in some future quarter the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially and adversely affected. There can be no assurance
that the Company will be successful in addressing these concerns. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON REPEAT CUSTOMERS
A significant portion of the Company's revenue for any given period is
derived from the sale of products to customers who purchased a similar product
during the corresponding prior period. From 1994 through 1996, approximately
75% of the Company's annual revenue was repeat and recurring revenue. Repeat
and
6
<PAGE>
recurring revenue includes revenue from the sale of syndicated data products,
benchmarking database licenses and software licenses. Customers generally do
not enter into long-term contracts for syndicated data products. As a result,
repeat revenue from these products is dependent upon the customers' decision
to purchase updated materials. Benchmarking database licenses typically have a
one-year term. Repeat revenue from these products is dependent upon customers'
decisions to renew their licenses for annual database updates. In contrast,
software products are generally sold pursuant to multi-year licenses.
Decisions by current customers to refrain from purchasing, to reduce their
purchases of updated coding reference materials in the future, or to not renew
database or software licenses from the Company, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
TECHNOLOGICAL CHANGE AND NEED FOR PRODUCT DEVELOPMENT
The health care information market is characterized by rapid technological
change, changing customer needs and evolving industry standards. The Company
believes that as the market for its current products matures, its future
success will depend on its ability to enhance its current products and to
develop, acquire and introduce new products to keep pace with technological
developments and emerging industry standards. In this regard, the Company has
under development several new benchmarking database and software products
scheduled for commercial release. The Company's products under development
will require additional development, testing and quality assurance prior to
commercial introduction. Furthermore, there can be no assurance that
unforeseen delays or difficulties will not be encountered during the
development of a particular product or that scheduled release dates will be
achieved. There can be no assurance that the Company's expected new product
releases and product enhancements will adequately address customers'
requirements for performance and functionality or that new software products
will not contain errors that would delay product introduction or shipment. In
addition, products that the Company develops and introduces may not, when
introduced, be responsive to the needs of the market and the Company's
customers and may therefore fail to achieve market acceptance. Any inability
of the Company to meet scheduled release dates for new products or the failure
of new products being developed by the Company to achieve market acceptance
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Research and Product
Development."
Notwithstanding the Company's product development efforts, the introduction
of competing products embodying new technologies and the emergence of new
industry standards could render the Company's products obsolete or
noncompetitive. Furthermore, regardless of whether the Company is successful
in developing and introducing new products, competitors may develop and
introduce new products and services that render the Company's products and
services obsolete or noncompetitive. If competitors introduce new products
that render the Company's products obsolete or noncompetitive, the Company's
business, financial condition and results of operations would be materially
and adversely affected. See "Business -- Research and Product Development."
DEPENDENCE ON AMA LICENSES AND DATA SOURCES
The Company incorporates the Physicians' Current Procedural Terminology
("CPT") codes of the American Medical Association (the "AMA") into its
products under a nonexclusive agreement with the AMA. The CPT code system is
considered to be the current industry standard for identifying medical
procedures. Loss of the right to incorporate and use the CPT codes in the
Company's products or an increase in royalty payments to the AMA for the use
of such codes coupled with the inability to pass such costs on to customers in
whole or in part would adversely affect the Company's business, financial
condition and results of operations. The Company also obtains data from its
customers and from other sources that is used to update its proprietary
database. There can be no assurance that the Company's sources will continue
to provide data in the future or will provide such data on a timely basis. In
addition, the Company's data sources generally are not subject to exclusive
agreements with the Company; therefore, data included in the Company's
products may also be available to the Company's competitors. Furthermore,
certain of the Company's competitors may have access to data which is
unavailable to the Company and such data may provide their database products
with features or functionality superior to those of the Company's products. To
the extent
7
<PAGE>
that the Company is unable to keep its database products complete or current,
its customers may become dissatisfied with the Company's products and
discontinue their purchases. In the event that the Company's database is or is
perceived to be incomplete or out of date, the Company's business, financial
condition or results of operations could be materially adversely affected.
DEPENDENCE ON THIRD PARTIES
The Company's syndicated data products are dependent on the timely release
of updated coding references data by government agencies and professional
associations. Delays in the release of updated coding reference data by such
third parties would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company also utilizes third
parties for printing of its technical coding and reimbursement publications
and for fulfillment services for these products. There can be no assurance
that such publications will be printed in a timely manner, or that they will
satisfy the Company's quality specifications. Significant delays in the
production or distribution of such publications may cause customers to
purchase competitive products from other companies and the loss of such
revenue and the potential loss of repeat revenue associated with such
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's benchmarking database and clinical editing software products
are dependent upon a number of third-party software products and clinical
coding systems. Financial or other difficulties experienced by third-party
providers could have an adverse impact on the Company's ability to create its
products. Moreover, if third-party products and systems become unavailable,
there is no assurance the Company would be able to find suitable alternatives
on commercially reasonable terms if at all. Failure of such third parties to
maintain or enhance their products could impair the functionality of the
Company's software products and could require the Company to obtain
alternative products from other sources or to develop such software
internally, either of which could involve costs and delays as well as
diversion of Company resources. In addition, modifications or enhancements by
these third-party vendors often require that the Company modify its own
products to operate with these enhancements or modifications. There can be no
assurance that the Company will be able to modify its own software to
accommodate third-party changes or that the effort to make such changes will
not adversely affect the Company's other development projects. These factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
INTEGRITY AND RELIABILITY OF DATA
The marketability of the Company's database products depends significantly
on the integrity of the data upon which they are based. Although the Company
tests data for completeness and consistency, it does not conduct independent
audits of the information provided by its customers. Moreover, while the
Company believes that the benchmarking and other clinical, cost and
performance information contained in its databases generally represents the
operating experience of the health care providers from which it is obtained,
there can be no assurance that such information is appropriate for comparative
analysis in any or all cases or that the databases accurately reflect general
or specific trends in the health care market. If the information contained in
the Company's databases were found or perceived to be inaccurate, or if such
information were generally perceived to be unreliable, commercial acceptance
of the Company's database products would be materially and adversely affected.
Such loss of commercial acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT
The Company's success is dependent to a significant extent on its ability to
maintain the proprietary and confidential aspects of its products. The Company
relies on its license agreements with customers, confidentiality agreements
with employees, trade secrets, copyrights and patents to protect its
proprietary rights. There can be no assurance that the legal protections
available to and precautions taken by the Company will be adequate to prevent
misappropriation of the Company's proprietary information. Furthermore,
although the Company holds an issued patent relating to its CareTrends
technology, there can be no assurance
8
<PAGE>
such patent, or any future patents that may be issued to the Company, will not
be challenged, and subsequently invalidated or circumvented, by competitors or
others.
Substantial litigation regarding intellectual property rights exists in the
software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products overlaps. The Company is not aware of any
infringement claims against the Company; however there can be no assurance
that third parties will not in the future claim infringement by the Company
with respect to current or future products, patents, copyrights, trademarks or
other proprietary rights. Any such claims, regardless of their merit, could
result in significant diversion of management time, result in costly
litigation, delay or prevent product shipments or require the Company to enter
into costly royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company or at all. Any of these events could have a material adverse effect on
the Company's ability to market and sell its products and on its business,
financial condition and results of operations. See "Business --Intellectual
Property."
CHANGES IN THE HEALTH CARE INDUSTRY; 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 providers and payors. The Company's products and services are
designed to function within the current structure of the United States health
care financing and reimbursement system, their commercial value could be
adversely affected if there were material changes in this system. Many federal
and state legislators have announced that they intend to propose programs to
reform the United States health care system at both the federal and state
levels. These programs may, if enacted, increase governmental involvement in
health care, lower reimbursement rates and otherwise change health care
delivery and payment systems. Participants in the health care market may react
to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investments, including investments in the Company's
products and services. In addition, in response to this changing environment,
many providers and payors are consolidating to create larger organizations.
This consolidation reduces the number of potential customers for the Company's
products and services and may increase the bargaining power of these
organizations, which could lead to reduced prices for the Company's products.
The impact of these developments in the health care industry is difficult to
predict and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Under the Health Insurance Portability and Accountability Act of 1996, the
Secretary of Health and Human Services is required to adopt national standards
for health information transactions and the data elements used in such
transactions. In addition, the Secretary is required to adopt safeguards to
ensure the integrity and confidentiality of health information. Violation of
the standards is punishable by fines and, in the case of wrongful disclosure
of individually identifiable health information, imprisonment. A number of
states are also considering the adoption of rules to protect the privacy of
patient records. These requirements, if adopted, may substantially affect the
means used by the Company to collect data and could therefore have an adverse
effect on the availability of data to the Company or on the Company's ability
to use certain data.
Although the Company is not currently subject to regulation by the United
States Food and Drug Administration (the "FDA"), the FDA could determine in
the future that one or more of the Company's software products is a clinical
decision tool, and thus subject to FDA regulation. In such event, the Company
could experience delays in developing and marketing new software products and
an increase in research and development costs which could have a material
adverse effect on the Company's business, financial condition or results of
operations.
PRODUCT LIABILITY
The Company's products provide information that relates to payment and
reimbursement of health care claims and provision of care. Any failure of the
Company's products to function in accordance with their
9
<PAGE>
specifications could result in product liability claims against the Company by
its customers. The Company may also be subject to potential claims if
physicians make clinical decisions or develop protocols which result in
adverse clinical events. The Company maintains insurance to protect against
certain types of product liability claims, but there can be no assurance that
its insurance coverage would adequately cover any claim asserted against the
Company. A successful claim brought against the Company in excess of, or
excluded from, its insurance coverage could have a material adverse effect on
the Company's business, financial condition or results of operations. Even
unsuccessful claims could result in the Company's expenditure of funds in
litigation and diversion of management time and resources. Although the
Company uses standard contractual language to protect against claims by its
customers, there can be no assurance that the Company will not be subject to
product liability claims, that such claims will not result in liability in
excess of insurance coverage, that the Company's insurance will cover such
claims or that appropriate insurance will continue to be available to the
Company in the future at commercially reasonable rates.
The information products offered by the Company may contain undetected
errors or failures. Errors or failures that are not detected until after the
commencement of commercial shipments of a product could result in a loss of,
or delay in, market acceptance of products and in claims against the Company.
The Company also depends on the accuracy of the data received from its data
sources. If a statistically significant number of medical records or
transactions were found to have been altered or incorrectly entered, or
otherwise contain flawed data, there could be a loss of, or delay in, market
acceptance of products based on such data and possible claims against the
Company, which could have a material adverse effect on the Company's business,
financial condition or results of operations.
COMPETITION
The health care information systems market is intensely competitive. The
Company believes that the principal competitive factors in the market include
the breadth and quality of system and product offerings, access to proprietary
data, the proprietary nature of methodologies and technical resources, and the
price and the effectiveness of marketing and sales efforts. Many of the
Company's existing and potential competitors have significantly greater
financial, technical, product development and marketing resources than the
Company. Competitors vary in size and in the scope and breadth of the products
and services offered, and the Company's products compete with various products
in their relevant markets. The Company's potential competitors include
specialty health care information companies, health care information systems
companies, software vendors and large data processing and information
companies. The Company also competes with the internal information resources
and systems of certain of its prospective and existing customers. Furthermore,
other major information companies not presently offering clinical health care
information services may enter the markets in which the Company competes.
There can be no assurance that future competition will not have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon a number of key
managerial, technical and marketing personnel, none of whom is bound by an
employment agreement or has prior experience in managing a public company. The
loss of the services of one or more of the key employees of the Company could
have a material adverse effect on the Company. In addition, the Company
believes that its future success will also depend in large part upon its
ability to attract, train and retain highly skilled technical, management,
sales and marketing personnel. Competition for such personnel in the health
care information and software industries is intense. There can be no assurance
that the Company will be successful in attracting or retaining such personnel,
and the failure to attract or retain such personnel could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Management."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may in the future pursue acquisitions of complementary
technologies or businesses. Future acquisitions by the Company may result in
potentially dilutive issuances of equity securities, the
10
<PAGE>
incurrence of additional debt and amortization expenses related to goodwill
and other intangible assets, which could adversely affect the Company's
results of operations. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, products and
personnel of the acquired company, the diversion of management's attention
from other business concerns, risks of entering markets in which the Company
has no direct prior experience, and the potential loss of key employees of the
acquired company. There can be no assurance that the Company will ever
successfully complete an acquisition or that the Company will realize value
equal to or in excess of the consideration paid with respect to any
acquisition. These factors could have a material adverse effect on the
Company's business, financial condition or results of operations.
BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS
The primary uses of proceeds from this offering are to provide funds for
research and development, sales and marketing, working capital and general
corporate purposes, including capital expenditures. A significant portion of
the net proceeds to the Company from this offering have not been designated
for specific uses. Accordingly, management of the Company will have broad
discretion with respect to the use of these funds. See "Use of Proceeds."
CONTROL BY EXISTING STOCKHOLDERS
The Company's executive officers, directors and their affiliates will, in
the aggregate, beneficially own approximately % of the outstanding shares of
the Company's Common Stock immediately following this offering ( % if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders will continue to be able to elect all of the Company's directors,
will retain the voting power to approve all matters requiring stockholder
approval, and will continue to have significant influence over the affairs of
the Company. Such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Principal and
Selling Stockholders."
POTENTIAL ANTI-TAKEOVER EFFECT OF DELAWARE LAW, CERTIFICATE OF INCORPORATION
AND BYLAWS
Certain provisions of Delaware law applicable to the Company could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, including Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years from the date the
person became an interested stockholder unless certain conditions are met. In
addition, the Board of Directors of the Company may issue shares of Preferred
Stock without stockholder approval on such terms as the Board may determine.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. In addition, the Company's Certificate of
Incorporation and Bylaws eliminate the right of stockholders to call special
meetings of stockholders or to act by written consent without a meeting,
provide for a classified board of directors and eliminate cumulative voting in
the election of directors. All of the foregoing could have the effect of
delaying, deferring or preventing a change in control of the Company and could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. See "Management" and "Description of
Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
the offering made hereby could have an adverse effect on the trading price of
the Common Stock. Upon completion of this offering, the Company will have
outstanding shares of Common Stock assuming no exercise of outstanding
options after June 30, 1997. Of these shares, the shares offered hereby
( shares if the Underwriters' overallotment option is exercised in full)
will be freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless purchased by
11
<PAGE>
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 287,500 shares of Common Stock outstanding upon
completion of this offering are "restricted securities" as that term is
defined in Rule 144. As a result of lock-up agreements between certain
stockholders and representatives of the Underwriters and the provisions of
Rule 144 and Rule 701, additional shares will be available for sale in the
public market as follows: (i) shares will be eligible for immediate sale on
the date of this Prospectus, (ii) shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this
Prospectus, subject to the provisions of Rule 144 and Rule 701 and (iii) the
remaining shares will be eligible for sale thereafter upon expiration of
their respective one-year holding periods. Shortly after the closing of this
offering, the Company intends to file a registration statement under the
Securities Act to register approximately shares of Common Stock reserved
for issuance under the Company's stock option plans. Following the closing of
this offering, the holders of shares of Common Stock will be entitled to
certain registration rights with respect to such shares. The existence of a
large number of shares eligible for future sale could have an adverse impact
on the Company's ability to raise additional equity capital or on the price at
which such equity capital could be raised. See "Description of Capital
Stock -- Registration Rights."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that a viable public market for
the Common Stock will develop or be sustained after the offering contemplated
hereby or that the trading price of the Common Stock will not decline below
the initial public offering price. The initial public offering price will be
determined through negotiations among the Company, the Selling Stockholders
and the Representatives of the Underwriters and may not be indicative of
future market prices. See "Underwriting" for information relating to the
method of determining the initial public offering price. Factors such as
announcements of technological innovations or new products by the Company, its
competitors and other third parties, as well as quarterly variations in the
Company's anticipated or actual results of operations, changes in stock market
analysts' recommendations regarding the Company's securities and market
conditions in technology and health care industries generally, may cause the
market price of the Company's Common Stock to fluctuate significantly. In
addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and health care companies and which have often been unrelated to
the operating performance of such companies. These broad market fluctuations
may also adversely affect the market price of the Company's Common Stock. In
the future, the Company's operating results may be below the expectations of
public market analysts and investors, and, as a result, the price of the
Common Stock would likely be materially adversely affected. See
"Underwriting."
ABSENCE OF DIVIDENDS
The Company currently intends to retain any future earnings to fund
operations and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. The Company is prohibited from paying dividends under
the terms of the Company's bank credit agreement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Dividend Policy."
DILUTION
The initial public offering price will be substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in this offering will therefore incur immediate and substantial
net tangible book value dilution of $ per share of Common Stock. See
"Dilution."
12
<PAGE>
THE COMPANY
The Company was incorporated in Utah in October 1988 and will be
reincorporated in Delaware under the name Medicode (Delaware), Inc. prior to
the completion of this offering. The Company's principal offices are located
at 5225 Wiley Post Way, Suite 500, Salt Lake City, Utah 84116. The telephone
number at this location is (801) 536-1000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $ per share are estimated to be $ million ($ million if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. The Company plans to use the proceeds of this offering for
research and development, sales and marketing and general corporate purposes
including working capital. In addition, approximately $3.5 million of such
proceeds are expected to be used for capital expenditures, including
approximately $2.5 million of expenditures for new computer and management
information systems. The amount and timing of expenditures will depend on
numerous factors, and management of the Company will have broad discretion in
determining the amount and timing of such expenditures. The Company may also
use a portion of the net proceeds to acquire related businesses, technologies
or products. While the Company regularly evaluates potential acquisitions, the
Company has no present agreements or commitments with respect to any such
acquisition. Pending such uses, the Company intends to invest the net proceeds
of this offering in investment grade, short-term, income- producing
investments, including United States government obligations.
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Stockholders.
DIVIDEND POLICY
The Company currently intends to use all available funds in the operation of
its business and does not anticipate paying any cash dividends in the
foreseeable future. Future dividends, if any, will be determined by the Board
of Directors. Covenants in the Company's bank credit facility prohibit the
payment of cash dividends.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on a pro forma basis to give effect to the filing of a Restated
Certificate of Incorporation to authorize 5,000,000 and 50,000,000 shares of
Preferred Stock and Common Stock, respectively, to reflect the conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock and
the exercise of all outstanding warrants upon the completion of this offering
and the retirement of treasury stock and (ii) as adjusted to reflect the sale
of the shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share and after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
PRO FORMA AS ADJUSTED
--------- -----------
(in thousands)
<S> <C> <C>
Long-term liabilities, less current portion.............. $ 172 $ 172
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding, pro
forma and as adjusted................................. -- --
Common Stock, $0.001 par value, 50,000,000 shares
authorized; 4,404,808 shares issued and outstanding,
pro forma; shares issued and outstanding as
adjusted(1)........................................... 4,352
Accumulated deficit.................................... (1,551) (1,551)
Note receivable from stockholder....................... (329) (329)
------ ------
Total stockholders' equity........................... 2,472
------ ------
Total capitalization............................... $2,644 $
====== ======
</TABLE>
- --------
(1) Includes 723,326 shares of Common Stock issuable upon the exercise of
outstanding warrants upon the completion of this offering. Excludes an
aggregate of 1,002,192 shares of Common Stock reserved for issuance upon
exercise of stock options outstanding as of June 30, 1997 at a weighted
average exercise price of $1.55 per share. See "Management -- Stock
Plans."
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997 was
approximately $2,472,000 or $0.56 cents per share of Common Stock. Pro forma
net tangible book value per share represents the amount of the Company's total
tangible assets less total liabilities divided by the total number of shares
of Common Stock outstanding after giving effect to the conversion of all
outstanding shares of Preferred Stock into Common Stock and the exercise of
all outstanding warrants upon the completion of this offering. After giving
effect to the sale by the Company of the shares of Common Stock offered
hereby at an assumed initial public offering price of $ per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, the Company's pro forma net tangible book
value as of June 30, 1997 would have been approximately $ or $ per
share. This represents an immediate increase in pro forma net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors purchasing shares of Common Stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Pro forma net tangible book value per share at June 30, 1997.... $0.56
Increase attributable to new investors..........................
-----
Pro forma net tangible book value after this offering.............
----
Dilution to new investors......................................... $
====
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing
stockholders and to be paid (at an assumed initial offering price of $ per
share) by purchasers of shares offered hereby (after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 4,404,808 % $22,511,000 % $5.11
New investors...............
--------- ----- ----------- -----
Total..................... 100.0% $ 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Includes 723,326 shares of Common Stock issuable upon the exercise of
outstanding warrants upon the completion of this offering. Proceeds from
the exercise of such warrants are expected to be $1,685,000.
The computations in the above table are determined after deducting the
underwriting discounts and commissions and estimated expenses of this offering
payable by the Company and assume no exercise of outstanding stock options. At
June 30, 1997 there were options outstanding to purchase 1,002,192 shares of
Common Stock at a weighted average exercise price of $1.55 per share. To the
extent outstanding options are exercised, there will be further dilution to
new investors. See "Management -- Stock Plans."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data presented below for the five
years ended December 31, 1996 and the consolidated balance sheet data for the
five years ended December 31, 1996, are derived from the Company's financial
statements (except as otherwise noted) which have been audited by Ernst &
Young LLP, independent auditors. The unaudited consolidated statement of
operations data for the six months ended June 30, 1996 and 1997 have been
prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
operating results for such periods. The unaudited consolidated operating
results for the six months ended June 30, 1997 are not necessarily indicative
of the results to be expected for any other interim period or any future
fiscal year. The data set forth below should be read in conjunction with the
Company's financial statements, related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Syndicated data........ $ 7,679 $ 7,535 $ 9,408 $11,678 $15,830 $ 3,869 $ 4,903
Benchmarking databases
and software.......... 7,315 9,369 11,627 14,021 16,788 7,942 9,086
------- ------- ------- ------- ------- -------- --------
Total revenue.......... 14,994 16,904 21,035 25,699 32,618 11,811 13,989
Cost of revenue......... 4,840 6,053 7,173 9,164 11,053 3,313 4,027
------- ------- ------- ------- ------- -------- --------
10,154 10,851 13,862 16,535 21,565 8,498 9,962
Other expenses:.........
Selling, general and
administrative........ 7,155 14,019 10,774 11,947 13,735 5,865 6,768
Research and develop-
ment.................. 1,689 2,211 3,141 4,335 5,214 2,963 2,765
------- ------- ------- ------- ------- -------- --------
Operating income (loss). 1,310 (5,379) (53) 253 2,616 (330) 429
Interest income (ex-
pense), net............ (97) (260) (165) (107) (46) (20) 37
------- ------- ------- ------- ------- -------- --------
Income (loss) before in-
come taxes............. 1,213 (5,639) (218) 146 2,570 (350) 466
Income tax provision
(benefit).............. 531 (1,576) (106) 98 941 (120) 185
------- ------- ------- ------- ------- -------- --------
Net income (loss)....... $ 682 $(4,063) $ (112) $ 48 $ 1,629 $ (230) $ 281
======= ======= ======= ======= ======= ======== ========
Pro forma net income
(loss) per share(1).... $ 0.30 $ 0.05
======= ========
Shares used in computing
pro forma net income
(loss) per share (1)... 5,375 5,402
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (defi-
cit)................... $(1,748) $ 566 $ (302) $ (828) $ 981 $ (1,469) $ 1,128
Total assets............ 9,179 8,186 8,372 10,220 12,309 6,577 9,606
Long-term liabilities,
less current portion... 2,700 2,274 1,546 691 285 272 172
Stockholders' equity.... 1,499 407 310 391 2,150 260 2,472
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine weighted average common shares
and equivalents.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Medicode is a leading provider of health care information products which
reduce administrative costs associated with the reimbursement process, control
clinical costs and increase the efficiency of the health care delivery
process. The Company has three primary sources of revenue: syndicated data
products, benchmarking database products and clinical editing software.
Syndicated data products include (i) essential regulatory coding products
consisting of usage manuals on various coding systems, (ii) proprietary coding
and reimbursement products consisting of problem-solving manuals and software
tools which are used to code and review medical procedures and (iii) certain
non-proprietary third-party reference materials which the Company resells.
Revenue for syndicated data products is recognized when the product is
shipped.
Benchmarking database products include database modules containing both
comparative and specialty pricing information. Revenue from benchmarking
database products is derived from the license of standardized database
modules. Database licenses typically have a one-year term. The annual database
license fee entitles the customer to an update of the then current data
residing in the database six months after the contract date. Revenue is
recognized upon shipment of the product on either magnetic tape or diskette
and incidental customer support costs are accrued. Beginning in January 1998,
the Company plans to modify its database pricing to consist of both a database
license fee, which will be payable upon shipment, and a separate update fee
for periodic database updates during the year.
Clinical editing software includes products for screening and editing health
care claims. Software products are generally sold pursuant to multi-year
software license agreements. Revenue from software contracts is recognized
ratably over the initial period or subsequent renewal periods. Some software
contracts are priced based on transaction volume or require incremental usage
fees in addition to minimum fees. Revenue from variable fees is recognized as
earned. Post-contract customer support costs related to software products are
expensed as incurred. Contracts involving custom software development are
accounted for using the percentage-of-completion method. Amounts received in
advance of satisfying revenue recognition criteria are classified as deferred
revenue. Costs incurred in the development of software products are expensed
during the period in which such costs are incurred.
The sales cycles of the Company's products vary by product category. The
Company's syndicated data products and benchmarking database products have
sales cycles of approximately zero to six months, and the Company's clinical
editing software products have sales cycles of approximately six to 12 months.
A significant portion of the Company's revenue consists of repeat and
recurring revenue from the Company's current customer base. From 1994 through
1996, approximately 75% of the Company's annual revenue was derived from the
sale of a product to a customer that purchased a similar product during the
corresponding prior period. Customers generally do not enter into long-term
contracts for syndicated data products and, as a result, repeat revenue from
these products is dependent upon the customers' decision to purchase updated
materials annually. Because database licenses typically have a one-year term,
repeat revenue
17
<PAGE>
from these products is dependent upon customers' decisions to renew their
licenses for annual database updates. Software products are generally sold
pursuant to multi-year licenses, which are renewable at the expiration of the
initial multi-year term. Failure of current customers to purchase updated
coding reference materials or renew database or software licenses could have a
material adverse effect on the Company's ability to achieve anticipated levels
of repeat and recurring revenue, and therefore on its business, financial
condition or results of operations.
The Company has historically experienced, and expects to continue to
experience, a seasonal pattern in its results of operations. Revenue and net
income in the fourth quarter have been significantly higher than in the other
quarters due to the nature of the Company's syndicated data business. The
Company's syndicated data products, which represented 48.5% of total revenue
in 1996, incorporates coding reference data from regulatory agencies and
professional associations which is updated annually and typically released in
the third quarter. As a result, the Company ships substantially all of its
syndicated data products in the fourth quarter and, to a lesser extent, the
ensuing first quarter. While the Company's revenue is seasonal, its operating
expense levels are relatively fixed throughout the year and, to a large
degree, are based on anticipated revenue. As a result, any failure of the
Company to achieve its anticipated revenue in the fourth quarter would
adversely affect its results of operations for the year. In addition, the
combination of seasonality in revenue and fixed expenses has historically
produced, and may in the future produce, an operating loss in the second and
third quarters. As a result of the concentration of shipments of syndicated
data products in the fourth quarter, any delay in the release of updated
coding reference data by the relevant agencies or professional associations,
or any delay in the Company's production of coding reference materials for
shipment to customers, could have a material adverse effect on the Company's
business, financial condition or results of operations in a particular quarter
or fiscal year or on an ongoing basis. Revenue from benchmarking database and
software products typically do not experience seasonal fluctuations in the
same manner as syndicated data products revenue. Accordingly, if a higher rate
of revenue growth in these divisions continues as compared to the syndicated
data products division, then the seasonality of the Company's revenue and net
income will diminish. However, due to the large portion of revenue represented
by syndicated data products, a major shift in the composition of the Company's
revenue towards benchmarking database and software products would be required
for the seasonality of the Company's revenue and net income to diminish
significantly.
In addition to seasonality, the Company's quarterly operating results have
varied significantly in the past and are likely to vary substantially in the
future. Operating results for a particular quarter could be adversely affected
by factors such as the availability or delays in release of updated coding
reference data from regulatory agencies and professional associations; failure
of customers to renew licenses for the Company's benchmarking database or
software products; delays or price increases by the Company's suppliers,
printers and third-party product manufacturers; announcements of new products
by the Company or its competitors; discontinuation of any of the Company's
products and services; the loss of customers due to consolidation in the
health care industry; the timing of revenue recognition; customer budgeting
cycles and changes in customer budgets; changes in product mix; investments by
the Company in marketing, sales, research and development and administrative
personnel necessary to support the Company's anticipated operations; marketing
and sales promotional activities; changes in the length of the sales cycle for
the Company's products; software defects and other quality factors; excess
inventory charges associated with syndicated data products that remain unsold
at the end of the selling season; and general economic conditions. The
Company's operating results for any particular quarterly or annual period may
not be indicative of results for future periods. As a result of any or all of
the foregoing factors, the Company believes that quarter-to-quarter
comparisons of its results of operations should not be relied upon as
indications of future performance.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenue:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Syndicated data............. 44.7% 45.4% 48.5% 32.8% 35.0%
Benchmarking databases and
software................... 55.3 54.6 51.5 67.2 65.0
------- ------- ------- -------- --------
Total revenue............. 100.0 100.0 100.0 100.0 100.0
Cost of revenue............... 34.1 35.7 33.9 28.1 28.8
------- ------- ------- -------- --------
65.9 64.3 66.1 71.9 71.2
Other expenses:
Selling, general and admin-
istrative.................. 51.2 46.5 42.1 49.7 48.4
Research and development.... 14.9 16.9 16.0 25.1 19.8
------- ------- ------- -------- --------
Total other expenses...... 66.1 63.4 58.1 74.8 68.2
Operating income (loss)....... (0.2) 0.9 8.0 (2.9) 3.0
Interest income (expense),
net.......................... (0.8) (0.4) (0.1) (0.2) 0.3
------- ------- ------- -------- --------
Income (loss) before income
taxes........................ (1.0) 0.5 7.9 (3.1) 3.3
Income tax provision (bene-
fit)......................... (0.5) 0.4 2.9 (1.0) 1.3
------- ------- ------- -------- --------
Net income (loss)............. (0.5)% 0.1% 5.0% (2.1)% 2.0%
======= ======= ======= ======== ========
</TABLE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
Revenue. Total revenue for the six months ended June 30, 1997 increased
18.4% to approximately $14.0 million from $11.8 million for the comparable six
month period ended June 30, 1996. Revenue from syndicated data products for
the 1997 period increased 26.7% to $4.9 million from $3.9 million in the 1996
period. Revenue growth for syndicated data products resulted primarily from
increased sales of essential regulatory coding products and increased sales of
electronic media and software. Revenue from benchmarking databases and
software for the 1997 period increased 14.4% to $9.1 million from $7.9 million
in the 1996 period. Benchmarking database and software revenue growth resulted
from increased unit sales to new and existing customers and increased
transaction volume from certain users of the Company's Medical Bill Advisor
system which have licenses that are priced on a transaction volume basis.
Cost of Revenue. Cost of revenue for the six months ended June 30, 1997
increased to $4.0 million, or 28.8% of revenues, from $3.3 million, or 28.1%
of revenue, for the six months ended June 30, 1996. The increase in cost of
revenue on a percentage basis is due primarily to the change in revenue mix.
For the six months ended June 30, 1997, syndicated data products accounted for
35.0% of total revenue compared to 32.8% of total revenue for the same period
in 1996. Syndicated data products have a higher cost of revenue than
benchmarking database and clinical editing software products due primarily to
the inclusion within syndicated data products of lower margin, third-party
products resold by the Company as well as paper and printing costs associated
with such products. The Company expects the cost of syndicated data products
revenue to decrease in the future as ordering patterns shift from paper
products to publications produced and delivered on electronic media. The
Company expects, however, that syndicated data products will continue to have
a higher cost of revenue than benchmarking database and software products.
Selling, General and Administrative. Selling, general and administrative
costs increased 15.4% to $6.8 million in the six months ended June 30, 1997
from $5.9 million in the six months ended June 30, 1996. As a percentage of
revenue, selling, general and administrative costs decreased slightly to 48.4%
in the 1997 period
19
<PAGE>
from 49.7% in the 1996 period. The dollar increase in selling, general and
administrative expenses was due primarily to increased sales and marketing.
Selling, general and administrative costs increased due to additional
administrative costs associated with support of higher volumes of business as
well as costs associated with resolution of certain pending legal matters.
Research and Development. Research and development costs decreased 6.7% to
$2.8 million for the six months ended June 30, 1997 from $3.0 million for the
six months ended June 30, 1996. As a percentage of revenue, research and
development costs were 19.8% in the first six months of 1997 as compared to
25.1% for the comparable period of 1996. This decrease was due primarily to
lower spending for development of the new PowerTrak System in the 1997 period
as compared to the 1996 period. The Company has recently taken steps to
standardize the platforms and tools used to develop its various software
products. The Company believes that, as new development projects are
undertaken, research and development costs will increase in absolute dollars
in future periods.
Years Ended December 31, 1996, 1995 and 1994
Revenue. Revenue increased 26.9% to $32.6 million in 1996 and increased
22.2% to $25.7 million in 1995 from $21.0 million in 1994. Revenue from
syndicated data products increased 35.6% to $15.8 million in 1996 and
increased 24.1% to $11.7 million in 1995 from $9.4 million in 1994. The
increase in syndicated data products revenue was primarily the result of
increased sales of essential regulatory coding products due in large part to
the addition of telemarketing and direct mail resources during this period.
These additional marketing resources also contributed to increased sales of
proprietary coding and reimbursement products in 1996.
Revenue from benchmarking databases and software increased by 19.7% to $16.8
million in 1996 and increased 20.6% to $14.0 million in 1995 from $11.6
million in 1994. Revenue from benchmarking databases and software in 1996
increased due primarily to new benchmarking database products introduced at
the end of 1995, an expanded sales force, a net increase in selling prices and
increased sales of ClaimsManager and Claims Edit Systems. Sales of these
systems increased due to increases in the number of value-added resellers
offering the products as well as the availability of software interfaces
enabling users to incorporate these systems into additional management
information systems used by payors and providers.
Cost of Revenue. Cost of revenue increased 20.6% to $11.1 million in 1996
and increased by 27.8% to $9.2 million in 1995 from $7.2 million in 1994. As a
percentage of total revenue, cost of revenue was 33.9% in 1996, 35.7% in 1995
and 34.1% in 1994. Cost of revenue increased from 1994 to 1995 due primarily
to shifts in syndicated data product mix and increases in resources to support
increased volumes of software product sales. These additional resources were
generally sufficient to support 1996 levels of business and, as a result, cost
of revenue as a percentage of sales for benchmarking databases and software
did not change significantly from 1995 to 1996.
Selling, General and Administrative. Selling, general and administrative
expenses in absolute dollars increased by 15.0% to $13.7 million in 1996 and
increased by 10.9% to $11.9 million in 1995 from $10.8 million in 1994. As a
percentage of revenue, selling, general and administrative costs decreased to
42.1% in 1996 from 46.5% in 1995 and 51.2% in 1994. The dollar increase in
selling, general and administrative expenses was due primarily to increased
sales and marketing expenses. Selling, general and administrative costs
increased in 1996 due to increased legal and other professional service
expenses associated with the resolution of certain legal matters and costs of
hiring and relocating certain executive management personnel hired during
1996. Selling, general and administrative expenses decreased as a percentage
of revenue due primarily to increasing sales volumes.
20
<PAGE>
Research and Development. Research and development expenses increased by
20.3% to $5.2 million in 1996 and increased by 38.0% to $4.3 million in 1995
from $3.1 million in 1994. As a percentage of revenue, research and
development expenses were 16.0%, 16.9% and 14.9% in 1996, 1995 and 1994,
respectively. The increase in research and development expenses was primarily
the result of costs incurred for development of the Company's PowerTrak system
and for clinical research and development of the CareTrends episode profiling
techniques. To date, no software development costs have been capitalized by
the Company. Costs accumulated after the establishment of technological
feasibility have not been material.
Income Taxes. The Company's effective tax rate was 36.6% in 1996, 67.1% in
1995 and 48.6% in 1994. Fluctuations from the statutory tax rates have
occurred due primarily to accrual of reserves for deferred tax assets that
potentially could expire before being utilized and benefits from research tax
credits. The Company has federal and state net operating loss carry forwards
as well as tax credits attributable to the Company's subsidiary. Because usage
of these tax benefits is dependent upon the subsidiary being able to generate
operating income, such tax benefits have been fully reserved. It is
anticipated that in the future the Company's effective tax rate will
approximate the combined federal and state statutory rate.
SELECTED QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited quarterly financial
information for the eight quarters ended June 30, 1997. The Company believes
that all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the selected quarterly information when read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere
herein. The operating results for any quarter are not necessarily indicative
of results for any subsequent period or for the entire fiscal year and the
Company believes that quarter-to-quarter comparisons of its results of
operations should not be relied upon as indications of future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Syndicated data........ $ 934 $7,445 $2,626 $1,243 $2,992 $8,969 $3,122 $1,781
Benchmarking databases
and software.......... 3,090 3,954 4,311 3,631 3,970 4,876 4,886 4,200
----- ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 4,024 11,399 6,937 4,874 6,962 13,845 8,008 5,981
Cost of revenue......... 1,191 4,753 2,012 1,301 2,044 5,696 2,367 1,660
----- ------ ------ ------ ------ ------ ------ ------
2,833 6,646 4,925 3,573 4,918 8,149 5,641 4,321
Other expenses:
Selling, general and
administrative........ 3,118 3,312 3,081 2,784 3,563 4,307 3,593 3,175
Research and develop-
ment.................. 1,062 1,560 1,518 1,445 1,185 1,066 1,626 1,139
Net income (loss)....... (525) 654 187 (417) 47 1,812 259 22
</TABLE>
The Company's quarterly revenue and operating results have varied
significantly in the past and are likely to vary substantially from quarter-
to-quarter in the future. In addition, the Company has historically
experienced and expects to continue to experience a seasonal pattern in
revenue and net income, with revenue and net income in the fourth quarter
being significantly higher than the other quarters due to the seasonal nature
of the Company's syndicated data business. As a result of the concentration of
shipments of syndicated data products in the fourth quarter, any delay in the
release of updated coding reference data by the relevant agencies or
professional associations, or any delay in the Company's production of coding
reference materials for shipment to customers, could have a material adverse
effect on the Company's business, financial condition or results of operations
in a particular quarter or fiscal year or on an ongoing basis. Revenue from
benchmarking database and software products typically do not experience
seasonal fluctuations in the same manner as syndicated data products revenue.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the three year period ended December 31, 1996 and for the six months
ended June 30, 1997, the Company has generally funded its operating and
capital requirements through cash generated by operations. The Company
generated cash from operations of $400,000 in 1994, $1.6 million in 1995,
$3.2 million in 1996 and $3.3 million for the six months ended June 30, 1997.
At June 30, 1997, cash and cash equivalents totaled $5.2 million.
Cash used in financing activities was $1.1 million in 1994, $900,000 in
1995, $800,000 in 1996 and $700,000 in the six months ended June 30, 1997. In
1994 and 1995, the Company borrowed $500,000 annually to finance seasonal
inventory build up for syndicated data products. These borrowings were made
pursuant to a revolving credit facility and were each outstanding for
approximately six months. In 1996, the Company borrowed $500,000 to finance
the acquisition of furniture and equipment. In August 1997, the Company repaid
all of its outstanding indebtedness, including the remaining balance of this
loan.
In August 1997, the Company negotiated a new bank credit facility providing
for borrowings up to $5.0 million at an interest rate of prime plus .25%.
Borrowings are limited to a percentage of eligible accounts receivable,
inventory and equipment but in no event will the available line be less than
$2.25 million provided that certain financial ratios are maintained.
Borrowings are secured by substantially all of the Company's assets. To date,
the Company has not borrowed any amounts under this credit facility. At June
30, 1997, the Company had no outstanding balance under its former $2.5 million
revolving bank credit facility, which was replaced by the new credit facility
obtained in August 1997.
Cash used in investing activities consisting of purchases of furniture and
equipment was $700,000 in 1994, $700,000 in 1995, $800,000 in 1996 and
$500,000 in the six months ended June 30, 1997.
The Company anticipates that it will be required to undertake capital
expenditures of approximately $3.5 million over the next 12 months, including
approximately $2.5 million of expenditures for new computer and management
information systems. The Company anticipates funding these expenditures with a
portion of the proceeds of this offering.
The Company believes that the net proceeds from this offering, together with
available funds and cash generated from operations, will be adequate to
satisfy its operating and capital requirements for at least the next 12
months. There can, however, be no assurance that the Company will not require
additional financing within this time frame. Such financing, if required, may
not be available on favorable terms or at all. Future equity financings could
result in dilution to the Company's stockholders.
22
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
Medicode is a leading provider of health care information products which
reduce administrative costs associated with the reimbursement process, control
clinical costs and increase the efficiency of the health care delivery
process. The Company's products are used by payors, providers and self-insured
employers to (i) accurately code and measure utilization of health care
services; (ii) screen and edit claims for accuracy, consistency and
compliance, (iii) efficiently evaluate, negotiate and implement provider
payment arrangements, and (iv) track and analyze all aspects of care for a
particular medical condition from initial diagnosis to treatment. The
foundation for Medicode's solutions is its proprietary database of over 500
million geographically dispersed ambulatory patient care records, which is
leveraged through the Company's clinical and technical expertise in data
collection, mapping and analysis.
INDUSTRY BACKGROUND
Health care expenditures have increased rapidly in recent years, totaling
approximately $1 trillion in 1995. The rapid escalation of costs has led to
the formation of managed care organizations ("MCOs"), which have sought
aggressively to control costs and manage the delivery of care. Efforts
initially focused on administrative cost reduction, followed by clinical cost
containment and, more recently, care reengineering, or the prospective
modification of health care delivery by providers. Payors have attempted to
achieve cost savings by shifting to providers an increasing portion of the
financial risk associated with care delivery, generally under capitated
payment arrangements. Providers have responded by forming groups or networks,
including emerging integrated delivery systems. As providers assume financial
risk, they seek to implement strategies and solutions that reduce
administrative costs, enhance revenue while containing clinical costs, and
reengineer care delivery. Moreover, providers, payors and self-insured
employers must balance these cost containment and care reengineering
initiatives with increasing demands to demonstrate quality of care.
Cost containment and care reengineering techniques have greatly increased
the necessity for reliable clinical and financial data in the health care
delivery and payment system. The pursuit of administrative savings has led to
the implementation of systems and knowledge bases designed to streamline
administrative processes and financial transactions. Efforts to contain
clinical costs have led to the development of methodologies designed to assess
the appropriateness of care and the reasonableness of provider charges,
requiring standardized pricing guidelines and comparative databases and tools.
More recent care reengineering efforts require systems to compare the outcomes
of various treatment paths and standardization of best treatment practices.
Due to the increasing complexity of the health care delivery and payment
environment, the generation and use of health care claims data has become
extremely important to the cost containment and care reengineering efforts of
providers and payors. The typical patient encounter generates health care
claims data which is consistent across reimbursement environments. The
resulting database represents the most readily available and reliable set of
geographically dispersed information regarding health care transactions.
In the treatment documentation process, patient visits are documented,
procedures and diagnoses are captured and coded, and the relevant data is
entered into the provider's billing system. Because providers generally
utilize English language descriptions of procedures and conditions, standard
coding systems are employed to enable efficient claims processing and cross-
provider comparisons. These coding systems represent the common language
between providers and payors and constitute the standard unit of service
identifier in both capitated and fee-for-service environments. A number of
coding systems have been developed, including the World Health Organization's
International Classification of Diseases, 9th Edition ("ICD-9"); the American
Medical Association's ("AMA") Current Procedural Terminology, ("CPT"); and the
23
<PAGE>
Healthcare Financing Administration's ("HCFA") Current Procedural Coding
Systems ("HCPCS"). Substantial modifications to these coding systems are
typically made on an annual basis to reflect changes in medical technology and
practice.
The data generated in the treatment documentation process is then used in
the financial transaction process, which involves provider compensation, care
utilization review, trend analysis and management reporting. In a traditional
or discounted fee-for-service environment, claims are generated and
transmitted to payors for adjudication and reimbursement. Payors review claims
for accuracy, completeness and appropriateness of care, compare pricing
against benchmarks and fee schedules, reprice claims when appropriate and
employ the data generated for utilization analysis and reporting.
Additionally, in a capitated environment, claims are replaced with care
reports, which both MCOs and at-risk providers utilize to review
appropriateness and effectiveness of care and, when applicable, calculate
provider incentive payments. This reporting data is then analyzed and compared
with national benchmarks to assess and improve the care delivery process and
standardize treatment protocols. As health care's standard unit of service
identifier, coding systems are fundamental to this range of analytical tasks
in any reimbursement environment.
Industry sources estimate that in 1995, approximately $7 billion was spent
by the United States health care system on inaccurately or fraudulently coded
claims. In addition to the substantial cost reduction opportunities available
through claims analysis, editing and repricing, enhancing the accuracy of
health care reimbursement claims and tracking and measuring the
appropriateness of care provided to patients also represent significant needs.
Providers need information solutions to improve the accuracy of claims
submitted for reimbursement and to ensure appropriate revenue. Payors and
self-insured employers require information solutions to screen and edit
reimbursement claims for accuracy and cost appropriateness, and to track and
analyze the level of care provided to patients for particular medical
conditions. In order for providers, payors and self-insured employers to
effectively use claims databases for cost containment and care reengineering,
such databases must be standardized, normalized and screened for accuracy and
reliability through the use of clinical editing techniques. As larger payor
and provider organizations seek to integrate disparate data sets, they require
more sophisticated clinical editing systems and enterprise-wide analytical
tools.
MEDICODE SOLUTION
Medicode's products are designed to provide solutions for administrative
cost reduction, clinical cost containment and care reengineering. Medicode's
syndicated data products, benchmarking databases and clinical editing software
are used by payors, providers and self-insured employers to enhance each
principal step in the patient encounter data flow. Medicode's products and
services enhance its customers' ability to (i) accurately code and measure
utilization of health care services, (ii) screen and edit claims for accuracy,
consistency and compliance, (iii) efficiently evaluate, negotiate and
implement provider payment arrangements, and (iv) track and analyze all
aspects of care for a particular medical condition from initial diagnosis
through treatment. The foundation for Medicode's solutions is its extensive,
proprietary database of over 500 million geographically dispersed ambulatory
patient care records, which is leveraged through the Company's clinical
expertise and technical expertise in data collection, mapping and analysis.
These elements form the basis for Medicode's product development and marketing
strategy.
GROWTH STRATEGY
Key elements of the Company's growth strategy include:
* Develop and Market New Products Based on Database and Database
Management Expertise. The Company maintains, updates, and manages a
proprietary database of over 500 million patient
24
<PAGE>
encounter records reflecting actual health care transactions, which
Medicode regularly updates through the addition of raw data contributed
by customers. The Company plans to introduce in the fourth quarter of
1997 two new products developed through its database expertise: the
PowerTrak System, a comprehensive workers' compensation and automobile
medical insurance claims management tool; and Allowed Medical, a payor-
oriented database of payor allowed health care claims. Additionally, in
the first quarter of 1998, the Company plans to introduce CareTrends, a
patient episode of care analysis tool. The Company believes its database
and database management expertise provide an efficient and extensive
platform for developing additional new products, which reduces time to
market and overall development cost.
* Leverage Large Customer Base. The Company has approximately 80,000
customers that have purchased one or more of its syndicated data
products in the last three years and has over 1,300 licensed customers
for its benchmarking database products. The Company believes there is a
significant opportunity to expand sales to existing customers because
many syndicated data and benchmarking database customers purchase only a
small percentage of the current products offered in these product lines.
Additionally, the Company continues to expand its syndicated data and
benchmarking database product offerings through new product development.
The Company also believes there is a substantial opportunity to cross-
sell higher value clinical editing software to syndicated data and
benchmarking database customers.
* Target Provider and Self-Insured Employer Segments. The Company believes
that providers and self-insured employers represent its fastest growing
customer segments. As a result of cost containment initiatives in the
health care industry, providers are increasingly assuming more financial
risk. As a result, the Company is actively marketing many of its payor-
oriented products to evolving provider organizations. In addition, the
Company believes that a substantial opportunity is developing to sell
many of its managed care oriented products to workers' compensation and
automobile insurers. The Company believes that its understanding of and
relationships with both the payor and provider markets represent a
significant competitive advantage in this regard.
* Target Larger Customers. The Company is increasingly targeting larger
payor and provider organizations which typically have larger operating
budgets, have more sophisticated requirements for analytical and
decision support tools and can achieve a higher level of cost saving
through use of enhanced information systems. The Company's ClaimsManager
System is targeted toward large provider organizations and its PowerTrak
System is being developed for large workers' compensation and automobile
insurers. The Company believes that industry consolidation will create
additional large potential customers as smaller payor and provider
organizations, which represent a major portion of the Company's current
customer base, are consolidated into larger entities.
* Emphasize Repeat and Recurring Revenue. The Company derives a
significant portion of its revenue from the sale of a product to a
customer that purchased a similar product during the corresponding prior
period. Medicode seeks to emphasize this repeat business by focusing on
annual purchasing of updated syndicated data products and benchmarking
databases and recurring revenue through contractual, multi-year software
license agreements. From 1994 through 1996, approximately 75% of the
Company's annual revenue was derived from customers that purchased a
similar system or product in the prior year. The Company believes that
its high level of repeat and recurring business results principally from
Medicode's strong end-user relationships and the ongoing need for
current information and analytical tools resulting from changes in
medical practice and the continuing evolution of the health care
industry.
* Acquire Complementary Products and Businesses. The Company may acquire
complementary businesses, products or technologies to expand into
related areas and to increase market share within the Company's existing
product lines. The Company believes that acquisitions of new products
may provide additional cross-selling opportunities and expand its
customer base.
25
<PAGE>
PRODUCTS
Medicode's products fall into three broad categories: (i) syndicated data
products, (ii) benchmarking databases and (iii) clinical editing software. The
following table summarizes the functions performed by the Company's principal
products in each of these product categories:
<TABLE>
<CAPTION>
PRODUCTS (CURRENT AND
PRODUCT LINE UNDER DEVELOPMENT) DESCRIPTION CUSTOMERS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Syndicated Data Essential Regulatory Coding reference 80,000 customers over the last
Products Coding Products materials covering CPT, three years
ICD-9 and
HCPCS coding systems
------------------------------------------------------------------------
Proprietary Coding and Interpretive tools using
Reimbursement essential regulatory
Products coding products
------------------------------------------------------------------------
Third-Party Products Resale of third-party
publications
- --------------------------------------------------------------------------------------------------------
Benchmarking UCR Modules Prevailing fees for 1,300 licensed customers
Databases --Medical medical procedures by
--Dental CPT code at the
--Anesthesia geographic level
--HCPCS
--Outpatient Facility
------------------------------------------------------------------------
Workers' Compensation State-mandated fee
Fee Schedule Module schedules for workers'
compensation claims
------------------------------------------------------------------------
RBRVS Module Resource-based pricing
system
------------------------------------------------------------------------
Allowed Medical Payor-allowed fees at
(under development, the geographic and plan
beta site testing underway, level
scheduled for release Q4/97)
------------------------------------------------------------------------
CareTrends database Episodes of care for a
particular medical
CareTrends EIS condition on a severity-
adjusted basis,
(under development, identifying
beta site testing underway, overutilization,
scheduled for release Q1/98) underutilization and
referral patterns
- --------------------------------------------------------------------------------------------------------
Clinical Editing Claims Edit System Edit claims on a line- 170 licensed customers
Software by-line basis to ensure
data accuracy,
normalization and
payment
------------------------------------------------------------------------
ClaimsManager System Edit bills on a line-by-
line basis for accuracy,
data quality, and
revenue capture
------------------------------------------------------------------------
Medical Bill Advisor Bill review and
repricing for workers'
compensation and auto
insurance medical claims
------------------------------------------------------------------------
PowerTrak System Comprehensive management
(under development, beta of workers' compensation
site testing underway, and auto insurance
scheduled for release medical claims covering
Q4/97) all state-mandated
payment rules and
regulations
</TABLE>
26
<PAGE>
Syndicated Data Products
The Company's syndicated data products include essential regulatory coding
products consisting of usage manuals on the CPT, ICD-9 and HCPCS coding
systems, and proprietary coding and reimbursement products consisting of
problem-solving manuals and software products. Medicode's syndicated data
products provide solutions for enhancing the administrative efficiency of the
treatment documentation process and the accuracy of the patient encounter data
created in this process. These technical information data products enable
payors and providers to prepare and review medical, dental and workers'
compensation claims for payment using the mandated coding systems. Providers
utilize these products in the preparation of claims while payors and self-
insured employers use these products in the claims review process. Because
substantial modifications to the CPT, ICD-9 and HCPCS coding systems are
typically made on an annual basis, customers typically require new coding
reference materials at the beginning of each calendar year. Essential
regulatory coding products are available in print and electronic media and
will be furnished through an on-line service in the future. Proprietary coding
and reimbursement products are available in print, electronic media and
software. The Company also resells third-party publications.
Benchmarking Databases
Database Technology. Medicode's proprietary database of over 500 million
patient encounter records reflecting actual health care transactions underlies
the Company's current products and provides an efficient and extensive
platform for developing new products. Medicode regularly updates its database
by obtaining raw data from customers through its voluntary data contribution
program. Currently, approximately 25% of the Company's payor customers
contribute data in exchange for credits against future database license fees.
Through this data contribution program, the Company is able to supply current
information for its database- related products. When data is submitted, it is
run through a sophisticated proprietary editing and quality assurance process
to standardize and normalize the data prior to acceptance into the databases.
The Company's data engineering methodologies are designed to ensure that its
databases are comprehensive, accurate and unbiased towards either payors or
providers. The resulting objectivity allows the Company to market its products
to both payors and providers and improves the credibility of the databases as
benchmarking tools. In addition, the Company is developing new methodologies
to analyze, edit and statistically validate health care encounter data to
ensure that its core databases are up to date and accurate.
Current Products. Medicode's benchmarking databases are proprietary
solutions for financial and clinical cost containment and administrative
efficiency initiatives in the financial transactions process. Payors
incorporate the Company's databases in their claims adjudication systems to
generate fee schedules for claims review and payment. These databases are also
used to evaluate, negotiate and implement provider payment arrangements in
managed care environments. The Company's five UCR modules are databases of
usual, customary and reasonable ("UCR") charges for specific procedures in
particular geographic areas. Workers' compensation modules incorporate current
fee schedules for all of the approximately 40 states that have mandated the
use of a standardized schedule. These modules are used by payors to implement
state-mandated fee schedules and by states to benchmark their fee schedules.
The resource based relative value system ("RBRVS") module is used to assess
and analyze RBRVS fees to compare with change based contract amounts and
enable migration to resource-based pricing and adjudication.
Products Under Development. The Company is developing Allowed Medical, a
product which is designed to provide a database based on charges allowed by
payors rather than charges submitted by providers. Historically, health care
pricing databases have primarily captured data regarding the amounts charged
by providers, rather than the amounts that payors will actually allow, for
particular procedures. Allowed Medical is being designed to provide an
objective and defensible benchmark of payor-allowed charges in over 250
geographical and plan level groupings, differentiating between primary care
and specialty
27
<PAGE>
fee settings. The Company believes that the Allowed Medical module methodology
will be useful for payors and providers in creating, reviewing and repricing
claims, establishing new contractual arrangements and assessing appropriate
pricing levels in geographic markets.
CareTrends is being developed to enable providers, payors and self-insured
employers to optimize utilization of medical care through episode of care
analysis. CareTrends uses a reference database that incorporates extensive
data linked to a specific patient over a period of up to two years in order to
capture an entire course of treatment for a particular condition. The
CareTrends reference database of over 250 million records of patient encounter
information is a subset of the Company's proprietary database. The actual
clinical experience reflected in the CareTrends reference database will enable
users to compare actual patient treatment with prevailing local treatment
norms for specific medical conditions. CareTrends is being designed to support
a variety of applications, including evaluating and comparing outcomes and
treatment costs across networks, various benefit plans, individual physicians,
physician groups and others, measuring the financial impact of a provider's
practice patterns, evaluating the effect of a particular benefit structure on
costs of care, and researching and evaluating a network or health care
affiliate before accepting financial risk. Provider organizations, payors and
self-insured employers will also be able to reengineer medical condition-
specific care delivery processes by requiring individual providers to utilize
protocols developed in part from CareTrends benchmarks.
Medicode also intends to provide CareTrends database information and
analytical services in which Medicode will perform episode of care analysis
using the CareTrends database on the customers' data. Medicode will also
license the CareTrends Executive Information System ("EIS"), a full decision
support software tool, to enable customers to perform their own analysis.
Clinical Editing Software
Current Products. The Company leverages its basic coding resources and
databases with claims editing software for both payors and providers. Payors
use the Company's Claims Edit System in the claims review process to screen
and edit claims on a line-by-line basis for accuracy, consistency and
compliance with Medicare regulations and other payor requirements. Providers
use Medicode's ClaimsManager to screen and edit bills during the claims
generation process, with the dual goals of fully capturing appropriate
provider revenue, and avoiding charges that result in rejection of payment and
require claim resubmission. Payors use the Company's Medical Bill Advisor to
review, reprice and adjudicate workers' compensation and automobile medical
claims.
Products Under Development. The Company is developing the PowerTrak System,
which will succeed the Company's earlier-generation Medical Bill Advisor
software system, as a decision support application for the workers'
compensation and automobile insurance medical claims marketplace. Workers'
compensation insurers must reimburse claims in accordance with state-mandated
payment rules and regulations in all states with mandated workers'
compensation fee schedules. Automobile insurers have historically not sought
to aggressively manage or contain health care costs paid in connection with
automobile accidents and, as a result, have encountered increasing exposure to
medical reimbursement claims. PowerTrak is being developed to cover all states
with mandated workers' compensation fee schedules and will be continually
updated for state workers' compensation payment rules, regulations, and
pricing. The Company believes that PowerTrak, when introduced, will represent
the most comprehensive bill review and claims adjudication software
application for managing such claims.
SERVICES
Medicode complements its products with data analysis services, which
primarily involve benchmarking a client's data against Medicode's reference
databases. Through these services, the functionality of many of
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<PAGE>
Medicode's products can be accessed by customers on a project fee basis.
Medicode also provides analytical services to assist its customers in the
review and statistical analysis of database information provided by Medicode.
Other Medicode analytical services include impact analysis studies to
demonstrate to prospective customers potential cost savings associated with
use of Medicode products and operative report coding reviews which assist
payors and providers in properly coding medical treatments or procedures that
involve complex or unique coding concerns. In addition, in connection with
software system installation, the Company may provide, at the customer's
request, additional training and database configuration services. These
services are typically billed to customers on a per project fee basis.
RESEARCH AND PRODUCT DEVELOPMENT
The Company's research and product development activities include new
software product development, new and ongoing database development, product
updates and enhancements to existing products. The Company uses several
methods to identify new product opportunities and enhancements to current
products, including (i) targeted focus groups to collect feedback on specific
requirements, (ii) co-development arrangements with selected customers, (iii)
user conferences to achieve broad consensus on market needs, and (iv) feedback
from users of the Company's analytical services.
The Company's research and development activities are performed internally
by the Company's research and development staff of 50 professionals as of June
30, 1997. The Company from time to time also uses outside software development
consultants to gain access to specialized expertise. The Company plans to
continue to increase its internal software research and development
capabilities.
Medicode's new software products under development consist primarily of its
CareTrends EIS and PowerTrak systems which are being developed to run on
Windows-based UNIX operating systems with an Oracle database. The Company is
also developing Windows and UNIX based versions of its ClaimsManager and
Claims Edit systems.
The Company's research and development expenditures in the six months ended
June 30, 1997 and the years ended December 31, 1996, 1995 and 1994 were $2.8,
$5.2, $4.3, and $3.1 million, respectively.
The Company's products under development will require additional
development, testing and quality assurance prior to commercial introduction.
Furthermore, there can be no assurance that unforeseen delays or difficulties
will not be encountered during the completion of development or that scheduled
release dates will be achieved. There can be no assurance that the Company's
expected new product releases and product enhancements will adequately address
customers' requirements for performance and functionality or that new software
products will not contain errors that would delay product introduction or
shipment. In addition, products that the Company develops and introduces may
not, when introduced, be responsive to the needs of the market and the
Company's customers and may therefore fail to achieve market acceptance. Any
inability of the Company to meet scheduled release dates for new products or
the failure of new products being developed by the Company to achieve market
acceptance could have a material adverse effect on the Company's business,
financial condition and results of operations.
CUSTOMERS
The Company's customers include health care providers, payors and self-
insured employers, located throughout the United States. As of June 30, 1997,
the Company had more than 80,000 customers that have purchased one or more of
its syndicated data products in the last three years, approximately 1,300
licensed customers for its benchmarking database products, and over 170
licensed customers for its clinical editing software products. Representative
customers of the Company's products include the following:
29
<PAGE>
PAYORS PROVIDERS SELF-INSURED EMPLOYERS
Capital Blue Cross/ Cleveland Clinic Boise Cascade
Blue Shield
Empire Blue Cross/ Dartmouth Hitchcock Chrysler
Blue Shield
Foundation Health Plan Duke University Government Employees Health
Association
Healthcare Compare Johns Hopkins Kimberly Clark
University
HealthSource Kaiser Permanente K-Mart
John Alden Insurance PhyCor Motorola
Stanford University Wal-Mart
SALES, MARKETING AND CUSTOMER SUPPORT
Medicode's sales, marketing, and customer support organization is segmented
into three sales groups, each focused on a specific market or customer
segment, and its respective product and service offerings. The Company
believes that this sales organization facilitates the marketing of additional
products to the Company's existing customers and allows the Company's sales
personnel to enhance focus on the product needs of the customers.
Payor and Self-Insured Employer Group. This group focuses on selling
benchmarking database products and clinical editing software to payors and
self-insured employers. The Company employs a field sales force currently
consisting of 10 account executives who sell to new customers. In addition,
the Company employs six inside sales professionals who concentrate on renewals
and sell new licenses to existing customers. These six inside sales personnel
sell the Company's products through telemarketing, trade shows and an annual
industry conference sponsored by the Company, and focus on generating leads
for the Company's field sales force. The Company is currently implementing a
program to use value-added resellers on a selected basis.
Provider Group. Medicode has a field sales group, currently consisting of
five sales personnel, focused on selling ClaimsManager to large provider group
practices, clinics, academic centers and provider practice management
companies. This sales group will also focus on selling certain of the
Company's payor-oriented products to providers that are assuming financial
risk for care delivery.
Syndicated Data Group. Medicode sells syndicated data products through a
direct sales and account management program, including field sales for large
accounts and telemarketing. The Company conducts a direct mail campaign and
circulates a catalog of currently available products five times a year to
approximately 80,000 customers who have purchased products during the last
three years and over 200,000 additional prospects. Medicode's telemarketing
groups respond to in-bound orders and inquiries from customers and make out-
bound calls between catalog mailings to generate new sales to new customers
and expand sales to existing customers. Medicode also utilizes resellers who
distribute certain of the Company's coding products under Medicode's name or
under a private label.
The sales cycles for the Company's products vary by product category. The
Company's syndicated data products and benchmarking databases have sales
cycles of approximately zero to six months, and the Company's clinical editing
software products have sales cycles of approximately six to 12 months. The
Company believes that its PowerTrak System will have a sales cycle of
approximately 12 to 18 months. The health care information services industry
has experienced, and may in the future experience, lengthening sales cycles,
and such changes in sales cycles for the Company's products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company, through its customer support group, provides customer service
and support as part of the purchase price for benchmarking database and
software products. This support includes a toll-free telephone help line to
provide both clinical and technical assistance. To facilitate prompt response
and tracking of customer inquiries, a computerized system is used to log,
track, close and analyze all customer calls. The customer support group is
comprised of experienced nurses, clinical coders, technical support
specialists, and
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<PAGE>
installation and training personnel. The customer support group is also
responsible for performing operative report coding reviews and impact analysis
studies.
COMPETITION
The health care information systems market is intensely competitive. The
Company believes that the principal competitive factors in the market include
the breadth and quality of system and product offerings, access to proprietary
data, the proprietary nature of methodologies and technical resources, and the
price and the effectiveness of marketing and sales efforts. Many of the
Company's existing and potential competitors have significantly greater
financial, technical, product development and marketing resources than the
Company. Competitors vary in size and in the scope and breadth of the products
and services offered, and the Company's products compete with various products
in their relevant markets. The Company's potential competitors include
specialty health care information companies, health care information systems
companies, software vendors and large data processing and information
companies. The Company also competes with the internal information resources
and systems of certain of its prospective and existing customers. Furthermore,
other major information companies not presently offering clinical health care
information services may enter the markets in which the Company competes.
There can be no assurance that future competition will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
INTELLECTUAL PROPERTY
Medicode relies on a combination of trade secrets, patents, copyrights,
trademarks, contractual provisions and technical measures to protect its
rights in various methodologies, systems, products and databases. The Company
seeks to protect its proprietary information through confidentiality
agreements with its employees. The Company's policy is to have employees enter
into agreements which among other things prohibits the disclosure of
confidential information and requires assignment to the Company of proprietary
rights to inventions that are related to the Company's business and are
conceived during the employee's tenure with the Company. There can be no
assurance that the legal protections available to and precautions taken by the
Company will be adequate to prevent misappropriation of the Company's
proprietary information. In addition, these precautions do not prevent
independent third-party development of functionally equivalent or superior
products or services.
Medicode was issued a United States patent in September 1996 relating to
methodologies used to analyze historical medical provider billings in order to
statistically establish a normative utilization profile. The technology
covered by this patent relates to Medicode's CareTrends product line. To date,
the Company has not filed additional United States patent applications. There
can be no assurance that the Company's issued patent or any future patents
which may be issued to the Company will not be challenged and subsequently
invalidated or circumvented by competitors or others.
The Company has entered into a cross-license agreement with HPR, Inc.
("HPR") pursuant to which agreement HPR has granted to the Company a license
to use, sell, develop, and sublicense to end-users products incorporating the
techniques and methodologies in a United States patent held by HPR and the
Company has granted HPR a license to use, sell, develop, and sublicense to
end-users products incorporating the techniques and methodologies in the
Company's patent relating to CareTrends. The cross-licenses granted under the
agreement are nonexclusive and non-royalty bearing and extend for the life of
the respective patents. HPR's patent under which the Company is licensed
relates to software algorithms which are designed to analyze medical treatment
and procedure codes for clinical inconsistencies and logical errors.
Substantial litigation regarding intellectual property rights exists in the
software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the number of
products and competitors in the Company's industry segment grows and the
functionality of products overlap. The Company is not aware of any
infringement claims against the Company; however, there can be no assurance
that third parties will not in the future claim infringement by the Company
with respect
31
<PAGE>
to current or future products, patents, copyrights, trademarks or other
proprietary rights. Any such claims, regardless of their merit, could be time
consuming, result in costly litigation, delay or prevent product shipments or
require the Company to enter into costly royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all. Any of these events could have a material
adverse effect on the Company's business, operating results and financial
condition.
EMPLOYEES
As of June 30, 1997, the Company had 218 full time equivalent employees,
including 53 in customer support and fulfillment, 85 in sales and marketing
positions, 50 in research and development activities and 30 in administration.
None of the Company's employees are represented by a union or other collective
bargaining group. The Company believes its relationships with its employees to
be satisfactory.
PROPERTIES
The Company's principal facility is located in Salt Lake City, Utah, in
approximately 54,000 square feet of leased space, under a lease that expires
on May 1, 2001. The Company also leases approximately 9,000 square feet of
warehouse space in Salt Lake City, Utah, under a lease that expires on June
30, 2001. The Company believes that its facilities are adequate for its
current operations and its reasonably foreseeable future requirements.
LITIGATION
The Company is not a party to any material pending litigation.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
June 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas F. Stephenson (1)... 55 Chairman of the Board of Directors
Eugene Santa Cattarina..... 50 President, Chief Executive Officer and Director
Kevin W. Pearson........... 40 Chief Operating Officer, Chief Financial
Officer, Treasurer and Secretary
Eileen Shanon.............. 48 Senior Vice President, Purchaser and Payor Group
Jerold G. Seare, M.D....... 48 Medical Director
Kevin M. Marcum............ 36 Senior Vice President, Syndicated Data Group
Terry L. Cameron........... 31 Senior Vice President, Provider Group
Thomas R. Martin........... 43 Senior Vice President, Software Development
Melville H. Hodge (2)...... 67 Director
John H. Moragne (2)........ 40 Director
L. John Wilkerson (1)...... 54 Director
Carl Witonsky (2).......... 59 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(I) Class I Director
(II) Class II Director
(III) Class III Director
Thomas F. Stephenson has served as a director of the Company since 1993.
Since 1988, Mr. Stephenson has been a General Partner of the Sequoia Capital
group of venture capital funds. He currently serves as a director of Sequana
Therapeutics, Inc., Sterigenics International, Inc. and several private
companies. Mr. Stephenson holds a B.A. from Harvard College, an M.B.A. from
the Harvard Business School and a J.D. from Boston College Law School.
Eugene Santa Cattarina joined the Company in January 1996 as President and
Chief Executive Officer. Prior to joining the Company, from 1986 to 1993, Mr.
Cattarina served in several positions with TDS Healthcare Systems Corporation
("TDS"), including Vice President Marketing and Sales, General Manager of
Domestic Division and Chief Operating Officer and President. From 1993 to
1995, following the acquisition of TDS by ALLTEL Corporation, Mr. Cattarina
served as Chief Operating Officer and President of TDS and then as Executive
Vice President of ALLTEL Information Services-Healthcare Division, a health
care software company. From 1967 to 1986, Mr. Cattarina held various positions
with Technicon Corporation, a clinical laboratory automation Company, most
recently as President of its Domestic division. Mr. Cattarina holds a B.S. in
Biology from Brooklyn College.
Kevin W. Pearson became the Chief Financial Officer of the Company in
February 1993 and became Chief Operating Officer in September 1997. Mr.
Pearson joined the Company in 1991 and previously held various positions in
the database and syndicated data products divisions. Prior to joining the
Company, from 1988 to 1991, Mr. Pearson was a senior manager in the Ernst &
Young LLP health care consulting practice. Mr. Pearson holds a B.S. in Finance
from the University of Utah and an M.B.A. from Harvard Business School.
Eileen Shanon, the Company's founder, was appointed Senior Vice President,
Purchaser and Payor Group in September 1997 and served as Senior Vice
President of Corporate Affairs from January 1996 through September 1997. Ms.
Shanon previously served as the Company's President from 1993 to January 1996.
Prior to founding the Company in 1983, Ms. Shanon served for over 13 years as
a consultant, medical administrator and multi-specialty review specialist. Ms.
Shanon holds a B.S. in Business from Chadron State College.
33
<PAGE>
Jerold G. Seare, M.D. joined the Company in 1989 as Medical Director. Prior
to joining the Company, from 1984 to 1989, Dr. Seare fulfilled his general
surgical residency at the University of Utah affiliated hospitals. From 1972
to 1980, Dr. Seare operated his own chiropractic practice. Dr. Seare holds a
B.S. from the University of Utah and an M.D. from the University of Utah.
Kevin M. Marcum joined the Company in 1993 and has served as Senior Vice
President, Syndicated Data Group since 1996. From 1991 to 1993, Mr. Marcum
held a variety of sales, marketing and consulting positions, most recently
with Franklin Quest Co., a time management and consulting entity where he
served in the sales and training group of that company's Canadian subsidiary.
Terry L. Cameron joined the Company in January 1997 as Senior Vice
President, Provider Group. Prior to joining the Company, from 1996 to 1997,
Mr. Cameron served as Executive Director of Washington University's Shared
Practice Plan. From 1993 to 1996, Mr. Cameron was Director of Reimbursement
and Managed Care at Duke University Medical Center. From 1992 to 1993, Mr.
Cameron was Director of Accounts Receivable and Reimbursement for Lutheran
General Medical Group. Mr. Cameron holds a B.S. in Business Administration
from the University of Iowa.
Thomas R. Martin joined the Company in February 1997 as Vice President
Software Development. Prior to joining the Company, from 1976 to 1996, Mr.
Martin held various positions with ALLTEL Information Services-Healthcare
Division, a health care software company, most recently as Vice President of
Research and Development. Mr. Martin holds a B.S. in Electrical Engineering
from the Ohio Institute of Technology.
Melville H. Hodge has served as a director of the Company since 1996. Since
1983, Mr. Hodge has been an independent management consultant. Mr. Hodge holds
a B.S. in Electrical Engineering from Northwestern University and was a Sloan
Fellow in Executive Management at Stanford University Graduate School of
Business.
John H. Moragne has served as a director of the Company since 1993. Since
1993, Mr. Moragne has been a Managing Director of Trident Capital, a private
investment firm which he helped found. From 1990 to 1993, Mr. Moragne served
as a principal of Information Partners, a private equity firm, and from 1989
to 1993, he served as a principal of Bain Capital, a leveraged-buyout firm.
Mr. Moragne is a director of DAOU Systems, Inc. Mr. Moragne holds a B.A. from
Dartmouth College, a Masters in Engineering and Petroleum Geology from the
Stanford Graduate School of Applied Earth Sciences and an M.B.A. from Stanford
Graduate School of Business.
L. John Wilkerson has served as a director of the Company since 1993. Since
1990, Mr. Wilkerson has been a General Partner in Galen Associates, a risk
capital partnership. Since 1980, Mr. Wilkerson has also held various positions
with The Wilkerson Group, a dedicated health care products consulting
practice, including his current position as a consultant to the Wilkerson
Group. Mr. Wilkerson serves as a director of British Biotechnology PLC,
Gensia-Sicor Inc. and Stericycle, Inc. Mr. Wilkerson holds a Ph.D. from
Cornell University.
Carl Witonsky has served as a director of the Company since 1994. Since
1991, Mr. Witonsky has been an independent management consultant. From July
1995 to December 1995, Mr. Witonsky also served as the interim Chief Executive
Officer of the Company. From 1989 to 1992, Mr. Witonsky served as the Chief
Executive Officer and Chairman of the Board of GMIS Inc., a health care
information systems company. He currently serves as the Chairman of the Board
of both Integrated Medical Management and Pace Health Management Systems and
as a director of Healthworks Alliance. In addition, Mr. Witonsky is a Venture
Partner at St. Paul Venture Capital. Mr. Witonsky holds a B.S. in Mathematics
and Physics from Albright College and is a graduate of The IBM Systems
Research Institute.
BOARD COMPOSITION
The Company currently has authorized six directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, effective upon
the closing of this offering, the terms of office of the Board of Directors
will be divided into three classes; Class I, whose term will expire at the
annual meeting of
34
<PAGE>
stockholders to be held in 1998; Class II, whose term will expire at the
annual meeting of stockholders to be held in 1999; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2000. The
Class I directors are and , the Class II directors are , and ,
and the Class III directors are , and . At each annual meeting of
stockholders after the initial classification, the successors to directors
whose term will then expire will be elected to serve from the time of election
and qualification until the third annual meeting following election. In
addition, the Company's Restated Certificate of Incorporation provides that
the authorized number of directors may be changed only by resolution of the
Board of Directors. Any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of one-third of the directors.
This classification of the Board of Directors may have the effect of delaying
or preventing changes in control or management of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers and directors, other than
nonemployee directors, devotes substantially full time to the affairs of the
Company. The Company's nonemployee directors devote such time to the affairs
of the Company as is necessary to discharge their duties. Ilan Shanon, an
employee of the Company, is the spouse of Eileen Shanon, the Company's Senior
Vice President, Purchaser and Payor Group. Otherwise, there are no family
relationships among any of the directors, officers or key employees of the
Company.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee consisting of Messrs. Hodge, Witonsky and
Moragne reviews the internal accounting procedures of the Company and consults
with and reviews the services provided by the Company's independent auditors.
The Compensation Committee consisting of Messrs. Stephenson and Wilkerson
reviews and recommends to the Board the compensation and benefits of all
executive officers of the Company, administers the Company's 1997 Stock Plan
and 1997 Employee Stock Purchase Plan with respect to grants made thereunder
to executive officers, and reviews general policies relating to compensation
and benefits of employees of the Company.
DIRECTOR COMPENSATION
The Company does not pay its directors for attending meetings of the Board
of Directors or for serving on Committees of the Board of Directors. Directors
are reimbursed for their out-of-pocket expenses incurred in attending
meetings. From time to time, certain directors of the Company have received
grants of options to purchase shares of the Company's Common Stock pursuant to
the 1991 Stock Option Plan. After the closing of this offering, directors of
the Company will be eligible to receive grants of options to purchase Common
Stock pursuant to the 1997 Stock Option Plan. See "-- Incentive Stock Plans"
and "Certain Transactions."
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth certain
information for the year ended December 31, 1996 regarding the compensation of
the Company's Chief Executive Officer and the four other most highly
compensated executive officers of the Company whose total salary and bonus for
such fiscal year were in excess of $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- --------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Eugene Santa Cattarina..... $200,000 $100,000 263,500 $54,200(1)
President and Chief Execu-
tive Officer
Kevin W. Pearson........... 150,000 67,500 15,000 2,000(2)
Executive Vice President,
Chief Operating Officer
and Chief Financial Offi-
cer
Eileen Shanon.............. 130,000 68,000 -- 12,000(3)
Senior Vice President,
Purchaser and Payor Group
Jerold G. Seare............ 145,000 28,000 -- --
Medical Director
Kevin M. Marcum............ 120,000 60,000 35,000 --
Senior Vice President,
Syndicated Data Group
</TABLE>
- --------
(1) Represents reimbursement for relocation costs incurred in connection with
commencing employment with the Company.
(2)Represents long-term disability insurance premiums paid by the Company.
(3)Represents an automobile allowance and long-term disability insurance
premiums paid by the Company.
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1996 to each
of the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM(4)
OPTIONS FISCAL PRICE EXPIRATION --------------------
GRANTED(#)(1) YEAR(%)(2) ($/SHARE)(3) DATE 5%($) 10%($)
-------------- ------------- ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eugene Santa Cattarina.. 263,500(5) 42.92% $ 1.25 N/A $ N/A $ N/A
Kevin W. Pearson........ 15,000 2.44 1.25 1/1/06 12,000 30,000
Eileen Shanon........... -- -- -- -- -- --
Jerold G. Seare......... -- -- -- -- -- --
Kevin M. Marcum......... 10,000 1.63 1.25 1/1/06 8,000 40,000
25,000 4.07 2.50 10/17/06 20,000 100,000
</TABLE>
- --------
(1) Options were granted under the Company's 1991 Stock Option Plan and vest
over four years with one-fourth vesting on the first anniversary of the
date of grant, and one-forty-eighth vesting monthly thereafter, subject to
continued employment with or services to the Company.
36
<PAGE>
(2) Based on an aggregate of 614,000 options and stock purchase rights granted
by the Company in the year ended December 31, 1996 to employees and
directors of and consultants to the Company, including the Named Executive
Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. These numbers are
calculated based on the requirements promulgated by the Securities and
Exchange Commission and do not reflect the Company's estimate of future
stock price growth.
(5) The grant to Mr. Cattarina was in the form of a stock purchase right and
was made pursuant to the Company's 1991 Stock Option Plan. Mr. Cattarina
purchased such shares in June 1996 at a purchase price of $1.25 per share.
The purchase price was paid by delivery of a full recourse promissory note
in the amount of $329,375, which note bears interest at 6% per annum and
is due and payable in full on the earlier of January 1, 2003 or 90 days
following the termination of Mr. Cattarina's employment with the Company.
The shares are subject to a right of repurchase in favor of the Company
which right lapsed as to 25% of such shares on January 1, 1997 and lapses
as to the remaining shares on a ratable, monthly basis over the next 36
months. In the event of the termination of Mr. Cattarina's employment
prior to the lapse of such repurchase right, the Company has the option to
repurchase, at a repurchase price equal to the original purchase price,
any shares as to which the repurchase right has not lapsed. See "Certain
Transactions."
Year End Option Values. No Named Executive Officer exercised any stock
options during the fiscal year ended December 31, 1996, other than the stock
purchase right exercised by Mr. Cattarina in June 1996. The exercise price for
such stock purchase right was equal to the fair market value of the Company's
Common Stock at the time of such exercise, and accordingly no value was
realized by Mr. Cattarina at the time of such exercise. The following table
sets forth for each of the Named Executive Officers the number and value of
securities underlying unexercised options held at December 31, 1996:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
---------------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Eugene S. Cattarina..... -- -- $ $
Kevin W. Pearson........ 145,833 49,167
Eileen Shanon........... 79,286 12,500
Jerold G. Seare......... 31,875 8,125
Kevin M. Marcum......... 2,396 37,604
</TABLE>
- --------
(1) Calculated by determining the difference between the assumed initial
public offering price of $ per share and the per share exercise price of
the options.
STOCK PLANS
1991 Stock Option Plan. The Company's 1991 Stock Option Plan (the "1991
Plan") provides for the grant of incentive stock options to employees and
nonstatutory stock options to employees, directors and consultants. Options
granted under the 1991 Plan typically vest over four years. As of June 30,
1997, options to purchase an aggregate of 918,834 shares of Common Stock (plus
options to purchase an additional 83,358
37
<PAGE>
shares which were granted prior to adoption of the 1991 Plan) were outstanding
and 505,357 shares had been issued upon exercise of outstanding options and
stock purchase rights. The remaining shares reserved for issuance under the
1991 Plan will be carried forward and reserved for issuance under the 1997
Plan, as described below. Options granted under the 1991 Plan will remain
outstanding in accordance with their terms, but the Board of Directors has
determined that following the date of this Prospectus, no additional options
will be granted under the 1991 Plan.
1997 Stock Plan. The Company's 1997 Stock Plan (the "1997 Plan") provides
for the grant of incentive stock options to employees (including employee
directors) and nonstatutory stock options and stock purchase rights to
employees, directors and consultants. A total of 750,000 shares of Common
Stock (including the 575,809 shares remaining available for issuance under the
1991 Plan) have been reserved for issuance under the 1997 Plan, all of which
are currently available for grant. The 1997 Plan is administered by the Board
of Directors. Options and stock purchase rights granted under the 1997 Plan
will vest as determined by the relevant administrator, and may accelerate and
become fully vested in the event of an acquisition of the Company if so
determined by the Board. The exercise price of options and stock purchase
rights granted under the 1997 Plan will be as determined by the Board,
although the exercise price of incentive stock options must be at least equal
to the fair market value of the Company's Common Stock on the date of grant.
The Board of Directors may amend or modify the 1997 Plan at any time. The 1997
Plan will terminate in September 2007, unless sooner terminated by the Board
of Directors.
1997 Employee Stock Purchase Plan. The Company has adopted a 1997 Employee
Stock Purchase Plan (the "Purchase Plan") and has reserved a total of 200,000
shares of Common Stock for issuance thereunder. No shares have been issued
under the Purchase Plan. The Purchase Plan will be administered by the Board
of Directors of the Company or by a committee appointed by the Board of
Directors. The Purchase Plan permits eligible employees to purchase Common
Stock through payroll deductions of up to 15% of an employee's compensation,
up to a maximum of $25,000 for all purchases ending within the same calendar
year. Employees are eligible to participate if they are customarily employed
by the Company or any participating subsidiary for at least 20 hours per week
and more than five months in any calendar year. Unless the Board of Directors
or its committee determine otherwise, each offering period will run for 24
months and will be divided into four consecutive purchase periods of
approximately six months. The first offering period and the first purchase
period will commence on the date of this Prospectus, and new 24 month offering
periods will commence every six months thereafter. In the event of an
acquisition of the Company, offering and purchase periods then in progress
shall be shortened and all options automatically exercised. The price at which
Common Stock will be purchased under the Purchase Plan is equal to 85% of the
fair market value of the Common Stock on the first day of the applicable
offering period or the last day of the applicable purchase period, whichever
is lower. Employees may end their participation in the offering period at any
time, and participation automatically ends on termination of employment. The
Board may amend or modify the Purchase Plan at any time. The Purchase Plan
will terminate in September 2007, unless terminated earlier in accordance with
its provisions.
401(K) PLAN
The Company has adopted a tax-qualified employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees who meet certain
eligibility requirements. Pursuant to the 401(k) Plan, employees may elect to
defer a portion of their current compensation in an amount up to the lesser of
the statutorily prescribed limit ($9,500 in 1997) which is set annually by the
Internal Revenue Service or 15% of their pre-tax earnings and have the amount
of such reduction contributed to the 401(k) Plan. The 401(k) Plan also
authorizes the Company to make matching contributions, the maximum amount
which must be set by the Board of Directors prior to the end of each plan
year. The Board of Directors has authorized matching contributions for the
calendar year 1997 of the lesser of 50% of the employee deferral limited to a
maximum Company match of 2% of an employee's salary. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that employee deferrals
and Company contributions to the plan and income earned on 401(k)
38
<PAGE>
Plan contributions, are not taxable to employees until withdrawn from the
401(k) Plan, and so that employee deferrals and contributions by the Company,
if any, will be deductible by the Company for the fiscal year to which they
relate.
EXECUTIVE OFFICER BONUS PLAN
The Company has maintained an employee bonus plan which provides for annual
bonuses for executive officers. Bonuses paid under the plan will be paid in
cash after the end of the year if the Company in such year meets predetermined
targets. Each executive officer's bonus amount is determined on the basis of
satisfaction of prespecified personal goals. The bonus plan is subject to
change at the discretion of the Compensation Committee.
EMPLOYMENT CONTRACTS AND CHANGES OF CONTROL ARRANGEMENTS
The Compensation Committee of the Board of Directors, as Plan Administrator
of the 1991 Stock Plan, has the authority to provide for accelerated vesting
of the shares of Common Stock subject to outstanding options held by the Named
Officers and any other officer in connection with certain changes in control
of the Company or the subsequent termination of the officer's employment
following a change in control event.
None of the Named Officers have employment agreements with the Company, and
their employment may be terminated at any time. However, the Company has
entered into an agreement with Mr. Cattarina, the Company's President and
Chief Executive Officer, which provides for the acceleration of vesting of
certain option shares so that such options shall immediately become fully
exercisable in the event of certain changes in control. In addition, Messrs.
Martin, Cameron, Pearson and Cattarina commenced employment with the Company
pursuant to employment offer letters which entitle such individuals to certain
severance payments in the event their employment is terminated by the Company
without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company served on the compensation committee of
another entity or on any other committee of the board of directors of another
entity performing similar functions during the year ended December 31, 1996.
LIMITATIONS ON LIABILITIES AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i)
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchases or redemptions or (iv) any transaction from
which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its employees and other agents to the
fullest extent permitted by law. The Company believes that indemnification
under its Bylaws covers at least negligence and gross negligence on the part
of indemnified parties. The Company's Bylaws also permit it to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws would permit indemnification.
39
<PAGE>
The Company has entered into agreements to indemnify its directors and
officers, in addition to indemnification provided for in the Company's Bylaws.
These agreements, among other things, indemnify the Company's directors and
officers for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by any such person in any action or
proceeding, including any action by or in the right of the Company, arising
out of such person's services as a director or officer of the Company, any
subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and officers.
CERTAIN TRANSACTIONS
In January 1996, the Company sold 263,500 shares of Common Stock to Eugene
S. Cattarina, the Company's President and Chief Executive Officer, for an
aggregate purchase price of $329,375, which was paid by delivery of a full
recourse promissory note with an interest rate of 6.0%. The loan is due and
payable in full on the earlier of January 1, 2003 or 90 days following the
termination of Mr. Cattarina's employment with the Company. The shares are
subject to a right of repurchase in favor of the Company which right lapsed as
to 25% of such shares on January 1, 1997 and lapses as to the remaining shares
on a ratable, monthly basis over the next 36 months. In the event of the
termination of Mr. Cattarina's employment prior to the lapse of such
repurchase right, the Company has the option to repurchase, at a repurchase
price equal to the original purchase price, any shares as to which the
repurchase right has not lapsed.
In September 1996, the Company sold 24,000 shares of Common Stock to
Melville H. Hodge, a director of the Company, for an aggregate purchase price
of $30,000. The shares are subject to a right of repurchase in favor of the
Company which right lapsed as to 1/36th of such shares on October 15, 1996 and
lapses as to the remaining shares on a ratable, monthly basis over the next 36
months. In the event of termination of Mr. Hodge's relationship with the
Company prior to the lapse of such repurchase right, the Company has the right
to repurchase, at a repurchase price equal to the original purchase price, any
shares as to which the repurchase right has not lapsed.
In July 1997, Registrant granted stock options to employees and directors
under its stock plans covering an aggregate of 161,500 shares of Registrant's
Common Stock, at an exercise price of $6.00 per share.
The Company has from time to time granted options and other compensation to
its directors and executive officers. Options granted to executive officers
vest and become exercisable in full in the event of an acquisition of the
Company in which the stockholders of the Company before the transaction own
less than 50% of the voting securities of the surviving or successor
corporation (or its parent if any) after the transaction. See "Management--
Director Compensation," "--Executive Compensation" and "--Stock Plans."
All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by
a majority of the Board of Directors, including a majority of the independent
and disinterested members of the Board of Directors or, if required by law, a
majority of disinterested stockholders, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 30, 1997 and as adjusted
to reflect the sale by the Company and the Selling Stockholders of the shares
of Common Stock offered hereby (assuming no exercise of the Underwriters over-
allotment option) by: (i) each person (or group of affiliated persons) known
by the Company to be the beneficial owner of 5% or more of the Company's
outstanding shares of Common Stock, (ii) by each director, (iii) by each of
the Named Executive Officers, (iv) by all Directors and executive officers as
a group and (v) the Selling Stockholders. Except as otherwise noted, the
stockholders named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to applicable community property laws.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK BEFORE OF COMMON STOCK AFTER
THE OFFERING THE OFFERING
----------------------- NUMBER OF ----------------------------
PERCENTAGE OF SHARES PERCENTAGE OF
NAME AND ADDRESS OF OUTSTANDING BEING OUTSTANDING
BENEFICIAL OWNER NUMBER SHARES OFFERED (1) NUMBER SHARES
------------------- --------- ------------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Entities Affiliated with 1,107,786 25.2%
Sequoia Capital (2)....
Thomas F. Stephenson
3000 Sand Hill Road
Menlo Park, CA 94025
Entities Affiliated with 855,269 19.4
Galen Partners (3).....
L. John Wilkerson
666 Third Avenue
New York, NY 10017
Entities Affiliated with 717,285 16.3
Partech/Paribas (4)....
101 California Street,
Suite 3150
San Francisco, CA 94111
Entities Affiliated with 369,262 8.4
Trident Capital (5)....
John Moragne
2480 Sand Hill Road,
Suite 100
Menlo Park, CA 94025
St. Paul Fire and Marine 342,108 7.8
Ins. Co. (6)...........
8500 Normandale Lake
Blvd.
Bloomington, MN 55437
Thomas F. Stephenson 1,107,786 25.2
(2)....................
Sequoia Capital
3000 Sand Hill Road
Menlo Park, CA 94025
John H. Moragne (5)..... 369,262 8.4
Trident Capital
One Bush Street, 15th
Floor
San Francisco, CA 94104
L. John Wilkerson (3)... 855,269 19.4
666 Third Avenue
New York, NY 10017
Carl Witonsky (7)....... 45,858 1.0
Melville H. Hodge(8).... 24,000 *
Eugene S. Cattarina (9). 263,500 6.0
Eileen Shanon (10)...... 222,444 5.0
Kevin W. Pearson (11)... 165,104 3.7
Jerold G. Seare (12).... 36,875 *
Kevin M. Marcum (13).... 7,187 *
All current directors
and executive officers
as a group (12 persons)
(14)................... 3,097,285 59.7
All Selling Stockholders
as a group ( persons).
</TABLE>
- --------
* Less than one percent.
41
<PAGE>
(1) Applicable percentage of ownership is based on 4,404,808 shares of Common
Stock outstanding as of June 30, 1997 together with applicable options
for such stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission, and includes
voting and investment power with respect to shares. Shares of Common
Stock subject to options or warrants currently exercisable or exercisable
within 60 days after June 30, 1997 are deemed outstanding for computing
the percentage ownership of the person holding such options or warrants,
but are not deemed outstanding for computing the percentage of any other
person.
(2) Consists of (i) 543,645 shares and warrants exercisable within 60 days of
June 30, 1997 to purchase an aggregate of 150,564 shares held by Sequoia
Capital Growth Fund, (ii) 268,931 shares and warrants exercisable within
60 days of June 30, 1997 to purchase an aggregate of 74,480 shares held
by Sequoia Capital V, (iii) 34,711 shares and warrants exercisable within
60 days of June 30, 1997 to purchase an aggregate of 9,610 shares held by
Sequoia Technology Partners III, (iv) 11,566 shares and warrants
exercisable within 60 days of June 30, 1997 to purchase an aggregate of
3,204 shares held by Sequoia XXIII, and (v) 8,674 shares and warrants
exercisable within 60 days of June 30, 1997 to purchase an aggregate of
2,401 shares held by Sequoia Technology Partners V. Thomas F. Stephenson
is the Chairman of the Board of Directors of the Company and a general
partner of the general partner of each of Sequoia Capital Growth Fund,
Sequoia Capital V, Sequoia Technology Partners III, Sequoia XXIII and
Sequoia Technology Partners V. Mr. Stephenson disclaims beneficial
ownership of the shares held by Sequoia Capital Growth Fund, Sequoia
Capital V, Sequoia Technology Partners III, Sequoia XXIII and Sequoia
Technology Partners V except to the extent of his proportionate
partnership interest therein. Excludes options to purchase 10,000 shares
of Common Stock granted in July 1997.
(3) Consists of (i) 517,371 shares and warrants exercisable within 60 days of
June 30, 1997 to purchase an aggregate of 112,073 shares held by Galen
Partners II, L.P., (ii) 197,951 shares and warrants exercisable within 60
days of June 30, 1997 to purchase an of 25,217 shares held by Galen
Partners International II, L.P., and (iii) 2,229 shares and warrants
exercisable within 60 days of June 30, 1997 to purchase an aggregate of
428 shares held by Galen Employee Fund, L.P. L. John Wilkerson is a
director of the Company and is a general partner of the general partner
of each of Galen Partners II, L.P., Galen Partners International II,
L.P., and Galen Employee Fund, L.P. Mr. Wilkerson disclaims beneficial
ownership of the shares held by Galen Partners II, L.P., Galen Partners
International II, L.P., and Galen Employee Fund, L.P. except to the
extent of his proportionate partnership interest therein. Excludes
options to purchase 10,000 shares of Common Stock granted in July 1997.
(4) Consists of (i) 289,173 shares and warrants exercisable within 60 days of
June 30, 1997 to purchase an aggregate of 80,089 shares held by U.S.
Growth Fund Partners C.V., (ii) 163,382 shares and warrants exercisable
within 60 days of June 30, 1997 to purchase an aggregate of 45,250 shares
held by Parvest U.S. Partners II, C.V., (iii) 104,102 shares and warrants
exercisable within 60 days of June 30, 1997 to purchase an aggregate of
28,832 shares held by Paribus U.S. Partners V.O.F., and (iv) 5,060 shares
and warrants exercisable within 60 days of June 30, 1997 to purchase an
aggregate of 1,397 shares held by Multinvest Limited.
(5) Consists of (i) 241,416 shares and warrants exercisable within 60 days of
June 30, 1997 to purchase an aggregate of 66,862 shares held by Trident
Capital Partners Fund--I, L.P., and (ii) 47,757 shares and warrants
exercisable within 60 days of June 30, 1997 to purchase an aggregate of
13,227 shares held by Trident Capital Partners Fund--I, C.V. John H.
Moragne is a director of the Company and is an employee of the general
partner of the general partner of each of Trident Capital Partners Fund--
I, L.P. and Trident Capital Partners Fund--I, C.V. Mr. Moragne disclaims
beneficial ownership of the shares held by Trident Capital Partners
Fund--I, L.P. and Trident Capital Partners Fund--I, C.V. except to the
extent of his proportionate partnership interest therein. Excludes
options to purchase 10,000 shares of Common Stock granted in July 1997.
(6) Consists of 287,020 shares and warrants exercisable within 60 days of
June 30, 1997 to purchase 55,088 shares.
(7) Consists of 11,900 shares and options to purchase 33,958 shares
exercisable within 60 days of June 30, 1997. Excludes options to purchase
10,000 shares of Common Stock granted in July 1997.
(8) Excludes options to purchase 10,000 shares of Common Stock granted in
July 1997.
(9) Unvested shares held by Mr. Cattarina are subject to a right of
repurchase in favor of the Company in the event of termination of his
employment. See "Management--Executive Compensation" and "Certain
Transactions." Excludes options to purchase 25,000 shares of Common Stock
granted in July 1997.
42
<PAGE>
(10) Consists of 139,158 shares and options to purchase 83,286 shares
exercisable within 60 days of June 30, 1997. Excludes options held by
Ilan Shanon, an employee of the Company and the spouse of Ms. Shanon. Ms.
Shanon disclaims beneficial ownership of such options.
(11) Consists of options exercisable within 60 days of June 30, 1997. Excludes
options to purchase 7,500 shares of Common Stock granted in July 1997.
(12) Consists of options exercisable within 60 days of June 30, 1997.
(13) Consists of options exercisable within 60 days of June 30, 1997. Excludes
options to purchase 20,000 shares of Common Stock granted in July 1997.
(14) See footnotes 2, 3 and 5 through 13.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Restated Certificate of Incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
50,000,000 shares of Common Stock, $0.001 par value per share and authorizes
the issuance of 5,000,000 shares of Preferred Stock, $0.001 par value per
share, the rights and preferences of which may be established from time to
time by the Company's Board of Directors. As of June 30, 1997, 4,404,808
shares of Common Stock (including 2,739,613 shares issuable upon conversion of
outstanding Preferred Stock and 723,326 shares issuable upon exercise of
outstanding warrants upon the completion of this offering) were issued and
outstanding and held of record by 33 stockholders.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividends Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
would be entitled to share in the Company's assets remaining after the payment
of liabilities and the satisfaction of any liquidation preference granted the
holders of any outstanding shares of Preferred Stock. Holders of Common Stock
have no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock.
All outstanding shares of Common Stock are, and the shares of Common Stock
offered by the Company in this offering, when issued and paid for, will be,
fully paid and nonassessable. The rights, preferences and privileges of the
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 which the
Company may designate in the future.
PREFERRED STOCK
Upon the closing of this offering, the Board of Directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, from time to time to issue up to an aggregate of 5,000,000 shares of
Preferred Stock, $0.001 par value per share, in one or more series, each of
such series to have such rights and preferences, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors. The rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of holders of any Preferred Stock that may be issued in the
future. Issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, 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, a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue any shares of Preferred Stock.
REGISTRATION RIGHTS
As of the date hereof, the holders of shares of Common Stock (the
"Registrable Securities") or their transferees are entitled to certain rights
with respect to the registration of such shares under the Securities Act.
These rights are provided under the terms of the Registration Right Agreement
between the Company and such holders. Subject to certain limitations in the
agreement, the holders of at least 30% of the Registrable Securities (or any
lesser number of shares of Registrable Securities having an expected aggregate
offering price, net of underwriting discounts and commissions, greater than
$7,500,000) may require, at any time, that the Company register their shares
for public resale. In this connection, the holders of Registrable Securities
are entitled to request registration of their shares on Form S-1 or any
similar long form registration statement on not more than two occasions. In
addition, any holder or holders or Registrable Securities may request on one
occasion each calendar year that the Company file a registration on Form S-3
(or any successor
44
<PAGE>
form to S-3) for a public offering of shares of Registrable Securities the
reasonably anticipated aggregate price to the public of which, net of
underwriting discounts and commissions, would exceed $500,000. In addition, if
the Company registered any of its Common Stock either for its own account or
for the account of any of its stockholders, the holders of Registrable
Securities are entitled to include their shares of Common Stock in the
registration. A holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering. All expenses incurred in connection with
any registration effected pursuant to the Registration Rights Agreement (other
than underwriting discounts and commissions) must be borne by the Company.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certain provisions of Delaware law and the Company's Certificate of
Incorporation could make more difficult the acquisition of the Company by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and
to encourage persons seeking to acquire control of the Company to first
negotiate with the Company. The Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
the Company outweigh the disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals could result in an
improvement of their terms.
The Company will be subject to the provisions of Section 203 of the Delaware
law. In general, the statute 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 that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved
in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of the corporation's voting Stock. This provision may
have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholder.
The Company's Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and may not
be taken by written consent. The Bylaws provide that special meetings of
stockholders can be called only by the Board of Directors, the Chairman of the
Board, if any, or the President of the Company. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting by the Board of Directors, the
Chairman of the Board, if any, or the President of the Company. The Bylaws set
forth an advance notice procedure with regard to the nomination, other than by
or at the direction of the Board of Directors, of candidates for election as
directors and with regard to business to be brought before an annual meeting
of stockholders of the Company.
The Company's Certificate of Incorporation contains provisions requiring the
affirmative vote of the holders of at least two-thirds of the voting stock of
the Company to amend the foregoing provisions of the Certificate of
Incorporation and Bylaws.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is Norwest
Bank Minnesota, N.A..
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
shares of Common Stock assuming no exercise of outstanding options after June
30, 1997. Of these shares, the shares offered hereby ( shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless purchased by "affiliates"
of the Company as that term is defined under Rule 144 adopted under the
Securities Act. The remaining 287,500 shares of Common Stock outstanding upon
completion of this offering are "restricted securities" as defined in Rule 144
("Restricted Shares"). Of such Restricted Shares, approximately 287,500
Restricted Shares are subject to lock-up agreements with the representatives
of the Underwriters. See "Underwriting."
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices and adversely affect the
Company's ability to raise additional capital in the capital markets at a time
and price favorable to the Company. As a result of the lock-up agreements and
the provisions of Rule 144 and Rule 701, additional shares will be available
for sale in the public market as follows: (i) shares will be eligible for
immediate sale on the date of this Prospectus, (ii) shares will be eligible
for sale upon expiration of the lock-up agreements 180 days after the date of
this Prospectus, subject to the provisions of Rule 144 and Rule 701 and (iii)
the remaining shares will be eligible for sale thereafter upon expiration of
their respective one-year holding period.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of 1% of the then outstanding
shares of the Company's Common Stock (approximately shares immediately after
this offering) or the average weekly trading volume during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and availability of current
public information about the Company. A person who is not an affiliate, has
not been an affiliate within three months prior to the sale and has
beneficially owned the Restricted Shares for at least two years is entitled to
sell such shares under Rule 144(k) without regard to any of the limitations
described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers between May 20, 1988,
the effective date of Rule 701, and the date the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act (including options granted before
May 20, 1988, if made in accordance with the Rule had it been in effect),
along with the shares acquired upon exercise of such options beginning May 20,
1988 (including exercises after the date of this Prospectus). Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days after the date of
this Prospectus, such securities may be sold (i) by persons other than
Affiliates, subject only to the manner of sale provisions of Rule 144 and (ii)
by Affiliates under Rule 144 without compliance with its one-year minimum
holding period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register an aggregate of shares of Common Stock reserved
for issuance under the Company's 1991 Stock Option Plan, the 1997 Stock Option
Plan and the 1997 Employee Stock Purchase Plan, thus permitting the resale of
shares issued under such Plans by non-affiliates in the public market without
restriction under the Securities Act. Such registration statement is expected
to be filed within 90 days after the date of this Prospectus and will
automatically become effective upon filing. 90 days following the date of this
Prospectus, shares issuable upon the exercise of vested options as of such
date will be eligible for sale pursuant to Rule 701. Furthermore, 180 days
after the date of this Prospectus, an additional shares issuable upon
exercise of vested options that are subject to the lock-up agreements will be
eligible for sale.
46
<PAGE>
After this offering, the holders of approximately shares are entitled to
certain registration rights with respect to such shares. If such registration
rights are exercised, the shares can be sold without any holding period or
sales volume limitation. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have an adverse effect on the market price for the
Company's Common Stock. If the Company were required to include in a Company-
initiated registration the shares held by such holders pursuant to the exercise
of their registration rights, such sales might have an adverse effect on the
Company's ability to raise needed capital. See "Description of Capital Stock--
Registration Rights."
Prior to this offering, there has been no public market for the Common Stock
of the Company and no predictions can be made as to the effect, if any, that
market sales of shares of Common Stock prevailing from time to time may have on
the market price of the Common Stock. Nevertheless, sales of significant
numbers of shares of the Common Stock in the public market may adversely affect
the market price of the Common Stock offered hereby and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
47
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Hambrecht & Quist LLC and Wessels, Arnold &
Henderson, L.L.C. (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement by and among the
Company, the Selling Stockholders and the Underwriters, to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Robertson, Stephens & Company LLC...............................
Hambrecht & Quist LLC...........................................
Wessels, Arnold & Henderson, L.L.C..............................
---
Total.......................................................
===
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the
public at the offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession of not more than
$ per share, of which $ may be reallowed to other dealers. After the
consummation of this offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company or
the Selling Stockholders as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up
to additional shares of Common Stock at the same price per share as the
Company and the Selling Stockholders will receive for the shares that the
Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above
table represents as a percentage of the shares offered hereby. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the terms of lock-up agreements, the holders of shares of the
Company's Common Stock prior to the offering have agreed with the
Representatives that, except for shares being sold by the Selling
Stockholders in this offering, until 180 days after the effective date of this
Prospectus (the "lock-up period") they will not sell or otherwise dispose of
any shares of Common Stock, including shares issuable under options or
warrants exercisable during the 180 days after the date of this Prospectus,
any options or warrants to purchase shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock owned directly by
such holders or with respect to which they have the power of disposition,
without the prior written consent of Robertson, Stephens & Company LLC.
Approximately shares of Common Stock subject to the lock-up agreements will
become eligible for immediate public sale following expiration of the lock-up
period, subject to the provisions of Rule 144 and approximately shares will
be eligible for sale thereafter upon expiration of their respective one-year
holding period. Robertson, Stephens & Company LLC may, in its sole discretion,
and at any time without notice, release all or a portion of the securities
subject to the lock-up agreements. See "Shares Eligible for Future Sale." In
addition, the Company has agreed that until the expiration of the lock-up
period, the Company will not offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock, other than the Company's sales of
48
<PAGE>
shares in this offering, the issuance of shares of Common Stock upon the
exercise of outstanding options, the grant of options to purchase shares or
the issuance of shares of Common Stock under the Company's 1991 Stock Option
Plan, the 1997 Stock Option Plan and the 1997 Employee Stock Purchase Plan,
without the prior written consent of Robertson, Stephens & Company LLC.
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with the offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
Prior to this offering, there has been no public market for the Company's
securities. The initial public offering price of the Common Stock will be
determined by negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in such negotiations will
be prevailing market conditions, the results of operations of the Company in
recent periods, market valuations of publicly traded companies that the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development, the current state of the industry and the economy as a
whole, and other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with this offering will
be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP,
Newport Beach, California.
EXPERTS
The financial statements of Medicode, Inc. at December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 appearing in
this Prospectus, and the financial statement schedule for the aforementioned
periods included in the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
49
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the Rules and
Regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith.
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 filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Copies of the Registration Statement and the exhibits and
schedules thereto may be inspected or copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of the Registration Statement may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Medicode, Inc.
We have audited the accompanying consolidated balance sheets of Medicode, Inc.
as of December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medicode, Inc.
at December 31, 1995 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Salt Lake City, Utah
January 24, 1997
F-2
<PAGE>
MEDICODE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
------------------ JUNE 30, EQUITY AT
1995 1996 1997 JUNE 30, 1997
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 1,405 $ 3,038 $ 5,191
Accounts receivable, less
allowance for doubtful
accounts of $137,000,
$207,000 and $268,000,
respectively................. 5,062 5,633 1,447
Inventories................... 1,002 1,036 388
Income tax receivable......... 46 -- --
Deferred income taxes......... 474 873 744
Prepaid expenses and other
assets....................... 321 275 320
-------- -------- --------
Total current assets........... 8,310 10,855 8,090
Furniture and equipment, net... 1,428 1,261 1,293
Deferred income taxes.......... 462 193 223
Intangible assets, net......... 20 -- --
-------- -------- --------
Total assets................... $ 10,220 $ 12,309 $ 9,606
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Bank line of credit........... $ 500 $ -- $ --
Accounts payable.............. 3,653 2,762 2,048
Deferred revenue.............. 2,015 2,240 2,592
Customer deposits............. 1,056 926 981
Accrued payroll and related
costs........................ 520 998 667
Other accrued liabilities..... 540 1,046 395
Income taxes payable.......... -- 1,025 5
Current portion of long-term
debt and capital lease
obligations.................. 854 877 274
-------- -------- --------
Total current liabilities...... 9,138 9,874 6,962
Long-term debt and capital
lease obligations, less
current portion............... 691 285 172
Commitments and contingencies
Stockholders' equity:
Series A preferred stock, no
par value: 5,000,000 shares
authorized; 2,739,613 shares
issued and outstanding at
December 31, 1995, 1996 and
at June 30, 1997; liquidation
preference $19,122,000 Pro
forma unaudited: $0.001 par
value, 5,000,000 shares
authorized, no shares
outstanding.................. 18,673 18,673 18,673 $ --
Common stock, no par value:
50,000,000 shares authorized;
2,834,630 shares and
3,254,755 shares issued and
outstanding at December 31,
1995 and 1996, respectively,
3,283,921 shares issued and
outstanding at June 30, 1997
(unaudited); Pro-forma
unaudited: $0.001 par value,
50,000,000 shares authorized,
3,681,482 shares issued and
outstanding, at amount paid
in........................... 1,653 2,112 2,153 4,352
Accumulated deficit........... (3,461) (1,832) (1,551) (1,551)
Treasury stock, at cost:
2,342,052 common shares at
December 31, 1995, 1996 and
at June 30, 1997, Pro forma
unaudited: no treasury shares (16,474) (16,474) (16,474) --
Note receivable from
stockholder.................. -- (329) (329) (329)
-------- -------- -------- -------
Total stockholders' equity..... 391 2,150 2,472 $ 2,472
-------- -------- -------- =======
Total liabilities and
stockholders' equity.......... $ 10,220 $ 12,309 $ 9,606
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MEDICODE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Syndicated data............. $ 9,408 $11,678 $15,830 $ 3,869 $ 4,903
Benchmarking databases and
software................... 11,627 14,021 16,788 7,942 9,086
------- ------- ------- -------- --------
Total revenue............... 21,035 25,699 32,618 11,811 13,989
Cost of revenue.............. 7,173 9,164 11,053 3,313 4,027
------- ------- ------- -------- --------
13,862 16,535 21,565 8,498 9,962
Operating expenses:
Selling, general and admin-
istrative.................. 10,774 11,947 13,735 5,865 6,768
Research and development.... 3,141 4,335 5,214 2,963 2,765
------- ------- ------- -------- --------
Operating income (loss)...... (53) 253 2,616 (330) 429
Interest (expense) income,
net......................... (165) (107) (46) (20) 37
------- ------- ------- -------- --------
Income (loss) before income
taxes....................... (218) 146 2,570 (350) 466
Income tax expense (benefit). (106) 98 941 (120) 185
------- ------- ------- -------- --------
Net income (loss)............ $ (112) $ 48 $ 1,629 $ (230) $ 281
======= ======= ======= ======== ========
Net income per share......... $ 0.30 $ 0.05
======= ========
Shares used in per share com-
putations................... 5,375 5,402
======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
MEDICODE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK NOTE TREASURY STOCK
----------------- ---------------- RECEIVABLE -------------------- TOTAL
SHARES SHARES FROM ACCUMULATED STOCKHOLDERS'
ISSUED AMOUNT ISSUED AMOUNT STOCKHOLDER DEFICIT SHARES AMOUNT EQUITY
--------- ------- --------- ------ ----------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1993................... 2,739,613 $18,673 2,778,564 $1,605 $ -- $(3,397) (2,342,052) $(16,474) $ 407
Issuance of common
stock................. -- -- 11,900 15 -- -- -- -- 15
Net loss............... -- -- -- -- -- (112) -- -- (112)
--------- ------- --------- ------ ----- ------- ---------- -------- ------
Balances at December 31,
1994................... 2,739,613 18,673 2,790,464 1,620 -- (3,509) (2,342,052) (16,474) 310
Exercise of stock op-
tions................. -- -- 44,166 33 -- -- -- -- 33
Net income............. -- -- -- -- -- 48 -- -- 48
--------- ------- --------- ------ ----- ------- ---------- -------- ------
Balances at December 31,
1995................... 2,739,613 18,673 2,834,630 1,653 -- (3,461) (2,342,052) (16,474) 391
Issuance of common
stock................. -- -- 287,500 359 (329) 30
Exercise of stock op-
tions................. -- -- 132,625 100 -- -- -- -- 100
Net income............. -- -- -- -- -- 1,629 -- -- 1,629
--------- ------- --------- ------ ----- ------- ---------- -------- ------
Balances at December 31,
1996................... 2,739,613 18,673 3,254,755 2,112 (329) (1,832) (2,342,052) (16,474) 2,150
Exercise of stock op-
tions
(unaudited)........... -- -- 29,166 41 -- -- -- -- 41
Net income (unaudited). -- -- -- -- -- 281 -- -- 281
--------- ------- --------- ------ ----- ------- ---------- -------- ------
Balances at June 30,
1997
(unaudited)............ 2,739,613 $18,673 3,283,921 $2,153 $(329) $(1,551) (2,342,052) $(16,474) $2,472
========= ======= ========= ====== ===== ======= ========== ======== ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
MEDICODE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS
31, ENDED JUNE 30,
------------------------- ----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................ $ (112) $ 48 $ 1,629 $ (230) $ 281
Adjustments to reconcile net in-
come (loss) to net cash provided
by operating activities:
Depreciation and amortization... 934 1,046 1,004 474 476
Provision for losses on accounts
receivable and returns......... 247 171 547 (41) 61
(Gain) loss on disposition of
furniture and equipment........ (13) -- 8 (12) 10
Changes in operating assets and
liabilities:
Accounts receivable............ (1,992) (2,078) (1,118) 3,500 4,125
Income tax receivable.......... 677 56 46 (180) -
Inventories.................... (234) (51) (34) 577 648
Prepaid expenses and other as-
sets.......................... (43) (128) 46 (64) (45)
Deferred income tax benefit.... (97) (87) (130) 60 99
Accounts payable............... 612 1,894 (891) (2,089) (714)
Accrued payroll and related
costs......................... 68 (40) 478 (15) (331)
Deferred revenue............... 424 595 225 (104) 352
Customer deposits.............. (39) 281 (130) (134) 55
Income taxes payable........... 3 (3) 1,025 -- ( 1,020)
Other accrued liabilities...... 13 (58) 506 (129) (651)
------- ------- ------- ------- -------
Net cash provided by operating ac-
tivities......................... 448 1,646 3,211 1,613 3,346
INVESTING ACTIVITIES
Purchase of furniture and equip-
ment............................ (731) (655) (825) (582) (518)
Proceeds from sale of furniture
and equipment................... 80 -- -- -- --
------- ------- ------- ------- -------
Net cash (used in) investing ac-
tivities......................... (651) (655) (825) (582) (518)
FINANCING ACTIVITIES
Payments on long-term debt and
capital leases.................. (961) (903) (883) (666) (716)
Proceeds from issuance of long-
term debt....................... -- -- 500 163 --
Payments on bank of line-of-cred-
it.............................. (604) (500) (500) (500) --
Proceeds from bank line-of-cred-
it.............................. 500 500 -- -- --
Proceeds from exercise of stock
options......................... -- 33 100 100 41
Proceeds from issuance of common
stock........................... 15 -- 30 -- --
------- ------- ------- ------- -------
Net cash used in financing activi-
ties............................. (1,050) (870) (753) (903) (675)
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents................. (1,253) 121 1,633 128 2,153
Cash and cash equivalents at be-
ginning of period................ 2,537 1,284 1,405 1,405 3,038
------- ------- ------- ------- -------
Cash and cash equivalents at end
of period........................ $ 1,284 $ 1,405 $ 3,038 $ 1,533 $ 5,191
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING TO THE
SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Medicode, Inc. (the Company), a Utah Corporation, serves the United States
healthcare industry in the specific area of medical coding and reimbursement
through its syndicated data products, benchmarking databases and software
development and production activities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts of a
92% majority-owned subsidiary, Softouch Software, Inc. (Softouch). Significant
intercompany transactions have been eliminated. Until such time as the
minority interest holder in Softouch has a positive basis, Medicode will
record 100% of the net loss or income from Softouch's operations.
INTERIM FINANCIAL DATA
In the opinion of management, the interim unaudited consolidated financial
statements have been prepared on the same basis as the annual financial
statements and include all adjustments (consisting only of normal recurring
adjustments) necessary to state fairly the financial information set forth
therein, in accordance with generally accepted accounting principles.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results to be expected for the full fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS
Cash equivalents are considered to be highly liquid short-term investments
purchased with original maturity dates of three months or less.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash investments, marketable debt
securities and trade receivables. The Company places its temporary cash
investments with creditworthy, high quality financial institutions. The
Company at times holds notes and bonds issued by the United States government,
its agencies and financially strong corporations. The Company has not
experienced significant losses related to receivables from individual
customers, groups of customers within the health care industry or customers
within certain geographic areas. Due to the large number of customers in a
wide geographic area, management does not believe it is exposed to credit risk
beyond amounts provided for as allowances for bad debts.
F-7
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
Revenues from the sale of syndicated data products is generally recognized
when the products are shipped. The Company licenses its benchmarking database
products primarily pursuant to multi-year contracts. Initial license fees are
recognized at the time the product is shipped. Subsequent annual license fees
are recognized on the contract anniversary date. The Company accrues
incidental customer support costs associated with benchmarking database
products when revenue is recognized.
License fees for software products are generally recognized ratably over the
initial or subsequent renewal periods. Some software contracts are priced
based on transaction volume or in addition to minimum fees, require
incremental usage fees. Revenue from variable fee software contracts are
recognized as earned. Contracts involving custom software development are
accounted for using the percentage-of-completion method. Revenues from
services are recognized when the services are performed. Amounts received in
advance of satisfying revenue recognition criteria are classified as deferred
revenue in the accompanying balance sheets.
PER SHARE AMOUNTS
Historical net income (loss) per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of the
incremental common shares issuable upon conversion of the series A preferred
stock (using the if-converted method) and shares issuable upon the exercise of
stock options and warrants (using the modified treasury stock method).
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins
and staff policy, such computations include all common and common equivalent
shares issued within 12 months of the filing date as if they were outstanding
for all periods presented using the treasury stock method.
Historical net income (loss) per share information as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- --------------------
1994 1995 1996 1996 1997
------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) per
share................... $ (0.15) $ 0.01 $ 0.30 $ (0.21) $ 0.05
Shares used in computing
net income (loss) per
share................... 757,000 5,005,000 5,375,000 1,095,000 5,402,000
</TABLE>
Pro forma net income (loss) per share is the same as historical net income
(loss) per share in periods of net income and is shown on the face of the
statement of operations for the year ended December 31, 1996 and the six
months ended June 30, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Development costs
incurred for new software products and enhancements are accounted for 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." To date it has been the Company's experience that technological
feasibility of products is not established until working models have been
completed. No software development costs have been capitalized because the
impact of capitalizing such costs has been immaterial.
F-8
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE ASSETS
Intangible assets consisting of tradenames, patents and goodwill have arisen
as a result of prior business combinations. Intangible assets are amortized
using the straight-line method over their useful life. The Company
periodically reviews goodwill and other intangible assets to assess
recoverability. Differences between the carrying value of intangible assets
and their related discounted cash flows are charged to expense when asset
impairment is identified.
FURNITURE AND EQUIPMENT
Furniture, equipment and leasehold improvements are stated at cost, less
accumulated depreciation or amortization computed using the straight-line
method. Furniture and equipment are depreciated over their estimated useful
lives of two to five years. Leasehold improvements are amortized over the
shorter of their useful lives or the remainder of the lease period. Repairs
and maintenance are charged to expense as incurred.
STOCK-BASED COMPENSATION
In October 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which establishes accounting and reporting standards for stock-
based compensation plans. SFAS No. 123 defines a fair value-based method of
accounting for and measuring compensation expense related to stock options or
similar equity instruments and encourages adoption of the new standard.
However, the statement also allows entities to continue to measure
compensation expense for stock-based plans using the intrinsic value-based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company adopted SFAS No. 123 effective January 1, 1996 and has
elected to continue to account for stock-based compensation plans using the
provisions of APB Opinion No. 25. Pro forma footnote disclosure of net income
has been made as if the fair value based method of accounting defined in the
statement had been applied.
INVENTORIES
Inventories consist primarily of syndicated data products and are valued at
the lower of cost or market. Cost is computed using the first-in, first-out
method.
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Work in process............................ $ 98,000 $ 39,000 $162,000
Finished goods............................. 904,000 997,000 226,000
---------- ---------- --------
$1,002,000 $1,036,000 $388,000
========== ========== ========
</TABLE>
RECLASSIFICATIONS
The Company has reclassified certain prior year balances to conform with the
current year's presentation.
F-9
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FURNITURE AND EQUIPMENT
Furniture and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment................... $ 2,896,000 $ 3,451,000 $ 3,627,000
Furniture and fixtures............... 622,000 640,000 642,000
Office equipment..................... 556,000 412,000 362,000
Computer software.................... 165,000 165,000 147,000
Leasehold improvements............... 140,000 146,000 140,000
----------- ----------- -----------
4,379,000 4,814,000 4,918,000
Less accumulated depreciation and
amortization........................ (2,951,000) (3,553,000) (3,625,000)
----------- ----------- -----------
$ 1,428,000 $ 1,261,000 $ 1,293,000
=========== =========== ===========
</TABLE>
Depreciation and amortization expense was $873,000 in 1994, $1,015,000 in
1995, $985,000 in 1996, and $487,000 and $476,000 for the six months ended
June 30, 1996 and 1997, respectively.
3. BORROWINGS
SHORT-TERM BORROWING ARRANGEMENTS
Under a line-of-credit agreement with a bank, the Company may borrow up to a
maximum of $2,500,000. Interest on the outstanding principal balance accrues
at a rate equal to the prime rate plus one and three-quarter points (10% at
June 30, 1997). Borrowings under the line-of-credit are limited to and are
collateralized by the Company's eligible receivables. At June 30, 1997, the
Company had no outstanding borrowings under its line-of-credit agreement and
was eligible to borrow $886,000. The terms of the line-of-credit agreement
restrict the Company from redeeming, retiring, or paying dividends on its
capital stock and contain other restrictive covenants.
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Convertible notes payable with interest at
4.5%, payable in annual installments of
$428,000 plus interest................... $ 856,000 $ 428,000 $ --
Note payable to a bank with interest at
10%, payable in monthly principal in-
stallments of $17,000 plus interest, se-
cured by equipment....................... -- 482,000 379,000
--------- --------- ---------
856,000 910,000 379,000
Less amounts due within one year.......... (428,000) (634,000) (207,000)
--------- --------- ---------
$ 428,000 $ 276,000 $ 172,000
========= ========= =========
</TABLE>
The convertible notes are convertible at the holders' option into 55,747 and
27,584 Medicode common shares as of December 31, 1995 and 1996, respectively.
INTEREST
Interest expense during 1994, 1995 and 1996 was approximately $231,000,
$175,000 and $101,000, respectively and approximately $49,000 and $35,000 for
the six months ended June 30, 1996 and 1997, respectively. Cash payments for
interest in 1994, 1995 and 1996 were $285,000, $170,000 and $129,000,
respectively and approximately $71,000 and $48,000 for the six months ended
June 30, 1996 and 1997, respectively.
F-10
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
LEASES
The following summarizes the future minimum lease payments required under
noncancelable leases with initial terms greater than one year as of December
31, 1996.
<TABLE>
<CAPTION>
FURNITURE FACILITIES
AND AND
EQUIPMENT EQUIPMENT
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- ----------
<S> <C> <C>
1997................................................... $ 254,000 $961,000
1998................................................... 9,000 937,000
1999................................................... -- 922,000
2000................................................... -- 914,000
2001................................................... -- 305,000
---------
Total net minimum payments............................. 263,000
Less amount representing interest...................... (11,000)
---------
Present value of net minimum payments.................. 252,000
Less current portion................................... (243,000)
---------
Long-term obligation................................... $ 9,000
=========
</TABLE>
Furniture and equipment includes assets recorded under capital leases of
approximately $1,965,000 and $1,669,000 at December 31, 1995 and 1996,
respectively and accumulated amortization of approximately $1,589,000 and
$l,592,000 at December 31, 1995 and 1996, respectively.
The Company has entered into lease agreements for equipment, office and
warehouse facilities that expire at various dates through June 30, 2001. In
certain cases, these leases contain escalation clauses based on increases in
the Consumer Price Index. The Company incurred rental expense of approximately
$653,000, $664,000 and $850,000 during 1994, 1995 and 1996, respectively.
Rental expense for the six months ended June 30, 1996 and 1997 was
approximately $403,000 and $457,000, respectively.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings which arise from time
to time in connection with the conduct of the Company's business. In the
opinion of management, such proceedings will not have a material adverse
effect on the Company's financial condition or results of operations.
5. EQUITY
PREFERRED STOCK
The Series A preferred stock (the Preferred Stock) is entitled to receive a
percentage dividend at a rate of 10% of the initial sales price of $6.98 per
share. Dividends on Preferred Stock are non-cumulative and are not payable
unless declared. In addition, the Preferred Stock will participate on a pro
rata basis in any dividends that are declared on the Company's common stock on
an as-if-converted basis.
Each share of Preferred Stock is convertible at any time, at the option of
the holder, into fully paid and non assessable shares of common stock. The
conversion rate is subject to adjustment in a number of circumstances,
including subsequent issuances of preferred stock, stock splits and
combinations.
F-11
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Preferred stockholders are entitled to vote on all matters with the common
stockholders and are entitled to the number of votes equal to the number of
common shares into which their preferred shares are convertible. Each share of
common stock is entitled to one vote.
Each share of Preferred Stock will be automatically converted into shares of
common stock, based upon the current conversion rate, immediately upon the
closing of a fully underwritten public offering under the Securities Act of
1933, if gross proceeds equal or exceed $10 million and the price per share
equals or exceeds $10.47.
In the event of any liquidation or dissolution of the Company, holders of
Preferred Stock are entitled to payment in an amount equal to $6.98 per share
plus all declared and unpaid dividends, before any payment will be made to
common stockholders. If the assets to be distributed to the holders of
Preferred Stock are insufficient, then the assets will be distributed ratably
to the holders of the Preferred Stock.
STOCK WARRANTS
On October 17, 1993, the Company completed a $19 million private placement
stock offering wherein 2,739,613 shares of Series A preferred stock and
723,326 warrants to purchase common stock were issued. The weighted average
exercise price of the warrants is $2.33 and they expire September 16, 1998.
Upon the closing of a public offering of the Company's common stock the
warrant holders have the right to convert their warrants into common stock on
a net exercise basis.
NOTE RECEIVABLE FROM STOCKHOLDER
In January 1996 the Company issued 263,500 shares of common stock to an
officer for an aggregate purchase price of $329,375 which was paid for by
delivery of a full recourse promissory note with an interest rate of 6.00% per
year. The shares are subject to a repurchase option in favor of the Company
that lapses 25 percent on January 1, 1997 with the remainder lapsing ratably
over the succeeding 36 months, contingent upon the officer's continued
employment with the Company.
STOCK OPTIONS
The Company adopted a stock option plan in 1991 that provides for the grant
of nonqualified and incentive stock options to officers and key employees to
purchase up to 350,000 shares of the Company's common stock. The plan was
amended in 1995 to increase the total number of shares available under the
plan to 2,000,000. Options granted under the plan vest over two to four years
and expire ten years from date of grant.
The Company accounts for the stock option plan under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost
for these plans been determined consistent with FASB Statement No. 123, the
Company's net income would have been reduced to the following pro forma
amounts.
<TABLE>
<CAPTION>
JUNE 30,
1995 1996 1997
---- ---- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net Income As Reported................. $48,000 $1,629,000 $281,000
Pro Forma................... 22,000 1,555,000 245,000
</TABLE>
F-12
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Because the method of accounting for stock-based compensation as defined in
SFAS No. 123 has not been applied to options granted prior to January 1, 1995,
the resulting pro forma compensation cost may not be representative of that to
be expected in future years.
A summary of the status of the Company's stock option plan at December 31,
1996 and 1995 and changes during the years then ended is presented in the
following table:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING
-------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
--------- --------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1993.............. 1,548,000 535,358 $2.18
Stock purchase agreements.................... (11,900) -- --
Options granted.............................. (434,332) 434,332 .75
Options cancelled............................ 103,332 (103,332) (4.79)
--------- ---------
Balances at December 31, 1994................. 1,205,100 866,358 $1.17
Options granted.............................. (128,000) 128,000 1.25
Options exercised............................ -- (44,166) (0.75)
Options canceled............................. 70,834 (70,834) (0.79)
--------- ---------
Balances at December 31, 1995................. 1,147,934 879,358 1.23
Stock purchase agreements.................... (287,500) -- --
Options granted.............................. (326,500) 326,500 1.77
Options exercised............................ -- (132,625) (0.76)
Options cancelled............................ 40,375 (40,375) (0.79)
--------- ---------
Balances at December 31, 1996................. 574,309 1,032,858 1.48
Options granted.............................. (22,000) 22,000 4.00
Options exercised............................ -- (29,166) (1.37)
Options canceled............................. 23,500 (23,500) (1.24)
--------- ---------
Balances at June 30, 1997 (unaudited)......... 575,809 1,002,192 1.55
========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Options exercisable and fully vested at....... 605,629 611,448 683,175
Weighted average exercise price............... $ 1.34 $ 1.39 $ 1.36
Weighted-average fair value of options granted
during the year.............................. $ 0.85 $ 1.04 $ 2.87
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively; risk-free interest
rates of 7.75 and 6.50 percent, expected dividend yields of zero for both
years, expected lives of 7 and 6 years, expected volatility of 60 and 70
percent (based on stock market prices for comparable stocks in the Company's
industry).
F-13
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under SFAS No. 109, deferred tax assets and deferred tax
liabilities are recognized based on temporary differences between the basis of
assets and liabilities using statutory rates. SFAS No. 109 also requires a
valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. Significant components of the
Company's deferred tax assets and liabilities for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Accrued payroll and related costs........ $ 135,000 $ 95,000 $ 95,000
Reserve for bad debts.................... 51,000 77,000 100,000
Reserve for sales returns................ 104,000 281,000 260,000
Inventory capitalization................. 65,000 56,000 56,000
Tax versus book depreciation............. 99,000 151,000 180,000
Losses and credits from subsidiary....... 285,000 285,000 285,000
Tax credits.............................. 276,000 -- --
Other accrued expenses................... 208,000 406,000 276,000
--------- ---------- ---------
Total deferred tax assets................. 1,223,000 1,351,000 1,252,000
Valuation allowance....................... (285,000) (285,000) (285,000)
--------- ---------- ---------
938,000 1,066,000 967,000
Deferred tax liabilities:
Other.................................... (2,000) -- --
--------- ---------- ---------
Total deferred tax liabilities............ (2,000) -- --
--------- ---------- ---------
Net deferred tax asset.................... $ 936,000 $1,066,000 $ 967,000
========= ========== =========
</TABLE>
As of June 30, 1997, the Company had approximately $400,000 in net operating
loss carryforwards and $135,000 in tax credit carryforwards that expire
beginning in the year 2004. Utilization of these net operating losses and tax
credits is limited to the future taxable income of the Company's subsidiary.
Under the "change of ownership" provisions of the Internal Revenue Code,
utilization of these net operating losses and credit carryforwards may be
subject to an annual limitation, depending upon the fair market value of the
Company immediately before any "change of ownership."
Approximately $50,000, $204,000 and $0 was paid for income taxes in 1994,
1995 and 1996, respectively and approximately $0 and $1,107,000 was paid for
income taxes in the six months ended June 30, 1996 and 1997, respectively.
F-14
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
--------- -------- ---------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................ $ (12,000) $155,000 $ 889,000 $(128,000) $ 65,000
State.................. 3,000 30,000 182,000 (21,000) 10,000
--------- -------- ---------- --------- --------
(9,000) 185,000 1,071,000 (149,000) 75,000
Deferred:
Federal................ (91,000) (74,000) (75,000) 25,000 95,000
State.................. (6,000) (13,000) (55,000) 4,000 15,000
--------- -------- ---------- --------- --------
(97,000) (87,000) (130,000) 29,000 110,000
--------- -------- ---------- --------- --------
Provision for income
taxes.................. $(106,000) $ 98,000 $ 941,000 $(120,000) $185,000
========= ======== ========== ========= ========
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is as follows:
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
--------- -------- ---------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax provision computed
at the statutory rate
of 34%................. $ (74,000) $ 50,000 $ 874,000 $(120,000) $158,000
State taxes, net of fed-
eral benefit........... (8,000) 5,000 85,000 (12,000) 16,000
Increase (decrease) in
valuation allowance.... 139,000 90,000 -- (15,000) --
Research credits........ (167,000) (67,000) (38,000) -- --
Other................... 4,000 20,000 20,000 27,000 11,000
--------- -------- ---------- --------- --------
$(106,000) $ 98,000 $ 941,000 $(120,000) $185,000
========= ======== ========== ========= ========
</TABLE>
7. BENEFIT PLAN
The Company has a defined contribution plan qualified under Section 401(k)
of the Internal Revenue Code, which is available to employees of the Company
who meet certain eligibility requirements. Under the terms of the plan,
participants make voluntary contributions based on a percentage of their
pretax earnings not to exceed limits set annually by the Internal Revenue
Service. The Company is required to match employee contributions at a 50% rate
limited to a maximum Company match of 2% of an employee's annual compensation.
The Company's contribution vests over a five-year period beginning with the
employee's hire date. The Company's expense relating to the 401(k) plan was
approximately $78,000, $100,000 and $104,000 in 1994 , 1995 and 1996,
respectively and approximately $50,000 and $57,000 for the six months ended
June 30, 1996 and 1997, respectively.
F-15
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On September 16, 1997, the board of directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission for the Company's initial public offering of its common stock.
Under the terms contemplated, all outstanding shares of Series A Preferred
Stock will automatically convert on a 1-for-1 basis into 2,739,613 shares of
common stock upon completion of the offering. Such conversion is reflected in
the unaudited pro forma stockholders equity at June 30, 1997 in the
accompanying consolidated balance sheet. In conjunction with the offering, the
board of directors authorized, subject to shareholder approval, the
reincorporation of the Company in Delaware. In connection with the
reincorporation, the Company will adopt an Amended and Restated Certificate of
Incorporation which provides that the Company will be authorized to issue
5,000,000 shares of $0.001 par value preferred stock and 50,000,000 shares of
$0.001 par value common stock.
On September 16, 1997, the board of directors adopted the Employee Stock
Purchase Plan (the "Purchase Plan") which authorizes for issuance 200,000
shares of common stock. Shares may be purchased under the Purchase Plan at 85%
of the lesser of the fair market value of the common stock on the first day of
the offering period or the last day of the purchase period.
On September 16, 1997, the board of directors adopted the 1997 Stock Plan,
and authorized, subject to stockholder approval, 750,000 shares for issuance
under the Plan.
F-16
<PAGE>
(LOGO OF MEDICODE APPEARS HERE)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee, the NASD filing fee and the Nasdaq
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee............................................ $7,667
NASD filing fee................................................. 3,030
Nasdaq National Market listing fee.............................. *
Director and officer liability insurance........................ *
Printing and engraving expenses................................. *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Blue Sky fees and expenses...................................... *
Transfer Agent and registrar fees............................... *
Custodial fees.................................................. *
Miscellaneous expenses.......................................... *
------
Total....................................................... $ *
======
</TABLE>
- --------
* To be filed by amendment.
The Company will bear the expenses of the Selling Stockholders in connection
with the registration of the shares, other than underwriting discounts and
commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law (the "Corporation
Law") provides in relevant part that "[a] corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee or Agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or Agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful." With respect to
derivative actions, Section 145(b) of the Corporation Law provides in relevant
part that "[a] corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor . . . [by reason of his service in one of the capacities specified
in the preceding sentence] against expenses (including attorneys' fees)
actually and reasonable incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper."
II-1
<PAGE>
Article VI of the Company's Bylaws provides that the Company shall indemnify
each person who is or was a director or officer of the Company to the full
extent permitted by Corporation Law. Such Article also provides that the
Company may, but is not required to, indemnify its employees and agents (other
than directors and officers) to the extent and in the manner permitted by the
Corporation Law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant, its directors and executive officers and other
persons for certain liabilities, including liabilities arising under the
Securities Act of 1933.
The Registrant has entered into an indemnification agreement with each of
its directors and officers and intends to maintain insurance for the benefit
of its directors and officers insuring such persons against certain
liabilities, including liabilities under the securities laws.
See also the undertakings set out in response to Item 17 herein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1994, Registrant has sold and issued the following
securities which were not registered under the Securities Act:
(a) Since January 1, 1994, Registrant has granted Stock options to
employees, consultants and directors under its stock option plans
covering an aggregate of 1,133,691 shares of Registrant's Common Stock,
at exercise prices ranging from $0.75 to $6.00 per share. Since January
1, 1994, Registrant has issued 506,191 shares of Common Stock to
employees, consultants and directors upon exercise of stock options and
stock purchase rights.
(b) In January 1996, Registrant sold 263,500 shares of Common Stock to
Eugene S. Cattarina, the Company's President and Chief Executive
Officer, for an aggregate purchase price of $329,375, which was paid by
delivery of a full recourse promissory note with an interest rate of
6.0%. The loan is due and payable in full on the earlier of January 1,
2003 or 90 days following the termination of Mr. Cattarina's employment
with Registrant. The shares are subject to a right of repurchase in
favor of Registrant which right lapsed as to 25% of such shares on
January 1, 1997 and lapses as to the remaining shares on a ratable,
monthly basis over the next 36 months. In the event of the termination
of Mr. Cattarina's employment prior to the lapse of such repurchase
right, Registrant has the option to repurchase, at a repurchase price
equal to the original purchase price, any shares as to which the
repurchase right has not lapsed.
(c) In September 1996, Registrant sold 24,000 shares of Common Stock to
Melville H. Hodge, a director of Registrant, for an aggregate purchase
price of $30,000. The shares are subject to a right of repurchase in
favor of Registrant which right lapsed as to 1/36th of such shares on
October 15, 1996 and lapses as to the remaining shares on a ratable,
monthly basis over the next 36 months. In the event of termination of
Mr. Hodge's employment prior to the lapse of such purchase right,
Registrant has the right to repurchase, at a repurchase price equal to
the original purchase price, any shares as to which the repurchase
right has not lapsed.
The sales and issuances of securities in the transactions described above in
paragraphs (a) and (b) above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act in
reliance upon Section 4(2) of the Securities Act, or Regulation D promulgated
thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act,
as transactions by an issuer not involving any public offering or transactions
pursuant to compensatory benefit plans and contracts relating to compensation
as provided under Rule 701. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or
II-2
<PAGE>
for sale in connection with any distribution thereof and appropriate legends
were affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of Registrant as currently in effect.
3.2 Certificate of Incorporation to be filed with Delaware Secretary of
State in connection with Delaware reincorporation of Registrant.
3.3 Restated Certificate of Incorporation to be filed with Delaware
Secretary of State upon completion of offering.
3.4 Bylaws of Registrant as currently in effect.
3.5 Delaware Bylaws of Registrant to be in effect upon Delaware
reincorporation of Registrant.
4.1* Form of Common Stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 1991 Stock Plan and form of agreement thereunder.
10.2 1997 Stock Plan and form of agreement thereunder.
10.3 1997 Employee Stock Purchase Plan and form of subscription agreement
thereunder.
10.4 Form of Indemnification Agreement to be entered into between Registrant
and each of its directors and executive officers.
10.5 Registration Rights Agreement dated September 16, 1993 between the
Registrant and certain stockholders.
10.6* Lease dated December 28, 1990 for facilities located at 5225 Wiley Post
Way, Suite 500, Salt Lake City, Utah.
10.7 Stock Purchase Agreement dated June 16, 1996 between Registrant and
Eugene Santa Cattarina.
10.8* Loan and Security Agreement dated August 29, 1997 between Registrant and
Zions First National Bank.
10.9 License Agreement dated April 15, 1997 between Registrant and HPR, Inc.
10.10 Employment offer letter dated October 9, 1996 between the Registrant and
Thomas R. Martin.
10.11 Employment offer letter dated October 9, 1996 between the Registrant and
Terry L. Cameron.
10.12 Employment offer letter dated December 19, 1995 between the Registrant
and Eugene Santa Cattarina.
11.1 Calculation of Net Income (Loss) Per Share.
23.1 Consent of Independent Auditors (see page II-6).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
Schedule VIII--Valuation and Qualifying Accounts and Reserves (see page
II-8).
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 24 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 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 such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the Closing, as specified in the Underwriting Agreement, certificates in
such denomination and registered in such names as required by the Underwriters
to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PALO ALTO, STATE OF
CALIFORNIA, ON THIS 24TH DAY OF SEPTEMBER, 1997.
Medicode, Inc.
/s/ Eugene Santa Cattarina
By: _________________________________
Eugene Santa Cattarina,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Eugene Santa Cattarina and Kevin W.
Pearson and each of them acting individually, as his attorney-in-fact, each
with full power of substitution, for him in any and all capacities, to sign
any and all amendments to this Registration Statement, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all
amendments to said Registration Statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Eugene Santa Cattarina President, Chief September 24, 1997
- ------------------------------------- Executive Officer
EUGENE SANTA CATTARINA and Director
(Principal
Executive Officer)
/s/ Kevin W. Pearson Chief Financial September 24, 1997
- ------------------------------------- Officer (Principal
KEVIN W. PEARSON Financial and
Accounting Officer)
/s/ John H. Moragne Director September 24, 1997
- -------------------------------------
JOHN H. MORAGNE
/s/ Melville H. Hodge Director September 24, 1997
- -------------------------------------
MELVILLE H. HODGE
/s/ Thomas F. Stephenson Director September 24, 1997
- -------------------------------------
THOMAS F. STEPHENSON
/s/ L. John Wilkerson Director September 24, 1997
- -------------------------------------
L. JOHN WILKERSON
/s/ Carl Witonsky Director September 24, 1997
- -------------------------------------
CARL WITONSKY
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our reports dated
January 24, 1997, with respect to the financial statements and financial
statement schedule included in the Registration Statement (Form S-1) and
related prospectus of Medicode, Inc. for the registration of its common stock.
/s/ Ernst & Young LLP
Salt Lake City, Utah
September 23, 1997
II-6
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Medicode, Inc. as
of December 31, 1995 and 1996, and for each of the three years in the period
ended December 31, 1996, and have issued our report thereon dated January 24,
1997 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, information required to be
included therein.
/s/ Ernst & Young LLP
Salt Lake City, Utah
January 24, 1997
II-7
<PAGE>
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ------------------------------- ------------- -------------
BALANCE AT
BEGINNING OF CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS(1) END OF PERIOD
----------- ------------ ---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts and
Cancellations
Six months ended June
30, 1997............... 207,000 87,000 -- 26,000 268,000
Year ended December 31,
1996................... 137,000 148,000 -- 78,000 207,000
Year ended December 31,
1995................... 205,000 171,000 -- 239,000 137,000
Year ended December 31,
1994................... 79,000 246,000 -- 120,000 205,000
</TABLE>
- --------
(1) Includes amounts written off, net of recoveries
II-8
<PAGE>
EXHIBIT INDEX
(A) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of Registrant as currently in effect.
3.2 Certificate of Incorporation to be filed with Delaware Secretary of
State in connection with Delaware reincorporation of Registrant.
3.3 Restated Certificate of Incorporation to be filed with Delaware
Secretary of State upon completion of offering.
3.4 Bylaws of Registrant as currently in effect.
3.5 Delaware Bylaws of Registrant to be in effect upon Delaware
reincorporation of Registrant.
4.1* Form of Common Stock certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 1991 Stock Plan and form of agreement thereunder.
10.2 1997 Stock Plan and form of agreement thereunder.
10.3 1997 Employee Stock Purchase Plan and form of subscription agreement
thereunder.
10.4 Form of Indemnification Agreement to be entered into between Registrant
and each of its directors and executive officers.
10.5 Registration Rights Agreement dated September 16, 1993 between the
Registrant and certain stockholders.
10.6* Lease dated December 28, 1990 for facilities located at 5225 Wiley Post
Way, Suite 500, Salt Lake City, Utah.
10.7 Stock Purchase Agreement dated June 16, 1996 between Registrant and
Eugene Santa Cattarina.
10.8* Loan and Security Agreement dated August 29, 1997 between Registrant and
Zions First National Bank.
10.9 License Agreement dated April 15, 1997 between Registrant and HPR, Inc.
10.10 Employment offer letter dated October 9, 1996 between the Registrant and
Thomas R. Martin.
10.11 Employment offer letter dated October 9, 1996 between the Registrant and
Terry L. Cameron.
10.12 Employment offer letter dated December 19, 1995 between the Registrant
and Eugene Santa Cattarina.
11.1 Calculation of Net Income (Loss) Per Share.
23.1 Consent of Independent Auditors (see page II-6).
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
__________ SHARES/1/
MEDICODE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
____________, 1997
ROBERTSON, STEPHENS & COMPANY LLC
HAMBRECHT & QUIST LLC
WESSELS, ARNOLD & HENDERSON, L.L.C.
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Medicode, Inc., a Delaware corporation (the "Company"), and certain
stockholders of the Company named in Schedule B hereto (hereafter called the
"Selling Stockholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
---------------------
_________ shares of its authorized and unissued Common Stock, $0.001 par value
per share, to the several Underwriters. The Selling Stockholders, acting
severally and not jointly, propose to sell an aggregate of ________ shares of
the Company's authorized and outstanding Common Stock, $0.001 par value per
share, to the several Underwriters. The _________ shares of Common Stock,
$0.001 par value per share, of the Company to be sold by the Company are
hereinafter called the "Company Shares" and the _________ shares of Common
Stock, $0.001 par value per share, to be sold by the Selling Stockholders are
hereinafter called the "Selling Stockholder Shares." The Company Shares and the
Selling Stockholder Shares are hereinafter collectively referred to as the "Firm
Shares." The Company also proposes to grant to the Underwriters an option to
purchase up to ________ additional shares of the Company's Common Stock, $0.001
par value per share (the "Option Shares"), as provided in Section 7 hereof. As
used in this Agreement, the term
_________________
/1/ Plus an option to purchase up to _________ additional shares from the
Company to cover over-allotments.
<PAGE>
"Shares" shall include the Firm Shares and the Option Shares. All shares of
Common Stock, $0.001 par value per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby, including the Shares, are
hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the
-----------------------------------------------------------------
Selling Stockholders.
- --------------------
I. The Company represents and warrants to and agrees with each
Underwriter and each Selling Stockholder that:
(a) A registration statement on Form S-1 (File No. 333-_____)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses") and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, shall agree to
the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations. The term "Registration Statement"
as used in this Agreement shall mean such registration statement, including
-2-
<PAGE>
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
--------
however, that if in reliance on Rule 434 of the Rules and Regulations and with
- -------
the consent of Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term
sheet, together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact
-3-
<PAGE>
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date (hereinafter defined) and on
any later date on which Option Shares are to be purchased, (i) the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained and will contain all material information required to be included
therein by the Act and the Rules and Regulations and will in all material
respects conform to the requirements of the Act and the Rules and Regulations,
(ii) the Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iii) the Prospectus, and any amendments
or supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that none of the representations and warranties
-------- -------
contained in this subparagraph (b) shall apply to information contained in or
omitted from the Registration Statement or Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) Each of the Company and its subsidiary has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns [ninety-two percent]
of the outstanding capital stock of its subsidiary free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; each of the
Company and its subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the ownership
or leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiary considered as one enterprise; no proceeding has been
instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification;
each of the Company and its subsidiary is in possession of and operating in
compliance with all authorizations, licenses, certificates, consents, orders and
permits from state, federal and other regulatory authorities which are material
to the conduct of its business, all of which are valid and in full force and
effect; neither the Company nor its subsidiary is in violation of its respective
charter or bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or its subsidiary is a
-4-
<PAGE>
party or by which it or its subsidiary or their respective properties may be
bound; and neither the Company nor its subsidiary is in material violation of
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its subsidiary or over their respective
properties of which it has knowledge. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
Softouch, Inc.
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or its subsidiary
is a party or by which it or its subsidiary or their respective properties may
be bound, (ii) the charter or bylaws of the Company or its subsidiary, or (iii)
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or its subsidiary or over their respective
properties. No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or its subsidiary or over their respective
properties is required for the execution and delivery of this Agreement and the
consummation by the Company or its subsidiary of the transactions herein
contemplated, except such as may be required under the Act or under state or
other securities or Blue Sky laws, all of which requirements have been satisfied
in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, its
subsidiary or any of their respective officers or any of their respective
properties, assets or rights before any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or its
subsidiary or over their respective officers or properties or otherwise which
(i) might result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiary considered as one enterprise or might materially and
adversely affect their properties, assets or rights, (ii) might prevent
consummation of the transactions contemplated hereby or (iii) is required to be
disclosed in the Registration
-5-
<PAGE>
Statement or Prospectus and is not so disclosed; and there are no agreements,
contracts, leases or documents of the Company or its subsidiary of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the Act
or the Rules and Regulations which have not been accurately described in all
material respects in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and the authorized and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" and conforms
in all material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company);
the Company Shares and the Option Shares have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right, co-
sale right, registration right, right of first refusal or other similar right of
stockholders exists with respect to any of the Company Shares or Option Shares
or the issuance and sale thereof other than those that have been expressly
waived prior to the date hereof and those that will automatically expire upon
the consummation of the transactions contemplated on the Closing Date. No
further approval or authorization of any stockholder, the Board of Directors of
the Company or others is required for the issuance and sale or transfer of the
Shares except as may be required under the Act or under state or other
securities or Blue Sky laws. All issued and outstanding shares of capital stock
of the subsidiary of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and were not issued in violation of or
subject to any preemptive right, or other rights to subscribe for or purchase
shares and are owned by the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest. Except as disclosed in or
contemplated by the Prospectus and the financial statements of the Company, and
the related notes thereto, included in the Prospectus, neither the Company nor
its subsidiary has outstanding any options to purchase, or any preemptive rights
or other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights.
-6-
<PAGE>
(g) Ernst & Young LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of June 30, 1997 and for each of the years in the three (3) years
ended December 31, 1996, all of which financial statements have been filed with
the Commission as a part of the Registration Statement, and which are included
in the Prospectus, are independent accountants within the meaning of the Act and
the Rules and Regulations; the audited consolidated financial statements of the
Company, together with the related schedules and notes, and the unaudited
consolidated financial information, forming part of the Registration Statement
and Prospectus, fairly present the financial position and the results of
operations of the Company and its subsidiary at the respective dates and for the
respective periods to which they apply; and all audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiary
considered as one enterprise, (ii) any transaction that is material to the
Company and its subsidiary considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiary considered as one
enterprise, incurred by the Company or its subsidiary, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or its subsidiary that is
material to the Company and its subsidiary considered as one enterprise, (v) any
dividend or distribution of any kind declared, paid or made on the capital stock
of the Company or its subsidiary, or (vi) any loss or damage (whether or not
insured) to the property of the Company or its subsidiary which has been
sustained or will have been sustained which has a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiary considered as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiary has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a material adverse effect on the condition
-7-
<PAGE>
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiary considered as one enterprise, (ii) the
agreements to which the Company or its subsidiary is a party described in the
Registration Statement and Prospectus are valid agreements, enforceable by the
Company and its subsidiary (as applicable), except as the enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company and
its subsidiary has valid and enforceable leases for all properties described in
the Registration Statement and Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and Prospectus, the Company owns or leases
all such properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(j) The Company and its subsidiary have timely filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted against the
Company or its subsidiary that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiary considered as one enterprise; and
all tax liabilities are adequately provided for on the books of the Company and
its subsidiary.
(k) The Company and its subsidiary maintain insurance with
insurers of recognized financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiary against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; neither the Company nor its
subsidiary has been refused any insurance coverage sought or applied for; and
neither the Company nor its subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not materially and adversely
affect the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiary considered as one
enterprise.
(l) To the best of Company's knowledge, no labor disturbance by
the employees of the Company or its subsidiary exists or is imminent; and the
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<PAGE>
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subassemblers, value added
resellers, subcontractors, original equipment manufacturers, authorized dealers
or international distributors that might be expected to result in a material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiary considered as
one enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) Each of the Company and its subsidiary owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiary considered as
one enterprise; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiary considered as one
enterprise.
(n) The Common Stock has been approved for quotation on The
Nasdaq National Market, subject to official notice of issuance.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any
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<PAGE>
Preliminary Prospectuses, the Prospectus, the Registration Statement and other
materials, if any, permitted by the Act.
(q) Neither the Company nor its subsidiary has at any time
during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, each Selling
Stockholder and each beneficial owner of shares of Common Stock, other than
_________________, has agreed in writing that such person will not, for a period
of 180 days from the date that the Registration Statement is declared effective
by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
(collectively, a "Disposition") any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into or exchangeable for shares of Common Stock (collectively, "Securities") now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to limited
partners or stockholders of such person, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of Robertson, Stephens & Company LLC. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than such
holder. Such prohibited hedging or other transactions would include, without
limitation, any short sale (whether or not against the box) or any purchase,
sale or grant of any right (including, without limitation, any put or call
option) with respect to any Securities or with respect to any security (other
than a broad-based market basket or index) that includes, relates to or derives
any significant part of its value from Securities. Furthermore, such person will
also agree and consent to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction. The Company has provided to
counsel for the Underwriters a complete and accurate list of all securityholders
of the Company and the number and type of securities held by each
securityholder. The
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<PAGE>
Company has provided to counsel for the Underwriters true, accurate and complete
copies of all of the agreements pursuant to which its officers, directors and
stockholders have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other stockholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of Robertson, Stephens &
Company LLC.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et
--
seq.), or otherwise designated as a contaminated site under applicable state or
- ---
local law.
(u) The Company and its subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
II. Each Selling Stockholder, severally and not jointly, represents
and warrants to and agrees with each Underwriter and the Company that:
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<PAGE>
(a) Such Selling Stockholder now has and on the Closing Date
will have valid marketable title to the Shares to be sold by such Selling
Stockholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest other than pursuant to this Agreement; and upon
delivery of such Shares hereunder and payment of the purchase price as herein
contemplated, each of the Underwriters will obtain valid marketable title to the
Shares purchased by it from such Selling Stockholder, free and clear of any
pledge, lien, security interest pertaining to such Selling Stockholder or such
Selling Stockholder's property, encumbrance, claim or equitable interest,
including any liability for estate or inheritance taxes, or any liability to or
claims of any creditor, devisee, legatee or beneficiary of such Selling
Stockholder.
(b) Such Selling Stockholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing ___________ and ___________ as attorneys-in-fact (collectively, the
"Attorneys" and individually, an "Attorney") and a Letter of Transmittal and
Custody Agreement (the "Custody Agreement") with ______________________________,
as custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such Selling
Stockholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Attorneys, acting
alone, is authorized to execute and deliver this Agreement and the certificate
referred to in Section 6(g) hereof on behalf of such Selling Stockholder, to
determine the purchase price to be paid by the several Underwriters to such
Selling Stockholder as provided in Section 3 hereof, to authorize the delivery
of the Selling Stockholder Shares under this Agreement and to duly endorse (in
blank or otherwise) the certificate or certificates representing such Shares or
a stock power or powers with respect thereto, to accept payment therefor, and
otherwise to act on behalf of such Selling Stockholder in connection with this
Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on behalf
of such Selling Stockholder of this Agreement and the sale and delivery of the
Selling Stockholder Shares under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; such Selling
Stockholder, if other than a natural person, has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Stockholder has full legal right, power and
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<PAGE>
authority to enter into and perform its obligations under this Agreement and
such Power of Attorney and Custody Agreement, and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Stockholder or with respect to which such Selling
Stockholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to limited
partners or stockholders of such Selling Stockholder, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with the prior written consent of Robertson, Stephens &
Company LLC. The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the Selling Stockholder. Such prohibited hedging or
other transactions would including, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Such Selling Stockholder also agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the securities held by such Selling Stockholder except in compliance
with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by
such Selling Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Stockholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling Stockholder,
or any Selling Stockholder Shares hereunder, may be
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<PAGE>
bound or, to the best of such Selling Stockholders' knowledge, result in any
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over such Selling Stockholder or over the
properties of such Selling Stockholder, or, if such Selling Stockholder is other
than a natural person, result in any violation of any provisions of the charter,
bylaws or other organizational documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Selling Stockholder
Shares that is contained in the representations and warranties of such Selling
Stockholder in such Selling Stockholder's Power of Attorney or set forth in the
Registration Statement and the Prospectus is, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date, was or will be, true, correct
and complete, and does not, and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date,
and will advise one of its Attorneys and Robertson, Stephens & Company LLC prior
to the Closing Date if any statement to be made on behalf of such Selling
Stockholder in the certificate contemplated by Section 6(g) would be inaccurate
if made as of the Closing Date.
(k) Such Selling Stockholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by the Company or any of the other Selling Stockholders to the Underwriters
pursuant to this Agreement; such Selling Stockholder does not have, or has
waived prior to the date hereof, any registration right or other similar right
to participate in the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such Selling
Stockholder in the transactions to which this Agreement relates in accordance
with the
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<PAGE>
terms of this Agreement; and such Selling Stockholder does not own any warrants,
options or similar rights to acquire, and does not have any right or arrangement
to acquire, any capital stock, rights, warrants, options or other securities
from the Company, other than those described in the Registration Statement and
the Prospectus.
(l) Such Selling Stockholder is not aware (without having
conducted any investigation or inquiry) that any of the representations and
warranties of the Company set forth in Section 2.I. above is untrue or
inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
-------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders
agree to sell to the Underwriters, and each Underwriter agrees, severally and
not jointly, to purchase from the Company and the Selling Stockholders,
respectively, at a purchase price of $_____ per share, the respective number of
Company Shares and Selling Stockholder Shares set forth opposite the names of
the Company and the Selling Stockholders in Schedule B hereto. The obligation
of each Underwriter to the Company and to each Selling Stockholder shall be to
purchase from the Company or such Selling Stockholder that number of Company
Shares or Selling Stockholder Shares, as the case may be, which (as nearly as
practicable, as determined by you) is in the same proportion to the number of
Company Shares or Selling Stockholder Shares, as the case may be, set forth
opposite the name of the Company or such Selling Stockholder in Schedule B
hereto as the number of Firm Shares which is set forth opposite the name of such
Underwriter in Schedule A hereto (subject to adjustment as provided in Section
10) is to the total number of Firm Shares to be purchased by all the
Underwriters under this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares
have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Stockholder agrees that the certificates for
the Selling Stockholder Shares of such Selling Stockholder so held in custody
are subject to the interests of the Underwriters hereunder, that the
arrangements made by such Selling Stockholder for such custody, including the
Power of Attorney is to that extent irrevocable and that the obligations of such
Selling Stockholder hereunder shall not be terminated by the act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of such
Selling Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Stockholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Stockholder Shares hereunder, the
Selling Stockholder Shares to be sold by such Selling Stockholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
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<PAGE>
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company with regard to the Shares being purchased from the Company, and
to the order of the Custodian for the respective accounts of the Selling
Stockholders with regard to the Shares being purchased from such Selling
Stockholders (and the Company and such Selling Stockholders agree not to deposit
and to cause the Custodian not to deposit any such check in the bank on which it
is drawn, and not to take any other action with the purpose or effect of
receiving immediately available funds, until the business day following the date
of its delivery to the Company or the Custodian, as the case may be, and, in the
event of any breach of the foregoing, the Company or the Selling Stockholders,
as the case may be, shall reimburse the Underwriters for the interest lost and
any other expenses borne by them by reason of such breach), at the offices of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, 1117 California
Avenue, Palo Alto, California 94304 (or at such other place as may be agreed
upon among the Representatives, the Company and the Selling Stockholders), at
7:00 A.M., San Francisco time (a) on the third (3rd) full business day following
the first day that Shares are traded, (b) if this Agreement is executed and
delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business
day following the day that this Agreement is executed and delivered or (c) at
such other time and date not later than seven (7) full business days following
the first day that Shares are traded as the Representatives and the Company and
the Selling Stockholders may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 10 hereof),
such time and date of payment and delivery being herein called the "Closing
Date"; provided, however, that if the Company has not made available to the
-------- -------
Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in their sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representatives. The certificates for the
Firm Shares to be so delivered will be made available to you at such office or
such other location including, without limitation, in New York City, as you may
reasonably request for checking at least one (1) full business day prior to the
Closing Date and will be in such names and denominations as you may request,
such request to be made at least two (2) full business days prior to the Closing
Date. If the Representatives so elect, delivery of the Firm Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
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<PAGE>
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), at the bottom of
the inside front cover page concerning stabilization and under the second, sixth
and seventh paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement, and you, on behalf of the respective Underwriters, represent and
warrant to the Company and the Selling Stockholders that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
---------------------------------
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required
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<PAGE>
under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed with the Commission within the time period prescribed; it will notify you
promptly of any request by the Commission for the amending or supplementing of
the Registration Statement or the Prospectus or for additional information;
promptly upon your request, it will prepare and file with the Commission any
amendments or supplements to the Registration Statement or Prospectus which, in
the opinion of counsel for the several Underwriters ("Underwriters' Counsel"),
may be necessary or advisable in connection with the distribution of the Shares
by the Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement or Prospectus which may be necessary to correct any
statements or omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; in
case any Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above
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provided, the Company will make and file such statements and reports in each
year as are or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and,
in the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its
stockholders as soon as practicable, but in any event not later than the forty-
fifth (45th) day following the end of the fiscal quarter first occurring after
the first anniversary of the effective date of the Registration Statement, an
earnings statement (which will be in reasonable detail but need not be audited)
complying with the provisions of Section 11(a) of the Act and covering a twelve
(12) month period beginning after the effective date of the Registration
Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its stockholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's stockholders, (ii) concurrently with furnishing to
its stockholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of stockholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, (iii)
as soon as they are available, copies of all reports (financial or other) mailed
to stockholders, (iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, any securities
exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v)
every material press release and every material news item or article in respect
of the Company or its affairs which was generally released to stockholders or
prepared by the Company or any of its subsidiary, and (vi) any additional
information of a public nature concerning the Company or any of its subsidiary,
or its business which you
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may reasonably request. During such five (5) year period, if the Company shall
have active subsidiary, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiary are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company or any
Selling Stockholder to perform any agreement on their respective parts to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Company Shares and the Option Shares hereunder and the Company's issuance of
options or Common Stock under the Company's presently authorized 1991 Stock
Plan, 1997 Stock Plan or 1997 Employee Stock Purchase Plan (the "Option Plans").
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(l) During a period of ninety (90) days from the effective date
of the Registration Statement, the Company will not file a registration
statement registering shares under the Option Plans or other employee benefit
plan.
5. Expenses.
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(a) The Company and the Selling Stockholders agree with each
Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Master Agreement Among
Underwriters, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary Prospectus
and the Prospectus, and any amendments or supplements to any of the foregoing;
NASD filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Stockholders will be borne collectively by the
Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Selling Stockholders and the Company hereby agree to pay, but shall
not affect any agreement which the Selling Stockholders and the Company may
make, or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to
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reimburse the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Company together with interest, compounded daily, determined on the basis
of the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) listed from time to time in The Wall Street Journal which
represents the base rate on corporate loans posted by a substantial majority of
the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(iii) In addition to their other obligations under
Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof relating to such Selling
Stockholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of such Selling Stockholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Selling
Stockholders, together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Stockholder on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such
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Selling Stockholder within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety
or enforceability of the obligation to indemnify for expenses which is created
by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 8(e)
hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholders
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Francisco time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, any Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, including, without limitation, the completion of
the reincorporation merger of the Company in Delaware as described in the
Prospectus, the form of Registration Statement and the Prospectus, and the
registration, authorization,
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issue, sale and delivery of the Shares, shall have been reasonably satisfactory
to Underwriters' Counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiary considered as one
enterprise from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and
that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus; and
(ii) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or potential
downgrading or of any review for a possible change that does not
indicate the direction of the possible change, in the rating accorded
any of the Company's securities by any "nationally recognized
statistical rating organization," as such term is defined for purposes
of Rule 436(g)(2) under the Act.
(d) You shall have received on the Closing Date and on any later
date on which Option Shares are purchased, as the case may be, the following
opinion of counsel for the Company and the Selling Stockholders, dated the
Closing Date or such later date on which Option Shares are purchased addressed
to the Underwriters and with reproduced copies or signed counterparts thereof
for each of the Underwriters, to the effect that:
(i) The Company does not have any Significant
Subsidiaries (as defined in Item 301 of Regulation S-X);
(ii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation;
(iii) The Company has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus;
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(iv) The Company is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction, if
any, in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiary
considered as one enterprise. To such counsel's knowledge, the Company
does not own or control, directly or indirectly, any corporation,
association or other entity other than Softouch, Inc.;
(v) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" as of the dates stated therein, the issued
and outstanding shares of capital stock of the Company (including the
Selling Stockholder Shares) have been duly and validly issued and are
fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws and, to such counsel's knowledge,
will not have been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or
other similar right;
(vi) All issued and outstanding shares of capital
stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws and, to such counsel's
knowledge, have not been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first
refusal or other similar right and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest;
(vii) The Firm Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable, and will not
have been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right of stockholders;
(viii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver
to the Underwriters the Shares to be issued and sold by it hereunder;
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<PAGE>
(ix) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been
duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by you, is a valid and binding
agreement of the Company, enforceable in accordance with its terms,
except insofar as indemnification provisions may be limited by
applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(x) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
(xi) The Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the financial
statements (including supporting schedules) and financial data derived
therefrom as to which such counsel need express no opinion), as of the
effective date of the Registration Statement, complied as to form in
all material respects with the requirements of the Act and the
applicable Rules and Regulations;
(xii) The information in the Prospectus under the
caption "Description of Capital Stock," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by
such counsel and is a fair summary of such matters and conclusions;
and the forms of certificates evidencing the Common Stock and filed as
exhibits to the Registration Statement comply with Delaware law;
(xiii) The description in the Registration Statement
and the Prospectus of the charter and bylaws of the Company and of
statutes are accurate and fairly present the information required to
be presented by the Act and the applicable Rules and Regulations;
(xiv) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a
party of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which are not described or referred to
therein or filed as required;
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(xv) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in
any violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a material breach or violation of any
of the terms and provisions of, or constitute a default under, any
bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument known to such counsel
to which the Company is a party or by which its properties are bound,
or any applicable statute, rule or regulation known to such counsel
or, to such counsel's knowledge, any order, writ or decree of any
court, government or governmental agency or body having jurisdiction
over the Company or its subsidiary, or over any of their properties or
operations;
(xvi) No consent, approval, authorization or order of
or qualification with any court, government or governmental agency or
body having jurisdiction over the Company or its subsidiary, or over
any of their properties or operations is necessary in connection with
the consummation by the Company of the transactions herein
contemplated, except such as have been obtained under the Act or such
as may be required under state or other securities or Blue Sky laws in
connection with the purchase and the distribution of the Shares by the
Underwriters;
(xvii) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened against the Company
or its subsidiary of a character required to be disclosed in the
Registration Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(xviii) To such counsel's knowledge, neither the
Company nor its subsidiary is presently (a) in material violation of
its respective charter or bylaws, or (b) in material breach of any
applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the Company or
its subsidiary, or over any of their properties or operations;
(xix) To such counsel's knowledge, except as set
forth in the Registration Statement and Prospectus, no holders of
Common Stock or other securities of the Company have registration
rights with respect to securities of the Company and, except as set
forth in the
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Registration Statement and Prospectus, all holders of securities of
the Company having rights known to such counsel to registration of
such shares of Common Stock or other securities, because of the filing
of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement or have included
securities in the Registration Statement pursuant to the exercise of
and in full satisfaction of such rights;
(xx) Each Selling Stockholder which is not a natural
person has full right, power and authority to enter into and to
perform its obligations under the Power of Attorney and Custody
Agreement to be executed and delivered by it in connection with the
transactions contemplated herein; the Power of Attorney and Custody
Agreement of each Selling Stockholder that is not a natural person has
been duly authorized by such Selling Stockholder; the Power of
Attorney and Custody Agreement of each Selling Stockholder has been
duly executed and delivered by or on behalf of such Selling
Stockholder; and the Power of Attorney and Custody Agreement of each
Selling Stockholder constitutes the valid and binding agreement of
such Selling Stockholder, enforceable in accordance with its terms,
except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general equitable
principles;
(xxi) Each of the Selling Stockholders has full
right, power and authority to enter into and to perform its
obligations under this Agreement and to sell, transfer, assign and
deliver the Shares to be sold by such Selling Stockholder hereunder;
(xxii) This Agreement has been duly authorized by each
Selling Stockholder that is not a natural person and has been duly
executed and delivered by or on behalf of each Selling Stockholder;
and
(xxiii) Upon the delivery of and payment for the Shares
as contemplated in this Agreement, each of the Underwriters will
receive valid marketable title to the Shares purchased by it from such
Selling Stockholder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest. In rendering such
opinion, such counsel may assume that the Underwriters are without
notice of any defect in the title of the Shares being purchased from
the Selling Stockholders.
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In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or the State of California
and Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person), and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, an opinion
of Brobeck, Phleger & Harrison LLP, in form and substance satisfactory to you,
with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a letter
from Ernst & Young LLP addressed to the Company and the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be,
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confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in such letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiary considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from Ernst
& Young LLP shall be addressed to or for the use of the Underwriters in form and
substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth their opinion with respect to their examination
of the consolidated balance sheet of the Company as of December 31, 1996 and
related consolidated statements of operations, stockholders' equity, and cash
flows for the twelve (12) months ended December 31, 1996, (iii) state that Ernst
& Young LLP has performed the procedure set out in Statement on Auditing
Standards No. 71 ("SAS 71") for a review of interim financial information and
providing the report of Ernst & Young LLP as described in SAS 71 on the
financial statements for the six months ended June 30, 1997, and (iv) address
other matters agreed upon by Ernst & Young LLP and you. In addition, you shall
have received from Ernst & Young LLP a letter addressed to the Company and made
available to you for the use of the Underwriters stating that their review of
the Company's system of internal accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the Company's
consolidated financial statements as of December 31, 1996, did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any later
date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
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(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied with all
the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material information
required to be included therein by the Act and the Rules and
Regulations and in all material respects conformed to the requirements
of the Act and the Rules and Regulations, the Registration Statement,
and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, and, since the effective date of the
Registration Statement, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so
set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiary considered as one
enterprise, (b) any transaction that is material to the Company and
its subsidiary considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any obligation,
direct or contingent, that is material to the Company and its
subsidiary considered as one enterprise, incurred by the Company or
its subsidiary, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding
indebtedness of the Company or its subsidiary that is material to the
Company and its subsidiary considered as one enterprise, (e) any
dividend
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or distribution of any kind declared, paid or made on the capital
stock of the Company or its subsidiary, or (f) any loss or damage
(whether or not insured) to the property of the Company or its
subsidiary which has been sustained or will have been sustained which
has a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of
the Company and its subsidiary considered as one enterprise.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material
respect on the Closing Date; or
(ii) Such Selling Stockholder has not complied with
any obligation or satisfied any condition which is required to be
performed or satisfied on the part of such Selling Stockholder at or
prior to the Closing Date.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Stockholder and each beneficial owner of shares of Common Stock, other than
__________________, in writing prior to the date hereof that such person will
not, during the Lock-up Period, effect the Disposition of any Securities now
owned or hereafter acquired directly by such person or with respect to which
such person has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to limited
partners or stockholders of such person, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of Robertson, Stephens & Company LLC. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. Furthermore, such
person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction; and
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(j) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Stockholders or officers of the Selling Stockholders (when the Selling
Stockholder is not a natural person) as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholders will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
7. Option Shares.
-------------
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase up to an aggregate of
________ Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of thirty (30) days after the date on which the Firm
Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses
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<PAGE>
borne by them by reason of such breach. Such delivery and payment shall take
place at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, 1117 California Avenue, Palo Alto, California 94304 or at such
other place as may be agreed upon among the Representatives and the Company (i)
on the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to the Closing
Date, or (ii) on a date which shall not be later than the third (3rd) full
business day following the date the Company receives written notice of the
exercise of such option, if such notice is received by the Company less than two
(2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Stockholders herein, to the accuracy of the statements of the Company, the
Selling Stockholders and officers of the Company made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder, and to the condition that all proceedings
taken at or prior to the payment date in connection with the sale and transfer
of such Option Shares shall be satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may request in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants or agreements of the Company
and the Selling Stockholders or the compliance with any of the conditions herein
contained.
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8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages or liabilities, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable
-------- -------
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
such Preliminary Prospectus or the Prospectus, or any such amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
-------- -------
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
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<PAGE>
(b) Each Selling Stockholder, severally and not jointly, agrees
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject (including, without limitation, in its capacity as an Underwriter or as
a "qualified independent underwriter" within the meaning of Schedule E or the
Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of any representation, warranty,
agreement or covenant of such Selling Stockholder herein contained, (ii) any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company or such Underwriter by such Selling
Stockholder, directly or through such Selling Stockholder's representatives,
specifically for use in the preparation thereof, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement provided
-------- -------
in this Section 8(b) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of a material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such
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<PAGE>
Selling Stockholder may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of any representation, warranty,
agreement or covenant of such Underwriter herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 8(c) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof, and agrees to reimburse the Company and each such
Selling Stockholder for any legal or other expenses reasonably incurred by the
Company and each such Selling Stockholder in connection with investigating or
defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Stockholder and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
each Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
-------- -------
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are
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<PAGE>
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified parties
under Section 8(a), 8(b) or 8(c) hereof who are parties to such action), (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
--------
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Stockholders are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
- -------- -------
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter in excess of the amount of damages which such Underwriter
has otherwise required to pay and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to
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<PAGE>
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(e) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls the Underwriters or the Company or any Selling
Stockholder within the meaning of the Act or the Exchange Act and each officer
of the Company who signed the Registration Statement and each director of the
Company and each officer of the Selling Stockholders who signed the Registration
Statement.
(f) The liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the aggregate initial public offering price of the
Selling Stockholder Shares sold by such Selling Stockholder to the Underwriters
minus the amount of the underwriting discount paid thereon to the Underwriters
by such Selling Stockholder. The Company and such Selling Stockholders may
agree, as among themselves and without limiting the rights of the Underwriters
under this Agreement, as to the respective amounts of such liability for which
they each shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company, the Selling Stockholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any controlling person within the meaning of the Act or the Exchange Act, or
by or on behalf of the Company or any Selling Stockholder, or any of their
officers, directors or controlling persons within the meaning of the Act or the
Exchange Act, and shall survive the delivery of the Shares to the several
Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the
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Firm Shares, the remaining Underwriters shall be obligated, severally in
proportion to their respective commitments hereunder, to take up and pay for the
Firm Shares of such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Shares to
be purchased by the remaining Underwriters and substituted underwriter or
underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor any Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholders and the other Underwriters for damages, if any,
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<PAGE>
resulting from such default) be liable to the Company or any Selling Stockholder
(except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i)
6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiary considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
-41-
<PAGE>
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event
of termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555
California Street, Suite 2600, San Francisco, California 94104, telecopier
number (415) 781-0278, Attention: General Counsel; if sent to the Company, such
notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Medicode, Inc., 5225 Wiley Post Way,
Suite 500, Salt Lake City, Utah 84116, telecopier number (801) 536-1709,
Attention: Eugene S. Catterina, Chief Executive Officer; if sent to one or more
of the Selling Stockholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
___________________________________________________, as Attorney-in-Fact for the
Selling Stockholders, at __________________, telecopier number (___) ________.
13. Parties. This Agreement shall inure to the benefit of and be binding
-------
upon the several Underwriters and the Company and the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or corporation, other than the parties hereto and their
respective executors, administrators, successors and assigns, and the
controlling persons within the meaning of the Act or the Exchange Act, officers
and directors referred to in Section 8 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or corporation. No purchaser of any of
-42-
<PAGE>
the Shares from any Underwriter shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
Robertson, Stephens & Company LLC on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
------------
each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several Underwriters.
Very truly yours,
MEDICODE, INC.
By: ___________________________________
SELLING STOCKHOLDERS
By: ___________________________________
Attorney-in-Fact for the Selling
Stockholders named in Schedule B
hereto
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
HAMBRECHT & QUIST LLC
-43-
<PAGE>
WESSELS, ARNOLD & HENDERSON, L.L.C.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.
By ________________________________________
Authorized Signatory
-44-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
- -------------------------------- -------------
<S> <C>
Robertson, Stephens & Company LLC...............................
Hambrecht & Quist LLC
Wessels, Arnold & Henderson, L.L.C..............................
Total...................................................... ---------
=========
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Firm Company
Company Shares To
- --------------------------------
Medicode, Inc. Be Sold
--------------
<S> <C>
----------
Total....................................................
==========
</TABLE>
<TABLE>
<CAPTION>
Number of
Selling
Stockholder
Shares
Name of Selling Stockholder To Be Sold
- ------------------------------------- --------------
<S> <C>
----------
Total....................................................
==========
</TABLE>
<PAGE>
EXHIBIT 3.1
ARTICLES OF RESTATEMENT
OF THE
ARTICLES OF INCORPORATION
OF
MEDICODE, INC.
September 10, 1993
In accordance with Section 16-10a-1007 of the Utah Revised Business
Corporation Act, Medicode, Inc., a Utah corporation (the "Company"), hereby
declares and certifies as follows:
1. The name of the Company is Medicode, Inc.
2. The text of the Amended and Restated Articles of Incorporation adopted
by the shareholders of the Company (the "Shareholders") is attached hereto as
Exhibit A and is incorporated herein by this reference.
- ---------
3. The amendments to the Articles of Incorporation contained in the
Amended and Restated Articles of Incorporation (the "Amendments") do not provide
for a reclassification of issued shares of the Company.
4. The Amended and Restated Articles of Incorporation were approved on
September 9, 1993 at a special meeting of the Shareholders in accordance with
the requirements of the Utah Revised Business Corporation Act and the Bylaws of
the Company.
5. There were, as of September 9, 1993, 2,521,970 shares of the Common
Stock of the Company were issued and outstanding. No other shares of the
capital stock of the Company were issued and outstanding. No shareholders of
the Company were entitled to vote in separate voting groups. At the special
meeting of the Shareholders approving the Amendments, 2,402,498 shares of the
Common Stock of the Company were indisputably represented. 2,332,098 shares
voted to approve the Amendments. 70,400 shares voted against the Amendments.
<PAGE>
IN WITNESS WHEREOF, these Articles of Restatement have been executed by the
Company as of the date first written above.
Medicode, Inc., a Utah corporation
By /s/ EILEEN S. SHANON
---------------------------------
Eileen S. Shanon
President
Attest:
/s/ KEVIN W. PEARSON
- --------------------
Kevin W. Pearson
Secretary
-2-
<PAGE>
EXHIBIT A
---------
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
MEDICODE, INC.
Pursuant to the provisions of Sections 1003, 1006 and 1007 of the Utah
Revised Business Corporation Act, the undersigned corporation, by and through
its authorized officers and with the written consent of its Board of Directors
(the "Board") and stockholders (the "Stockholders"), hereby amends its Articles
of Incorporation, and adopts the following Amended and Restated Articles of
Incorporation:
ARTICLE I
---------
NAME
The name of the corporation (the "Corporation") is
Medicode, Inc.
ARTICLE II
----------
PURPOSES AND POWERS
The Corporation is organized to perform services and produce products for
health care providers and insurers and to engage in any and all lawful acts,
activities, and/or pursuits for which a corporation may presently or hereafter
be organized under the Utah Revised Business Corporation Act.
The Corporation shall have all powers allowed by law, including without
limitation those powers described in Section 302 of the Utah Revised Business
Corporation Act, as amended and supplemented. The purposes stated herein shall
be construed as powers as well as purposes and the enumeration of a specific
purpose or power shall not be construed to limit or restrict the meaning of
general terms or the general powers; nor shall the expression of one thing be
deemed to exclude another not expressed, although it be of like nature.
<PAGE>
ARTICLE III
-----------
AUTHORIZED SHARES
The Corporation is authorized to issue two classes of shares to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares the Corporation is authorized to issue is Fifty Five Million
(55,000,000) shares. The number of shares of Common Stock authorized is Fifty
Million (50,000,000) shares. The number of shares of Preferred Stock authorized
is Five Million (5,000,000) shares.
In accordance with Section 602 of the Utah Revised Business Corporation
Act, the Board, without shareholder action, may amend the Articles of
Incorporation of the Corporation, pursuant to the authority granted to the Board
by Subsection 1002(1)(e) of the Utah Revised Business Corporation Act, to do any
of the following:
(a) designate, in whole or in part, the preferences, limitations and
relative rights, within the limits set forth in Section 601 of the Utah Revised
Business Corporation Act, of any class of shares before the issuance of any
shares of that class;
(b) create one or more series within a class of shares, fix the
number of shares of each such series, and designate, in whole or in part, the
preferences, limitations, and relative rights of the series, within the limits
set forth in Section 601 of the Utah Revised Business Corporation Act, all
before the issuance of any shares of that series;
(c) alter or revoke the preferences, limitations and relative rights
granted to or imposed upon any wholly unissued class of shares or any wholly
unissued series of any class of shares; or
(d) increase or decrease the number of shares constituting any
series, the number of shares of which was originally fixed by the Board, either
before or after the issuance of shares of the series, provided that the number
may not be decreased below the number of shares of the series then outstanding,
or increased above the total number of authorized shares of the applicable class
of shares available for designation as a part of the series.
The preferences, limitations and relative rights of each class of shares
(to the extent established hereby) are as follows:
1. Series. The shares of Preferred Stock may be issued from time to time
------
in one or more series. The first series of Preferred Stock shall be designated
"Series A Preferred Stock" and the Corporation is authorized to issue 2,866,178
shares of Series A Preferred Stock.
2. Voting. The shares of the Corporation shall have the following
------
preferences, limitations and relative rights with respect to voting:
-2-
<PAGE>
(a) Common Stock. Except as otherwise expressly provided by law or
------------
in this Article III, the voting rights of the Common Stock shall be as follows:
(i) Each outstanding share of Common Stock shall be entitled
to one (1) vote on each matter to be voted on by the stockholders of the
Corporation.
(ii) The holders of the outstanding shares of Common Stock (the
"Common Stockholders"), as a voting group (the "Common Voting Group"), shall be
entitled to elect one member of the Board, and to fill any vacancy (and replace
any successor elected by the Board to fill any vacancy) created upon the
resignation or removal of any director so elected by the Common Voting Group.
(iii) The Common Stockholders and the holders of Preferred Stock
(the "Preferred Stockholders"), voting as a voting group (the "Joint Voting
Group"), shall be entitled to elect certain other members of the Board as
provided in Section 2(b)(iv) below.
(b) Preferred Stock. Except as otherwise expressly provided by law
---------------
or in this Article III, the voting rights of the Preferred Stock shall be as
follows:
(i) Each share of Preferred Stock shall be entitled to vote,
on each matter to be voted on by the stockholders of the Corporation, the number
of votes which it would be entitled to cast if it were converted into shares of
Common Stock in accordance with this Article III (such that, for shares of
Preferred Stock held on the record date fixed of any meeting, or on the
effective date of any written consent, shares of Preferred Stock shall entitle
the Preferred Stockholder to the number of votes as shall be equal to the whole
number of shares of Common Stock into which such holder's shares of Preferred
Stock are convertible immediately after the close of business on the record date
fixed for the applicable meeting or the effective date of the applicable written
consent).
(ii) Shares of Preferred Stock may be voted with the shares of
Common Stock at any annual or special meeting of stockholders of the
Corporation, and may act by written consent in the same manner as the Common
Stock.
(iii) The holders of Series A Preferred Stock (the "Series A
Stockholders"), as a voting group (the "Series A Voting Group"), shall be
entitled to elect one member of the Board, and to fill any vacancy (and replace
any successor elected by the Board to fill any vacancy) created in respect of
any director so elected by the Series A Voting Group.
(iv) The Preferred Stockholders and Common Stockholders, voting
as the Joint Voting Group, shall be entitled to elect the members of the Board
who are not elected by other voting groups as provided in this Article III.
3. Liquidation. The shares of the Corporation shall have the following
-----------
preferences, limitations and relative rights with respect to the liquidation of
the Corporation:
-3-
<PAGE>
(a) Preferred Stock . After payment or provision for payment of the
---------------
debts and other liabilities of the Corporation, upon any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the Preferred Stockholders shall be entitled to the following:
(i) To be paid, out of the assets of the Corporation available
for distribution to its stockholders, whether from capital, surplus or earnings,
before any payment shall be made in respect of the Common Stock, an amount equal
to the Initial Sales Price (as defined below) of their respective series of
Preferred Stock, plus all declared and unpaid dividends thereon to the date
fixed for distribution.
(ii) If the assets of the Corporation available for
distribution to its stockholders are insufficient to pay the Preferred
Stockholders the full preferential amounts to which they shall be entitled
pursuant to the terms of Section 3(a)(i) above, then the entire assets of the
Corporation legally available for distribution shall be distributed ratably
among the Preferred Stockholders in such a manner that the amount to be
distributed to each Preferred Stockholder shall equal the amount obtained by
multiplying the entire assets of the Corporation legally available for
distribution by a fraction, the numerator of which shall be the sum of the
products obtained by multiplying the number of shares of each series of
Preferred Stock then held by each Preferred Stockholder by the respective
"Liquidation Preference" of the applicable series of Preferred Stock, and the
denominator of which shall be the sum of the products obtained by multiplying
the total number of shares of Preferred Stock then outstanding by the respective
Liquidation Preference of the applicable series of Preferred Stock. Unless
otherwise provided herein, the "Liquidation Preference" of each series of
Preferred Stock shall be equal to the amount of the Initial Sales Price of that
series of Preferred Stock.
(b) All Stockholders. After payment or provision for payment of the
----------------
debts and other liabilities of the Corporation and the setting apart or payment
in full of the preferential amounts due the Preferred Stockholders pursuant to
Section 3(a)(i) above, the remaining assets and funds of the Corporation
available for distribution to stockholders, if any, shall be distributed and
paid to the Common Stockholders and the Preferred Stockholders, on a pro-rata
basis, according to the number of shares of Common Stock held by them. For
purposes of this Section 3, the Preferred Stockholders shall be treated as if
all shares of Preferred Stock held by them have been converted into shares of
Common Stock in accordance with this Article III.
(c) Transfer of Assets or Merger. The following shall be deemed to
----------------------------
be included within the meaning of a "liquidation of the Corporation" as this
phrase is used in this Section 3:
(i) any sale, transfer or other disposition of all or
substantially all of the assets of the Corporation (except a transfer or other
disposition by pledge or mortgage to a bona fide lender of the Corporation);
(ii) any merger or consolidation of the Corporation with or
into another corporation or entity (except, if stockholders of the Corporation
immediately prior to any such transaction are holders of at least fifty-one
percent (51%) of the voting securities or voting interests of
-4-
<PAGE>
the surviving or acquiring corporation or entity immediately after such
transaction, and for the purposes of this calculation equity securities which
any shareholder of the Corporation owned immediately prior to such merger or
consolidation as a shareholder of another party to the transaction shall be
disregarded, then such merger or consolidation shall not be deemed to be a
"liquidation of the Corporation" ).
(d) Distribution of Assets other than Cash. In the event of any
--------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation which will involve the distribution of assets other than
cash, the Board shall promptly engage competent, independent appraisers to
determine the value of the assets to be distributed to the Preferred
Stockholders and the Common Stockholders. The Corporation shall, upon receipt
of such appraiser's valuation, give prompt written notice to each of the
Preferred Stockholders and Common Stockholders of the appraiser's valuation.
4. Dividends. Dividends may be paid on the outstanding shares of the
---------
Corporation as follows:
(a) Compliance with Law Dividends may only be paid in accordance with
-------------------
Section 640(3) of the Utah Revised Business Corporation Act out of assets
legally available therefor.
(b) Dividends Noncumulative. Dividends shall be paid as declared by
-----------------------
the Board, and the right to dividends shall not be cumulative. No right shall
accrue to the stockholders by reason of the fact that dividends are not declared
in any year, nor shall any undeclared or unpaid dividend bear or accrue
interest.
(c) Preference. Dividends on Preferred Stock shall be paid prior to
----------
the payment of any cash dividends on Common Stock.
(d) Preferred Stock. in any fiscal year, the Preferred Stockholders
---------------
may receive dividends, subject to and in accordance with the following:
(i) Special Definitions. For purposes of this Section 4, the
-------------------
following definitions shall apply:
A. "Initial Sales Price" shall mean the weighted average
of the sales price (per share) of the applicable series of Preferred Stock when
such shares were sold by the Corporation (excluding underwriting commissions
and/or discounts).
B. "Percentage Dividend," with respect to each series of
Preferred Stock, shall mean the amount in cash of the dividend determined by
multiplying that certain percentage (specified in this Article III for each
series of Preferred Stock) by the Initial Sales Price of the applicable series
of Preferred Stock.
-5-
<PAGE>
(ii) Percentage Dividends. Subject to Sections 4(a) and 4(b)
--------------------
above, with respect to each series of Preferred Stock, Percentage Dividends
shall be paid to the Preferred Stockholders in each fiscal year.
(iii) Percentage for Series A Preferred Stock. The applicable
---------------------------------------
percentage for determining the Percentage Dividend of the Series A Preferred
Stock shall be Ten percent (10%). The Initial Sales Price of the Series A
Preferred Stock is $6.98.
(e) All Stockholders. Subject to Section 4(a) above, if the
----------------
Percentage Dividends have been paid in whole in any one fiscal year and if the
Board shall elect to declare additional dividends in that fiscal year, such
additional dividends shall be distributed and paid to the Common Stockholders
and the Preferred Stockholders, on a pro-rata basis, according to the number of
shares of Common Stock held by them. For purposes of this Section 4(e), the
Preferred Stockholders shall be treated as if all shares of Preferred Stock held
by them have been converted into shares of Common Stock in accordance with this
Article III.
5. Conversion Rights. Each share of Preferred Stock shall be convertible
-----------------
into share(s) of Common Stock, in accordance with the rights and obligations
specified below (the "Conversion Rights"):
(a) Option to Convert. At any time after the date of issuance of
-----------------
Preferred Stock, the Preferred Stockholders, at their option, may exercise the
Conversion Rights.
(b) Conversion Ratio. Each outstanding share of Preferred Stock may
----------------
be converted into the number of fully paid and non-assessable shares of Common
Stock determined by dividing the Initial Sales Price (unless otherwise expressly
provided herein) by the conversion price of the applicable series of Preferred
Stock (the "Conversion Price") in effect at the time of conversion. The
Conversion Price shall be subject to adjustment as provided in Section 5(g)
below.
(c) Procedures for Conversion. Except as otherwise expressly
-------------------------
provided herein, the conversion of shares of Preferred Stock shall be subject to
the following:
(i) No fractional shares of Common Stock shall be issued upon
conversion of Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Corporation shall pay cash equal to such
fraction multiplied by the then effective Conversion Price. All shares of a
series of Preferred Stock held shall be aggregated for the purposes of
determining whether the conversion would result in the issuance of any
fractional share.
(ii) Before any Preferred Stockholder shall be entitled to
convert shares of Preferred Stock into full shares of Common Stock, such
Preferred Stockholder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or any transfer agent for the
applicable series of Preferred Stock, and shall give written notice to the
Corporation at such office that he elects to convert the same. The Corporation
shall, as soon as practicable thereafter, issue and
-6-
<PAGE>
deliver at such office to such Preferred Stockholder a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled in accordance with this Section 5, a check payable to such holder in
the amount of any cash amounts payable as a result of the conversion of any
shares of Preferred Stock into fractional shares of Common Stock, any declared
and unpaid dividends on the converted Preferred Stock and, if less than all of
the shares of Preferred Stock represented by such certificate are converted into
Common Stock, a certificate representing the shares of Preferred Stock not
converted into Common Stock. In the event of any conversion at the election of
a Preferred Stockholder, such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
(d) Automatic Conversion. Each share of a series of Preferred Stock
--------------------
shall automatically be converted into shares of Common Stock at the then
effective Conversion Price for such series of Preferred Stock, upon the earlier
of the following:
(i) the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), covering the offer and sale of
Common Stock for the account of the Corporation to the public at a price per
share (determined without regard to underwriter commissions and expenses) of not
less than $10.47 (subject to proportionate adjustment in the event of a stock
split, reverse stock split, reclassification or stock dividend), and an
aggregate gross offering price of at least Ten Million Dollars ($10,000,000),
before deduction of underwriting discounts and commissions; or
(ii) the vote to require conversion by the holders of at least
two-thirds of the total number of the then outstanding shares of a series
Preferred Stock.
(e) Conditions of Automatic of Conversion. The automatic conversion
-------------------------------------
of shares of the Preferred Stock pursuant to Section 5(d) above is subject to
the following:
(i) If the conversion is in connection with an underwritten
public offering of securities registered pursuant to the Securities Act, then
the conversion shall be conditioned upon the closing with the underwriter of the
sale of securities pursuant to such offering, in which event the person(s)
entitled to receive Common Stock issuable upon such conversion of Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the date of the closing of such sale of securities (the
"Closing Date"); or
(ii) If the conversion is in connection with the vote of the
holders of at least two-thirds of the total number of the then outstanding
shares of a series of Preferred Stock to require conversion, then such
conversion shall have been deemed to have been made immediately prior to the
close of business on the effective date of the vote (or such other time as may
have been set forth in the resolution approved by the Preferred Stockholders)
(the "Effective Date"), and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all
-7-
<PAGE>
purposes as the record holder or holders of such shares of Common Stock on such
date (or such other time as may have been set forth in the resolution approved
by the Preferred Stockholders).
(f) Notice. In the event of an automatic conversion pursuant to
------
Section 5(d) above, notice of such conversion shall be given by the Corporation
by mail, postage prepaid, to the Preferred Stockholders at their addresses shown
in the Corporation's records, within a reasonable time after the Closing Date or
the Effective Date, as the case may be. On or after the Closing Date or the
Effective Date, as the case may be, as specified in such notice, each affected
Preferred Stockholder shall surrender the certificate or certificates
representing such Preferred Stockholder's shares of Preferred Stock for the
number of shares of Common Stock to which such holder is entitled, at the office
of the Corporation or any transfer agent for the applicable series of Preferred
Stock. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such Preferred Stockholder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid, and a check payable to the holder in the amount of any
cash amounts payable as a result of the conversion of any shares of Preferred
Stock into fractional shares of Common Stock, and the amount of any declared and
unpaid dividends on the converted Preferred Stock. Notwithstanding that any
certificate representing Preferred Stock to be converted shall not have been
surrendered, on and after the Closing Date or the Effective Date (as the case
may be) each such Preferred Stockholder shall be treated for all purposes as the
record holder of the number of shares of Common Stock issuable to such holder
upon such conversion.
(g) Adjustment of Conversion Price. The Conversion Price of each
------------------------------
series shall be subject to adjustment as follows:
(i) Special Definitions. For purposes of this Section 5, the
-------------------
following definitions shall apply:
A. "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
B. "Original Issue Date" shall mean the date on which the
-------------------
first share of the applicable series of Preferred Stock was issued.
C. "Convertible Securities" shall mean any evidence of
----------------------
indebtedness, shares (other than Common Stock) or other securities convertible
into or exchangeable for Common Stock.
D. "Additional Shares of Common" shall mean all shares of
---------------------------
Common Stock issued (or, pursuant to Section 5(g)(iii) below, deemed to be
issued) by the Corporation on or after the Original Issue Date, other than
shares of Common Stock issued or issuable at any time:
(1) upon conversion of Preferred Stock authorized
herein;
-8-
<PAGE>
(2) upon exercise of Options, or conversion of
Convertible Securities, outstanding on the Original Issue Date, including,
without limitation, the following:
a. the warrant to purchase 100,000 shares of
Common Stock at $0.01 per share which may be issued to the investors (the
"Investors") who enter into that certain Master Investment Agreement (the
"Master Agreement" ) with the Corporation,
b. the warrant to purchase 523,236 shares of
Common Stock at $2.53 per share which may be issued to the investors pursuant to
the Master Investment Agreement; and
c. the convertible promissory notes, dated
October 30, 1992, executed by Softouch Software, Inc. (formerly Medical Bill
Review, Inc. ), a subsidiary of the Corporation, convertible into 112,378 shares
of Common Stock.
(3) to officers, directors, employees and consultants
of the Corporation to be designated and approved by the Board;
(4) in connection with capital asset leases or
borrowings for the acquisition of capital assets pursuant to approval by the
Board; or
(5) as a dividend or distribution on Preferred Stock
authorized herein or pursuant to any event for which adjustment is made pursuant
to Sections 5(g)(vi) below.
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of a particular series of Preferred Stock shall be made in
respect of the issuance of Additional Shares of Common unless the consideration
per share for an Additional Share of Common issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to such issuance, for such share of Preferred Stock.
(iii) Deemed Issuance of Additional Shares of Common.
----------------------------------------------
A. Options and Convertible Securities. In the event the
----------------------------------
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common issued as of the
time of such issuance, or in the case such a record date shall have been fixed,
as of the close of business on such record date, provided that Additional Shares
of Common shall not be deemed to have been issued unless the consideration per
share (determined pursuant to Section 5(g)(v) hereof) of such Additional Shares
of
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<PAGE>
Common would be less than the applicable Conversion Price in effect on the date
of and immediately prior to such issuance, or such record date, as the case may
be, and provided further that in any such case in which Additional Shares of
Common are deemed to be issued:
(1) no further adjustment in the applicable Conversion
Price shall be made upon the subsequent issuance of Convertible Securities or
shares of Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Corporation, or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
applicable Conversion Price computed upon the original issuance thereof (or upon
the occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(3) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original
issuance thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
a. in the case of Convertible Securities or
options for Common Stock, the only Additional Shares of Common issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issuance of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issuance of all such Convertible Securities which were actually
converted or exchanged, plus the additional consideration, if any, actually
received by the Corporation upon such conversion or exchange, and
b. in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issuance of such options, and the
consideration received by the Corporation for the Additional Shares of Common
deemed to have been then issued was the consideration actually received by the
Corporation for the issuance of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Corporation upon the
issuance of the Convertible Securities with respect to which such Options were
actually exercised;
(4) no readjustment pursuant to clause (2) or (3)
above shall have the effect of increasing the applicable Conversion Price to an
amount which exceeds the lower of (i) the applicable Conversion Price on the
original adjustment date or (ii) the applicable Conversion Price
-10-
<PAGE>
that would have resulted from any issuance of Additional Shares of Common
between the original adjustment date and such readjustment date; and
(5) in the case of any options which expire by their
terms not more than 30 days after the date of issuance thereof, no adjustment of
the applicable Conversion Price shall be made until the expiration or exercise
of all such options, whereupon such adjustments shall be made in the same manner
provided in clause (3) above.
B. Stock Dividends. In the event the Corporation at any
---------------
time or from time to time after the Original issue Date shall declare or pay any
dividend on Common Stock payable in Common Stock, and with respect to which no
similar Common Stock dividend is to be distributed to holders of each series of
Preferred Stock, then and in any such event, Additional Shares of Common shall
be deemed to have been issued immediately after the close of business on the
record date for the determination of holders of any class of securities entitled
to receive such dividend.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common. In the event the Corporation shall issue Additional Shares of
- ----------------
Common (including Additional Shares of Common deemed to be issued pursuant to
Section 5(g)(iii)) without consideration or for a consideration per share less
than the Conversion Price of a series immediately prior to such issuance, then
and in such event, such Conversion Price shall be reduced, concurrently with
such issuance, to a price (calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock which the aggregate
consideration received by the corporation for the total number of Additional
Shares of Common so issued would purchase at such Conversion Price; and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of such Additional Shares of
Common so issued; and provided, further, that for the purposes of this Section
5, all shares of Common Stock issuable upon exercise of outstanding Options and
upon conversion of outstanding Convertible Securities shall be deemed to be
outstanding, and immediately after any Additional Shares of Common are deemed
issued pursuant to Section 5(g)(iii) above, such Additional Shares of Common
shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 5, the consideration received by the Corporation for the issuance of any
Additional Shares of Common shall be computed as follows:
A. Cash and Property: Such consideration shall:
-----------------
(1) insofar as it consists of cash, be computed at the
net amount of cash received by the Corporation excluding discounts and
commissions payable by the Corporation in connection with such issuance or sale
and amounts paid or payable for accrued interest or accrued dividends;
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<PAGE>
(2) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issuance, as
determined in good faith by the Board net of expenses as set forth in clause (1)
above; and
(3) in the event Additional Shares of Common are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board.
B. Options and Convertible Securities. The consideration
----------------------------------
per share received by the Corporation for Additional Shares of Common deemed to
have been issued pursuant to Section 5(g)(iii) above, relating to Options and
Convertible Securities, shall be determined by dividing:
(1) the total amount, if any, received or receivable
by the Corporation as consideration for the issuance of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(2) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities or, in the case of Options for Convertible Securities and the
conversion or exchange of such Convertible Securities.
C. Stock Dividends. Any Additional Shares of Common
---------------
deemed to have been issued relating to stock dividends shall be deemed to have
been issued for no consideration.
(vi) Adjustments for Subdivisions, Combinations or
---------------------------------------------
Consolidations of Common Stock. In the event the outstanding shares of Common
- ------------------------------
Stock shall be subdivided or increased (by stock split or otherwise than by
payment of a dividend in Common Stock) into a greater number of shares of Common
Stock, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each Preferred
Stockholder a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any Preferred
Stockholder, furnish or cause to be furnished to such Preferred Stockholder a
like certificate setting forth (i) all such adjustments and readjustments since
the original date of issuance of any shares of Preferred Stock, (ii) the
Conversion Price of each series of Preferred Stock at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of such
Preferred Stockholder's shares of Preferred Stock.
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<PAGE>
(h) Series A Preferred Stock Conversion Rights. The Series A
------------------------------------------
Preferred Stock shall have the following rights and obligations:
(i) Each outstanding share of Series A Preferred Stock may be
converted into the number of fully paid and nonassessable shares of Common Stock
determined by dividing $6.98 by the conversion price of the Series A Preferred
Stock (the "Series A Conversion Price"), determined as provided in Section 5(g)
above, in effect at the time of conversion.
(ii) The initial Series A Conversion Price shall be $6.98 per
share of Common Stock.
6. Residual Rights. All rights accruing to the outstanding shares of the
---------------
Corporation not expressly provided for to the contrary herein or in the
Corporation's bylaws or in any amendment hereto or thereto shall be vested in
Common Stock.
7. Reservation of Common Stock. Upon issuance by the Corporation of any
---------------------------
shares of Preferred Stock which are convertible into shares of Common Stock, the
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
the then outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all the then outstanding shares of Preferred Stock, the
Corporation shall take such corporate action as, in the opinion of its counsel,
may be necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such purpose.
8. Notice of Record Date. In the event that the Corporation shall
---------------------
propose at any time:
(a) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(b) to offer for subscription pro rata to the holders of any class or
series of its shares any additional shares of stock of any class or series or
other rights;
(c) to effect any reclassification or recapitalization of its
outstanding Common Stock involving a change in Common Stock; or
(d) to consolidate or merge with or into any other corporation, or
sell, lease or convey all or substantially all of its property or business, or
to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
Preferred Stockholders:
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<PAGE>
(i) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the Common Stockholders shall be
entitled thereto) or for determining rights to vote in respect to the matters
referred to in (c) and (d) above; and
(ii) in the case of the matters referred to in (c) and (d)
above, at least 20 days' prior written notice of the date when the same shall
take place (and specifying the date on which the Common Stockholders shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the Preferred Stockholders at the address for each such
holder as shown on the books of the Corporation.
9. Changes. In addition to any other rights provided by law, so long as
-------
shares of Preferred Stock shall be outstanding, the Corporation shall not,
without first obtaining the affirmative vote or written consent of the holders
of not less than a majority of the outstanding shares of Preferred Stock, voting
as a voting group (the " Preferred Voting Group" ) (except that in the event any
action set forth below would adversely effect only one series of Preferred
Stock, such action shall require the affirmative vote or written consent of the
holders of not less than a majority of the outstanding shares of such series):
(a) amend or repeal any provision of, or add any provision to, the
Articles of Incorporation or Bylaws of the Corporation if such action would
materially and adversely alter or change the preferences, limitations and
relative rights of any outstanding shares of Preferred Stock;
(b) authorize or issue shares of any class of shares having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred Stock or having any
special voting rights or authorize or issue shares of any class or any bonds,
debentures, notes or other obligations convertible into or exchangeable for, or
having option rights to purchase, any shares of the Corporation having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred Stock or having any
special voting rights;
(c) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred Stock or having any
special voting rights;
(d) consolidate or merge with or into any other corporation or sell
or otherwise transfer in a single transaction or a series of related
transactions all or substantially all the assets of the Corporation, or
otherwise effect a reorganization of the Corporation unless the stockholders of
the Corporation immediately prior to any such transaction are holders of at
least 51% of the voting securities of the surviving or acquiring corporation
immediately thereafter (and for purposes of this calculation equity securities
which any shareholder of the Corporation owned immediately prior to such merger
or consolidation as a shareholder of another party to the transaction shall be
disregarded); or
-14-
<PAGE>
(e) increase the authorized number of shares of Preferred Stock or
Common Stock.
Any of the foregoing obligations may be amended only by the holders of
not less than a majority of the outstanding shares of Preferred Stock, voting as
the Preferred Voting Group.
ARTICLE IV
----------
TRANSFER OF STOCK
Any sale of shares of capital stock of the Corporation shall be subject to
the restrictions set forth in this Article IV. Any holder of capital stock
("Stockholder") desiring to sell any shares of the capital stock of the
Corporation (the "Offered Shares") shall first offer the Offered Shares to the
Corporation and the other Stockholders in the following manner:
(a) The selling Stockholder shall provide written notice by certified
mail to the Secretary of the Corporation (the "Notice of Sale") of (i) his or
her proposal to sell the Offered Shares, (ii) the sales price per share, and
(iii) the terms upon which the sale is to be made. The Corporation shall have
five (5) days from the receipt of the Notice of Sale (the "Corporation Purchase
Period") to exercise its right to purchase all or any full number of the Offered
Shares. The purchase of the Offered Shares may be authorized by the Board
without any action by the Stockholders.
(b) If the Corporation does not exercise its right to purchase all of
the Offered Shares within the Corporation Purchase Period, the Secretary of the
Corporation shall, within five (5) days after the conclusion of Corporation
Purchase Period, give written notice to each of the other Stockholders (the
"Stockholder Notice") of (i) the number of Offered Shares available for purchase
and not purchase by the Corporation, (ii) the sales price per share, and (iii)
the terms upon which the sale is to be made. The Stockholder Notice shall be
sent by mail to each of the Stockholders (except the selling Stockholder) at
such Stockholder's last address as it appears in the records of the Corporation.
Any of the Stockholders desiring to purchase part or all of the Offered Shares
shall provide to the Secretary of the Corporation, within five (5) days of the
mailing of the Stockholder Notice, a written offer to purchase all or part of
the Offered Shares (the "Purchase Offer"). The Purchase Offer shall specify the
number of Offered Shares the Stockholder desires to purchase and shall be
accompanied by the amount of the sales price with authorization to pay such
sales price against delivery of the specified number of Offered Shares.
(c) If the Stockholders offer to purchase more than the number of
Offered Shares available, then the purchasing Stockholders each shall be
entitled to purchase the number of Offered Shares determined by multiplying the
total number of available Offered Shares by a fraction, the numerator of which
is the aggregate number of shares of capital stock then owned by the Stockholder
and the denominator of which is the aggregate number of shares of capital stock
then owned by all of the Stockholders who have offered to purchase the Offered
Shares (the "Determination Method"). For purposes of the Determination Method,
Preferred Stock shall be treated as if it has been converted into
-15-
<PAGE>
Common Stock (in accordance with its applicable conversion ratio). If any
Stockholder is entitled to purchase. more offered Shares than he or she desires
to purchase, each of the other purchasing Stockholders shall be entitled to
purchase such surplus Shares in accordance with the Determination Method.
(d) If none or only part of the Offered Shares are purchased by the
Corporation or the Stockholders, then the selling Stockholder shall have the
right to sell the Offered Shares which were not purchased by the Corporation or
the Stockholders. Provided, however, the selling Stockholder shall not sell the
available Offered Shares at a lower price or on more favorable terms than those
specified in the Notice of Sale.
(e) The provisions of this Article IV shall automatically terminate
and be of no further force and effect upon the effective date of a registration
statement filed by the Corporation with the United States Securities and
Exchange Commission, pursuant to the Securities Act of 1933, as amended, for a
public offering of Common Stock in an amount equal to or greater than Ten
Million Dollars ($10,000,000).
(f) Any sale of shares of the capital stock of the Corporation shall
be null and void unless such sale is in strict compliance with this Article IV.
ARTICLE V
---------
REGISTERED OFFICE AND AGENT
The address of the initial registered office of the Corporation is 50 South
Main Street, Suite 1600, Salt Lake City, Utah 84144, and the name of its initial
registered agent at such address is Max A. Farbman.
ARTICLE VI
----------
LIMITATION ON LIABILITY
Within the meaning of and in accordance with Section 841 of the Utah
Revised Business Corporation Act:
(a) No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any action taken or any
failure to take any action as a director, except as provided in this Article VI.
(b) The limitation of liability contemplated in this Article VI shall
not extend to (i) the amount of a financial benefit received by a director to
which he is not entitled, (ii) an intentional
-16-
<PAGE>
infliction of harm on the Corporation or its stockholders, (iii) a violation of
Section 842 of the Utah Revised Business Corporation Act, or (iv) an intentional
violation of criminal law.
(c) Any repeal or modification of this Article VI by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
(d) Without limitation, this Article VI shall be applied and
interpreted, and shall be deemed to incorporate, any provision of the Utah
Revised Business Corporation Act, as the same exists or may hereafter be
amended, any provision of any act that may replace or supplement the Utah
Revised Business Corporation Act, as well as any applicable interpretation of
Utah law, so that personal liability of directors and officers of the
Corporation to the Corporation or its stockholders, or to any third person,
shall be eliminated or limited to the fullest extent as from time to time
permitted by Utah law.
ARTICLE VII
-----------
INCORPORATOR
The name and address of the incorporator is as follows:
- --------------------------------------------------------------------------------
NAME ADDRESS
- --------------------------------------------------------------------------------
Medicode, Incorporated 5225 Wiley Post Way
Suite 500
Salt Lake City, Utah 84116
IN WITNESS WHEREOF, the undersigned, acting as duly authorized
officers of and for the Corporation, hereby execute these Amended and Restated
Articles of Incorporation and certify to the truth of the facts herein stated,
this 10th day of September, 1993.
Medicode, Inc., a Utah corporation
s/ EILEEN S. SHANON
----------------------------------
Eileen S. Shanon, President
Attest:
/s/ KEVIN W. PEARSON
- ---------------------------
Kevin W. Pearson, Secretary
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<PAGE>
ACKNOWLEDGMENT OF REGISTERED AGENT
----------------------------------
The undersigned, Max A. Farbman hereby acknowledges that he has been
named as registered agent of Medicode, Inc., a Utah corporation, pursuant to the
Amended and Restated Articles of Incorporation to which this Acknowledgment is
attached, and the undersigned hereby agrees to act as registered agent of said
Corporation.
/s/ MAX A. FARBMAN
--------------------------------
Max A. Farbman
-18-
<PAGE>
MAILING ADDRESS
---------------
If, upon completion of filing of the above Amended and Restated
Articles of Incorporation, the Division elects to send a copy of the same by
mail, the address to which the copy should be mailed is:
Attn: Kevin W. Pearson, Secretary
Medicode, Inc.
5225 Wiley Post Way, Suite 500
Salt Lake City, Utah 84116
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<PAGE>
EXHIBIT 3.2
CERTIFICATE OF INCORPORATION
OF
MEDICODE (DELAWARE), INC.
ARTICLE I.
The name of this corporation is Medicode (Delaware), Inc. (the
"Corporation").
ARTICLE II.
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV.
This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is 55,000,000
shares. 50,000,000 shares shall be Common Stock with a par value of $0.001 per
share. 5,000,000 shares shall be Preferred Stock with a par value of $0.001 per
share, of which 2,866,178 shares are designated Series A Preferred Stock.
The remaining 2,133,822 shares of Preferred Stock shall be undesignated
Preferred Stock and may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the board of directors (authority to do so being hereby expressly vested in the
board of directors). The board of directors is further authorized to determine
or alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and to fix the number
of shares of any series of Preferred Stock and the designation of any such
series of Preferred Stock. The board of directors, within the limits and
restrictions stated in any resolution or resolutions of the board of directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of
<PAGE>
shares in any such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.
The authority of the board of directors with respect to each class or
series of stock shall include, without limitation of the foregoing, the right to
do any of the following:
(a) designate, in whole or in part, the preferences, limitations and
relative rights, of any class of shares before the issuance of any shares of
that class;
(b) create one or more series within a class of shares, fix the number
of shares of each such series, and designate, in whole or in part, the
preferences, limitations, and relative rights of the series, all before the
issuance of any shares of that series;
(c) alter or revoke the preferences, limitations and relative rights
granted to or imposed upon any wholly unissued class of shares or any wholly
unissued series of any class of shares; or
(d) increase or decrease the number of shares constituting any series,
the number of shares of which was originally fixed by the board of directors,
either before or after the issuance of shares of the series, provided that the
number may not be decreased below the number of shares of the series then
outstanding, or increased above the total number of authorized shares of the
applicable class of shares available for designation as a part of the series.
ARTICLE V.
The rights, preferences, privileges and restrictions granted to or imposed
upon the Common Stock and Preferred Stock are as follows:
1. Voting. The shares of the Corporation shall have the following
------
preferences, limitations and relative rights with respect to voting:
(a) Common Stock. Except as otherwise expressly provided by law or in
------------
this Article V, the voting rights of the Common Stock shall be as follows:
(i) Each outstanding share of Common Stock shall be entitled
to one (1) vote on each matter to be voted on by the stockholders of the
Corporation.
(ii) The holders of the outstanding shares of Common Stock
(the "Common Stockholders"), as a voting group (the "Common Voting Group"),
shall be entitled to elect one member of the board of directors, and to fill any
vacancy (and replace any successor
-2-
<PAGE>
elected by the board of directors to fill any vacancy) created upon the
resignation or removal of any director so elected by the Common Voting Group.
(iii) The Common Stockholders and the holders of Preferred Stock
(the "Preferred Stockholders"), voting as a voting group (the "Joint Voting
Group"), shall be entitled to elect certain other members of the board of
directors as provided in Section 1(b)(iv) below.
(b) Preferred Stock. Except as otherwise expressly provided by law
---------------
or in this Article V, the voting rights of the Preferred Stock shall be as
follows:
(i) Each share of Preferred Stock shall be entitled to vote,
on each matter to be voted on by the stockholders of the Corporation, the number
of votes which it would be entitled to cast if it were converted into shares of
Common Stock in accordance with this Article V (such that, for shares of
Preferred Stock held on the record date fixed of any meeting, or on the
effective date of any written consent, shares of Preferred Stock shall entitle
the Preferred Stockholder to the number of votes as shall be equal to the whole
number of shares of Common Stock into which such holder's shares of Preferred
Stock are convertible immediately after the close of business on the record date
fixed for the applicable meeting or the effective date of the applicable written
consent).
(ii) Shares of Preferred Stock may be voted with the shares of
Common Stock at any annual or special meeting of stockholders of the
Corporation, and may act by written consent in the same manner as the Common
Stock.
(iii) The holders of Series A Preferred Stock (the "Series A
Stockholders"), as a voting group (the "Series A Voting Group"), shall be
entitled to elect one member of the board of directors, and to fill any vacancy
(and replace any successor elected by the board of directors to fill any
vacancy) created in respect of any director so elected by the Series A Voting
Group.
(iv) The Preferred Stockholders and Common Stockholders, voting
as the Joint Voting Group, shall be entitled to elect the members of the board
of directors who are not elected by other voting groups as provided in this
Article V.
2. Liquidation. The shares of the Corporation shall have the following
-----------
preferences, limitations and relative rights with respect to the liquidation of
the Corporation:
(a) Preferred Stock . After payment or provision for payment of the
---------------
debts and other liabilities of the Corporation, upon any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the Preferred Stockholders shall be entitled to the following:
(i) To be paid, out of the assets of the Corporation available
for distribution to its stockholders, whether from capital, surplus or earnings,
before any payment shall
-3-
<PAGE>
be made in respect of the Common Stock, an amount equal to the Initial Sales
Price (as defined below) of their respective series of Preferred Stock, plus all
declared and unpaid dividends thereon to the date fixed for distribution.
(ii) If the assets of the Corporation available for distribution
to its stockholders are insufficient to pay the Preferred Stockholders the full
preferential amounts to which they shall be entitled pursuant to the terms of
Section 2(a)(i) above, then the entire assets of the Corporation legally
available for distribution shall be distributed ratably among the Preferred
Stockholders in such a manner that the amount to be distributed to each
Preferred Stockholder shall equal the amount obtained by multiplying the entire
assets of the Corporation legally available for distribution by a fraction, the
numerator of which shall be the sum of the products obtained by multiplying the
number of shares of each series of Preferred Stock then held by each Preferred
Stockholder by the respective "Liquidation Preference" of the applicable series
of Preferred Stock, and the denominator of which shall be the sum of the
products obtained by multiplying the total number of shares of Preferred Stock
then outstanding by the respective Liquidation Preference of the applicable
series of Preferred Stock. Unless otherwise provided herein, the "Liquidation
Preference" of each series of Preferred Stock shall be equal to the amount of
the Initial Sales Price of that series of Preferred Stock.
(b) All Stockholders. After payment or provision for payment of the
----------------
debts and other liabilities of the Corporation and the setting apart or payment
in full of the preferential amounts due the Preferred Stockholders pursuant to
Section 2(a)(i) above, the remaining assets and funds of the Corporation
available for distribution to stockholders, if any, shall be distributed and
paid to the Common Stockholders and the Preferred Stockholders, on a pro-rata
basis, according to the number of shares of Common Stock held by them. For
purposes of this Section 2, the Preferred Stockholders shall be treated as if
all shares of Preferred Stock held by them have been converted into shares of
Common Stock in accordance with this Article V.
(c) Transfer of Assets or Merger. The following shall be deemed to
----------------------------
be included within the meaning of a "liquidation of the Corporation" as this
phrase is used in this Section 2:
(i) any sale, transfer or other disposition of all or
substantially all of the assets of the Corporation (except a transfer or other
disposition by pledge or mortgage to a bona fide lender of the Corporation);
(ii) any merger or consolidation of the Corporation with or into
another corporation or entity (except, if stockholders of the Corporation
immediately prior to any such transaction are holders of at least fifty-one
percent (51%) of the voting securities or voting interests of the surviving or
acquiring corporation or entity immediately after such transaction, and for the
purposes of this calculation equity securities which any shareholder of the
Corporation owned immediately prior to such merger or consolidation as a
shareholder of another party to the
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<PAGE>
transaction shall be disregarded, then such merger or consolidation shall not be
deemed to be a "liquidation of the Corporation" ).
(d) Distribution of Assets other than Cash. In the event of any
--------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation which will involve the distribution of assets other than
cash, the board of directors shall promptly engage competent, independent
appraisers to determine the value of the assets to be distributed to the
Preferred Stockholders and the Common Stockholders. The Corporation shall, upon
receipt of such appraiser's valuation, give prompt written notice to each of the
Preferred Stockholders and Common Stockholders of the appraiser's valuation.
3. Dividends. Dividends may be paid on the outstanding shares of the
---------
Corporation as follows:
(a) Compliance with Law. Dividends may only be paid out of assets
-------------------
legally available therefor.
(b) Dividends Noncumulative. Dividends shall be paid as declared by
-----------------------
the board of directors, and the right to dividends shall not be cumulative. No
right shall accrue to the stockholders by reason of the fact that dividends are
not declared in any year, nor shall any undeclared or unpaid dividend bear or
accrue interest.
(c) Preference. Dividends on Preferred Stock shall be paid prior to
----------
the payment of any cash dividends on Common Stock.
(d) Preferred Stock. In any fiscal year, the Preferred Stockholders
---------------
may receive dividends, subject to and in accordance with the following:
(i) Special Definitions. For purposes of this Section 3, the
-------------------
following definitions shall apply:
(A) "Initial Sales Price" shall mean the weighted average of
the sales price (per share) of the applicable series of Preferred Stock when
such shares were sold by the Corporation (excluding underwriting commissions
and/or discounts).
(B) "Percentage Dividend," with respect to each series of
Preferred Stock, shall mean the amount in cash of the dividend determined by
multiplying that certain percentage (specified in this Article V for each series
of Preferred Stock) by the Initial Sales Price of the applicable series of
Preferred Stock.
-5-
<PAGE>
(ii) Percentage Dividends. Subject to Sections 3(a) and 3(b)
--------------------
above, with respect to each series of Preferred Stock, Percentage Dividends
shall be paid to the Preferred Stockholders in each fiscal year.
(iii) Percentage for Series A Preferred Stock. The applicable
---------------------------------------
percentage for determining the Percentage Dividend of the Series A Preferred
Stock shall be Ten percent (10%). The Initial Sales Price of the Series A
Preferred Stock is $6.98.
(e) All Stockholders. Subject to Section 3(a) above, if the
----------------
Percentage Dividends have been paid in whole in any one fiscal year and if the
board of directors shall elect to declare additional dividends in that fiscal
year, such additional dividends shall be distributed and paid to the Common
Stockholders and the Preferred Stockholders, on a pro-rata basis, according to
the number of shares of Common Stock held by them. For purposes of this Section
3(e), the Preferred Stockholders shall be treated as if all shares of Preferred
Stock held by them have been converted into shares of Common Stock in accordance
with this Article V.
4. Conversion Rights. Each share of Preferred Stock shall be convertible
-----------------
into share(s) of Common Stock, in accordance with the rights and obligations
specified below (the "Conversion Rights"):
(a) Option to Convert. At any time after the date of issuance of
-----------------
Preferred Stock, the Preferred Stockholders, at their option, may exercise the
Conversion Rights.
(b) Conversion Ratio. Each outstanding share of Preferred Stock
----------------
may be converted into the number of fully paid and non-assessable shares of
Common Stock determined by dividing the Initial Sales Price (unless otherwise
expressly provided herein) by the conversion price of the applicable series of
Preferred Stock (the "Conversion Price") in effect at the time of conversion.
The Conversion Price shall be subject to adjustment as provided in Section 4(g)
below.
(c) Procedures for Conversion. Except as otherwise expressly
-------------------------
provided herein, the conversion of shares of Preferred Stock shall be subject to
the following:
(i) No fractional shares of Common Stock shall be issued upon
conversion of Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Corporation shall pay cash equal to such
fraction multiplied by the then effective Conversion Price. All shares of a
series of Preferred Stock held shall be aggregated for the purposes of
determining whether the conversion would result in the issuance of any
fractional share.
(ii) Before any Preferred Stockholder shall be entitled to
convert shares of Preferred Stock into full shares of Common Stock, such
Preferred Stockholder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or any transfer agent for the
applicable series of Preferred Stock, and shall give written notice to the
Corporation at
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<PAGE>
such office that he elects to convert the same. The Corporation shall, as soon
as practicable thereafter, issue and deliver at such office to such Preferred
Stockholder a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled in accordance with this Section 4,
a check payable to such holder in the amount of any cash amounts payable as a
result of the conversion of any shares of Preferred Stock into fractional shares
of Common Stock, any declared and unpaid dividends on the converted Preferred
Stock and, if less than all of the shares of Preferred Stock represented by such
certificate are converted into Common Stock, a certificate representing the
shares of Preferred Stock not converted into Common Stock. In the event of any
conversion at the election of a Preferred Stockholder, such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(d) Automatic Conversion. Each share of a series of Preferred
--------------------
Stock shall automatically be converted into shares of Common Stock at the then
effective Conversion Price for such series of Preferred Stock, upon the earlier
of the following:
(i) the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), covering the offer and sale of
Common Stock for the account of the Corporation to the public at a price per
share (determined without regard to underwriter commissions and expenses) of not
less than $10.47 (subject to proportionate adjustment in the event of a stock
split, reverse stock split, reclassification or stock dividend), and an
aggregate gross offering price of at least Ten Million Dollars ($10,000,000),
before deduction of underwriting discounts and commissions; or
(ii) the vote to require conversion by the holders of at least
two-thirds of the total number of the then outstanding shares of a series
Preferred Stock.
(e) Conditions of Automatic of Conversion. The automatic
-------------------------------------
conversion of shares of the Preferred Stock pursuant to Section 4(d) above is
subject to the following:
(i) If the conversion is in connection with an underwritten
public offering of securities registered pursuant to the Securities Act, then
the conversion shall be conditioned upon the closing with the underwriter of the
sale of securities pursuant to such offering, in which event the person(s)
entitled to receive Common Stock issuable upon such conversion of Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the date of the closing of such sale of securities (the
"Closing Date"); or
(ii) If the conversion is in connection with the vote of the
holders of at least two-thirds of the total number of the then outstanding
shares of a series of Preferred Stock to require conversion, then such
conversion shall have been deemed to have been made immediately
-7-
<PAGE>
prior to the close of business on the effective date of the vote (or such other
time as may have been set forth in the resolution approved by the Preferred
Stockholders) (the "Effective Date"), and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date (or such other time as may have been set forth in the
resolution approved by the Preferred Stockholders).
(f) Notice. In the event of an automatic conversion pursuant to
------
Section 4(d) above, notice of such conversion shall be given by the Corporation
by mail, postage prepaid, to the Preferred Stockholders at their addresses shown
in the Corporation's records, within a reasonable time after the Closing Date or
the Effective Date, as the case may be. On or after the Closing Date or the
Effective Date, as the case may be, as specified in such notice, each affected
Preferred Stockholder shall surrender the certificate or certificates
representing such Preferred Stockholder's shares of Preferred Stock for the
number of shares of Common Stock to which such holder is entitled, at the office
of the Corporation or any transfer agent for the applicable series of Preferred
Stock. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such Preferred Stockholder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid, and a check payable to the holder in the amount of any
cash amounts payable as a result of the conversion of any shares of Preferred
Stock into fractional shares of Common Stock, and the amount of any declared and
unpaid dividends on the converted Preferred Stock. Notwithstanding that any
certificate representing Preferred Stock to be converted shall not have been
surrendered, on and after the Closing Date or the Effective Date (as the case
may be) each such Preferred Stockholder shall be treated for all purposes as the
record holder of the number of shares of Common Stock issuable to such holder
upon such conversion.
(g) Adjustment of Conversion Price. The Conversion Price of each
------------------------------
series shall be subject to adjustment as follows:
(i) Special Definitions. For purposes of this Section 4, the
-------------------
following definitions shall apply:
(A) "Options" shall mean rights, options or warrants to
-------
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(B) "Original Issue Date" shall mean the date on which the
-------------------
first share of the applicable series of Preferred Stock was issued.
(C) "Convertible Securities" shall mean any evidence of
----------------------
indebtedness, shares (other than Common Stock) or other securities convertible
into or exchangeable for Common Stock.
-8-
<PAGE>
(D) "Additional Shares of Common" shall mean all shares of
---------------------------
Common Stock issued (or, pursuant to Section 4(g)(iii) below, deemed to be
issued) by the Corporation on or after the Original Issue Date, other than
shares of Common Stock issued or issuable at any time:
1. upon conversion of Preferred Stock authorized
herein;
2. upon exercise of Options, or conversion of
Convertible Securities, outstanding on the Original Issue Date, including,
without limitation, the following:
i) the warrant to purchase 100,000 shares of
Common Stock at $0.01 per share which may be issued to the investors (the
"Investors") who enter into that certain Master Investment Agreement (the
"Master Agreement") with the Corporation,
ii) the warrant to purchase 523,236 shares of
Common Stock at $2.53 per share which may be issued to the investors pursuant to
the Master Investment Agreement; and
iii) the convertible promissory notes, dated
October 30, 1992, executed by Softouch Software, Inc. (formerly Medical Bill
Review, Inc. ), a subsidiary of the Corporation, convertible into 112,378 shares
of Common Stock.
3. to officers, directors, employees and consultants
of the Corporation to be designated and approved by the board of directors;
4. in connection with capital asset leases or
borrowings for the acquisition of capital assets pursuant to approval by the
board of directors; or
5. as a dividend or distribution on Preferred Stock
authorized herein or pursuant to any event for which adjustment is made pursuant
to Sections 4(g)(vi) below.
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of a particular series of Preferred Stock shall be made in
respect of the issuance of Additional Shares of Common unless the consideration
per share for an Additional Share of Common issued or deemed to be issued by the
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to such issuance, for such share of Preferred Stock.
(iii) Deemed Issuance of Additional Shares of Common.
----------------------------------------------
(A) Options and Convertible Securities. In the event
----------------------------------
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or
-9-
<PAGE>
Convertible Securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
instrument relating thereto without regard to any provisions contained therein
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common issued as of the time of such issuance,
or in the case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common shall
not be deemed to have been issued unless the consideration per share (determined
pursuant to Section 4(g)(v) hereof) of such Additional Shares of Common would be
less than the applicable Conversion Price in effect on the date of and
immediately prior to such issuance, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common are
deemed to be issued:
1. no further adjustment in the applicable
Conversion Price shall be made upon the subsequent issuance of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
2. if such Options or Convertible Securities
by their terms provide, with the passage of time or otherwise, for any increase
in the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the applicable Conversion Price computed upon the original issuance
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
3. upon the expiration of any such Options
or any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon the original
issuance thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon such expiration, be
recomputed as if:
i) in the case of Convertible Securities
or options for Common Stock, the only Additional Shares of Common issued were
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issuance of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issuance of all such Convertible Securities which were actually
converted or exchanged, plus the additional consideration, if any, actually
received by the Corporation upon such conversion or exchange, and
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<PAGE>
ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issuance of such options, and the
consideration received by the Corporation for the Additional Shares of Common
deemed to have been then issued was the consideration actually received by the
Corporation for the issuance of all such Options, whether or not exercised, plus
the consideration deemed to have been received by the Corporation upon the
issuance of the Convertible Securities with respect to which such Options were
actually exercised;
4. no readjustment pursuant to clause (2) or (3)
above shall have the effect of increasing the applicable Conversion Price to an
amount which exceeds the lower of (i) the applicable Conversion Price on the
original adjustment date or (ii) the applicable Conversion Price that would have
resulted from any issuance of Additional Shares of Common between the original
adjustment date and such readjustment date; and
5. in the case of any options which expire by their
terms not more than 30 days after the date of issuance thereof, no adjustment of
the applicable Conversion Price shall be made until the expiration or exercise
of all such options, whereupon such adjustments shall be made in the same manner
provided in clause (3) above.
(B) Stock Dividends. In the event the Corporation at any
---------------
time or from time to time after the Original Issue Date shall declare or pay any
dividend on Common Stock payable in Common Stock, and with respect to which no
similar Common Stock dividend is to be distributed to holders of each series of
Preferred Stock, then and in any such event, Additional Shares of Common shall
be deemed to have been issued immediately after the close of business on the
record date for the determination of holders of any class of securities entitled
to receive such dividend.
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common. In the event the Corporation shall issue Additional
- ----------------
Shares of Common (including Additional Shares of Common deemed to be issued
pursuant to Section 4(g)(iii)) without consideration or for a consideration per
share less than the Conversion Price of a series immediately prior to such
issuance, then and in such event, such Conversion Price shall be reduced,
concurrently with such issuance, to a price (calculated to the nearest cent)
determined by multiplying such Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issuance plus the number of shares of Common Stock which the
aggregate consideration received by the corporation for the total number of
Additional Shares of Common so issued would purchase at such Conversion Price;
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance plus the number of such
Additional Shares of Common so issued; and provided, further, that for the
purposes of this Section 4, all shares of Common Stock issuable upon exercise of
outstanding Options and upon conversion of outstanding Convertible Securities
shall be deemed to be outstanding, and immediately after any Additional Shares
of Common are deemed issued
-11-
<PAGE>
pursuant to Section 4(g)(iii) above, such Additional Shares of Common shall be
deemed to be outstanding.
(v) Determination of Consideration. For purposes of this
------------------------------
Section 4, the consideration received by the Corporation for the issuance of any
Additional Shares of Common shall be computed as follows:
(A) Cash and Property: Such consideration shall:
-----------------
1. insofar as it consists of cash, be computed at
the net amount of cash received by the Corporation excluding discounts and
commissions payable by the Corporation in connection with such issuance or sale
and amounts paid or payable for accrued interest or accrued dividends;
2. insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issuance, as
determined in good faith by the board of directors net of expenses as set forth
in clause (1) above; and
3. in the event Additional Shares of Common are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (1) and (2) above, as
determined in good faith by the board of directors.
(B) Options and Convertible Securities. The
----------------------------------
consideration per share received by the Corporation for Additional Shares of
Common deemed to have been issued pursuant to Section 4(g)(iii) above, relating
to Options and Convertible Securities, shall be determined by dividing:
1. the total amount, if any, received or receivable
by the Corporation as consideration for the issuance of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
2. the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities or, in the case of Options for Convertible Securities and the
conversion or exchange of such Convertible Securities.
-12-
<PAGE>
(C) Stock Dividends. Any Additional Shares of Common
---------------
deemed to have been issued relating to stock dividends shall be deemed to have
been issued for no consideration.
(vi) Adjustments for Subdivisions, Combinations or
---------------------------------------------
Consolidations of Common Stock. In the event the outstanding shares of Common
- ------------------------------
Stock shall be subdivided or increased (by stock split or otherwise than by
payment of a dividend in Common Stock) into a greater number of shares of Common
Stock, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each Preferred
Stockholder a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any Preferred
Stockholder, furnish or cause to be furnished to such Preferred Stockholder a
like certificate setting forth (i) all such adjustments and readjustments since
the original date of issuance of any shares of Preferred Stock, (ii) the
Conversion Price of each series of Preferred Stock at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of such
Preferred Stockholder's shares of Preferred Stock.
(h) Series A Preferred Stock Conversion Rights. The Series A
------------------------------------------
Preferred Stock shall have the following rights and obligations:
(i) Each outstanding share of Series A Preferred Stock may be
converted into the number of fully paid and nonassessable shares of Common Stock
determined by dividing $6.98 by the conversion price of the Series A Preferred
Stock (the "Series A Conversion Price"), determined as provided in Section 4(g)
above, in effect at the time of conversion.
(ii) The initial Series A Conversion Price shall be $6.98 per
share of Common Stock.
5. Residual Rights. All rights accruing to the outstanding shares of the
---------------
Corporation not expressly provided for to the contrary herein or in the
Corporation's bylaws or in any amendment hereto or thereto shall be vested in
Common Stock.
6. Reservation of Common Stock. Upon issuance by the Corporation of any
---------------------------
shares of Preferred Stock which are convertible into shares of Common Stock, the
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
the then outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all the then outstanding shares of Preferred Stock, the
Corporation shall take such corporate action as, in the opinion of its
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<PAGE>
counsel, may be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purpose.
7. Notice of Record Date. In the event that the Corporation shall
---------------------
propose at any time:
(a) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(b) to offer for subscription pro rata to the holders of any class or
series of its shares any additional shares of stock of any class or series or
other rights;
(c) to effect any reclassification or recapitalization of its
outstanding Common Stock involving a change in Common Stock; or
(d) to consolidate or merge with or into any other corporation, or
sell, lease or convey all or substantially all of its property or business, or
to liquidate, dissolve or wind up;
then, in connection with each such event, the Corporation shall send to the
Preferred Stockholders:
(i) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the Common Stockholders shall be
entitled thereto) or for determining rights to vote in respect to the matters
referred to in (c) and (d) above; and
(ii) in the case of the matters referred to in (c) and (d)
above, at least 20 days' prior written notice of the date when the same shall
take place (and specifying the date on which the Common Stockholders shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the Preferred Stockholders at the address for each such
holder as shown on the books of the Corporation.
8. Changes. In addition to any other rights provided by law, so long as
-------
shares of Preferred Stock shall be outstanding, the Corporation shall not,
without first obtaining the affirmative vote or written consent of the holders
of not less than a majority of the outstanding shares of Preferred Stock, voting
as a voting group (the " Preferred Voting Group" ) (except that in the event any
action set forth below would adversely effect only one series of Preferred
Stock, such action shall require the affirmative vote or written consent of the
holders of not less than a majority of the outstanding shares of such series):
-14-
<PAGE>
(a) amend or repeal any provision of, or add any provision to, the
Certificate of Incorporation or Bylaws of the Corporation if such action would
materially and adversely alter or change the preferences, limitations and
relative rights of any outstanding shares of Preferred Stock;
(b) authorize or issue shares of any class of shares having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred Stock or having any
special voting rights or authorize or issue shares of any class or any bonds,
debentures, notes or other obligations convertible into or exchangeable for, or
having option rights to purchase, any shares of the Corporation having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred Stock or having any
special voting rights;
(c) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or assets superior to or on a parity with
any such preference or priority of the Series A Preferred Stock or having any
special voting rights;
(d) consolidate or merge with or into any other corporation or sell
or otherwise transfer in a single transaction or a series of related
transactions all or substantially all the assets of the Corporation, or
otherwise effect a reorganization of the Corporation unless the stockholders of
the Corporation immediately prior to any such transaction are holders of at
least 51% of the voting securities of the surviving or acquiring corporation
immediately thereafter (and for purposes of this calculation equity securities
which any shareholder of the Corporation owned immediately prior to such merger
or consolidation as a shareholder of another party to the transaction shall be
disregarded); or
(e) increase the authorized number of shares of Preferred Stock or
Common Stock.
Any of the foregoing obligations may be amended only by the holders of
not less than a majority of the outstanding shares of Preferred Stock, voting as
the Preferred Voting Group.
9. Transfer of Stock. Any sale of shares of capital stock of the
-----------------
Corporation shall be subject to the restrictions set forth in this Section 9.
Any holder of capital stock ("Stockholder") desiring to sell any shares of the
capital stock of the Corporation (the "Offered Shares") shall first offer the
Offered Shares to the Corporation and the other Stockholders in the following
manner:
(a) The selling Stockholder shall provide written notice by certified
mail to the Secretary of the Corporation (the "Notice of Sale") of (i) his or
her proposal to sell the Offered Shares, (ii) the sales price per share, and
(iii) the terms upon which the sale is to be made. The Corporation shall have
five (5) days from the receipt of the Notice of Sale (the "Corporation Purchase
Period") to exercise its right to purchase all or any full number of the Offered
Shares. The
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<PAGE>
purchase of the Offered Shares may be authorized by the board of directors
without any action by the Stockholders.
(b) If the Corporation does not exercise its right to purchase all of
the Offered Shares within the Corporation Purchase Period, the Secretary of the
Corporation shall, within five (5) days after the conclusion of Corporation
Purchase Period, give written notice to each of the other Stockholders (the
"Stockholder Notice") of (i) the number of Offered Shares available for purchase
and not purchased by the Corporation, (ii) the sales price per share, and (iii)
the terms upon which the sale is to be made. The Stockholder Notice shall be
sent by mail to each of the Stockholders (except the selling Stockholder) at
such Stockholder's last address as it appears in the records of the Corporation.
Any of the Stockholders desiring to purchase part or all of the Offered Shares
shall provide to the Secretary of the Corporation, within five (5) days of the
mailing of the Stockholder Notice, a written offer to purchase all or part of
the Offered Shares (the "Purchase Offer"). The Purchase Offer shall specify the
number of Offered Shares the Stockholder desires to purchase and shall be
accompanied by the amount of the sales price with authorization to pay such
sales price against delivery of the specified number of Offered Shares.
(c) If the Stockholders offer to purchase more than the number of
Offered Shares available, then the purchasing Stockholders each shall be
entitled to purchase the number of Offered Shares determined by multiplying the
total number of available Offered Shares by a fraction, the numerator of which
is the aggregate number of shares of capital stock then owned by the Stockholder
and the denominator of which is the aggregate number of shares of capital stock
then owned by all of the Stockholders who have offered to purchase the Offered
Shares (the "Determination Method"). For purposes of the Determination Method,
Preferred Stock shall be treated as if it has been converted into Common Stock
(in accordance with its applicable conversion ratio). If any Stockholder is
entitled to purchase more offered Shares than he or she desires to purchase,
each of the other purchasing Stockholders shall be entitled to purchase such
surplus Shares in accordance with the Determination Method.
(d) If none or only part of the Offered Shares are purchased by the
Corporation or the Stockholders, then the selling Stockholder shall have the
right to sell the Offered Shares which were not purchased by the Corporation or
the Stockholders. Provided, however, the selling Stockholder shall not sell the
available Offered Shares at a lower price or on more favorable terms than those
specified in the Notice of Sale.
(e) The provisions of this Section 9 shall automatically terminate
and be of no further force and effect upon the effective date of a registration
statement filed by the Corporation with the United States Securities and
Exchange Commission, pursuant to the Securities Act of 1933, as amended, for a
public offering of Common Stock in an amount equal to or greater than Ten
Million Dollars ($10,000,000).
-16-
<PAGE>
(f) Any sale of shares of the capital stock of the Corporation shall
be null and void unless such sale is in strict compliance with this Section 9.
ARTICLE VI.
The Corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VII.
The Corporation is to have perpetual existence.
ARTICLE VIII.
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The Corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the Corporation, or any predecessor of
the Corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the Corporation or any predecessor to the
Corporation.
3. Amendments. Neither any amendment nor repeal of this Article VIII,
----------
nor the adoption of any provision of the Corporation's Certificate of
Incorporation inconsistent with this Article VIII, shall eliminate or reduce the
effect of this Article VIII, in respect of any matter occurring, or any action
or proceeding accruing or arising or that, but for this Article VIII, would
accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
ARTICLE IX.
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the Corporation.
-17-
<PAGE>
ARTICLE X.
1. Number of Directors. The number of directors which constitutes the
-------------------
whole Board of Directors of the Corporation shall be designated in the Bylaws of
the Corporation.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless the Bylaws of the Corporation shall so provide.
ARTICLE XI.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
ARTICLE XII.
Immediately upon the closing of a public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
any of the Corporation's securities (as that term is defined under the
Securities Act of 1933, as then in effect), no action shall be taken by the
stockholders of the Corporation except at an annual or special meeting of the
stockholders called in accordance with the Bylaws of the Corporation and no
action shall be taken by the stockholders by written consent.
ARTICLE XIII.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of 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 Bylaws of the Corporation.
ARTICLE XIV.
The name and mailing address of the incorporator are:
Vadim Stepanchenko, Esq.
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
* * *
-18-
<PAGE>
The undersigned incorporator hereby acknowledges that the above Certificate
of Incorporation of Medicode, Inc. is his act and deed and that the facts stated
therein are true.
_____________________________________
Vadim Stepanchenko
Dated: _____________________, 1997
<PAGE>
EXHIBIT 3.3
RESTATED CERTIFICATE OF INCORPORATION
OF
MEDICODE (DELAWARE), INC.
Medicode (Delaware), Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Medicode (Delaware), Inc. The
corporation was originally incorporated under the same name, and the original
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on _____________, 1997.
B. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Restated Certificate of Incorporation restates and
amends the provisions of the Certificate of Incorporation of the corporation.
C. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
The name of this corporation is Medicode (Delaware), Inc.
ARTICLE II
The address of the A registered office in the State of Delaware
is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The corporation is authorized to issue two classes of shares of stock to be
designated, respectively, Common Stock, $0.001 par value, and Preferred Stock,
$0.001 par value. The total number
<PAGE>
of shares that the corporation is authorized to issue is 55,000,000 shares. The
number of shares of Common Stock authorized is 50,000,000. The number of shares
of Preferred authorized is 5,000,000.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the board of directors (authority to do so being hereby expressly vested in the
board). The board of directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and to fix the number of shares of any
series of Preferred Stock and the designation of any such series of Preferred
Stock. The board of directors, within the limits and restrictions stated in any
resolution or resolutions of the board of directors originally fixing the number
of shares constituting any series, may increase or decrease (but not below the
number of shares in any such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series.
The authority of the board of directors with respect to each such class or
series shall include, without limitation of the foregoing, the right to
determine and fix:
(a) the distinctive designation of such class or series and the
number of shares to constitute such class or series;
(b) the rate at which dividends on the shares of such class or
series shall be declared and paid, or set aside for payment, whether dividends
at the rate so determined shall be cumulative or accruing, and whether the
shares of such class or series shall be entitled to any participating or other
dividends in addition to dividends at the rate so determined, and if so, on what
terms;
(c) the right or obligation, if any, of the corporation to redeem
shares of the particular class or series of Preferred Stock and, if redeemable,
the price, terms and manner of such redemption;
(d) the special and relative rights and preferences, if any, and
the amount or amounts per share, which the shares of such class or series of
Preferred Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the corporation;
(e) the terms and conditions, if any, upon which shares of such
class or series shall be convertible into, or exchangeable for, shares of
capital stock of any other class or series, including the price or prices or the
rate or rates of conversion or exchange and the terms of adjustment, if any;
(f) the obligation, if any, of the corporation to retire, redeem
or purchase shares of such class or series pursuant to a sinking fund or fund of
a similar nature or otherwise, and the terms and conditions of such obligation;
-2-
<PAGE>
(g) voting rights, if any, on the issuance of additional shares
of such class or series or any shares of any other class or series of Preferred
Stock;
(h) limitations, if any, on the issuance of additional shares of
such class or series or any shares of any other class or series of Preferred
Stock; and
(i) such other preferences, powers, qualifications, special or
relative rights and privileges thereof as the board of directors of the
corporation, acting in accordance with this Restated Certificate of
Incorporation, may deem advisable and are not inconsistent with law and the
provisions of this Restated Certificate of Incorporation.
ARTICLE V
The corporation reserves the right to amend, alter, change, or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right.
ARTICLE VI
The corporation is to have perpetual existence.
ARTICLE VII
1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
2. Indemnification. The corporation may indemnify to the fullest extent
---------------
permitted by law any person made or threatened to be made a party to an action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person or his or her testator or intestate is or
was a director, officer or employee of the corporation, or any predecessor of
the corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the corporation or any predecessor to the
corporation.
3. Amendments. Neither any amendment nor repeal of this Article VII, nor
----------
the adoption of any provision of the corporation's Certificate of Incorporation
inconsistent with this Article VII, shall eliminate or reduce the effect of this
Article VII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article VII, would accrue or arise,
prior to such amendment, repeal, or adoption of an inconsistent provision.
-3-
<PAGE>
ARTICLE VIII
In the event any shares of Preferred Stock shall be redeemed or converted
pursuant to the terms hereof, the shares so converted or redeemed shall not
revert to the status of authorized but unissued shares, but instead shall be
canceled and shall not be re-issuable by the corporation.
ARTICLE IX
Holders of stock of any class or series of the corporation shall not be
entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders.
ARTICLE X
1. Number of Directors. The number of directors which constitutes the
-------------------
whole Board of Directors of the corporation shall be designated in the Bylaws of
the corporation. The number of directors may be changed only by resolution of
the Board of Directors. The directors shall be divided into three classes with
the term of office of the first class (Class I) to expire at the annual meeting
of stockholders to be held in 1998; the term of office of the second class
(Class II) to expire at the annual meeting of stockholders held in 1999; the
term of office of the third class (Class III) to expire at the annual meeting of
stockholders held in 2000; and thereafter for each such term to expire at each
third succeeding annual meeting of stockholders after such election.
2. Election of Directors. Elections of directors need not be by written
---------------------
ballot unless the Bylaws of the corporation shall so provide.
ARTICLE XI
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the corporation.
ARTICLE XII
No action shall be taken by the stockholders of the corporation except at
an annual or special meeting of the stockholders called in accordance with the
Bylaws and no action shall be taken by the stockholders by written consent.
-4-
<PAGE>
ARTICLE XIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside of 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 Bylaws of the corporation.
IN WITNESS WHEREOF, Medicode, Inc. has caused this certificate to be
signed by Eugene Santa A, its President and Chief Executive Officer, and
Kevin W. Pearson, its Secretary, this _______ day of ______________, 1997.
By:____________________________________
Eugene Santa Cattarina, President
and Chief Executive Officer
Attest:________________________________
Kevin W. Pearson, Secretary
-5-
<PAGE>
EXHIBIT 3.4
Exhibit A
---------
B Y L A W S
OF
MEDICODE, INC.
a Utah corporation
1992
<PAGE>
T A B L E O F C O N T E N T S
-------------------------------
<TABLE>
<S> <C>
Section 1.1. Business Offices......................... 1
----------- ----------------
Section 1.2. Registered office........................ 1
----------- -----------------
ARTICLE 2. SHAREHOLDERS
Section 2.1. Annual Shareholder Meeting.............. 1
----------- --------------------------
Section 2.2. Special Shareholder Meetings............ 1
----------- ----------------------------
Section 2.3. Place of Shareholder Meeting............ 2
----------- ----------------------------
Section 2.4. Notice of Shareholder Meeting........... 2
----------- -----------------------------
Section 2.5. Fixing of Record Date................... 4
----------- ---------------------
Section 2.6. Shareholder List........................ 5
----------- ----------------
Section 2.7. Shareholder Quorum and Voting
----------- -----------------------------
Requirements............................................. 5
------------
Section 2.8. Proxies................................. 6
----------- -------
Section 2.9. Voting of Shares........................ 6
----------- ----------------
Section 2.10. Corporation's Acceptance of
------------ ---------------------------
Votes.................................................... 7
-----
Section 2.11. Informal Action by
------------ ------------------
Shareholders............................ 9
------------
Section 2.12. Voting for Directors.................... 10
------------ --------------------
Section 2.13. Shareholder's Rights to
------------ -----------------------
Inspect Corporate Records................................ 11
-------------------------
Section 2.14. Furnishing Financial
------------ --------------------
Statements to a Shareholder.............................. 13
---------------------------
Section 2.15. Information Respecting Shares........... 13
------------ -----------------------------
ARTICLE 3. BOARD OF DIRECTORS
Section 3.1. General Powers.......................... 13
----------- --------------
Section 3.3. Regular Meetings of the Board
----------- -----------------------------
of Directors............................................. 14
------------
Section 3.4. Special Meetings of the Board
----------- -----------------------------
of Directors............................................. 14
------------
Section 3.5. Notice and Waiver of Notice of
----------- ------------------------------
Special Director Meetings................................ 14
-------------------------
Section 3.6. Director Quorum......................... 15
----------- ---------------
Section 3.7. Manner of Acting........................ 15
----------- ----------------
Section 3.8 Director Action Without a
----------- -------------------------
Meeting.................................................. 16
--------
Section 3.9. Removal of Directors.................... 16
----------- --------------------
Section 3.10. Board of Director Vacancies............ 17
------------ ---------------------------
Section 3.11. Director Compensation.................. 18
------------ ---------------------
Section 3.12. Director Committees.................... 18
------------ -------------------
Section 3.13. Director's Rights to Inspect
------------- ----------------------------
Corporate Records....................................... 19
-----------------
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
ARTICLE 4. OFFICERS
Section 4.1. Number of Officers....................... 20
----------- ------------------
Section 4.2. Appointment and Term of
----------- -----------------------
Office.................................................... 21
------
Section 4.3. Removal of Officers...................... 21
----------- -------------------
Section 4.4. President................................ 21
----------- ---------
Section 4.5. Vice Presidents.......................... 21
----------- ---------------
Section 4.6. Secretary................................ 22
----------- ---------
Section 4.7. Treasurer................................ 23
----------- ---------
Section 4.8. Assistant Secretaries and
----------- -------------------------
Assistant Treasurers...................................... 23
--------------------
Section 4.9. Salaries.................................. 23
----------- --------
ARTICLE 5. INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, FIDUCIARIES, AND AGENTS
Section 5.1. Indemnification of Directors............. 23
----------- ----------------------------
Section 5.2. Advance of Expenses for
----------- -----------------------
Directors................................................. 25
---------
Section 5.3. Indemnification of Officers,
----------- ---------------------------
Employees, Fiduciaries, and Agents........................ 25
----------------------------------
Section 5.4. Insurance................................ 25
----------- ---------
ARTICLE 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 6.1. Certificates for Shares.................. 26
----------- -----------------------
Section 6.2. Shares Without Certificates.............. 27
----------- ---------------------------
Section 6.3. Registration of Transfer of
----------- ---------------------------
Shares.................................................... 28
------
Section 6.4. Restrictions on Transfer of
----------- ---------------------------
Shares Permitted.......................................... 28
----------------
Section 6.5. Acquisition of Shares.................... 29
----------- ---------------------
ARTICLE 7. DISTRIBUTIONS
Section 7.1. Distributions............................ 30
----------- -------------
ARTICLE 8. CORPORATE SEAL
--------------
Section 8.1. Corporate Seal........................... 30
----------- --------------
ARTICLE 9. FISCAL YEAR
Section 9.1. Fiscal Year.............................. 30
----------- -----------
ARTICLE 10. AMENDMENTS
Section 10.1. Amendments............................... 30
------------ ----------
</TABLE>
-ii-
<PAGE>
BYLAWS
------
OF
--
MEDICODE, INC.
-------------
ARTICLE 1. OFFICES
Section 1.1. Business Offices. The principal office of the
----------- ----------------
Corporation shall be located at any place either within or outside the State of
Utah, as designated in the Corporation's Articles of Incorporation or the
Corporation's most recent annual report on file with the Division of
Corporations and Commercial Code providing such information. The Corporation
may have such other offices, either within or outside the State of Utah as the
Board of Directors may designate or as the business of the Corporation may
require from time to time. The Corporation shall maintain at its principal
office a copy of those records specified in Section 2.13 of Article II of these
Bylaws. (16-10a-102(24))/*/
Section 1.2. Registered office. The registered office of the
----------- -----------------
Corporation required by the Utah Revised Business Corporation Act shall be
located within the State of Utah. The address of the registered office may be
changed from time to time. (16-10a-501 and 16-10a-502)
ARTICLE 2. SHAREHOLDERS
Section 2.1. Annual Shareholder Meeting. The annual meeting of the
----------- --------------------------
shareholders shall be held on the on the date fixed by the Board of Directors,
in each year, beginning with the year 1993, for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting. If the day fixed for the annual meeting is a legal holiday in the
State of Utah, the meeting shall be held on the next succeeding business day.
(16-10a-701)
Section 2.2. Special Shareholder Meetings. Special meetings of the
----------- ----------------------------
shareholders may be called, for any purposes
_____________________
/*/Citations in parentheses are to Utah Code Annotated. These Citations are
for reference only and shall not constitute a part of these bylaws.
<PAGE>
described in the notice of the meeting, by the president of the Corporation or
by the Board of Directors, and shall be called by the president at the request
of the holders of not less than one-tenth of all outstanding votes of the
corporation entitled to be cast on any issue at the meeting. (16-10a-702)
Section 2.3. Place of Shareholder Meeting. The Board of Directors
----------- ----------------------------
may designate any place, either within or outside the State of Utah, as the
place for any annual meeting of the shareholders and for any special meeting of
the shareholders called by the Board of Directors. The president of the
Corporation or any group of shareholders of the Corporation may designate any
place, within or outside the State of Utah, as the place for any special meeting
of the shareholders called by the president or the group of shareholders. If no
designation is made by the Board of Directors, the president, or the group of
shareholders, as the case may be, the place of the meeting shall be the
principal office of the Corporation. (16-10a-701(2) and 16-10a-702(3))
Section 2.4. Notice of Shareholder Meeting.
----------- -----------------------------
(a) Required Notice. Written notice stating the place, day, and hour
---------------
of any annual or special shareholder meeting shall be delivered not less than
ten nor more than sixty days before the date of the meeting, either personally
or by mail, by or at the direction of the Board of Directors, the president, or
other persons calling the meeting, to each shareholder of record entitled to
vote at such meeting, and to any other shareholder entitled by the Utah Revised
Business Corporation Act or the Corporation's Articles of Incorporation to
receive notice of the meeting. Notice shall be deemed to be effective when
mailed.
Notice shall not be required to be given to any shareholder to whom:
(1) A notice of two consecutive annual meetings, and all notices
of meetings or of the taking of action by written consent without a meeting
during the period between the two consecutive annual meetings, have been mailed,
addressed to the shareholder at the shareholder's address as shown on the
records of the Corporation, and have been returned undeliverable; or
(2) at least two payments, if sent by first class mail, of
dividends or interest on securities during a twelve month period, have been
mailed, addressed to the shareholder at
-2-
<PAGE>
the shareholder's address as shown on the records of the Corporation, and have
been returned undeliverable.
If a shareholder to whom notice is not required delivers to the
Corporation a written notice setting forth the shareholder's current address, or
if another address for the shareholder is otherwise made known to the
Corporation, the requirement that notice be given to the shareholder is
reinstated, (16-10a-103 and 16-10a-705)
(b) Adjourned Meeting. If any shareholder meeting is adjourned to a
-----------------
different date, time, or place, notice need not be given of the new date, time,
or place, if the new date, time, or place is announced at the meeting before
adjournment. However, if the adjournment is for more than 30 days, or if after
the adjournment a new record date for the adjourned meeting is or must be fixed
(see Section 2.5 of these Bylaws), then notice must be given pursuant to the
requirements of paragraph (a) of this Section 2.4 to shareholders of record who
are entitled to vote at the meeting. (16-10a-705(4))
(c) Waiver of Notice. Any shareholder may waive notice of a meeting
----------------
(or any notice required by the Utah Revised Business Corporation Act, the
Corporation's Articles of Incorporation, or these Bylaws), by a writing signed
by the shareholder, which is delivered to the Corporation (either before or
after the date and time stated in the notice as the date or time when any action
will occur or has occurred) for inclusion in the minutes or filing with the
Corporation's records.
A shareholder's attendance at a meeting:
(1) Waives objection to lack of notice or defective notice of
the meeting, unless the shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting; and
(2) waives objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented. (16-10a-706)
(d) Contents Of Notice. Notice of any special meeting of the
------------------
shareholders shall include a description of the purpose or purposes for which
the meeting is called. Except as provided in
-3-
<PAGE>
this Section 2.4(d), in the Articles of Incorporation, or in the Utah Revised
Business Corporation Act, notice of an annual meeting of the shareholders need
not include a description of the purpose or purposes for which the meeting is
called. (16-10a-705(2) and (3))
Section 2.5. Fixing of Record Date. For the purpose of determining
----------- ---------------------
shareholders of any voting group entitled to notice of or to vote at any meeting
of shareholders, or shareholders entitled to take action without a meeting or to
demand a special meeting, or shareholders entitled to receive payment of any
distribution or dividend, or in order to make a determination of shareholders
for any other proper purpose, the Board of Directors may fix in advance a date
as the record date, Such record date shall not be more than seventy days prior
to the date on which the particular action, requiring such determination of
shareholders, is to be taken. If no record date is so fixed by the Board of
Directors, the record date shall be at the close of business:
(a) With respect to an annual meeting of the shareholders or any
special meeting of the shareholders called by the Board of Directors or any
person or group specifically authorized by these Bylaws to call a meeting of the
shareholders, as of the close of business on the day before the first notice is
delivered to shareholders; (16-10a-707(1))
(b) with respect to a special shareholder meeting demanded by the
shareholders, on the earliest date of any of the demands pursuant to which the
meeting is called, or 60 days prior to the date the first of the written demands
is received by the Corporation, whichever is later; (16-10a-702(2))
(c) with respect to actions taken in writing without a meeting
(pursuant to Section 2.11 of these Bylaws), on the date the first shareholder
delivers to the Corporation a signed written consent upon which the action is
taken; (16-10a-704(6))
(d) with respect to a distribution to shareholders (other than one
involving a repurchase or reacquisition of shares), on the date the Board of
Directors authorizes the distribution; (16-10a-40(2))
and
-4-
<PAGE>
(e) with respect to the payment of a share dividend, on the date the
Board of Directors authorizes the share dividend. (16-10a-623(3))
When a determination of shareholders entitled to vote at any meeting
of shareholders has been made as provided in this Section, such determination
shall apply to any adjournment thereof unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting. (16-10a-707)
Section 2.6. Shareholder List. The secretary shall make a complete
----------- ----------------
record of the shareholders entitled to vote at each meeting of shareholders,
arranged in alphabetical order within each class or series, with the address of
and the number of shares held by each. The list must be arranged by voting
group (if such exists; see Section 2.7 of these Bylaws) and within each voting
---
group by class or series of shares. The shareholder list must be available for
inspection by any shareholder, beginning on the earlier of ten days before the
meeting for which the list was prepared or two business clays after notice of
the meeting is given and continuing through the meeting and any adjournments.
The list shall be available at the Corporation's principal office or at a place
identified in the notice of the meeting in the city where the meeting is to be
held. A shareholder, his agent, or attorney is entitled on written demand to
inspect and, subject to the requirements of Section 2.13 of these Bylaws, to
inspect and copy the list during regular business hours and during the period it
is available for inspection. The Corporation shall maintain the shareholder
list in written form or in another form capable of conversion into written form
within a reasonable time. (16-10a-720)
Section 2.7. Shareholder Quorum and Voting Requirements. If the
----------- ------------------------------------------
Articles of Incorporation or the Utah Revised Business Corporation Act provide
for voting by a single voting group on a matter, action on that matter is taken
when voted upon by that voting group.
Shares entitled to vote as a separate voting group may take action on
a matter at a meeting only if a quorum of those shares exists with respect to
that matter. Unless the Articles of Incorporation, a Bylaw adopted by the
shareholders pursuant to the Utah Revised Business Corporation Act, or the Utah
Revised Business Corporation Act provide otherwise, a majority of the
-5-
<PAGE>
votes entitled to be cast on the matter by the voting group constitutes a quorum
of that voting group for action on that Matter.
If the Articles of Incorporation or the Utah Revised Business
Corporation Act provide for voting by two or more voting groups on a matter,
action on that matter is taken only when voted upon by each of those voting
groups counted separately. One voting group may vote on a matter even though
another voting group entitled to vote on the matter has not voted.
Once a share is represented for any purpose at a meeting, including
the purpose of determining that a quorum exists, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting, unless a new record date is or must be set for that adjourned meeting.
If a quorum exists, action on a matter (other than the election of
directors) by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless the
Articles of Incorporation, a Bylaw adopted by the shareholders pursuant to the
Utah Revised Business Corporation Act, or the Utah Revised Business Corporation
Act require a greater number of affirmative votes. (16-10a-725 and 16-10a-726)
Section 2.8. Proxies. At all meetings of shareholders, a
----------- -------
shareholder may vote in person or by a proxy executed in any lawful manner.
Such proxy shall be filed with the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution unless otherwise provided in the proxy. (16-10a-722)
Section 2.9. Voting of Shares. Unless otherwise provided in the
----------- ----------------
Articles of Incorporation, each outstanding share entitled to vote shall be
entitled to one vote, and each fractional share shall be entitled to a
corresponding fractional vote, upon each matter submitted to a vote at a meeting
of shareholders.
Except as provided by specific court order, no shares of the
Corporation held by another corporation, if a majority of the Shares entitled to
vote for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting of the Corporation or counted in
determining the
-6-
<PAGE>
total number of outstanding shares at any given time for purposes of any
meeting. However, the power of the Corporation to vote any shares, including
its own shares, held by it in a fiduciary capacity is not hereby limited.
Redeemable shares are not entitled to be voted after notice of
redemption is mailed to the holders thereof and a sum sufficient to redeem the
shares has been deposited with a bank, trust company, or other financial
institution under an irrevocable obligation to pay the holders the redemption
price on surrender of the shares. (16-10a-721)
Section 2.10. Corporation's Acceptance of Votes.
------------ ---------------------------------
(a) If the name signed on a vote, consent, waiver, proxy appointment,
or proxy appointment revocation corresponds to the name of a shareholder, the
Corporation, if acting in good faith, is entitled to accept the vote, consent,
waiver, proxy appointment, or proxy appointment revocation and give it effect as
the act of the shareholder.
(b) If the name signed on a vote, consent, waiver, proxy appointment,
or proxy appointment revocation does not correspond to the name of a
shareholder, the Corporation, if acting in good faith, is nevertheless entitled
to accept the vote, consent, waiver, proxy appointment, or proxy appointment
revocation and give it effect as the act of the shareholder if:
(1) The shareholder is an entity as defined in the Utah Revised
Business Corporation Act and the name signed purports to be that of an
officer or agent of the entity;
(2) the name signed purports to be that of an administrator,
executor, guardian, or conservator representing the shareholder and,
if the Corporation requests, evidence of fiduciary status acceptable
to the Corporation has been presented with respect to the vote,
consent, waiver, proxy appointment, or proxy appointment revocation;
(3) the name signed purports to be that of a receiver or trustee
in bankruptcy of the shareholder and, if the Corporation requests,
evidence of this status acceptable to the Corporation has been
presented
-7-
<PAGE>
with respect to the vote, consent, waiver, proxy appointment, or proxy
appointment revocation;
(4) the name signed purports to be that of a pledgee, beneficial
owner, or attorney-in-fact of the shareholder and, if the Corporation
requests, evidence acceptable to the corporation of the signatory's
authority to sign for the shareholder has been presented with respect
to the vote, consent, waiver, proxy appointment, or proxy appointment
revocation;
(5) two or more persons are the shareholder as cotenants or
fiduciaries and the name signed purports to be the name of at least
one of the cotenants or fiduciaries and the person signing appears to
be acting on behalf of all the cotenants or fiduciaries; or
(6) the acceptance of the vote, consent, waiver, proxy
appointment, or proxy appointment revocation is otherwise proper under
rules established by the Corporation that are not inconsistent with
the provisions of this Section 2.10.
(c) If shares of the corporation are registered in the names of two
or more persons, or if two or more persons have the same fiduciary relationship
respecting the same shares, unless the secretary is given written notice to the
contrary and furnished with a copy of the instrument creating the relationship,
their acts with respect to voting shall have the following effect:
(1) If only one votes, the act binds all;
(2) if more than one vote, the act of the majority so voting
binds all;
(3) if more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in question
proportionately; and
(4) if the instrument so filed or the registration of the shares
shows that any tenancy is hold in unequal interests, a majority or
even split for the purpose of this Section 2.10 shall be a majority or
even split in interest.
-8-
<PAGE>
(d) The Corporation is entitled to reject a vote, consent, waiver,
proxy appointment, or proxy appointment revocation if the secretary or other
officer or agent authorized to tabulate votes, acting in good faith, has
reasonable basis for doubt about the validity of the signature on it or about
the signatory's authority to sign for the shareholder.
(e) The Corporation and its officer or agent who accepts or rejects a
vote, consent, waiver, proxy appointment, or proxy appointment revocation in
good faith and in accordance with the standards of this Section 2.10 are not
liable in damages to the shareholder for the consequences of the acceptance or
rejection.
(f) Corporate action based on the acceptance or rejection of a vote,
consent, waiver, proxy appointment, or proxy appointment revocation under this
Section 2.10 is valid unless a court of competent jurisdiction determines
otherwise. (16-10a-724)
Section 2.11. Informal Action by Shareholders.
------------ -------------------------------
(a) Unless otherwise provided in the Articles of Incorporation, any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice if one or more consents in
writing, setting forth the action so taken, are signed by the holders of
outstanding shares having not less than the minimum number of votes necessary to
authorize or take the action at a meeting at which all shares entitled to vote
thereon were present and voted.
(b) Unless written consents of all shareholders entitled to vote have
been obtained, the Corporation shall give notice of any shareholder approval
without a meeting at least ten days before the consummation of the action
authorized by the approval to:
(1) Those shareholders entitled to vote who have not consented
in writing; and
(2) those shareholders not entitled to vote and to whom the Utah
Revised Business Corporation Act requires notice be given.
-9-
<PAGE>
Such notice shall contain or be accompanied by the same material that
would have been required if a formal meeting had been called to consider the
action.
(c) Any shareholder giving a written consent, or the shareholders,
proxyholder, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholder, may revoke the consent by a signed
writing describing the action and stating that the shareholder's prior consent
is revoked, if the writing is received by the Corporation prior to the
effectiveness of the action.
(d) Action taken pursuant to this Section 2.11 is not effective
unless all written consents on which the Corporation relies for the taking of
action are received by the Corporation within a sixty day period and are not
revoked. Action thus taken is effective as of the date the last written consent
necessary to effect the action is received by the Corporation, unless all the
written consents necessary to effect the action specify a later date as the
effective date of action. If the Corporation has received written consents
signed by all shareholders entitled to vote with respect to the action, the
effective date of the action may be any date that is specified in all the
written consents as the effective date of the action. The writing may be
received by the Corporation by electronically transmitted facsimile or other
form of communication providing the Corporation with a complete copy thereof,
including a copy of the signature.
(e) Notwithstanding subsection (a) of this Section 2.11, directors
may not be elected by written consent except by unanimous written consent of all
shares entitled to vote for the election of directors.
(f) Action taken under this Section 2.11 has the same effect as
action taken at a meeting of shareholders and may be so described in any
document. (16-10a-704)
Section 2.12. Voting for Directors. At each election of directors,
------------ --------------------
unless otherwise provided in the Articles of Incorporation or the Utah Revised
Business Corporation Act, every shareholder entitled to vote at the election has
the right to vote, in person or by proxy, all of the votes to which the
shareholder's shares are entitled for as many persons as there are directors to
be elected and for whose election the shareholder has the right to vote.
-10-
<PAGE>
Unless otherwise provided in the Articles of Incorporation or the Utah
Revised Business corporation Act, directors are elected by a plurality of the
votes cast by the shares entitled to be voted in the election, at a meeting at
which a quorum is present. (16-10a-728)
Section 2.13. Shareholder's Rights to Inspect Corporate Records.
------------ -------------------------------------------------
(a) Minutes and Accounting Records. The Corporation shall keep as
------------------------------
permanent records minutes of all meetings of its shareholders and Board of
Directors, a record of all actions taken by its shareholders or Board of
Directors without a meeting, a record of all actions taken on behalf of the
Corporation by a committee of the Board of Directors in place of the Board of
Directors, and a record of all waivers of notices of meetings of its
shareholders, meetings of the Board of Directors, or any meetings of committees
of the Board of Directors. The Corporation shall maintain appropriate
accounting records. (16-10a-1601(l), (2))
(b) Absolute Inspection Rights of Records Required at Principal
-----------------------------------------------------------
office. If a shareholder gives the Corporation written notice of the
shareholder's demand at least five business days before the date on which the
shareholder wishes to inspect and copy, a shareholder (or the shareholder's
agent or attorney) has the right to inspect and copy, during regular business
hours, any of the following records, all of which the Corporation is required to
keep at its principal office:
(1) The Corporation's Articles of Incorporation currently in
effect;
(2) the Corporation's Bylaws currently in effect;
(3) the minutes of all shareholders' meetings, and records of
all action taken by shareholders without a meeting, for the past three
years;
(4) all written communications within the past three years to
shareholders as a group or to the holders of any class or series of
shares as a group;
(5) a list of the names and business addresses of the
Corporation's current officers and directors;
-11-
<PAGE>
(6) the Corporation's most recent annual report delivered to the
Division of Corporations and Commercial code; and
(7) all financial statements prepared for periods ending during
the last three years that a shareholder could request pursuant to
Section 16-10a-1605 of the Utah Revised Business Corporation Act. (16-
10a-1601(5) and 16-10a-1602(l))
(c) Conditional Inspection Right. If a shareholder gives the
----------------------------
Corporation a written demand made in good faith and for a proper purpose at
least five business days before the date on which the shareholder wishes to
inspect and copy, the shareholder describes with reasonable particularity the
shareholder's purpose and the records the shareholder desires to inspect, and
the records are directly connected with the shareholder's purpose, the
shareholder (or the shareholder's agent or attorney) is entitled to inspect and
copy, during regular business hours at a reasonable location specified by the
Corporation, any of the following records of the Corporation:
(1) Excerpts from:
(i) Minutes of any meeting of the Board of Directors,
records of any action of a committee of the Board of Directors
while acting on behalf of the Corporation in place of the Board
of Directors;
(ii) minutes of any meeting of the shareholders;
(iii) records of shareholders taken by the shareholders
without a meeting; and
(iv) waivers of notices of any meeting of the shareholders,
of any meeting of the Board of Directors, or of any meeting of a
committee of the Board of Directors;
(2) accounting records of the Corporation; and
(3) the record of the Corporation's shareholders referred to in
Section 16-10a-1601(3) of the Utah Revised Business Corporation Act.
(16-10a-1602(2))
-12-
<PAGE>
(d) Copy Costs. The right to copy records includes, if reasonable,
----------
the right to receive copies made by photographic, xerographic, or other means.
The Corporation may impose a reasonable charge, payable in advance, covering the
costs of labor and material, for copies of any documents provided to a
shareholder. The charge may not exceed the estimated cost of production or
reproduction of the records. (16-10a-1603)
(e) Shareholder Includes Beneficial Owner. For purposes of this
-------------------------------------
Section 2.14, the term "shareholder" shall include a beneficial owner whose
shares are held in a voting trust and any other beneficial owner who establishes
beneficial ownership. (16-10a-1602(4)(b))
Section 2.14. Furnishing Financial Statements to a Shareholder. Upon
------------ ------------------------------------------------
the written request of any shareholder, the Corporation shall mail to the
shareholder its most recent annual or quarterly financial statements showing in
reasonable detail its assets and liabilities and the results of its operations.
(16-10a-1605)
Section 2.15. Information Respecting Shares. Upon the written
------------ -----------------------------
request of any shareholder, the Corporation, at its own expense, shall mail to
the shareholder information respecting the designations, preferences,
limitations, and relative rights applicable to each class of shares, the
variations determined for each series, and the authority of the Board of
Directors to determine variations for any existing or future class or series.
The Corporation may comply by mailing the shareholder a copy of its Articles of
Incorporation containing such information. (16-10a-1606)
ARTICLE 3. BOARD OF DIRECTORS
Section 3.1. General Powers. All corporate powers shall be
----------- --------------
exercised by or under the authority of, and the business and affairs of the
Corporation managed under, the direction of the Board of Directors, subject to
any limitation set forth in the Articles of Incorporation or in any agreement
authorized by Section 16-10a-732 of the Utah Revised Business Corporation Act.
(16-10a-801)
Section 3.2. Number, Tenure and Qualification of Directors (Variable
----------- -------------------------------------------------------
Board Size). The number of directors of the Corporation shall be not less than
- -----------
five (5) nor more than nine (9). See (S) 16-10a-803(l) for the number of
required directors.
-13-
<PAGE>
The number of directors may be fixed or changed within the range by the
shareholders or the Board of Directors, but ro decrease may shorten the term of
any incumbent director.
Each director shall hold office until the next annual meeting of
shareholders or until removed. However, if a director's term expires, the
director shall continue to serve until the director's successor shall have been
elected and qualified, or until there is a decrease in the number of directors.
Directors need not be residents of the State of Utah or shareholders
of the Corporation unless the Articles of Incorporation so prescribe. (16-10a-
802, 16-10a-803 and 16-10a-805)
Section 3.3 Regular Meetings of the Board of Directors. A regular
----------- ------------------------------------------
meeting of the Board of Directors shall be held without other notice than
provided by this Section 3.3 immediately after, and at the same place as, the
annual meeting of shareholders. The Board of Directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than such resolution.
Section 3.4. Special Meetings of the Board of Directors. Special
----------- ------------------------------------------
meetings of the Board of Directors may be called by or at the request of the
president or any one director, who may fix any place within the county where the
Corporation has its principal office as the place for holding the meeting.
Section 3.5. Notice and Waiver of Notice of Special Director
----------- -----------------------------------------------
Meetings. Unless the Articles of Incorporation provide for a longer or shorter
- --------
period, special meetings of the Board of Directors must be preceded by at least
two days notice, either orally or in writing, of the date, time, and place of
the meeting.
Notice of any meeting of the Board of Directors shall be deemed to be
effective at the earliest of: (1) when received; (2) five days after it is
mailed; or (3) the date shown on the return receipt if sent by registered or
certified mail, return receipt requested, and the receipt is signed by or on
behalf of the director.
A director may waive notice of any meeting. Except as in this Section
3.5 provided, the waiver must be in writing and
-14-
<PAGE>
signed by the director entitled to the notice. The waiver shall be delivered to
the Corporation for filing with the corporate records, but delivery and filing
are not conditions to its effectiveness.
The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except when a director attends a meeting for the express
purpose of objecting to the transaction of any business and at the beginning of
the meeting, or promptly upon arrival, the director objects to holding the
meeting or transacting business at the meeting because of lack of notice or
defective notice, and does not thereafter vote for or assent to action taken at
the meeting.
A director who attends a special meeting to object to lack of notice
shall not be deemed to be present for quorum purposes. (16-10a-822 and 16-10a-
823)
Section 3.6. Director Quorum. A majority of the number of directors
----------- ---------------
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, unless the Articles of Incorporation require a greater
number.
A majority of the number of directors prescribed by resolution (or if
no number is prescribed, the number in office immediately before the meeting
begins) shall constitute a quorum for the transaction of business at any meeting
of the Board of Directors, unless the Articles of Incorporation require a
greater number.
Section 3.7. Manner of Acting. The act of the majority of the
----------- ----------------
directors present at a meeting at which a quorum is present when the vote is
taken shall be the act of the Board of Directors, unless the Articles of
Incorporation require a greater percentage.
Unless the Articles of Incorporation provide otherwise, any or all
directors may participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
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<PAGE>
A director who is present at a meeting of the Board of Directors when
corporate action is taken is considered to have assented to the action taken,
unless:
(a) The director objects at the beginning of the meeting, or promptly
upon arrival, to holding it or transacting business at the meeting;
(b) the director contemporaneously requests his dissent or abstention
as to any specific action to be entered into the minutes of the meeting; or
(c) the director causes written notice of a dissent or abstention as
to any specific action to be received by the presiding officer of the meeting
before its adjournment or by the Corporation promptly after adjournment of the
meeting.
The right of dissent or abstention as to a specific action is not
available to a director who votes in favor of the action taken. (16-10a-824)
Section 3.8 Director Action Without a Meeting. Unless the Articles
----------- ---------------------------------
of Incorporation or the Utah Revised Business Corporation Act provide otherwise,
any action required or permitted to be taken by the Board of Directors at a
meeting may be taken without a meeting if all the directors consent to the
action in writing. Action is taken by consents at the time the last director
signs a writing describing the action taken, unless, prior to that time, any
director has revoked a consent by a writing signed by the director and received
by the secretary. Action taken by consents is effective when the last director
signs the consent, unless the Board of Directors establishes a different
effective date. Action taken by consents has the same effect as action taken at
a meeting of directors and may be described as such in any document. (16-10a-
821)
Section 3.9. Removal of Directors. The shareholders may remove one
----------- --------------------
or more directors at a meeting called for that purpose if notice has been given
that a purpose of the meeting is such removal. The removal may be with or
without cause, unless the Articles of Incorporation provide that directors may
only be removed with cause. If a director is elected by a voting group of
shareholders, only the shareholders of that voting group may participate in the
vote to remove the director. If cumulative voting is in effect, a director may
not be removed if the number of votes sufficient to elect the director under
cumulative voting
-16-
<PAGE>
is voted against the director's removal. If cumulative voting is not in effect,
a director may be removed only if the number of votes cast to remove the
director exceeds the number of votes cast not to remove the director. (16-10a-
808)
Section 3.10. Board of Director Vacancies.
------------ ---------------------------
(a) Unless the Articles of Incorporation provide otherwise, if a
vacancy occurs on the Board of Directors, including a vacancy resulting from an
increase in the number of directors:
(1) The shareholders may fill the vacancy;
(2) the Board of Directors may fill the vacancy;
or
(3) if the directors remaining in office constitute fewer than a
quorum of the board, they may fill the vacancy by the affirmative vote of a
majority of all the directors remaining in office.
(b) Unless the Articles of Incorporation provide otherwise, if the
vacant office was held by a director elected by a voting group of shareholders:
(1) If one or more directors were elected by the same voting
group, only they are entitled to vote to fill the vacancy if it is filled
by the directors; and
(2) only the holders of shares of that voting group are entitled
to vote to fill the vacancy if it is filled by the shareholders.
A vacancy that will occur at a specific later date, because of a
resignation effective at a later date, may be filled before the vacancy occurs,
but the new director may not take office until the vacancy occurs.
If a director's term expires, the director shall continue to serve
until the director's successor is elected and qualified or until there is a
decrease in the number of directors. The term of a director elected to fill a
vacancy expires at the next shareholders' meeting at which directors are
elected. (16-10a-810 and 16-10a-805(5))
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<PAGE>
Section 3.11. Director Compensation. Unless otherwise provided in
------------ ---------------------
the Articles of Incorporation, by resolution of the Board of Directors, each
director may be paid his expenses, if any, of attendance at each meeting of the
Board of Directors, and may be paid a stated salary as a director or a fixed sum
for attendance at each meeting of the Board of Directors or both. No such
payment shall preclude any director from serving the Corporation in any capacity
and receiving compensation therefor.
Section 3.12. Director Committees.
------------ -------------------
(a) Creation of Committees. Unless the Articles of Incorporation
----------------------
provide otherwise, the Board of Directors may create one or more committees and
appoint members of the Board of Directors to serve on them. Each committee must
have two or more members, who serve at the pleasure of the Board of Directors.
(b) Selection of Members. The creation of a committee and appointment
--------------------
of members to it must be approved by the greater of:
(1) A majority of all the directors in office when the action is
taken; or
(2) the number of directors required by the Articles of
Incorporation to take such action, or if not specified in the Articles of
Incorporation the number required by Section 3.7 of these Bylaws to take
action.
(c) Required Procedures. Sections 3.4 through 3.9 of these Bylaws,
-------------------
which govern meetings, action without a meeting, notice, waiver of notice, and
quorum and voting requirements of the Board of Directors, apply to committees
and their members as well.
(d) Authority. Unless limited by the Articles of Incorporation, each
---------
committee may exercise those aspects of the authority of the Board of Directors
which the Board of Directors confers upon such committee in the resolution
creating the committee. (16-10a-825)
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<PAGE>
Section 3.13. Director's Rights to Inspect Corporate Records.
------------ ----------------------------------------------
(a) Absolute Inspection Rights of Records Required at Principal
-----------------------------------------------------------
Office. If a director gives the Corporation written notice of the director's
demand at least five business days before the date on which the director wishes
to inspect and copy, the director (or the director's agent or attorney) has the
right to inspect and copy, during regular business hours, any of the following
records, all of which the Corporation is required to keep at its principal
office:
(1) The Corporation's Articles of Incorporation currently in
effect;
(2) the Corporation's Bylaws currently in effect;
(3) the minutes of all shareholders' meetings, and records of all
action taken by shareholders without a meeting, for the past three years;
(4) all written communications within the past three years to
shareholders as a group or to the holders of any class or series of shares
as a group;
(5) a list of the names and business addresses of the
Corporation's current officers and directors;
(6) the Corporation's most recent annual report delivered to the
Division of Corporations and Commercial Code; and
(7) all financial statements prepared for periods ending during
the last three years that a shareholder could request. (16-10a-1601(5) and
16-10a-1602(l))
(b) Conditional Inspection Right. In addition, if a director gives
----------------------------
the Corporation a written demand made in good faith and for a proper purpose at
least five business days before the date on which the director wishes to inspect
and copy, the director describes with reasonable particularity the director's
purpose and the records the director desires to inspect, and the records are
directly connected with the director's purpose, the director (or the director's
agent or attorney) is entitled to inspect and copy, during regular business
hours at a reasonable location specified by the corporation, any of the
following records of the Corporation:
-19-
<PAGE>
(1) Excerpts from:
(i) Minutes of any meeting of the Board of Directors,
records of any action of a committee of the Board of Directors
while acting on behalf of the Corporation in place of the Board
of Directors;
(ii) minutes of any meeting of the shareholders;
(iii) records of action taken by the shareholders without a
meeting; and
(iv) waivers of notices of any meeting of the shareholders,
of any meeting of the Board of Directors, or of any meeting of a
committee of the Board of Directors;
(2) accounting records of the Corporation; and
(3) the record of the Corporation's shareholders referred to in
Section 16-10a-1601(3) of the Utah Revised Business Corporation Act.
(16-10a-1602(2))
(d) Copy Costs. The right to copy records includes, if reasonable,
----------
the right to receive copies made by photographic, xerographic, or other means.
The Corporation may impose a reasonable charge, payable in advance, covering the
costs of labor and material, for copies of any documents provided to the
director. The charge may not exceed the estimated cost of production or
reproduction of the records. (16-10a-1603)
ARTICLE 4. OFFICERS
Section 4.1. Number of Officers. The officers of the Corporation
----------- ------------------
shall be a president, a secretary, and a treasurer, each of whom shall be
appointed by the Board of Directors. Such other officers and assistant officers
as may be deemed necessary, including any vice presidents, may be appointed by
the Board of Directors. If specifically authorized by the Board of Directors,
an officer may appoint one or more officers or assistant officers. The same
individual may simultaneously hold more than one office in the Corporation.
(16-10a-830)
-20-
<PAGE>
Section 4.2. Appointment and Term of Office. The officers of the
----------- ------------------------------
Corporation shall be appointed by the Board of Directors for such term as is
determined by the Board of Directors. If no term is specified, each officer
shall hold office until the officer resigns, dies, is removed in the manner
provided in Section 4.3 of these Bylaws, or until the first meeting of the
directors held after the next annual meeting of the shareholders. If the
appointment of officers shall not be made at such meeting, such appointment
shall be made as soon thereafter as is convenient. Each officer shall hold
office until his successor shall have been duly appointed.
The designation of a specified term does not grant to the officer any
contract rights, and the Board of Directors may remove the officer at any time
prior to the end of such term. (16-10a-832)
Section 4.3. Removal of Officers. Any officer or agent may be
----------- -------------------
removed by the Board of Directors at any time, with or without cause. Such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Appointment of an officer or agent shall not of itself create
contract rights. (16-10a-832)
Section 4.4. President. The president shall be the principal
----------- ---------
executive officer of the corporation and, subject to the control of the Board of
Directors, shall, in general, supervise and control all of the business and
affairs of the Corporation. The president shall, when present, preside at all
meetings of the shareholders. The president may sign, with the secretary or any
other proper officer of the Corporation authorized by the Board of Directors,
certificates for shares of the Corporation, the issuance of which shall have
been authorized by a resolution of the Board of Directors, and deeds, mortgages,
bonds, contracts, or other instruments, except in cases where the signing and
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the Corporation, or shall be
required by law to be otherwise signed or executed; and in general shall perform
all duties incident to the office of president and such other duties as may be
prescribed by the Board of Directors from time to time. (16-10a-831)
Section 4.5. Vice Presidents. If appointed, in the absence of the
----------- ---------------
president or in the event of his death, inability, or refusal to act, the vice
president (or in the event there be
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<PAGE>
more than one vice president, the vice presidents in the order designated at the
time of their election, or in the absence of any designation, then in the order
of their appointment) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the president. If there is no vice president, then the treasurer shall perform
such duties of the president. Any vice president may sign, with the secretary
or an assistant secretary, certificates for shares of the Corporation the
issuance of which have been authorized by resolution of the Board of Directors;
and shall perform such other duties as from time to time may be assigned to him
or her by the president or by the Board of Directors. (16-10a-831)
Section 4.6. Secretary. The secretary shall:
----------- ---------
(a) Keep the minutes of the proceedings of the shareholders and of the
Board of Directors and the other records and information of the Corporation
required to be kept, in one or more books provided for that purpose;
(b) see that all notices are duly given in accordance with the
provisions of these Bylaws or as required by law;
(c) be custodian of the corporate records and of any seal of the
Corporation;
(d) when requested or required, authenticate any records of the
Corporation;
(e) keep a register of the post office address of each shareholder
which shall be furnished to the secretary by such shareholder;
(f) sign with the president, or a vice-president, certificates for
shares of the Corporation, the issuance of which shall have been authorized by
resolution of the Board of Directors;
(g) have general charge of the stock transfer books of the
Corporation; and
(h) in general perform all duties incident to the office of secretary
and such other duties as from time to time may be assigned to him or her by the
president or by the Board of Directors. (16-10a-830 and 16-10a-831)
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<PAGE>
Section 4.7. Treasurer. The treasurer shall:
----------- ---------
(a) Have charge and custody of and be responsible for all funds and
securities of the Corporation;
(b) receive and give receipts for moneys due and payable to the
Corporation from any source whatsoever, and deposit all such moneys in the name
of the Corporation in such banks, trust companies, or other depositaries as
shall be selected by the Board of Directors; and
(c) in general perform all of the duties incident to the office of
treasurer and such other duties as from time to time may be assigned to him or
her by the president or by the Board of Directors. (16-10a-831)
If required by the Board of Directors, the treasurer shall give a bond for the
faithful discharge of his or her duties in such sum and with such surety or
sureties as the Board of Directors shall determine.
Section 4.8. Assistant Secretaries and Assistant Treasurers. The
----------- ----------------------------------------------
assistant secretaries, when authorized by the Board of Directors, may sign, with
the president or a vice president, certificates for shares of the Corporation,
the issuance of which shall have been authorized by a resolution of the Board of
Directors. The assistant treasurers shall, if required by the Board of
Directors, give bonds for the faithful discharge of their duties in such sums
and with such sureties as the Board of Directors shall determine. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or the treasurer, respectively, or by
the president or the Board of Directors. (16-10a-831)
Section 4.9. Salaries. The salaries of the officers shall be fixed
----------- --------
from time to time by the Board of Directors.
ARTICLE 5. INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES, FIDUCIARIES, AND AGENTS
Section 5.1. Indemnification of Directors. Unless otherwise
----------- ----------------------------
provided in the Articles of Incorporation, the Corporation shall indemnify any
individual made party to a proceeding because the individual is or was a
director of the Corporation, against liability incurred in the proceeding if the
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<PAGE>
individual has met the standards of conduct set forth in Subsections (a), (b),
and (c) below. Any indemnification shall be made upon authorization in
accordance with Section 16-10a-906(4) of the Utah Revised Business Corporation
Act and only upon a determination having been made in the specific case, in
accordance with Section 16-10a-906(2) of the Utah Revised Business Corporation
Act, that indemnification is permissable in the circumstances because the
individual has met the aforesaid standards of conducts.
(a) Standards of Conduct. The standards of conduct are as follows:
--------------------
(1) The individual's conduct was in good faith;
and
(2) the individual reasonably believed that the individual's
conduct was in, or not opposed to, the Corporation's best interests;
and
(3) in the case of any criminal proceeding, the individual had no
reasonable cause to believe the individual's conduct was unlawful.
(b) No Indemnification Permitted in Certain Circumstances. The
-----------------------------------------------------
corporation shall not indemnify an individual under this Section 5.1:
(1) In connection with a proceeding by or in the right of the
Corporation in which the individual was adjudged liable to the
Corporation; or
(2) in connection with any other proceeding charging that the
individual derived an improper personal benefit, whether or not
involving action in the individual's official capacity, in which
proceeding he or she was adjudged liable on the basis that he or she
derived an improper personal benefit.
(c) Indemnification in Derivative Actions Limited. Indemnification
---------------------------------------------
permitted under this Section 5.1 in connection with a proceeding by or in the
right of the Corporation is limited to reasonable expenses incurred in
connection with the proceeding. (16-10a-902)
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<PAGE>
Section 5.2. Advance of Expenses for Directors. If a determination
----------- ---------------------------------
is made, following the procedures of Section 16-10a-906(2) of the Utah Revised
Business Corporation Act, that the individual has met the following
requirements; and if an authorization of payment is made, following the
procedures and standards set forth in Section 16-10a-906(4) of the Utah Revised
Business Corporation Act, then unless otherwise provided in the Articles of
Incorporation, the Corporation may pay for or reimburse the reasonable expenses
incurred by an individual who is a party to a proceeding because he is or was a
director of the Corporation in advance of final disposition of the proceeding,
if:
(a) The individual furnishes to the Corporation a written affirmation
of the individual's good faith belief that the individual has met the standard
of conduct described in Section 5.1 of these Bylaws;
(b) the individual furnishes to the Corporation a written undertaking,
executed personally or on the individual's behalf, to repay the advance if it is
ultimately determined that the individual did not meet the standard of conduct
(which undertaking must be an unlimited general obligation of the individual but
need not be secured and may be accepted without reference to financial ability
to make repayment); and
(c) a determination is made that the facts then known to those making
the determination would not preclude indemnification under Section 5.1 of these
Bylaws or Part 9 of the Utah Revised Business Corporation Act. (16-10a-904)
Section 5.3. Indemnification of Officers, Employees, Fiduciaries,
----------- ----------------------------------------------------
and Agents. Unless otherwise provided in the Articles of Incorporation, the
- ----------
Corporation may indemnify and advance expenses to any individual made a party to
a proceeding because the individual is or was an officer, employee, fiduciary,
or agent of the Corporation to the same extent as to an individual made a party
to a proceeding because the individual is or was a director of the Corporation,
or to a greater extent, if not inconsistent with public policy, if provided for
by general or specific action of the Board of Directors. (16-10a-907)
Section 5.4. Insurance. The Corporation may purchase and maintain
----------- ---------
liability insurance on behalf of a person who is or was a director, officer,
employee, fiduciary, or agent of the Corporation, or who, while serving as a
director, officer,
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<PAGE>
employee, fiduciary, or agent of the Corporation, is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of another foreign or domestic corporation or other person,
or of an employee benefit plan, against liability asserted against or incurred
by him or her in that capacity or arising from his or her status as a director,
officer, employee, fiduciary, or agent whether or not the Corporation would have
power to indemnify him or her against the same liability under Sections 16-10a-
902, 16-10a-903, or 16-10a-907 of the Utah Revised Business Corporation Act.
Insurance may be procured from any insurance company designated by the Board of
Directors, whether the insurance company is formed under the laws of the State
of Utah or any other jurisdiction of the United States or elsewhere, including
any insurance company in which the Corporation has an equity or any other
interest through stock ownership or otherwise. (16-10a-908)
ARTICLE 6. CERTIFICATES FOR SHARES AND
THEIR TRANSFER
Section 6.1. Certificates for Shares.
----------- -----------------------
(a) Content. Certificates representing shares of the Corporation
-------
shall, at a minimum, state on their face the name of the Corporation and that
the Corporation is organized under the laws of the State of Utah; the name of
the person to whom issued; and the number and class of shares and the
designation of the series, if any, the certificate represents; and be in such
form as is determined by the Board of Directors. Such certificates shall be
signed by the president or a vice president and by the secretary or an assistant
secretary and may be sealed with the corporate seal or a facsimile thereof. The
signatures of the officers may be facsimiles if the certificate is countersigned
by a transfer agent, or registered by a registrar, other than the Corporation
itself or an employee of the Corporation. Each certificate for shares shall be
consecutively numbered or otherwise identified. The certificates may contain
any other information the Corporation considers necessary or appropriate. (16-
10a-625)
(b) Legend as to Class or Series. If the Corporation is authorized to
----------------------------
issue different classes of shares or different series within a class, the
designations, preferences, limitations, and relative rights applicable to each
class, the variations in preferences, limitations, and relative rights
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<PAGE>
determined for each series, and the authority of the Board of Directors to
determine variations for any existing or future class or series must be
summarized on the front or back of each certificate. Alternatively, each
certificate may state conspicuously on its front or back that the Corporation
will furnish the shareholder this information on request in writing and without
charge. (16-10a-625)
(c) Shareholder List. The name and address of the person to whom the
----------------
shares represented are issued, with the number of shares and date of issue,
shall be entered on the stock transfer books of the Corporation.
(d) Transferring Shares. All certificates surrendered to the
-------------------
Corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled, except that in case of a lost, destroyed, or mutilated
certificate a new one may be issued therefor upon such terms and indemnity to
the Corporation as the Board of Directors may prescribe.
Section 6.2. Shares Without Certificates.
----------- ---------------------------
(a) Issuing Shares Without Certificates. Unless the Articles of
-----------------------------------
Incorporation provide otherwise, the Board of Directors may authorize the
issuance of some or all of the shares of any or all classes or series without
certificates. The authorization does not affect shares already represented by
certificates until they are surrendered to the Corporation.
(b) Information Statement Required. Within a reasonable time after
------------------------------
the issuance or transfer of shares without certificates, the Corporation shall
send the shareholder a written statement containing, at a minimum, the name of
the Corporation and that it is organized under the laws of the State of Utah;
the name of the person to whom issued; and the number and class of shares and
the designation of the series, if any, of the issued shares. If the Corporation
is authorized to issue different classes of shares or different series within a
class, the written statement shall describe the designations, preferences,
limitations, and relative rights applicable to each class, the variations in
preferences, limitations, and relative rights determined for each series, and
the authority of the Board of Directors to determine variations for any existing
or future class or series. (16-10a-626)
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<PAGE>
Section 6.3. Registration of Transfer of Shares. Registration of the
----------- ----------------------------------
transfer of shares of the Corporation shall be made only on the stock transfer
books of the Corporation. In order to register a transfer, the record owner
shall surrender the shares to the Corporation for cancellation, properly
endorsed by the appropriate person or persons with reasonable assurances that
the endorsements are genuine and effective. Unless the Corporation has
established a procedure by which a beneficial owner of shares held by a nominee
is to be recognized by the Corporation as the owner, the person in whose name
shares stand on the books of the Corporation shall be deemed by the Corporation
to be the owner thereof for all purposes.
Section 6.4. Restrictions on Transfer of Shares Permitted. The
----------- --------------------------------------------
Board of Directors or the shareholders may impose restrictions on the transfer
or registration of transfer of shares (including any security convertible into,
or carrying a right to subscribe for or acquire shares). A restriction does not
affect shares issued before the restriction was adopted unless the holders of
the shares are parties to the restriction agreement or voted in favor of the
registration or otherwise consented to the restriction.
(a) A restriction on the transfer or registration of transfer of
shares may be authorized:
(1) To maintain the corporation's status when it is dependent on
the number or identity of its shareholders;
(2) to preserve entitlements, benefits, or exemptions under
federal, state, or local laws; and
(3) for any other reasonable purpose.
(b) A restriction on the transfer or registration of transfer of
shares may:
(1) Obligate the shareholder first to offer the Corporation or
other persons, separately, consecutively, or simultaneously, an
opportunity to acquire the restricted shares;
(2) obligate the Corporation or other persons, separately,
consecutively, or simultaneously, to acquire the restricted shares;
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<PAGE>
(3) require, as a condition to a transfer or registration, that
any one or more persons, including the Corporation or any of its
shareholders, approve the transfer or registration, if the requirement
is not manifestly unreasonable; or
(4) prohibit the transfer or the registration of a transfer of
the restricted shares to designated persons or classes of persons, if
the prohibition is not manifestly unreasonable.
A restriction on the transfer or registration of transfer of shares is
valid and enforceable against the holder or a transferee of the holder if the
restriction is authorized by this Section 6.4 and its existence is noted
conspicuously on the front or back of the certificate, or if the restriction is
contained in the information statement required by Section 6.2 of these Bylaws
with regard to shares issued without certificates. Unless so noted, a
restriction is not enforceable against a person without knowledge of the
restriction. (16-10a-627)
Section 6.5. Acquisition of Shares. The Corporation may acquire its
----------- ---------------------
own shares, and, unless otherwise provided in the Articles of Incorporation, the
shares so acquired constitute authorized but unissued shares.
If the Articles of Incorporation prohibit the reissuance of acquired
shares, the number of authorized shares shall be reduced by the number of shares
acquired, effective upon amendment of the Articles of Incorporation, which
amendment shall be adopted by the shareholders or the Board of Directors without
shareholder action. Appropriate Articles of Amendment must be delivered to the
Division of Corporations and Commercial Code and must set forth:
(a) The name of the Corporation;
(b) the reduction in the number of authorized shares, itemized by
class and series;
(c) the total number of authorized shares, itemized by class and
series, remaining after reduction of the shares; and
(d) a statement that the amendment was adopted by the Board of
Directors without shareholder action and that
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<PAGE>
shareholder action was not required if such be the case. (16-10a-631)
ARTICLE 7. DISTRIBUTIONS
Section 7.1. Distributions. The Board of Directors may authorize,
----------- -------------
and the Corporation may make, distributions (including dividends on its
outstanding shares) in the manner and upon the terms and conditions provided by
law and in the Articles of Incorporation.
ARTICLE 8. CORPORATE SEAL
Section 8.1. Corporate Seal. The Board of Directors may provide a
----------- --------------
corporate seal which may be circular in form and have inscribed thereon any
designation including the name of the Corporation, Utah as the state of
incorporation, and the words "Corporate Seal."
ARTICLE 9. FISCAL YEAR
Section 9.1. Fiscal Year. The fiscal year of the Corporation shall
----------- -----------
be fixed by resolution of the Board of Directors.
ARTICLE 10. AMENDMENTS
Section 10.1. Amendments. The Corporation's Board of Directors may
------------ ----------
amend these Bylaws, except to the extent that the Articles of Incorporation,
these Bylaws, or the Utah Revised Business Corporation Act reserve this power
exclusively to the shareholders in whole or in part. However, the Board of
Directors may not adopt, amend, or repeal a Bylaw that fixes a shareholder
quorum or voting requirement that is greater than required by the Utah Revised
Business Corporation Act.
If authorized by the Articles of Incorporation, the shareholders may
adopt, amend, or repeal a Bylaw that fixes a greater quorum or voting
requirement for shareholders, or voting groups of shareholders, than is required
by the Utah Revised Business Corporation Act. Any such action shall comply with
the provisions of the Utah Revised Business Corporation Act.
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<PAGE>
The Corporation's shareholders may amend or repeal the Corporation's
Bylaws even though the Bylaws may also be amended or repealed by the
Corporation's Board of Directors.
(16-10a-1020 to 16-10a-1022)
ADOPTED by the Board of Directors as of the 20th day of October, 1992.
_______________________________________
Brent Anderson, Secretary
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<PAGE>
EXHIBIT 3.5
BYLAWS
OF
MEDICODE (DELAWARE), INC.
(A DELAWARE CORPORATION)
<PAGE>
BYLAWS OF
MEDICODE (DELAWARE), INC.
(a Delaware corporation)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I - CORPORATE OFFICES......................................................................... 1
1.1 Registered Office......................................................................... 1
1.2 Other Offices............................................................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS................................................................. 1
2.1 Place of Meetings......................................................................... 1
2.2 Annual Meeting............................................................................ 1
2.3 Special Meeting........................................................................... 1
2.4 Notice of Stockholders' Meetings.......................................................... 2
2.5 Advance Notice of Stockholder Nominees and Stockholder Business........................... 2
2.6 Manner of Giving Notice; Affidavit of Notice.............................................. 3
2.7 Quorum.................................................................................... 4
2.8 Adjourned Meeting; Notice................................................................. 4
2.9 Voting.................................................................................... 4
2.10 Stockholder Action by Written Consent Without a Meeting................................... 5
2.11 Record Date for Stockholder Notice; Voting................................................ 5
2.12 Proxies................................................................................... 6
2.13 Organization.............................................................................. 6
2.14 List of Stockholders Entitled to Vote..................................................... 6
2.15 Waiver of Notice.......................................................................... 7
ARTICLE III - DIRECTORS............................................................................... 7
3.1 Powers.................................................................................... 7
3.2 Number of Directors....................................................................... 7
3.3 Election and Term of Office of Directors.................................................. 7
3.4 Resignation and Vacancies................................................................. 8
3.5 Removal of Directors...................................................................... 9
3.6 Place of Meetings; Meetings by Telephone.................................................. 9
3.7 First Meetings............................................................................ 9
3.8 Regular Meetings.......................................................................... 9
3.9 Special Meetings; Notice................................................................. 10
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.10 Quorum................................................................................... 10
3.11 Waiver of Notice......................................................................... 10
3.12 Adjournment.............................................................................. 10
3.13 Notice of Adjournment.................................................................... 11
3.14 Board Action by Written Consent Without a Meeting........................................ 11
3.15 Fees and Compensation of Directors....................................................... 11
3.16 Approval of Loans to Officers............................................................ 11
3.17 Sole Director Provided by Certificate of Incorporation................................... 11
ARTICLE IV COMMITTEES................................................................................ 12
4.1 Committees of Directors.................................................................. 12
4.2 Meetings and Action of Committees........................................................ 12
4.3 Committee Minutes........................................................................ 13
ARTICLE V OFFICERS................................................................................... 13
5.1 Officers................................................................................. 13
5.2 Election of Officers..................................................................... 13
5.3 Subordinate Officers..................................................................... 13
5.4 Removal and Resignation of Officers...................................................... 13
5.5 Vacancies in Offices..................................................................... 14
5.6 Chairman of the Board.................................................................... 14
5.7 President................................................................................ 14
5.8 Vice Presidents.......................................................................... 14
5.9 Secretary................................................................................ 15
5.10 Chief Financial Officer.................................................................. 15
5.11 Assistant Secretary...................................................................... 15
5.12 Administrative Officers.................................................................. 16
5.13 Authority and Duties of Officers......................................................... 16
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS........................................................................ 16
6.1 Indemnification of Directors and Officers................................................ 16
6.2 Indemnification of Others................................................................ 17
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.3 Insurance................................................................................ 17
ARTICLE VII - RECORDS AND REPORTS.................................................................... 18
7.1 Maintenance and Inspection of Records.................................................... 18
7.2 Inspection by Directors.................................................................. 18
7.3 Annual Statement to Stockholders......................................................... 18
7.4 Representation of Shares of Other Corporations........................................... 18
7.5 Certification and Inspection of Bylaws................................................... 19
ARTICLE VIII - GENERAL MATTERS....................................................................... 19
8.1 Record Date for Purposes Other than Notice and Voting.................................... 19
8.2 Checks; Drafts; Evidences of Indebtedness................................................ 19
8.3 Corporate Contracts and Instruments: How Executed....................................... 19
8.4 Stock Certificates; Transfer; Partly Paid Shares......................................... 20
8.5 Special Designation on Certificates...................................................... 21
8.6 Lost Certificates........................................................................ 21
8.7 Transfer Agents and Registrars........................................................... 21
8.8 Construction; Definitions................................................................ 21
ARTICLE IX - AMENDMENTS.............................................................................. 22
</TABLE>
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<PAGE>
BYLAWS
------
OF
--
MEDICODE (DELAWARE), INC.
-------------------------
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the
certificate of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside
the State of Delaware designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Wednesday in November in each year at 9:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
2.3 SPECIAL MEETING
---------------
<PAGE>
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting. No other person or
persons are permitted to call a special meeting.
If a special meeting is called by any person or persons other than the
board of directors, then the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered mail or by telegraphic
or other facsimile transmission to the chairman of the board, the president, or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.6 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise
given in accordance with Section 2.6 of these bylaws not less than ten (10) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called (no business
other than that specified in the notice may be transacted) or (ii) in the case
of the annual meeting, those matters which the board of directors, at the time
of giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the board
of directors or by any stockholder entitled to vote in the election of directors
generally if such nomination or business proposed is otherwise proper business
before such meeting. However, any such stockholder may nominate one or more
persons for election as directors at a meeting or propose business to be brought
before a meeting,
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<PAGE>
or both, only if such stockholder has given timely notice in proper written form
of their intent to make such nomination or nominations or to propose such
business. To be timely, such stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the corporation not
less than one hundred twenty (120) calendar days in advance of the date
specified in the corporation's proxy statement released to stockholders in
connection with the previous year's annual meeting of stockholders; provided,
however, that in the event that no annual meeting was held in the previous year
or the date of the annual meeting has been changed by more than thirty (30) days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholder to be timely must be so received a reasonable time
before the solicitation is made. To be in proper form, a stockholder's notice
to the secretary shall set forth:
(i) the name and address of the stockholder who intends to
make the nominations or propose the business and, as the case may be, of
the person or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as would be required
to be included in a proxy statement filed pursuant to the proxy rules of
the Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose
-3-
<PAGE>
of notice. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting in accordance
with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. 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.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
-4-
<PAGE>
Except as may be otherwise provided in the certificate of
incorporation or these bylaws, each stockholder shall be entitled to one vote
for each share of capital stock held by such stockholder and stockholders shall
not be entitled to cumulate their votes in the election of directors or with
respect to any matter submitted to a vote of the stockholders.
Notwithstanding the foregoing, if the stockholders of the corporation
are entitled, pursuant to Sections 2115 and 301.5 of the California Corporations
Code, to cumulate their votes in the election of directors, each such
stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of votes that such stockholder normally
is entitled to cast) only if the candidates' names have been properly placed in
nomination (in accordance with these bylaws) prior to commencement of the
voting, and the stockholder requesting cumulative voting has given notice prior
to commencement of the voting of the stockholder's intention to cumulate votes.
If cumulative voting is properly requested, each holder of stock, or of any
class or classes or of a series or series thereof, who elects to cumulate votes
shall be entitled to as many votes as equals the number of votes that (absent
this provision as to cumulative voting) he or she would be entitled to cast for
the election of directors with respect to his or her shares of stock multiplied
by the number of directors to be elected by him, and he or she may cast all of
such votes for a single director or may distribute them among the number to be
voted for, or for any two or more of them, as he or she may see fit.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the Certificate of Incorporation, any
action required or permitted to be taken at any annual or special meeting of
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. Such consents shall be delivered to the corporation by delivery to it
registered office in the state of Delaware, its principal place of business, or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, 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
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on the business day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section
8.1 of these bylaws.
2.12 PROXIES
-------
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.13 ORGANIZATION
------------
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
secretary at any meeting of the stockholders, the chairman of the meeting may
appoint any person to act as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the
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time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
2.15 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, 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. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware
and to any limitations in the certificate of incorporation or these bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall consist of seven (7) members. The number
of directors may be changed only by an amendment to this bylaw, duly adopted by
the board of directors. Upon the closing of the first sale of the corporation's
common stock pursuant to a firmly underwritten registered public offering (the
"IPO"), the directors shall be divided into three classes, with the term of
office of the first class (Class I), which class shall initially consist of two
directors, to expire at the annual meeting of stockholders to be held in 1998;
the term of office of the second class (Class II), which class shall initially
consist of two directors, to expire at the annual meeting of stockholders to be
held in 1999; the term of office of the third class (Class III), which class
shall initially consist of three directors, to expire at the annual meeting of
stockholders to be held in 2000; and thereafter for each such term to expire at
each third succeeding annual meeting of stockholders held after such election.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors.
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3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office as provided in
Section 3.2 of these bylaws. Each director, including a director elected or
appointed to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, the
board of directors may elect a successor to take office when the resignation
becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
for a term expiring at the next annual meeting of the stockholders at which the
term of office of the class to which such director has been elected expires.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such
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increase), then the Court of Chancery may, upon application of any stockholder
or stockholders holding at least ten (10) percent of the total number of the
shares at the time outstanding having the right to vote for such directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office as aforesaid, which election shall be governed by the provisions of
Section 211 of the General Corporation Law of Delaware as far as applicable.
3.5 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, 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; provided, however,
that, if and so long as stockholders of the corporation are entitled to
cumulative voting, if less than the entire board is to be removed, no director
may be removed without cause if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of Delaware that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Any meeting of the board, regular or special, may be held by
conference telephone or similar communication equipment, so long as all
directors participating in the meeting can hear one another; and all such
participating directors shall be deemed to be present in person at the meeting.
3.7 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
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3.8 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice
at such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting shall
be held at the same time and place on the next succeeding full business day.
3.9 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or to the telegraph company at least forty-
eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or
to a person at the office of the director who the person giving the notice has
reason to believe will promptly communicate it to the director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the corporation.
3.10 QUORUM
------
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.12 of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the quorum for that meeting.
3.11 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting other than for the express purposed of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. All such waivers shall be filed with the corporate records
or made part
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of the minutes of the meeting. A waiver of notice need not specify the purpose
of any regular or special meeting of the board of directors.
3.12 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the board to another time and place.
3.13 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting of the
board need not be given unless the meeting is adjourned for more than twenty-
four (24) hours. If the meeting is adjourned for more than twenty-four (24)
hours, then notice of the time and place of the adjourned meeting shall be given
before the adjourned meeting takes place, in the manner specified in Section 3.9
of these bylaws, to the directors who were not present at the time of the
adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.16 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
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3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
------------------------------------------------------
In the event only one director is required by these bylaws or the
certificate of incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the directors
shall be deemed to refer to such notice, waiver, etc., by such sole director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to the board of directors.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation 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 corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the following provisions of Article III of these
bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8
(regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment), Section
3.13 (notice
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of adjournment) and Section 3.14 (board action by written consent without
meeting), with such changes in the context of those bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members; provided, however, that the time of regular meetings of committees may
be determined either by resolution of the board of directors or by resolution of
the committee, that special meetings of committees may also be called by
resolution of the board of directors, and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more vice
presidents (however denominated), one or more assistant secretaries, a treasurer
and one or more assistant treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
In addition to the Corporate Officers of the Company described above,
there may also be such Administrative Officers of the corporation as may be
designated and appointed from time to time by the president of the corporation
in accordance with the provisions of Section 5.12 of these bylaws.
5.2 ELECTION OF OFFICERS
--------------------
The Corporate Officers of the corporation, except such officers as may
be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
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5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
The president may from time to time designate and appoint
Administrative Officers of the corporation in accordance with the provisions of
Section 5.12 of these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of a Corporate Officer under any
contract of employment, any Corporate Officer may be removed, either with or
without cause, by the board of directors at any regular or special meeting of
the board or, except in case of a Corporate Officer chosen by the board of
directors, by any Corporate Officer upon whom such power of removal may be
conferred by the board of directors.
Any Corporate Officer may resign at any time by giving written notice
to the corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president
may be removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
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Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, if there be such an officer,
the president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He or
she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, and if there is no
chairman of the board, the vice presidents, if any, in order of their rank as
fixed by the board of directors or, if not ranked, a vice president designated
by the board of directors, shall perform all the duties of the president and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors, these bylaws, the president or the
chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of the board
of directors, committees of directors and stockholders. The minutes shall show
the time and place of each meeting, whether regular or special (and, if special,
how authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
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The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director for a purpose reasonably related to his
position as a director.
The chief financial officer shall deposit all money and other
valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the board of directors. He or she shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they request
it, an account of all of his or her transactions as chief financial officer and
of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
-----------------------
In addition to the Corporate Officers of the corporation as provided
in Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing powers, authority and duties, all
officers of the corporation shall respectively have such authority and powers
and perform such duties in the management of the business of the corporation as
may be designated from time to time by the board of directors.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
-------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware as the same now exists or
may hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation shall mean any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
The corporation shall be required to indemnify a director or officer
in connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the corporation's Certificate of Incorporation,
these bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
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<PAGE>
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by
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<PAGE>
a power of attorney or such other writing that authorizes the attorney or other
agent to so act on behalf of the stockholder. The demand under oath shall be
directed to the corporation at its registered office in Delaware or at its
principal place of business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of)
the corporation's stock ledger, a list of its stockholders and its other books
and records for a purpose reasonably related to his or her position as a
director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president,
the chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise
altered to date, certified by the secretary, shall be kept at the corporation's
principal executive office and shall be open to inspection by the stockholders
of the corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
stockholders 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, which shall not
precede the date upon which
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the resolution fixing the record date is adopted and which shall not be more
than sixty (60) days before any such action. In that case, only stockholders of
record at the close of business on the date so fixed are entitled to receive the
dividend, distribution or allotment of rights, or to exercise such rights, as
the case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date so fixed, except as otherwise provided by law.
If the board of directors does not so fix a record date, then the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the board of directors adopts the
applicable resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws,
may authorize and empower any officer or officers, or agent or agents, to enter
into any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of such corporation representing the number of shares registered in certificate
form. Any or all of the signatures on the certificate may be a facsimile. In
case any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate has ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
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<PAGE>
Certificates for shares shall be of such form and device as the board
of directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, or upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured
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<PAGE>
by a bond or other adequate security sufficient to protect the corporation
against any claim that may be made against it, including any expense or
liability, on account of the alleged loss, theft or destruction of the
certificate or the issuance of the replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------
The board of directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company -- either domestic or foreign, who shall be
appointed at such times and places as the requirements of the corporation may
necessitate and the board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules
of construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, as used in these bylaws, the singular number includes the plural, the
plural number includes the singular, and the term "person" includes both an
entity and a natural person.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such power has been so conferred upon the
directors shall not divest the stockholders of the power, nor limit their power
to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
MEDICODE (DELAWARE), INC.
ADOPTION BY INCORPORATOR
------------------------
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of Medicode (Delaware), Inc. hereby adopts the foregoing
bylaws, comprising twenty-two (22) pages, as the Bylaws of the corporation.
Effective as of __________________, 1997.
___________________________________
Vadim Stepanchenko
Incorporator
Certificate by Assistant Secretary of Adoption by Incorporator
--------------------------------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Medicode (Delaware), Inc. and that the foregoing Bylaws,
comprising twenty-two (22) pages, were adopted as the Bylaws of the corporation
effective as of _________________________, 1997, by the person appointed in the
Certificate of Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this __________________ day of _____________________ 1997.
___________________________________
Kevin W. Pearson
Secretary
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<PAGE>
EXHIBIT 10.1
MEDICODE, INC.
AMENDED AND RESTATED 1991 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and any Parent or Subsidiary and to promote the success of the
Company's business. Options granted under the Plan may be Incentive Stock
Options or Nonstatutory Stock Options, as determined by the Administrator at the
time of grant of an option and subject to the applicable provisions of Section
422 of the Code and the regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means a Committee appointed by the Board of
---------
Directors in accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Medicode, Inc.
-------
(g) "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company registers
any class of any equity security pursuant to the Exchange Act, the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent or Subsidiary
is not interrupted or terminated. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave. For purposes of Incentive Stock Options, no
such leave may exceed 90 days, unless reemployment upon expiration of such leave
is guaranteed by statute or contract, including Company policies. If
reemployment upon expiration of a leave of absence approved by the Company is
not so
<PAGE>
guaranteed, on the 181st day of such leave any Incentive Stock Option held by
the Optionee shall cease to be treated as an Incentive Stock Option and shall be
treated for tax purposes as a Nonstatutory Stock Option.
(i) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(j) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market trading day
prior to the time of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(o) "Option" means a stock option granted pursuant to the Plan.
------
(p) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(q) "Optionee" means an Employee or Consultant who receives an Option.
--------
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<PAGE>
(r) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(s) "Plan" means this 1995 Stock Option Plan.
----
(t) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(u) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 below.
(v) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 2,000,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
--------
however, that Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if unvested Shares are repurchased by the Company at
their original purchase price, and the original purchaser of such Shares did not
receive any benefits of ownership of such Shares, such Shares shall become
available for future grant under the Plan. For purposes of the preceding
sentence, voting rights shall not be considered a benefit of Share ownership.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which
----------------------
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or a committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon Which the Company
-------------------------------------------------------------
becomes Subject to the Exchange Act.
- -----------------------------------
(i) Administration With Respect to Directors and Officers
-----------------------------------------------------
Subject to Section 16(b). With respect to Option grants made to Employees who
- ------------------------
are also Officers or Directors subject to Section 16(b) of the Exchange Act, the
Plan shall be administered by (A) the Board, if the Board may administer the
Plan in a manner complying with the rules under Rule 16b-3 relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made, or
(B) a committee designated by
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<PAGE>
the Board to administer the Plan, which committee shall be constituted to comply
with the rules under Rule 16b-3 relating to the disinterested administration of
employee benefit plans under which Section 16(b) exempt discretionary grants and
awards of equity securities are to be made. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the Committee and
appoint additional members, remove members (with or without cause) and
substitute new members, fill vacancies (however caused), and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by the rules under Rule 16b-3 relating to the disinterested
administration of employee benefit plans under which Section 16(b) exempt
discretionary grants and awards of equity securities are to be made.
(ii) Administration With Respect to Other Persons. With
--------------------------------------------
respect to Option grants made to Employees or Consultants who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a committee designated by the Board, which committee shall be
constituted to satisfy the legal requirements, if any, relating to the
administration of incentive stock option plans of state corporate and securities
laws, of the Code, and of any stock exchange or national market system upon
which the Common Stock is then listed or traded (the "Applicable Laws"). Once
appointed, such Committee shall serve in its designated capacity until otherwise
directed by the Board. The Board may increase the size of the Committee and
appoint additional members, remove members (with or without cause) and
substitute new members, fill vacancies (however caused), and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange or national market
system upon which the Common Stock is then listed, the Administrator shall have
the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
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<PAGE>
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions may include, but are not limited to, the exercise price, the time or
times when Options may be exercised, any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or the Shares relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(e) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(ix) to provide for the early exercise of Options for the
purchase of unvested Shares, subject to such terms and conditions as the
Administrator may determine; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if otherwise
eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time the Option with respect
to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to the continuation of the Optionee's employment or consulting
relationship with the Company, nor shall it
-5-
<PAGE>
interfere in any way with the Optionee's right or the Company's right to
terminate the Optionee's employment or consulting relationship at any time, with
or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company, as described in Section 17 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per share
exercise price shall be determined by the Administrator.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the
-6-
<PAGE>
broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for three (3) months following the Optionee's termination. In the
case of an Incentive Stock Option, such period of time for exercise shall not
exceed three (3) months from the date of termination. If, on the date of
termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time
-7-
<PAGE>
specified by the Administrator, the Option shall terminate, and the Shares
covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in
status from Consultant to Employee or Employee to Consultant, an Optionee's
Continuous Status as an Employee or Consultant shall not automatically terminate
solely as a result of such change in status. However, in such event, an
Incentive Stock Option held by the Optionee shall cease to be treated as an
Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory
Stock Option three months and one day following such change of status.
(c) Disability of Optionee. In the event of termination of an
----------------------
Optionee's Continuous Status as an Employee or Consultant as a result of his or
her Disability, the Optionee may, but only within twelve (12) months from the
date of such termination (and in no event later than the expiration date of the
term of his or her Option as set forth in the Option Agreement), exercise the
Option to the extent the Optionee was otherwise entitled to exercise it on the
date of such termination. To the extent that the Optionee is not entitled to
exercise the Option on the date of termination, or if the Optionee does not
exercise the Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by the Option shall revert to
the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who has acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death,
the Optionee's estate or a person who acquires the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
(f) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
10. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
-8-
<PAGE>
11. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company:
(i) Options. Each Option may be assumed or an equivalent
-------
option substituted by such successor corporation (including as a "successor" any
purchaser of substantially all of the assets of the Company) or a parent or
subsidiary of such successor corporation. Alternatively, the Administrator in
its discretion may, as soon as practicable prior to the effective date of such
transaction, provide for an Optionee to have the right to exercise an Option as
to all of the Optioned Stock covered thereby, including Shares as to which the
Option would not otherwise be exercisable. In such event the Administrator
shall notify the Optionee as soon as practicable prior to the effective date of
such transaction that the Option shall be fully exercisable for a period of ten
(10) days from the date of such notice, and the Option shall terminate upon the
expiration of such period. For the purposes of this paragraph, an Option shall
be considered assumed if, following the merger, the option confers the right to
purchase or receive, for each Share of Optioned Stock subject to the
-9-
<PAGE>
Option immediately prior to the merger, the consideration (whether stock, cash,
or other securities or property) received in the merger by holders of Common
Stock for each Share held on the effective date of the transaction (and if
holders were offered a choice of consideration, the type of consideration chosen
by the holders of a majority of the outstanding Shares). If such consideration
received in the merger is not solely common stock of the successor corporation
or its Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon the exercise of
the Option, for each Share of Optioned Stock subject to the Option, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger.
(ii) Shares Subject to Repurchase Option. Any Shares subject
-----------------------------------
to a repurchase option of the Company shall be exchanged for the consideration
(whether stock, cash, or other securities or property) received in the merger or
asset sale by the holders of Common Stock for each Share held on the effective
date of the transaction, as described in the preceding paragraph. If in such
exchange an Optionee receives shares of stock of the successor corporation or a
parent or subsidiary of such successor corporation, and if the successor
corporation has agreed to assume or substitute for Options as provided in the
preceding paragraph, such exchanged shares shall continue to be subject to a
repurchase option as provided in the Optionee's restricted stock purchase
agreement. If, as provided in the preceding paragraph, an Optionee shall have
the right to exercise an Option as to all of the Optioned Stock covered thereby,
all Shares that are subject to a repurchase option of the Company shall be
released from such repurchase option and be fully vested.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any stock exchange or national market system upon
which the Common Stock is then listed), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between
-10-
<PAGE>
the Optionee and the Board, which agreement must be in writing and signed by the
Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange or national market system
upon which the Common Stock is then listed or traded, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
16. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Administrator shall approve from time to time.
17. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange or national market system upon which the Common
Stock is then listed or traded.
-11-
<PAGE>
MEDICODE, INC.
STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF GRANT
---------------
FIELD (1)
- ------------------------------
______________________________
______________________________
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Date of Grant: March 17, 1994
Vesting Commencement Date: January 1, 1994
Exercise Price per Share: $0.75
Total Number of Shares Granted: FIELD (2)
Type of Option: ___ Incentive Stock Option
X Nonstatutory Stock Option
---
Term/Expiration Date: Ten years from Date of Grant.
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
Twelve forty-eighths (12/48th) of the Shares subject to the Option shall
vest one year from the Vesting Commencement Date, and one forty-eighth (1/48th)
of the Shares subject to the Option shall vest each full month thereafter.
<PAGE>
Termination Period:
------------------
This Option may be exercised for thirty (30) days after termination of
employment or consulting relationship, or such longer period as may be
applicable upon death or disability of Optionee as provided in the Plan, but in
no event later than the Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. Medicode, Inc., a Utah corporation (the "Company"),
---------------
hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an
option (the "Option") to purchase the total number of shares of Common Stock
(the "Shares") set forth in the Notice of Grant, at the exercise price per share
set forth in the Notice of Grant (the "Exercise Price") subject to the terms,
definitions and provisions of the Stock Option Plan (the "Plan") adopted by the
Company, which is incorporated herein by reference. Except for the Option and
the Shares in respect of which the Option can be exercised, Optionee hereby
agrees that he is not entitled to receive any other option to purchase shares of
Common Stock or other securities of the Company and that the Shares represent
the total number of shares that Optionee is entitled to purchase. The Company
may, at its discretion, grant Optionee the right to purchase additional shares
of Common Stock in the future. Unless otherwise defined herein, the terms
defined in the Plan shall have the same defined meanings in this Option.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Vesting Schedule set out in the Notice of Grant and with
the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
-----------------
(a) This Option may not be exercised for a fraction of a Share.
(b) In the event of Optionee's death, disability or other
termination of the employment or consulting relationship, the exercisability of
the Option is governed by Sections 6, 7 and 8 below, subject to the limitation
contained in subsection 2(i)(c).
(c) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Grant.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of
-2-
<PAGE>
Shares in respect of which the Option is being exercised, and such other
representations and agreements as to the holder's investment intent with respect
to such shares of Common Stock as may be required by the Company pursuant to the
provisions of the Plan. Such written notice shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the Exercise
Price. This Option shall be deemed to be exercised upon receipt by the Company
of such written notice accompanied by the Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
(i) cash; or
(ii) check; or
(iii) surrender of other shares of Common Stock of the Company which
(A) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(iv) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the Exercise Price.
5. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require
-3-
<PAGE>
Optionee to make any representation and warranty to the Company as may be
required by any applicable law or regulation.
6. Termination of Relationship. In the event an Optionee's Continuous
---------------------------
Status as an Employee or Consultant terminates, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
exercise this Option during the Termination Period set out in the Notice of
Grant. To the extent that Optionee was not entitled to exercise this Option at
the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
7. Disability of Optionee. Notwithstanding the provisions of Section 6
----------------------
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his or her disability, Optionee
may, but only within six (6) months from the date of such termination (and in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination; provided, however, that if such
disability is not a "disability" as such term is defined in Section 22(e)(3) of
the Code, in the case of an Incentive Stock Option such Incentive Stock Option
shall automatically convert to a Nonstatutory Stock Option on the day three
months and one day following such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of termination, or if Optionee
does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
8. Death of Optionee. In the event of termination of Optionee's
-----------------
Continuous Status as an Employee or Consultant as a result of the death of
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee could exercise the Option at
the date of death.
9. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 7 of the Plan regarding Options designated as Incentive Stock Options
and Options granted to more than ten percent (10%) shareholders shall apply to
this Option.
11. Taxation Upon Exercise of Option. Optionee understands that, upon
--------------------------------
exercising a Nonstatutory Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then Fair Market Value of the
Shares over the exercise price. However, the timing of
-4-
<PAGE>
this income recognition may be deferred for up to six months if Optionee is
subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). If the Optionee is an Employee, the Company will be required
to withhold from Optionee's compensation, or collect from Optionee and pay to
the applicable taxing authorities an amount equal to a percentage of this
compensation income. Additionally, the Optionee may at some point be required
to satisfy tax withholding obligations with respect to the disqualifying
disposition of an Incentive Stock Option. The Optionee shall satisfy his or her
tax withholding obligation arising upon the exercise of this Option out of
Optionee's compensation or by payment to the Company.
12. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal and state tax consequences of exercise of
this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.
(i) Exercise of ISO. If this Option qualifies as an ISO, there
---------------
will be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
(ii) Exercise of ISO Following Disability. If the Optionee's
------------------------------------
Continuous Status as an Employee or Consultant terminates as a result of
disability that is not total and permanent disability as defined in Section
22(e)(3) of the Code, to the extent permitted on the date of termination, the
Optionee must exercise an ISO within 90 days of such termination for the ISO to
be qualified as an ISO.
(iii) Exercise of Nonstatutory Stock Option. There may be a regular
-------------------------------------
federal income tax liability and applicable state income tax liability upon the
exercise of a Nonstatutory Stock Option. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee, the Company will be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(iv) Disposition of Shares. In the case of an NSO, if Shares are
---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal and Utah income tax purposes.
In the case of an ISO, if Shares transferred pursuant to the Option are held for
at least one year after exercise and are disposed of at least two years after
the Date of Grant, any gain realized on disposition of the Shares will also be
treated as long-term capital gain for federal and Utah income tax purposes. If
Shares purchased under an ISO are disposed of within such one-year period or
within two years after the Date of Grant, any gain realized on such disposition
will be treated as compensation income (taxable at ordinary income rates) to the
extent of
-5-
<PAGE>
the difference between the Exercise Price and the lesser of (1) the Fair Market
Value of the Shares on the date of exercise, or (2) the sale price of the
Shares.
(v) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
Medicode, Inc.,
a Utah corporation
By: _______________________________
Its:_______________________________
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: _______________ ___________________________________
Optionee
-6-
<PAGE>
Residence Address:
___________________________________
___________________________________
___________________________________
-7-
<PAGE>
EXHIBIT A
---------
STOCK OPTION PLAN
EXERCISE NOTICE
Medicode, Inc.
5225 Wiley Post Way, Suite 500
Salt Lake City, Utah 84116
Attention: Chief Financial Officer
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
--------
_________ shares of the Common Stock (the "SHARES") of Medicode, Inc. (the
"COMPANY") under and pursuant to the Stock Option Plan, as amended (the "PLAN")
and the [X] Incentive [ ] Nonstatutory Stock Option Agreement dated March 17,
1994 (the "Option Agreement").
----------------
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
3. Rights as Shareholder. Until the stock certificate evidencing such
---------------------
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 11 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as Optionee
disposes of the Shares or the Company and/or its assignee(s) exercises the Right
of First Refusal hereunder. Upon such exercise, Optionee shall have no further
rights as a holder of the Shares so purchased except the right to receive
payment for the Shares so purchased in accordance with the provisions of this
Agreement, and Optionee shall forthwith cause the certificate(s) evidencing the
Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4. Company's Repurchase Option.
---------------------------
(a) Exercise of Repurchase Option. In the event of the termination
-----------------------------
of the Optionee's employment with the Company for any or no reason (including
death or disability) the Company shall, have the right, but not the obligation,
to repurchase all or any portion of the Shares at such time at the repurchase
price equal to the Fair Market Value of the Shares at the time the
<PAGE>
Company elects to make such repurchase. Said repurchase option shall be
exercised by the Company by delivery of written notice to the Optionee or his
executor within 90 days of the termination of the Optionee's employment and, at
the Company's option, (i) by delivery to the Purchaser or his executor with such
notice of a check in the amount of the repurchase price for the Shares being
repurchased, or (ii) by cancellation by the Company of an amount of the
Optionee's indebtedness to the Company equal to the repurchase price for the
Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the
combined payment and cancellation of indebtedness equals such repurchase price.
Upon delivery of such notice and the payment of the repurchase price in any of
the ways described above, the Company shall become the legal and beneficial
owner of the Shares being repurchased and all rights and interests therein or
relating thereto, and the Company shall have the right to retain and transfer to
its own name the number of Shares being repurchased by the Company. For
purposes of the Section 4, "Fair Market Value" shall be determined in good faith
by the Board of Directors of the Company and the optionee with reference to
customary indications of value such as recent arms-length issuances and sales of
the Company's securities. In the event the Board of Directors and the optionee
fail to agree on the Fair Market Value within 90 days of the delivery of the
notice as provided herein, such value shall be finally determined by a mutually
acceptable independent third party appraiser.
(b) Assignment of Repurchase Right. Whenever the Company shall have
------------------------------
the right to repurchase Shares hereunder, the Company may designate and assign
one or more employees, officers, directors or shareholders of the Company or
other persons or organizations to exercise all or a part of the Company's
repurchase rights under this Agreement and purchase all or a part of such
Shares.
(c) Termination of Repurchase Option. The repurchase option shall
--------------------------------
terminate as to any Shares 90 days after the first sale of Common Stock of the
Company to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
5. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
6. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE
-2-
<PAGE>
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE
ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE
OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
7. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
8. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
9. Governing Law; Severability. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the State of Utah excluding that body
of law pertaining to conflicts of law. Should any provision of this Agreement
be determined by a court of law to be illegal or unenforceable, the other
provisions shall nevertheless remain effective and shall remain enforceable.
10. Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown
-3-
<PAGE>
below beneath its signature, or to such other address as such party may
designate in writing from time to time to the other party.
11. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
12. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full Exercise Price for the Shares.
13. Entire Agreement. The Plan and Notice of Grant/Option Agreement are
----------------
incorporated herein by reference. This Agreement, the Plan, the Option
Agreement and the Investment Representation Statement constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and is governed by Utah law except for that body of law pertaining to
conflict of laws.
Submitted by: Accepted by:
OPTIONEE: MEDICODE, INC.
By:________________________________
Its:_______________________________
______________________________
Signature
-4-
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: MEDICODE, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company and any other legend required under applicable state
securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer qualifies under Rule
701 at the time of the grant of the Option to the Optionee, the exercise will be
exempt from registration under the Securities Act. In the event the Company
becomes subject to the reporting requirements of
<PAGE>
Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days
thereafter (or such longer period as any market stand-off agreement may require)
the Securities exempt under Rule 701 may be resold, subject to the satisfaction
of certain of the conditions specified by Rule 144, including: (1) the resale
being made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the
availability of certain public information about the Company, (3) the amount of
Securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), and (4) the timely filing of a Form 144,
if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any securities of the Company under the Securities Act, Optionee
shall not sell or otherwise transfer any Shares or other securities of the
Company during the 180-day period following the effective date of a registration
statement of the Company filed under the Securities Act; provided, however, that
such restriction shall only apply to the first registration statement of the
Company to become effective under the Securities Act which include securities to
be sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such 180-day period.
(e) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that any
such other registration exemption will be available in such event.
Signature of Optionee:
___________________________________
Date: ___________________, 19______
-2-
<PAGE>
EXHIBIT 10.2
MEDICODE, INC.
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Medicode, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
<PAGE>
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
-2-
<PAGE>
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
------
(s) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this 1997 Stock Plan.
----
(y) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
-3-
<PAGE>
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is [______________] Shares, plus (a) any Shares which have been
reserved but unissued under the Company's Amended and Restated 1991 Stock Option
Plan ("1991 Plan") as of the date of shareholder approval of this Plan not to
exceed an aggregate of [750,000] Shares, and (b) any Shares returned to the 1991
Plan as a result of termination of options under the 1991 Plan not to exceed an
aggregate of [750,000] Shares. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
-4-
<PAGE>
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to
be covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
-5-
<PAGE>
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
-6-
<PAGE>
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than [200,000] Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional [200,000 ]
Shares which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
------------
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of the
Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
-7-
<PAGE>
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
-8-
<PAGE>
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of
-9-
<PAGE>
time as is specified in the Option Agreement to the extent the Option is vested
on the date of termination (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable for
twelve (12) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by
-10-
<PAGE>
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior
-11-
<PAGE>
to the effective date of such proposed transaction. The Administrator in its
discretion may provide for an Optionee to have the right to exercise his or her
Option until ten (10) days prior to such transaction as to all of the Optioned
Stock covered thereby, including Shares as to which the Option would not
otherwise be exercisable. In addition, the Administrator may provide that any
Company repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock Purchase Right shall lapse as to all such Shares, provided the
proposed dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option or
Stock Purchase Right will terminate immediately prior to the consummation of
such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
15. Amendment and Termination of the Plan.
-------------------------------------
-12-
<PAGE>
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
1997 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _____________________________
Date of Grant _____________________________
Vesting Commencement Date _____________________________
Exercise Price per Share $____________________________
Total Number of Shares Granted _____________________________
Total Exercise Price $____________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _____________________________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter, subject to the Optionee continuing to be a Service
Provider on such dates.
<PAGE>
Termination Period:
------------------
This Option may be exercised for 30 days after Optionee ceases to be a
Service Provider. Upon the death or Disability of the Optionee, this Option may
be exercised for one year after Optionee ceases to be a Service Provider. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
II. AGREEMENT
---------
1. Grant of Option. The Plan Administrator of the Company hereby grants
---------------
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to [Title] of the Company. The Exercise Notice
shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
-2-
<PAGE>
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
----------------
this Option, as of the date of this Option, are set forth below. THIS SUMMARY
IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
---------------------
(i) Nonstatutory Stock Option. The Optionee may incur regular
-------------------------
federal income tax liability upon exercise of a NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required to
withhold from his or her compensation or collect from Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
-3-
<PAGE>
(ii) Incentive Stock Option. If this Option qualifies as an
----------------------
ISO, the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal tax
purposes and may subject the Optionee to alternative minimum tax in the year of
exercise. In the event that the Optionee ceases to be an Employee but remains a
Service Provider, any Incentive Stock Option of the Optionee that remains
unexercised shall cease to qualify as an Incentive Stock Option and will be
treated for tax purposes as a Nonstatutory Stock Option on the date three (3)
months and one (1) day following such change of status.
(b) Disposition of Shares.
---------------------
(i) NSO. If the Optionee holds NSO Shares for at least one
---
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
---
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price. Any additional gain will be taxed
as capital gain, short-term or long-term depending on the period that the ISO
Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
-------------------------------------------------
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of Utah.
8. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING
-4-
<PAGE>
SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL
OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION
OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT
ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: MEDICODE, INC.
______________________________________ _____________________________________
Signature By
______________________________________ _____________________________________
Print Name Title
______________________________________
Residence Address
______________________________________
-5-
<PAGE>
EXHIBIT A
---------
1997 STOCK PLAN
EXERCISE NOTICE
Medicode, Inc.
5225 Wiley Post Way, Suite 500
Salt Lake City, Utah 84116
Attention: [Title]
1. Exercise of Option. Effective as of today, __________, 199__, the
------------------
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of Medicode, Inc. (the "Company") under and
pursuant to the 1997 Stock Plan (the "Plan") and the Stock Option Agreement
dated __________, 19___ (the "Option Agreement"). The purchase price for the
Shares shall be $__________, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
----------------------------
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance (as evidenced by the
---------------------
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a stockholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 13 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
----------------
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all
<PAGE>
prior undertakings and agreements of the Company and Purchaser with respect to
the subject matter hereof, and may not be modified adversely to the Purchaser's
interest except by means of a writing signed by the Company and Purchaser. This
agreement is governed by the internal substantive laws, but not the choice of
law rules, of Utah.
Submitted by: Accepted by:
PURCHASER: MEDICODE, INC.
______________________________________ _____________________________________
Signature By
______________________________________ _____________________________________
Print Name Its
Address: Address:
- ------- -------
______________________________________ Medicode, Inc.
______________________________________ 5225 Wiley Post Way, Suite 500
Salt Lake City, Utah 84116
_____________________________________
Date Received
-2-
<PAGE>
EXHIBIT 10.3
MEDICODE, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of Medicode, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Medicode, Inc. and any Designated Subsidiary
-------
of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
and commissions, but exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
<PAGE>
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board, or;
(4) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement in Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Company's Common Stock (the "Registration
Statement").
(k) "Offering Periods" shall mean the periods of approximately
----------------
twenty-four (24) months during which an option granted pursuant to the Plan may
be exercised, commencing on the first Trading Day on or after [_______________]
and [_______________] of each year and terminating on the last Trading Day in
the periods ending twenty-four months later; provided, however, that the first
Offering Period under the Plan shall commence with the first Trading Day on or
after the date on which the Securities and Exchange Commission declares the
Company's Registration Statement effective and ending on the last Trading Day on
or before [ _____________ ]. The duration and timing of Offering Periods may be
changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first
-2-
<PAGE>
Purchase Period of any Offering Period shall commence on the Enrollment Date and
end with the next Exercise Date.
(o) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after [_______________] and [_______________] each year, or on
such other date as the Board shall determine, and continuing thereafter until
terminated in accordance with Section 20 hereof; provided, however, that the
first Offering Period under the Plan shall commence with the first Trading Day
on or after the date on which the Securities and Exchange Commission declares
the Company's Registration Statement effective and ending on the last Trading
Day on or before [ _____________ ]. The Board shall have the power to change
the duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without shareholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
-3-
<PAGE>
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding 15% of the Compensation
which he or she receives on each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any,
-4-
<PAGE>
which arise upon the exercise of the option or the disposition of the Common
Stock. At any time, the Company may, but shall not be obligated to, withhold
from the participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefits attributable to sale or
early disposition of Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than
30,000 shares of the Company's Common Stock (subject to any adjustment pursuant
to Section 19) on the Enrollment Date, and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall
expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall
-5-
<PAGE>
be made for such Offering Period. If a participant withdraws from an Offering
Period, payroll deductions shall not resume at the beginning of the succeeding
Offering Period unless the participant delivers to the Company a new
subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or she
shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be [Two Hundred Thousand (200,000)] shares. If, on a given Exercise Date,
the number of shares with respect to which options are to be exercised exceeds
the number of shares then available under the Plan, the Company shall make a pro
rata allocation of the shares remaining available for purchase in as uniform a
manner as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
-6-
<PAGE>
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to delivery to such participant of
such shares and cash. In addition, a participant may file a written designation
of a beneficiary who is to receive any cash from the participant's account under
the Plan in the event of such participant's death prior to exercise of the
option. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
-7-
<PAGE>
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
-8-
<PAGE>
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
-9-
<PAGE>
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
MEDICODE, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________________________ hereby elects to
participate in the Medicode, Inc. 1997 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase shares of the
Company's Common Stock in accordance with this Subscription Agreement and
the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 0 to 15%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
____________________________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing within 30 days after the date
---------------------------------------------------------------------------
of any disposition of my shares and I will make adequate provision for
----------------------------------------------------------------------
Federal, state or other tax withholding obligations, if any, which arise
------------------------------------------------------------------------
upon the disposition of the Common Stock. The Company may, but will not be
----------------------------------------
obligated to, withhold
<PAGE>
from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits attributable to
sale or early disposition of Common Stock by me. If I dispose of such
shares at any time after the expiration of the 2-year and 1-year holding
periods, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)_________________________________________________________
(First) (Middle) (Last)
_____________________________ _____________________________________________
Relationship
_____________________________________________
(Address)
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_______________________ _____________________________________________
Signature of Employee
-2-
<PAGE>
________________________________________
Spouse's Signature (If beneficiary other than
spouse)
-3-
<PAGE>
EXHIBIT B
---------
MEDICODE, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Medicode, Inc.
1997 Employee Stock Purchase Plan which began on ____________, 19____ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically terminated. The undersigned under stands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:___________________________
<PAGE>
EXHIBIT 10.4
MEDICODE, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of
_____________, 1997 by and between Medicode, Inc., Delaware corporation (the
"Company"), and ________________, ("Indemnitee").
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;
WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.
1. Certain Definitions.
-------------------
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended) or group acting in concert, other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 50% of the total voting power represented by the Company's then outstanding
Voting Securities (as defined below), (ii) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least two thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the
<PAGE>
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of related transactions) all or substantially all of the
Company's assets.
(b) "Claim" shall mean with respect to a Covered Event (as defined
below): any threatened, pending or completed action, suit, proceeding or
alternative dispute resolution mechanism, or any hearing, inquiry or
investigation that Indemnitee in good faith believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other.
(c) References to the "Company" shall include, in addition to
Medicode, Inc., any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which Medicode, Inc. (or
any of its wholly owned subsidiaries) is a party which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, agents or fiduciaries, so that if Indemnitee is
or was a director, officer, employee, agent or fiduciary of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.
(e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld), actually and reasonably incurred,
of any Claim and any federal, state, local or foreign taxes imposed on the
Indemnitee as a result of the actual or deemed receipt of any payments under
this Agreement.
(f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.
-2-
<PAGE>
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.
(j) "Section" refers to a section of this Agreement unless otherwise
indicated.
(k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
2. Indemnification.
---------------
(a) Indemnification of Expenses. Subject to the provisions of Section
---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.
(b) Review of Indemnification Obligations. Notwithstanding the
-------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid to Indemnitee to which Indemnitee is not entitled hereunder
under applicable law; provided, however, that if Indemnitee has commenced or
-------- -------
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee is entitled to be indemnified
-3-
<PAGE>
hereunder under applicable law, any determination made by any Reviewing Party
that Indemnitee is not entitled to be indemnified hereunder under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expenses theretofore paid in indemnifying Indemnitee until a
final judicial determination is made with respect thereto (as to which all
rights of appeal therefrom have been exhausted or lapsed). Indemnitee's
obligation to reimburse the Company for any Expenses shall be unsecured and no
interest shall be charged thereon.
(c) Indemnitee Rights on Unfavorable Determination; Binding Effect.
--------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(d) Selection of Reviewing Party; Change in Control. If there has not
-----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the Company otherwise determines or (ii) any
Indemnity shall provide a written statement setting forth in detail a reasonable
objection to such Independent Legal Counsel representing other Indemnitees.
(e) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.
-4-
<PAGE>
3. Expense Advances.
----------------
(a) Obligation to Make Expense Advances. The Company shall make
-----------------------------------
Expense Advances to Indemnitee upon receipt of a written undertaking by or on
behalf of the Indemnitee to repay such amounts if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified therefore by
the Company.
(b) Form of Undertaking. Any written undertaking by the Indemnitee to
-------------------
repay any Expense Advances hereunder shall be unsecured and no interest shall be
charged thereon.
(c) Determination of Reasonable Expense Advances. The parties agree
--------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.
4. Procedures for Indemnification and Expense Advances.
---------------------------------------------------
(a) Timing of Payments. All payments of Expenses (including without
------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than forty-five (45) business days after such
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than twenty (20) business days
after such written demand by Indemnitee is presented to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---------------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law. In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement or applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any
-5-
<PAGE>
particular belief. In connection with any determination by any Reviewing Party
or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
------------------
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently employed by
or on behalf of Indemnitee with respect to the same Claim; provided, however,
that, (i) Indemnitee shall have the right to employ Indemnitee's separate
counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment
of separate counsel by Indemnitee has been previously authorized by the Company,
(B) Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.
5. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.
(b) Nonexclusivity. The indemnification and the payment of Expense
--------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as
-6-
<PAGE>
to Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though subsequent thereto Indemnitee may have ceased to serve in
such capacity.
6. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.
7. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
9. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
10. Exceptions. Notwithstanding any other provision of this Agreement,
----------
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
----------------------------
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law; provided, however, that notwithstanding any limitation set forth in this
Section 10(a) regarding the Company's obligation to provide indemnification,
Indemnitee shall be entitled under Section 3 to receive Expense Advances
hereunder with respect to any such Claim unless and until a court having
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
Indemnitee has engaged in acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or applicable
law.
(b) Claims Initiated by Indemnitee. To indemnify or make Expense
------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or cross-claim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or
-7-
<PAGE>
under the Company's Certificate of Incorporation or Bylaws now or hereafter in
effect relating to Claims for Covered Events, (ii) in specific cases if the
Board of Directors has approved the initiation or bringing of such Claim, or
(iii) as otherwise required under Section 145 of the Delaware General
Corporation Law (relating to indemnification of officers, directors, employees
and agents, and insurance), regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, Expense Advances, or
insurance recovery, as the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute; provided, however, that
notwithstanding any limitation set forth in this Section 10(d) regarding the
Company's obligations to provide indemnification, Indemnitee shall be entitled
under Section 3 to receive Expense Advances hereunder with respect to any such
Claim unless and until a court having jurisdiction over the Claim shall have
made a final determination (as to which all rights of appeal have been exhausted
or lapsed) that Indemnitee has violated said statute.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Expenses Incurred in Action Relating to Enforcement or Interpretation.
---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having jurisdiction over such action makes a final
-8-
<PAGE>
judicial determination (as to which all rights of appeal therefrom have been
exhausted or lapsed) that each of the material assertions made by Indemnitee as
a basis for such action was not made in good faith or was frivolous; provided,
however, that until such final judicial determination is made, Indemnitee shall
be entitled under Section 3 to receive payment of Expense Advances hereunder
with respect to such action. In the event of an action instituted by or in the
name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be indemnified for all
Expenses incurred by Indemnitee in defense of such action (including without
limitation costs and expenses incurred with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action a court having jurisdiction over such action makes a final judicial
determination (as to which all rights of appeal therefrom have been exhausted or
lapsed) that each of the material defenses asserted by Indemnitee in such action
was made in bad faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action.
14. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
15. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
16. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
17. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
-9-
<PAGE>
18. Choice of Law. This Agreement, and all rights, remedies, liabilities,
-------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware as applied to
contracts between Delaware residents entered into and to be performed entirely
in the State of Delaware without regard to principles of conflicts of laws.
19. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
20. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.
21. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
22. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
MEDICODE, INC. AGREED TO AND ACCEPTED
By:____________________________ __________________________________
Signature
Title:_________________________ __________________________________
Print Name
Address: 5225 Wiley Post Way, Suite 500 Address ______________________
Salt Lake City, Utah 84116 ______________________
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<PAGE>
EXHIBIT 10.5
MEDICODE, INC.
REGISTRATION RIGHTS AGREEMENT
This Agreement is made as of September 16, 1993 among Medicode, Inc., a
Utah corporation (the "Company") and the persons and entities listed as
Investors in the signature section at the end of this Agreement.
1. Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Master Investment Agreement" shall mean the Master Investment
---------------------------
Agreement dated of even date herewith.
"Shares" shall mean the Series A Preferred Stock sold pursuant to the
------
Master Investment Agreement and the Common Stock issued or issuable upon
exercise of the Bridge Warrants, the Purchase Warrants and the Selling
Shareholder Warrant (all as defined therein) issued pursuant to the Master
Investment Agreement.
"Purchasers" shall mean the persons and entities holding Shares issued
----------
pursuant to the Master Investment Agreement.
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legends set forth in the Master Investment Agreement.
"Act" shall mean the Securities Act of 1933, as amended.
---
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Act.
"Register," "registered" and "registration" shall refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Act, and the declaration or ordering of the effectiveness of
such registration statement.
"Registrable Securities" shall mean (i) the Common Stock issued or
----------------------
issuable upon conversion of the Shares (the "Conversion Stock") and (ii) any
Common Stock or other securities issued or issuable with respect to the Shares
upon any stock split, stock dividend, recapitalization, or similar event, or any
Common Stock otherwise issued or issuable with respect to the Shares, provided,
however, that shares of Common Stock or other securities shall only be treated
as Registrable Securities if and so long as they have
<PAGE>
not been sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction.
"Holder" shall mean any Purchaser holding Registrable Securities
------
(including Shares) and any person holding Registrable Securities to whom the
rights under this Agreement have been transferred in accordance with paragraph
10 hereof.
"Initiating Holders" shall mean any Holders who in the aggregate
------------------
possess at least 30% of the Registrable Securities.
"Registration Expenses" shall mean all expenses, except Selling
---------------------
Expenses as otherwise stated below, incurred by the Company in complying with
paragraphs 2, 3 and 4 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, fees and disbursements of a single
counsel for the selling shareholders, blue sky fees and expenses, the expense of
any special audits incident to or required by any such registration (but
excluding the compensation of regular employees of the Company which shall be
paid in any event by the Company).
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions, stock transfer taxes applicable to the securities registered by the
Holders.
2. Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect any registration,
qualification or compliance with respect to at least 30% of the shares of
Registrable Securities (or any lesser number of shares of Registrable Securities
having an expected aggregate offering price, net of underwriting discounts and
commissions, greater than $7,500,000), the Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration, qualification or compliance (including, without limitation,
appropriate qualification under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued under the Act
and any other govern mental requirements or regulations) as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in such
-2-
<PAGE>
request, together with all or such portion of the Registrable Securities of any
Holder or Holders joining in such request as are specified in a written request
received by the Company within 20 days after receipt of such written notice from
the Company;
Provided, however, that the Company shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this paragraph 2:
(1) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Act;
(2) During the period starting with the date sixty (60) days
prior to the Company's estimated date of filing of, and ending on the date three
(3) months immediately following the effective date of, any registration
statement pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective;
(3) After the Company has effected two such registrations
pursuant to this paragraph 2(a), and such registrations have been declared or
ordered effective; or
(4) If the Company shall furnish to such Holders a certificate
signed by the President of the Company that in the good faith judgment of the
Board of Directors it would be seriously detrimental to the Company or its
shareholders for a registration statement to be filed at such time, then the
Company's obligation to use its best efforts to register, qualify or comply
under this paragraph 2 shall be deferred for a period not to exceed 90 days from
the date of receipt of written request from the Initiating Holders, provided,
--------
however, that the Company may not make such certification more than once every
twelve (12) months.
Subject to the foregoing clauses (1) through (5), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable, after receipt of the request or
requests of the Initiating Holders and in any event within ninety (90) days
after receipt of such request.
-3-
<PAGE>
(b) Underwriting. In the event that a registration pursuant to this
------------
paragraph 2 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
paragraph 2(a)(i). In such event, the right of any Holder to such registration
shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this paragraph 2, and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent requested shall be
limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by a majority in interest of the Initiating Holders, but subject to the
Company's reasonable approval. Notwithstanding any other provision of this
paragraph 2, if the managing underwriter advises the Initiating Holders in
writing that marketing factors require a limitation of the number of shares to
be underwritten, then the Company shall so advise all holders of Registrable
Securities and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders thereof (except those Holders who have indicated to the Company their
decision not to distribute any of their Registrable Securities through such
underwriting) in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by such Holders at the time of filing the
registration statement, provided, however, that the number of shares of
Registrable Securities to be included in such underwriting shall not be reduced
unless all other securities are first entirely excluded from the underwriting.
No Registrable Securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration. To
facilitate the allocation of shares in accordance with the above provisions, the
Company or the underwriters may round the number of shares allocated to any
Holder to the nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of
the underwriting, such person may elect to withdraw therefrom by written notice
to the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration, and such Registrable Securities shall not be
transferred in a public distribution prior to 90 days after the effective date
of such registration, or such other shorter period of time as the underwriters
may require.
-4-
<PAGE>
3. Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time the
----------------------
Company shall determine to register any of its securi ties, either for its own
account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 20 days after receipt of such written notice from the
Company, by any Holder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to paragraph 3(a)(i). In such event the right of any Holder to
registration pursuant to this paragraph 3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of Registrable
Securities in the underwriting to the extent provided herein. All Holders pro
posing to distribute their securities through such underwriting shall (together
with the Company and the other holders distributing their securities through
such underwriting) enter into an under writing agreement in customary form with
the managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this paragraph 3, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities or other securities to be included in such registration
or exclude them entirely. Provided, however, that all securities other than
Registrable Securities and securities sold by the Company shall be eliminated
first and if further reduction is needed then Registrable Securities may be
excluded entirely from the Company's initial public offering but must comprise
at least 30% of any subsequent offering. The Company shall so advise all
Holders and other holders distributing their securities through such under
writing and the number of shares of Registrable Securities and other securities
that may be included in the registration and
-5-
<PAGE>
underwriting shall be allocated among the holders thereof in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities and
other securities held by such holders at the time of filing the registration
statement. To facilitate the allocation of shares in accordance with the above
provisions, the Company may round the number of shares allocated to any Holder
or holder to the nearest 100 shares.
If any Holder or holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any securities withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 90 days after the effective date
of the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this paragraph 3
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
4. Registration on Form S-3.
------------------------
(a) If any Holder or Holders request that the Company file a
registration statement on Form S-3 (or any successor form to Form S-3) for a
public offering of shares of the Registrable Securities the reasonably
anticipated aggregate price to the public of which, net of underwriting
discounts and commissions, would exceed $500,000, and the Company is a
registrant entitled to use Form S-3 to register the Registrable Securities for
such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form and to
cause such Registrable Securities to be qualified in such jurisdictions as the
Holder or Holders may reasonably request; provided, however, that the Company
shall not be required to effect more than one registration pursuant to this
paragraph 4 in any calendar year. The substantive provisions of paragraph 3(b)
shall be applicable to each registration under this paragraph 4.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this paragraph 4: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and
-6-
<PAGE>
except as may be required by the Act; (ii) if the Company, within ten (10)
days of the receipt of the request of the initiating Holders, gives notice of
its bona fide intention to effect the filing of a registration statement with
the Commission within sixty (60) days of receipt of such request (other than
with respect to a registration statement relating to a Rule 145 transaction, an
offering solely to employees or any other registration which is not appropriate
for the registration of Registrable Securities); (iii) during the period
starting with the date sixty (60) days prior to the Company's estimated date of
filing of, and ending on the date three (3) months immediately following, the
effective date of any registration statement pertaining to securities of the
Company (other than a registration of securities in a Rule 145 transaction or
with respect to an employee benefit plan), provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or (iv) if the Company shall furnish to such
Holder a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors it would be seriously detrimental
to the Company or its shareholders for registration statements to be filed at
such time, then the Company's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed 90 days from
the receipt of the request to file such registration by such Holder provided
that the Company may not make such certification more than once every twelve
(12) months.
5. Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with (i) two registrations pursuant to paragraph 2 and (ii) all
registrations pursuant to paragraphs 3 and 4 shall be borne by the Company.
6. Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for one hundred and twenty (120) days
or earlier if the distribution described in the Registration Statement has
been completed;
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used
-7-
<PAGE>
in connection with such registration statement as may be necessary to comply
with the provisions of the 1933 Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) Furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Agreement, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Agreement, (i) an opinion, dated such date,
of the counsel representing the Company for the purposes of such registration,
in form and substance as is customarily given to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities and (ii) a letter dated such
date, from the independent accountants of the Company, in form and substance as
is customarily
-8-
<PAGE>
given by independent accountants to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
7. Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Act, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
federal, state or common law rule or regulation applicable to the Company in
connection with any such registration, qualification or compliance, and the
Company will reimburse each such Holder, each of its officers and directors, and
each person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder, controlling person or underwriter and stated to be
specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each underwriter, if any, of the Company's securities covered by such
a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Act, and each other such
-9-
<PAGE>
Holder, each of its officers and directors and each person controlling such
Holder within the meaning of Section 15 of the Act, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such Holders, such
directors, officers, persons, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein. Not
withstanding the foregoing, the liability of each Holder under this subsection
(b) shall be limited in an amount equal to the public offering price of the
shares sold by such Holder, unless such liability arises out of or is based on
willful conduct by such Holder.
(c) Each party entitled to indemnification under this paragraph 7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, provided, however, that the Indemnifying Party shall bear the
--------
expense of independent counsel for the Indemnified Party if the Indemnified
Party reasonably determines that representation of both parties by the same
counsel would be inappropriate due to actual or potential conflicts of interest,
and provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Agreement unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action and
provided further, that the Indemnifying Party shall not assume the defense for
matters as to which there is a conflict of interest or separate and different
defenses. No Indemnifying
-10-
<PAGE>
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect to such claim or litigation.
8. Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement.
9. Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Act, at all times after the
effective date that the Company becomes subject to the reporting requirements of
the Act or the Securities Exchange Act of 1934, as amended.
(b) Use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the Act and
the Securities Exchange Act of 1934, as amended (at any time after it has become
subject to such reporting requirements);
(c) So long as a Purchaser owns any Restricted Securities to furnish
to the Purchaser forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after 90 days after the effective date of the first registration statement filed
by the Company for an offering of its securities to the general public), and of
the Act and the Securities Exchange Act of 1934 (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as a Purchaser may reasonably request in availing itself of any
-11-
<PAGE>
rule or regulation of the Commission allowing a Purchaser to sell any such
securities without registration.
10. Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Purchasers under paragraphs 2, 3 and 4 may be
assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by a Purchaser provided that: (i) such
transfer may otherwise be effected in accordance with applicable securities
laws, and (ii) such assignee or transferee acquires at least 50,000 Shares
and/or the Conversion Stock into which the Shares are convertible.
Notwithstanding the foregoing, the rights to cause the Company to register
securities may be assigned, in connection with a distribution by such Purchaser,
to any parent or subsidiary company or to any partner, former partner, or the
estate of any such partner without compliance with item (ii) above, provided
written notice thereof is promptly given to the Company.
11. Standoff Agreement. Each Holder agrees, so long as such Holder holds
------------------
at least one percent (1.0%) of the Company's outstanding voting equity
securities, in connection with the Company's initial public offering of the
Company's securities that, upon request of the Company or the underwriters
managing any underwritten offering of the Company's securities, not to sell,
make any short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any Common Stock of the Company (other than those included in the
registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days) from the effective date of such registration as may
be requested by the underwriters, provided that the officers and directors of
the Company enter into similar agreements.
12. Termination of Registration Rights. All rights of the Holders under
----------------------------------
this Agreement shall terminate five years from the date of the Company's initial
public offering.
13. Amendment of Registration Rights. Any provision of the Agreement may
--------------------------------
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of a majority of the Registrable
Securities then outstanding. Any amendment or waiver effected in accordance
with this paragraph shall be binding upon each holder of any Registrable
Securities then outstanding, each future holder of all such Registrable
Securities, and the Company.
-12-
<PAGE>
14. Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of the outstanding Registrable Securities, enter
into any agreement with any holder or prospective holder of any securities of
the Company which would allow such holder or prospective holder to include such
securities in any registration filed under Sections 2, 3 or 4 hereof, unless
under the terms of such agreement, such holder or prospective holder may include
such securities in any such registration only to the extent that the inclusion
of his securities will not reduce the amount of the Registrable Securities of
the Holders which is included or (b) to make a demand registration.
Notwithstanding the foregoing Purchasers who acquire Shares pursuant to the
Master Investment Agreement subsequent to the date hereof, shall become a party
to this Agreement by appending a page hereto.
15. Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement among the parties with regard to the subject matter
hereof. Nothing in this Agreement, express or implied, is intended to confer
upon any person or entity, other than the parties hereto and their respective
successors and assigns, any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided herein.
16. Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Utah as such laws are applied to agreements between
Utah residents entered into and to be performed entirely within Utah.
17. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
18. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person, by telecopy, electronic mail, overnight delivery
service or U.S. mail, in which event it may be mailed by first-class, certified
or registered, postage prepaid, addressed (a) if to a Holder, at such Holder's
address set forth at the end of this Agreement, or at such other address as such
Holder shall have furnished the Company in writing, or, until any such holder so
furnishes an address to the Company, then to and at the address of the last
holder of such shares who has so furnished an address to the Company, or (b) if
to the
-13-
<PAGE>
Company, at its address set forth at the end of this Agreement, or at
such other address as the Company shall have furnished to the Holders and each
such other holder in writing.
19. Severability. Any invalidity, illegality or limitation on the
------------
enforceability of the Agreement or any part thereof, by any Holder whether
arising by reason of the law of the respective Holder's domicile or otherwise,
shall in no way affect or impair the validity, legality or enforceability of
this Agreement with respect to other Holders. If any provision of this
Agreement shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
20. Titles and Subtitles. The titles of the paragraphs and subparagraphs
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
21. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
22. Delays or Omissions. It is agreed that no delay or omission to
-------------------
exercise any right, power or remedy accruing to the Holders, upon any breach or
default of the Company under this Agreement, shall impair any such right, power
or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character by a Holder of any breach or default under this Agreement,
or any waiver by a Holder of any provisions or conditions of this Agreement must
be in writing and shall be effective only to the extent specifically set forth
in writing and that all remedies, either under this Agreement, or by law or
otherwise afforded to a Holder, shall be cumulative and not alternative.
23. Attorney Fees. If any action at law or in equity is necessary to
-------------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first written above.
COMPANY: MEDICODE, INC.
By: _______________________________
Title: ____________________________
Address: 5225 Wiley Post Way
Salt Lake City, UT 84116
INVESTORS: SEQUOIA CAPITAL GROWTH FUND
By: _______________________________
Title: ____________________________
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
SEQUOIA TECHNOLOGY PARTNERS III
By: _______________________________
Title: ____________________________
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
SEQUOIA CAPITAL V
By: _______________________________
Title: ____________________________
-15-
<PAGE>
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
SEQUOIA TECHNOLOGY PARTNERS V
By: _______________________________
Title: ____________________________
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
SEQUOIA XXIII
By: _______________________________
Title: ____________________________
Address: 3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
TRIDENT CAPITAL
By: _______________________________
Title: ____________________________
Address: One Bush Street
15th Floor
San Francisco, CA 94104
PARIBAS U.S. PARTNERS, V.O.F.
By: _______________________________
Title: ____________________________
-16-
<PAGE>
Address: 101 California Street
Suite 3150
San Francisco, CA 94111
PARVEST U.S. PARTNERS II, C.V.
By: _______________________________
Title: ____________________________
Address: 101 California Street
Suite 3150
San Francisco, CA 94111
U.S. GROWTH FUND PARTNERS, C.V.
By: _______________________________
Title: ____________________________
Address: 101 California Street
Suite 3150
San Francisco, CA 94111
PARTECH PROFIT SHARING ON BEHALF OF
THOMAS G. MCKINLEY
By: _______________________________
Title: ____________________________
Address: 101 California Street
Suite 3150
San Francisco, CA 94111
TRADEINVEST LIMITED
By: _______________________________
-17-
<PAGE>
Title: ____________________________
Address: 101 California Street
Suite 3150
San Francisco, CA 94111
MULTINVEST LIMITED
By: _______________________________
Title: ____________________________
Address: 101 California Street
Suite 3150
San Francisco, CA 94111
TRIDENT CAPITAL PARTNERS FUND-I, L.P.
By: _______________________________
Title: ____________________________
Address: One Bush Street
15th Floor
San Francisco, CA 94104
----------------------------------
Eugene Horbach, dba E&H Properties
Address: 1220-116th Avenue, N.E.
Bellevue, WA 98004
-18-
<PAGE>
ADDITIONAL INVESTORS FOR SERIES A CLOSING
ST. PAUL FIRE AND MARINE INSURANCE COMPANY
By: _______________________________
Everett V. Cox,
Investment Officer
Address: 8500 Normandale Lake Blvd.
Bloomington, MN 55437-3831
GALEN ASSOCIATES
By: _______________________________
Title: ____________________________
Address: 666 Third Avenue
Suite 1400
New York, NY 10017
GALEN PARTNERS II, L.P.
By: GWW Partners, L.P.
By: _______________________________
Title: General Partner
----------------------------
Address: 666 Third Avenue
Suite 1400
New York, NY 10017
-19-
<PAGE>
GALEN PARTNERS INTERNATIONAL II, L.P.
By: GWW Partners, L.P.
By: _______________________________
Title: General Partner
----------------------------
Address: 666 Third Avenue
Suite 1400
New York, NY 10017
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EXHIBIT 10.7
MEDICODE, INC.
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made this ____ day of June 1996, between Medicode, Inc.,
a Utah corporation (the "Company"), and Eugene Cattarina (the "Purchaser").
WHEREAS the Purchaser is an employee of the Company and the Purchaser's
continued participation is considered by the Company to be important for the
Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Company is willing to sell to the Purchaser and the
Purchaser desires to purchase 263,500 shares of Common Stock according to the
terms and conditions contained in the 1991 Stock Plan (the "Plan") and herein.
THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
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the Purchaser hereby agrees to purchase an aggregate of 263,500 shares of the
Company's Common Stock (the "Shares"), at the price of $1.25 per share for an
aggregate purchase price of $329,375.00.
2. Payment of Purchase Price. The purchase price for the Shares shall be
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paid by delivery to the Company at the time of execution of this Agreement of a
duly executed full recourse promissory note (the "Note") in the form attached
hereto as Exhibit A in the amount of $329,375.00 for the purchase of the Shares.
(a) With respect to the Note, the parties agree to the following:
(i) The Note shall become payable in full 90 days after
termination or cessation of the Purchaser's employment with or services to the
Company for any reason.
(ii) The Purchaser shall deliver to the Secretary of the Company
as escrow holder (the "Escrow Holder") all certificates representing the Shares
and an executed blank stock assignment for use in transferring all or a portion
of said Shares to the Company if, as and when required under this Section 2(a)
or under any other provision of this Agreement including Section 4.
(iii) As security for the payment of the Note and any renewal,
extension or modification thereof, the Purchaser hereby grants to the Company a
security interest in and pledges with and delivers to the Company the
certificate or certificates representing the Shares.
(iv) In the event of any foreclosure of the security interest,
the Company may sell the Shares at a private sale or may itself repurchase any
or all of the Shares. The parties acknowledge that, prior to the establishment
of a public market for the Shares of the Company, the
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securities laws applicable to the sale of the Shares make a public sale of the
Shares commercially unreasonable. The parties agree that the repurchasing of
said Shares by the Company, or by any person to whom the Company may have
assigned its rights hereunder, is commercially reasonable if made at a price per
Share determined in accordance with the provisions of Section 10(c) hereof.
(v) In the event of default in payment when due of any
indebtedness under the Note, the Company may elect then, or at any time
thereafter, to exercise all rights available to a secured party under the Utah
Uniform Commercial Code, including the right to sell the Shares at a private or
public sale or repurchase the Shares as provided above. The proceeds of any sale
shall be applied in the following order:
(1) To pay all reasonable expenses of the Company in
enforcing this Agreement, including without limitation
reasonable attorneys' fees and legal expenses incurred
by the Company.
(2) In satisfaction of the remaining indebtedness under the
Note.
(3) To the Purchaser, any remaining proceeds.
(vi) Upon full payment by the Purchaser of all amounts due on
Purchaser's Note, the Escrow Holder shall deliver to the Purchaser the
certificate or certificates representing the Shares in the Escrow Holder's
possession belonging to the Purchaser, the blank stock assignment, and the
executed original of the Note marked "cancelled" by the Company, and the Escrow
Holder shall be discharged of all further obligations hereunder; provided,
however, that the Escrow Holder shall nevertheless retain said certificate or
certificates and stock assignment as escrow agent if so required pursuant to
other restrictions imposed pursuant to this Agreement.
3. Issuance of Shares. Upon receipt by the Company of the purchase
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price, the Company shall issue a duly executed certificate evidencing the Shares
in the name of the Purchaser to be held in escrow until expiration of the
Company's repurchase option as described in this Agreement.
4. Repurchase Option.
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(a) In the event of the voluntary or involuntary termination of the
Purchaser's employment with or services to the Company for any or no reason
(including death or disability) before all of the Shares are released from the
Company's repurchase option under Section 5, the Company shall, upon the date of
such termination have an irrevocable, exclusive option for a period of ninety
(90) days from such date to repurchase all or any portion of the Shares which
have not been released from the repurchase option described in this Section 4 at
such time at the original purchase price per share ($1.25). Said repurchase
option shall be exercised by the Company by written notice to the Purchaser or
the Purchaser's executor (with a copy to the Escrow Holder) and, at the
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Company's option, (i) by delivery to the Purchaser or the Purchaser's executor
with such notice of a check in the amount of the repurchase price for the Shares
being repurchased, or (ii) by cancellation by the Company of an amount of the
Purchaser's indebtedness to the Company equal to the repurchase price for the
Shares being repurchased, or (iii) by a combination of (i) and (ii) so that the
combined payment and cancellation of indebtedness equals such repurchase price.
Upon delivery of such notice and the payment of the repurchase price in any of
the ways described above, the Company shall become the legal and beneficial
owner of the Shares being repurchased and all rights and interests therein or
relating thereto, and the Company shall have the right to retain and transfer to
its own name the number of Shares being repurchased by the Company.
(b) In the event that the Company at any time has an option to
repurchase shares of the Purchaser's Common Stock pursuant to this Agreement and
such repurchase would cause the Company to cease to qualify as a Qualified Small
Business (as defined in Section 1202(d) of the Internal Revenue Code of 1986, as
amended), the Purchaser will extend the time period during which the Company
must complete such repurchase by a period of time which will enable the Company
to complete such repurchase without ceasing to qualify as a Qualified Small
Business.
(c) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or shareholders of the Company or other persons or organizations to
exercise all or a part of the Company's repurchase rights under this Agreement
and purchase all or a part of such Shares.
5. Release of Shares From Repurchase Option.
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(a) Twelve forty-eighths (12/48) of the Shares shall be released from
the Company's repurchase option described in Section 4 above on January 1, 1997,
and an additional one forty-eighth (1/48) of the Shares shall be released at the
end of each full month thereafter until all Shares have been released; provided
in each case that the Purchaser's employment or services have not been
terminated prior to the date of any such release.
(b) The Shares which have been released from the Company's repurchase
option described in Section 4 shall be delivered to the Purchaser at the
Purchaser's request (see Section 7).
(c) Notwithstanding the foregoing, in the event of a Change in Control
(as defined below), all of the Shares shall be released from the Company's
repurchase option. For purposes hereof, a "Change in Control" shall be deemed to
have occurred in the event that:
(i) Any "person," as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (other than the Company, a subsidiary
of the Company, an affiliate of the Company, or a Company
employee benefit plan, including any trustee of such plan
acting as trustee) is or becomes the
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"beneficial owner" as defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of securities of the
Company (or a successor to the Company) representing more
than fifty percent (50%) of the combined voting power of the
then-outstanding securities of the Company or such
successor; or
(ii) The Company undergoes (1) a sale of assets involving
50% or more of the assets in value of the Company, (2) any
merger or consolidation or other reorganization of the
Company where another entity is the survivor (other than any
such merger undertaken for the sole purpose of changing the
jurisdiction of incorporation of the Company), (3) a
transaction pursuant to which the holders, as a group, of
all the securities of the Company outstanding prior to the
transaction hold, as a group, less than 50% of the combined
voting power of the Company or any successor company
outstanding after the transaction, or (4) any other event
that the board determines in the Board's discretion would
materially alter the structure of the Company or the
ownership of the Company.
6. Restriction on Transfer. Except for the escrow described in Section 7
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or transfer of the Shares to the Company or its assignees contemplated by this
Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until the release of
such Shares from the Company's repurchase option in accordance with the
provisions of this Agreement.
7. Escrow of Shares.
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(a) The Shares issued under this Agreement shall be held by the
Secretary of the Company as escrow holder ("Escrow Holder"), along with a stock
assignment executed by the Purchaser in blank, until the expiration of the
Company's option to repurchase such Shares as set forth above and full payment
of the Note.
(b) The Escrow Holder is hereby directed to permit transfer of the
Shares only in accordance with this Agreement or instructions signed by both
parties. In the event further instructions are desired by the Escrow Holder, he
shall be entitled to rely upon directions executed by a majority of the
authorized number of the Company's Board of Directors. The Escrow Holder shall
have no liability for any act or omission hereunder while acting in good faith
in the exercise of his own judgment.
(c) If the Company or any assignee exercises its repurchase option
hereunder, the Escrow Holder, upon receipt of written notice of such option
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
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(d) When the repurchase option has been exercised or expires
unexercised or a portion of the Shares has been released from such repurchase
option, upon Purchaser's request the Escrow Holder shall promptly cause a new
certificate to be issued for such released Shares and shall deliver such
certificate to the Purchaser.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a shareholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the Company's repurchase option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Company's repurchase option.
8. Investment Representations; Restriction on Transfer.
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(a) In connection with the purchase of the Shares, the Purchaser
represents to the Company the following:
(i) The Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities. The
Purchaser is purchasing these securities for investment for the Purchaser's own
account only and not with a view to, or for resale in connection with, any
"distribution" thereof within the meaning of the Securities Act of 1933 (the
"Securities Act").
(ii) The Purchaser understands that the securities have not been
registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of the
Purchaser's investment intent as expressed herein. In this connection, the
Purchaser understands that, in view of the Securities and Exchange Commission
("Commission"), the statutory basis for such exemption may not be present if the
Purchaser's representations meant that the Purchaser's present intention was to
hold these securities for a minimum capital gains period under the tax statutes,
for a deferred sale, for a market rise, for a sale if the market does not rise,
or for a year or any other fixed period in the future.
(iii) The Purchaser further acknowledges and understands that the
securities must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available.
The Purchaser further acknowledges and understands that the Company is under no
obligation to register the securities. The Purchaser understands that the
certificate evidencing the securities will be imprinted with a legend which
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prohibits the transfer of the securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
(iv) The Purchaser is familiar with the provisions of Rule 701
and Rule 144, each promulgated under the Securities Act, which, in substance,
permit limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of issuance of the securities to the
Purchaser, such issuance will be exempt from registration under the Securities
Act. In the event the Company later becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
ninety (90) days thereafter the securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including among other things: (i) the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and,
in the case of an affiliate, (ii) the availability of certain public information
about the Company, and the amount of securities being sold during any three
month period not exceeding the limitations specified in Rule 144(e), if
applicable. Notwithstanding this paragraph 8(a)(iv), the Purchaser acknowledges
and agrees to the restrictions set forth in paragraph 8(b).
In the event that the Company does not qualify under Rule 701 at the
time of issuance of the securities to the Purchaser, then the securities may be
resold in certain limited circumstances subject to the provisions of Rule 144,
which requires among other things: (i) the availability of certain public
information about the Company: (ii) the resale occurring not less than two years
after the party has purchased, and made full payment for, within the meaning of
Rule 144, the securities to be sold; and (iii) in the case of an affiliate, or
of a non-affiliate who has held the securities less than three years, the sale
being made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as said term is defined under the
Securities Exchange Act of 1934) and the amount of securities being sold during
any three month period not exceeding the specified limitations stated therein,
if applicable.
The Purchaser further acknowledges that in the event all of the
requirements of Rule 144 are not met, compliance with Regulation A or some other
registration exemption will be required; and that although Rule 144 is not
exclusive, the staff of the Commission has expressed its opinion that persons
proposing to sell private placement securities other than in a registered
offering and other than pursuant to Rule 144 will have a substantial burden of
proof in establishing that an exemption from registration is available for such
offers or sales and that such persons and the brokers who participate in the
transactions do so at their own risk.
(b) The Purchaser agrees, in connection with the Company's initial
public offering of the Company's securities, (i) not to sell, make short sales
of, loan, grant any options for the purchase of, or otherwise dispose of any
shares of Common Stock of the Company held by the Purchaser (other than those
shares included in the registration) without the prior written consent of
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the Company or the underwriters managing such initial underwritten public
offering of the Company's securities for one hundred eighty (180) days from the
effective date of such registration and (ii) further agrees to execute any
agreement reflecting (i) above as may be requested by the underwriters at the
time of the public offering.
9. Legends. The share certificate evidencing the Shares issued hereunder
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shall be endorsed with the following legends (in addition to any legends
required under applicable state securities laws):
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
(b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN
THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
10. Right of First Refusal.
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(a) In the event, at any time following the date of this Agreement,
the Purchaser or the Purchaser's transferee desires (or is required) to sell or
transfer in any manner the Shares as to which the repurchase option provided in
Section 4 above is not applicable or has expired, he shall first offer such
Shares for sale to the Company at the same price, and upon the same terms (or
terms as similar as reasonably possible) upon which he is proposing or is to
dispose of such Shares. If the transfer does not involve a price freely set by
the Purchaser, the price shall be determined as set forth in Section 10(c)
below. Such right of first refusal shall be provided to the Company for a period
of thirty (30) days following receipt by the Company of written notice by the
Purchaser of the terms and conditions of said proposed sale or transfer, or
thirty (30) days following the setting of a price under Section 10(c) (when the
price is determined under Section 10(c)). In the event the Shares are not
disposed of within thirty (30) days following lapse of the period of the right
of first refusal provided to the Company, they shall once again be subject to
the right of first refusal herein provided.
(b) In the event, at any time following the date of this Agreement, of
any transfer by operation of law or other involuntary transfer (including a
transfer pursuant to dissolution of marriage) of all or a portion of the Shares,
the Company shall have an option to purchase all of the Shares transferred.
Upon such a transfer, the person acquiring the Shares shall promptly notify the
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Secretary of the Company of such transfer. The right to purchase such Shares
shall be provided to the Company for a period of thirty (30) days following
receipt by the Company of written notice by the person acquiring the Shares.
(c) With respect to any stock to be transferred pursuant to Sections
10(a) or 10(b) and as to which a price has not been set by the Purchaser under
Section 10(a), the price per Share shall be a price set by the Board of
Directors of the Company which will reflect the current value of the Shares in
terms of present earnings and future prospects of the Company. The Company shall
notify the Purchaser or the Purchaser's executor of the price so determined
within thirty (30) days after receipt by it of written notice of the transfer or
proposed transfer of the Shares. If the Purchaser or the Purchaser's executor
disputes the price as set by the Board of Directors by giving notice to the
Company within ten (10) days after being informed of the price, the price of the
Shares shall be determined by an independent financial analyst mutually selected
by the Board of Directors of the Company and the Purchaser, with the cost of
such determination to be divided equally between the Company and the Purchaser.
The Board of Directors and the Purchaser shall select such analyst within thirty
(30) days after receipt of notice that the Purchaser is disputing the price set
by the Board of Directors. If the Board is not notified of any such dispute
within such ten (10) day period, the decision of the Board of Directors as to
the purchase price shall be final. Any time required to resolve a dispute shall
be added to the thirty (30) day period in which the Company may exercise its
right to purchase.
(d) The right of the Company to purchase any part of the Shares may be
assigned in whole or in part to one or more employees, officers, directors or
shareholders of the Company or other persons or organizations.
(e) All transferees of Shares or any interest therein shall be
required as a condition of such transfer to agree in writing in the form
satisfactory to the Company that they will receive and hold such Shares or
interests subject to the provisions of this Agreement, including, insofar as
applicable, the Company's right of first refusal in this Section 10. Any sale
or transfer of the Company's Shares shall be void unless the provisions of this
Agreement are met.
(f) The right of first refusal granted the Company by this Section 10
shall terminate at such time as a public market exists for the Company's Common
Stock (or any other stock issued to purchasers in exchange for the Shares
purchased under this Agreement). Upon termination of the right of first
refusal, at the Purchaser's request the Company shall issue a new certificate
representing the Shares without a legend referring to such refusal right. For
the purpose of this Agreement, a "public market" shall be deemed to exist if (i)
such stock is listed on a national securities exchange (as that term is used in
the Securities Exchange Act of 1934), (ii) such stock is traded on the over-the-
counter market and prices are published daily on business days in a recognized
financial journal, or (iii) the Company has completed an Initial Public
Offering. For purposes hereof, an Initial Public Offering shall mean an initial
firm commitment underwritten public offering of the Company's Common Stock,
which offering results in gross proceeds of at least
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$7,500,000 and is effected pursuant to a Registration Statement on Securities
and Exchange Commission Form S-1 or Form SB-2 (or any successor form thereto).
(g) The right of first refusal contained in this Section 10 shall not
apply to a transfer to the Purchaser's ancestors or descendants or spouse or to
a trustee for their benefit, provided that such transferee shall agree in
writing in form satisfactory to the Company to take such Shares subject to all
the terms of this Agreement, including the Company's right of first refusal on
further transfers.
11. Adjustment for Stock Split. All references to the number of Shares
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and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
12. General Provisions.
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(a) This Agreement shall be governed by the internal laws of the State
of Utah. This Agreement represents the entire agreement between the parties with
respect to the purchase of Common Stock by the Purchaser, may only be modified
or amended in writing signed by both parties and satisfies all of the Company's
obligations to the Purchaser with regard to the issuance or sale of securities.
(b) Any notice, demand or request required or permitted to be given by
either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
(d) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party thereafter from enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
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(e) The Purchaser agrees upon request to execute any further documents
or instruments necessary or desirable to carry out the purposes or intent of
this Agreement.
(f) The Purchaser understands that the Purchaser (and not the Company)
shall be responsible for the Purchaser's own federal, state, local or foreign
tax liability and any of the Purchaser's other tax consequences that may arise
as a result of the transactions contemplated by this Agreement. The Purchaser
shall rely solely on the determinations of the Purchaser's tax advisors or the
Purchaser's own determinations, and not on any statements or representations by
the Company or any of its agents, with regard to all such tax matters. The
Purchaser shall notify the Company in writing if the Purchaser files an election
pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with
the Internal Revenue Service within thirty (30) days from the date of the sale
of the Shares hereunder. The Company intends, in the event it does not receive
from the Purchaser evidence of such filing, to claim a tax deduction for any
amount which would be taxable to the Purchaser in the absence of such an
election.
(g) Purchaser acknowledges receipt of a copy of the Plan, a copy of
which is annexed hereto, represents that Purchaser is familiar with the terms
and provisions thereof, and hereby accepts this Agreement subject to all of the
terms and provisions thereof. The Purchaser has reviewed the Plan and this
Agreement in their entirety, has had an opportunity to obtain the advice of
counsel prior to executing this Agreement and fully understands all provisions
of the Agreement. The Purchaser hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Board or of the Committee upon
any questions arising under the Plan. The Purchaser further agrees to notify the
Company upon any change in the residence address indicated below.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first set forth above.
MEDICODE, INC. PURCHASER:
________________________________
Eugene Cattarina
By:___________________________ ________________________________
________________________________
Title:________________________
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ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, Eugene Cattarina, hereby sell, assign and transfer to
_____________________________________________(________) shares of the Common
Stock of MEDICODE, INC. (the "Company") standing in my name on the books of the
Company represented by Certificate No. __________ and do hereby irrevocably
constitute and appoint Wilson, Sonsini, Goodrich & Rosati, attorney, to transfer
said stock on the books of the Company with full power of substitution in the
premises.
This Assignment Separate from Certificate may only be used in accordance
with the Stock Purchase Agreement dated June __, 1996.
Dated:____________, 19__.
Signature: ________________________
Eugene Cattarina
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ELECTION UNDER SECTION 83(b)
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OF THE INTERNAL REVENUE CODE OF 1986
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The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in his gross income for the current taxable year, the
amount of any compensation taxable to him in connection with his receipt of the
property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME : TAXPAYER: Eugene Cattarina SPOUSE: Marianne Cattarina
ADDRESS :
IDENTIFICATION NO.: TAXPAYER: ###-##-#### SPOUSE: ###-##-####
TAXABLE YEAR : 1996
2. The property with respect to which the election is made is described as
follows:
263,500 shares of Common Stock (the "Shares") of MEDICODE, INC., a Utah
corporation (the "Company").
3. The date on which the property was transferred is: June __, 1996.
4. The property is subject to the following restrictions:
The Company has the right to repurchase a portion of the Shares upon the
happening of certain events. This right of repurchase lapses with regard
to a portion of the Shares over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is: $329,375.00.
6. The amount (if any) paid for such property: $329,375.00.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
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except with the consent of the Commissioner.
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________________________________
Dated: _________________________ Eugene Cattarina
The undersigned spouse of taxpayer joins in this election.
Dated: _________________________ ________________________________
Marianne Cattarina, Spouse of Taxpayer
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EXHIBIT A
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PROMISSORY NOTE
$329,375.00 ________, 1996
For value received, the undersigned promises to pay to Medicode, Inc., a
Utah corporation (the "Company"), or order, at its principal office the
principal sum of $329,375.00 with interest thereon at the rate of 6% per annum
compounded annually on the unpaid balance of the principal sum. Said principal
and interest shall be due on January 1, 2003.
In the event of termination of the employment between the undersigned and
the Company, this Note shall be due and payable 90 days after the date of such
termination.
Principal payable in lawful money of the United States of America. THE
PRIVILEGE IS RESERVED TO PREPAY ANY PORTION OF THE NOTE AT ANY TIME.
Should suit be commenced to collect this Note or any portion thereof, such
sum as the Court may deem reasonable shall be added hereto as attorneys' fees.
The maker waives presentment for payment, protest, notice of protest, and notice
of non-payment of this Note.
This Note is secured by a pledge of certain shares of Common Stock of the
Company, pursuant to the provisions of the Stock Purchase Agreement between the
Company and the undersigned executed contemporaneously with this Note.
The holder of this Note shall have full recourse against the maker, and
shall not be required to proceed against the Shares or other collateral securing
this Note in the event of default.
________________________________
Eugene Cattarina
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<PAGE>
EXHIBIT 10.9
CROSS LICENSE AGREEMENT
-----------------------
This Cross License Agreement (this "Agreement") is made and executed this
15 day of April, 1997 (the "Effective Date") by and between HPR Inc., a Delaware
corporation having a place of business at 245 First Street, Cambridge,
Massachusetts 02142 ("HPR") and Medicode, Inc., a Utah corporation having a
place of business at 5225 Wiley Post Way, Suite 500, Salt Lake City, Utah 84116
("MEDICODE").
Background of This Agreement
----------------------------
MEDICODE is the owner of U.S. Patent No. 5,557,514 ("the '514 Patent"), and
HPR is the owner of U.S. Patent No. 5,253,164 ("the '164 Patent"). Each of
MEDICODE and HPR wishes to license to the other, on the terms and conditions
hereinafter set forth, the right to practice the inventions within the scope of
the claims of the aforesaid patents and use and commercialize certain related
technology rights.
NOW, THEREFORE, in consideration of the premises stated in the Background
of this Agreement, for other good and valuable consideration including the
following terms and conditions, and intending to be legally bound hereby, HPR
and MEDICODE agree as follows:
1. DEFINITIONS
As used herein, the following terms shall have the following meanings:
(a) "MEDICODE Subsidiary" means a corporation or other entity, a majority
(based on voting power in the election of directors or similar managers) of the
capital stock or other equity interest of which is owned by MEDICODE.
(b) "HPR Subsidiary" means a corporation or other entity, a majority (based
on voting power in the election of directors or similar managers) of the capital
stock or other equity interest of which is owned by HPR.
(c) "MEDICODE Technology" means the '514 patent, any continuation,
continuation in part or divisional patent application claiming priority to the
patent application from which the '514 patent issued, and reissue, reexamination
or extension granted with respect to a patent issued on any of the foregoing,
and thereof, any counterpart application or patent corresponding to any of the
foregoing in any other countries of the world.
(d) "MEDICODE Intellectual Property Rights" means any patents, pending
patent applications and patents issuing thereon, inventions (whether or not
patented) or other intellectual property rights owned by MEDICODE or a MEDICODE
Subsidiary (or with respect to which MEDICODE or a MEDICODE Subsidiary may grant
licenses to third parties) which are necessary
<PAGE>
for the practice of the license to the MEDICODE Technology granted in paragraph
2 below by HPR or any HPR Subsidiary.
MEDICODE hereby represents that, as of the Effective Date, there are no
MEDICODE Intellectual Property Rights. If for any reason the foregoing
representation is untrue, any such MEDICODE Intellectual Property Rights
existing as of the Effective Date shall be included in the definition of
MEDICODE Technology for purposes of this Agreement.
(e) "HPR Technology" means the '164 patent, any continuation, continuation
in part or divisional patent application claiming priority to the patent
application from which the '164 patent issued, or its parent patent applications
U.S.S.N. 566,841 filed August 14, 1990, and U.S.S.N. 252,307 filed September 30,
1988, any reissue, reexamination or extension granted with respect to a patent
issued on any of the foregoing, and any counterpart application or patent
corresponding to any of the foregoing in any other countries of the world.
(f) "HPR Intellectual Property Rights" means any patents, pending patent
applications and patents issuing thereon, inventions (whether or not patented)
or other intellectual property rights owned by HPR or an HPR Subsidiary (or with
respect to which HPR or an HPR Subsidiary may grant licenses to third parties)
which are necessary for the practice of the license to the HPR Technology
granted in paragraph 3 below by MEDICODE or any MEDICODE Subsidiary.
HPR hereby represents that, as of the Effective Date, there are no HPR
Intellectual Property Rights. If for any reason the foregoing representation is
untrue, any such HPR Intellectual Property Rights existing as of the Effective
Date shall be included in the definition of HPR Technology for purposes of this
Agreement.
(g) "MEDICODE Product" means any software product within the scope of a
patent application or patent within the HPR Technology.
(h) "HPR Product" means any software product within the scope of a patent
application or patent within the MEDICODE Technology.
2. MEDICODE TECHNOLOGY LICENSE
(a) License. MEDICODE hereby grants to HPR a non-exclusive, fully paid up,
-------
worldwide license under the MEDICODE Technology to make, have made, use, sell,
offer for sale and import HPR Products. This license does not convey any right
to grant sublicenses, except that HPR may, directly or through distributors or
other third parties which market or offer for sale any HPR Product, grant
sublicenses of the MEDICODE Technology to customers of HPR or to customers of
such distributors for use by such customers as a part of any HPR Product.
Notwith standing the foregoing, (i) HPR is not authorized to grant any rights
under the MEDICODE Technology separately from a right to market or offer for
sale an HPR Product, and (ii) HPR may not sell, transfer or otherwise assign the
license granted pursuant to this paragraph 2(a); provided,
-2-
<PAGE>
however, that it may assign all or any part of its rights under such license in
connection with any assignment (whether by sale, merger, consolidation or
otherwise) of substantially all of its operating assets relating to an HPR
Product which embodies MEDICODE Technology. Unless sooner terminated as
provided in paragraph 6, the term of the license granted by this paragraph 2(a)
is the unexpired term of the last to expire of the patents included within the
definition of MEDICODE Technology.
(b) MEDICODE Subsidiaries. MEDICODE shall cause any MEDICODE Subsidiary
---------------------
receiving a patent described in paragraph 1(c) to execute and deliver to HPR a
written confirmation, in form and substance reasonably satisfactory to HPR, that
the invention claimed under such patent constitutes MEDICODE Technology for the
purposes of this Agreement.
(c) Release; Covenant not to Sue. MEDICODE hereby fully and finally
----------------------------
remises, releases, waives and forever discharges HPR and each of its past and
present Subsidiaries, and their respective directors, officers, agents, and
customers from any and all manner of actions, causes of actions, suits, debts,
controversies, damages, claims, liabilities and demands of any nature for
infringement, alleged infringement, violation or alleged violation, whether
known or unknown, arising on or before the date of this Agreement, of any rights
of MEDICODE arising from use or commercialization of MEDICODE Technology,
including without limitation the Symmetry Software (as hereinafter defined).
MEDICODE further agrees that, whether or not MEDICODE brings any legal action
against Symmetry Health Data Systems, Inc, ("Symmetry"), or any of the
directors, officers, employees or stockholders of Symmetry, with respect to any
software or other intellectual property rights licensed to HPR by Symmetry
pursuant to any agreement in effect as of the Effective Date, including any
amendment or extension of any such agreement (the "Symmetry Software"), MEDICODE
will not bring or maintain legal action against HPR or any of its licensees or
sublicensees arising from the use or commercialization of the Symmetry Software;
provided, however, that nothing herein contained shall prevent MEDICODE from
bringing any action against Symmetry with respect to use or commercialization of
the Symmetry Software.
3. HPR TECHNOLOGY LICENSE
(a) License. HPR hereby grants to MEDICODE a non-exclusive, fully paid up,
-------
worldwide license under the HPR Technology to make, have made, use, sell, offer
for sale and import MEDICODE Products. This license does not convey any right
to grant sublicenses, except that MEDICODE may, directly or through distributors
or other third parties which market or offer for sale any MEDICODE Product,
grant sublicenses of the HPR Technology to customers of MEDICODE or to customers
of such distributors for use by such customers as a part of any MEDICODE
Product. Notwithstanding the foregoing, (i) MEDICODE is not authorized to grant
any rights under the HPR Technology separately from a right to market or offer
for sale a MEDICODE Product, and (ii) MEDICODE may not sell, transfer or
otherwise assign the license granted pursuant to this paragraph 3(a). Unless
sooner terminated as provided in paragraph 6, the term of the license granted by
this paragraph 3(a) is the unexpired term of the last to expire of the patents
included within the definition of HPR Technology.
-3-
<PAGE>
(b) HPR Subsidiaries. HPR shall cause any HPR Subsidiary receiving a
----------------
patent described in paragraph 1(e) to execute and deliver to MEDICODE a written
confirmation, in form and substance reasonably satisfactory to MEDICODE, that
the invention claimed under such patent constitutes HPR Technology for the
purposes of this Agreement.
(c) Release. HPR hereby fully and finally remises, releases, waives and
-------
forever discharges MEDICODE and each of its past and present Subsidiaries, and
their respective directors, officers, agents, and customers from any and all
manner of actions, causes of actions, suits, debts, controversies, damages,
claims, liabilities and demands of any nature for infringement, alleged
infringement, violation or alleged violation, whether known or unknown, arising
on or before the date of this Agreement, of any rights of HPR arising from use
or commercialization of HPR Technology.
4. MARKING MEDICODE AND HPR PRODUCTS
MEDICODE shall mark each MEDICODE Product or material component thereof
covered by the claims of an issued patent within the HPR Technology which is
made, sold, or used within the United States with the legend "U.S. Patent
5,253,164" and shall comply with the applicable patent marking laws and
regulations in any other countries in which a MEDICODE Product is made, used or
sold. HPR shall mark each HPR Product or material component thereof covered by
the claims of an issued patent within the MEDICODE Technology which is made,
sold or used within the United States with the legend "U.S. Patent 5,557,514"
and shall comply with the applicable patent marking laws and regulations in any
other countries in which an HPR Product is made, used or sold.
5. NO TRANSFER OF CLAIMS
MEDICODE and HPR each represents and warrants that it has not sold,
assigned, transferred, conveyed or otherwise disposed of any claim, demand or
cause of action relating to any matter covered by the releases contained in
paragraphs 2(c) and 3(c) of this Agreement and agrees that it shall not do so
during the term hereof, except as permitted pursuant to an assignment made in
accordance with paragraph 10.
6. TERM; TERMINATION AND EFFECTS THEREOF
(a) Unless terminated earlier with respect to a particular party pursuant
to the terms of this paragraph 6, this Agreement shall remain in effect with
respect to each party the date which is thirty (30) years after the Effective
Date.
(b) Either party may terminate this Agreement for the material breach of
the other party, but only if (i) the non-breaching party notifies the alleged
breaching party of such breach in writing, and (ii) the alleged breaching party
fails to cure such breach within thirty (30) days after receiving such notice;
provided, that if the alleged breaching party brings an action within fifteen
(15) days after expiration of such thirty (30) day period challenging the other
party's right to terminate, or any
-4-
<PAGE>
litigation or other proceeding involving MEDICODE and HPR and relating to this
Agreement is then pending, then no such termination shall be effective until and
unless (a) the court rules in a final judgment that is or has become
unappealable that the alleged breaching party has in fact breached this
Agreement to an extent justifying termination hereof, and (b) the breaching
party falls to cure such breach within thirty (30) days after such final
judgment is or becomes unappealable or within such longer period as the court
shall determine is a reasonable amount of time to effectuate such a cure.
(c) Either party may terminate this Agreement if the other party becomes
the subject of a voluntary or involuntary petition in bankruptcy or any
preceding relating to insolvency, receivership, liquidation, or composition for
the benefit of creditors, if that petition or proceeding is not dismissed with
prejudice within sixty (60) days after filing.
(d) (i) Termination of this Agreement for any reason shall not release a
party hereto from any liability or obligation which, at the time of such
termination, has already accrued to the other party or which is attributable to
a period prior to such termination, nor shall it preclude either party from
pursuing any rights and remedies it may have hereunder or at law or in equity
which accrued or are based upon an event occurring prior to such termination.
(ii) In the event of expiration of the license granted to HPR under
paragraph 2 or termination of this Agreement by MEDICODE, in either case prior
to expiration of the license granted to MEDICODE under paragraph 3, the license
granted to MEDICODE shall survive; provided, however, that if HPR terminates
this Agreement, the license granted to MEDICODE hereunder shall concurrently
terminate.
(iii) In the event of expiration of the license granted to MEDICODE,
under paragraph 3 or termination of this Agreement by HPR, in either case prior
to expiration of the license granted to HPR under paragraph 2, the license
granted to HPR shall survive; provided, however, that if MEDICODE terminates
this Agreement, the license granted to HPR hereunder shall concurrently
terminate.
(e) Notwithstanding the foregoing, paragraphs 2(c), 3(c), 6(d), 6(c), 7, 9,
11 and 12 shall survive expiration of termination of this Agreement for any
reason,
7. EXCLUSION OF WARRANTY; LIMITATION OF LIABILITY
Except as expressly provided in this Agreement, neither party makes any
warranty to the other with respect to its Technology licensed hereunder.
Neither party shall be liable to the other for consequential, incidental,
indirect or special damages arising out of or related to this Agreement or the
transactions contemplated hereunder, even if the breaching parry has been
apprised of the likelihood of such damages occurring.
-5-
<PAGE>
8. NOTICES
All notices under this Agreement shall be in writing and shall be delivered
personally or sent via facsimile (with transmission verified), certified mail,
return receipt requested, or by reputable courier service to the addresses first
shown above, attention: Chief Executive Officer, to such other addresses as may
be designated in accordance with this paragraph 8.
9. PREDECESSORS, SUCCESSORS AND ASSIGNS
This Agreement and all of the provisions hereof including, bur not limited
to, the licenses and releases granted or contained in paragraphs 2 and 3, shall
inure to the benefit of MEDICODE, and HPR, respectively, and each of their
predecessors, successors and (subject to the limitations contained in paragraphs
2(a) and 3(a)) assigns.
10. ADDITIONAL REPRESENTATIONS AND WARRANTIES
(a) MEDICODE represents and warrants that: (i) it is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Utah; (ii) when executed and delivered, this Agreement will become valid and
binding on MEDICODE in accordance with its terms; (iii) the execution, delivery
and performance of this Agreement have been duly authorized by all necessary
corporate action on the part of MEDICODE; (iv) as of the Effective Date, it is
the sole and exclusive owner of the MEDICODE Technology, (v) it has the right to
grant the license granted to HPR herein; (vi) it has not previously granted, and
will not grant during the term of this Agreement, any right, license, or
interest in or to the MEDICODE Technology inconsistent with the license granted
to HPR herein; (vii) as of the Effective Date, there are no pending or
threatened actions, suits, investigations, claims or proceedings in any way
relating to the MEDICODE Technology; and (viii) MEDICODE does not own or control
any technology or intellectual property, other than the MEDICODE Technology, for
which a license or other grant of rights is required in order for HPR to
practice the license granted under paragraph 2.
(b) HPR represents and warrants that: (i) it is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; (ii) when executed and delivered, this Agreement will become valid and
binding on HPR in accordance with its terms; (iii) the execution, delivery and
performance of this Agreement have been duly authorized by all necessary
corporate action on the part of HPR; (iv) as of the Effective Date, it is the
sole and exclusive owner of the HPR Technology; (v) it has the right to grant
the license granted to MEDICODE herein; (vi) it has not previously granted, and
will nor grant during the term of this Agreement, any right, license or interest
in or to the MEDICODE Technology inconsistent with the license granted to HPR
herein; and (vii) as of the Effective Date, there are no pending or threatened
actions, suits, investigations, claims or proceedings, in any way relating to
the HPR Technology; and (viii) HPR does not own or control any technology or
intellectual property, other than the HPR Technology, for which a license or
other grant of rights is required in order for MEDICODE to practice the license
granted under paragraph 3.
-6-
<PAGE>
11. PRIOR DISCUSSIONS AND AGREEMENTS
All of the negotiations, discussions or oral agreements made heretofore or
concurrently with the execution of this Agreement are hereby incorporated and
deemed integrated into this Agreement. MEDICODE and HPR agree that this
Agreement fully and completely expresses the intent, understanding and agreement
of the parties and there are no implicit or extraneous understandings made
heretofore or simultaneously herewith.
12. MISCELLANEOUS
This Agreement may not be modified, except in a writing signed by or on
behalf of each of the parties hereto. No waiver by either party of any breach
hereunder shall be deemed a waiver of any other or subsequent breach. In the
event that any provision of this Agreement is determined to be invalid or
unenforceable, the remainder of the Agreement shall remain in full force and
effect without such provision. This Agreement may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute one and the same instrument. This Agreement shall be interpreted and
enforced as a contract under seal in accordance with the laws of the
Commonwealth of Massachusetts (without regard to its conflict of laws
principles). This Agreement may be executed in several counterparts, each of
which shall be an original and all of which shall constitute one and the same
agreement.
IN WITNESS WHEREOF, MEDICODE and HPR have caused this Agreement to be
executed by their authorized representatives as of the date first above written.
MEDICODE, INC.
By: /S/ Eugene Santa Cattarina
----------------------------------------
Its: CEO
HPR INC.
By: /S/ Illegible
-----------------------------------------
Its: Chairman of the Board
and Chief Executive Officer
-7-
<PAGE>
EXHIBIT 10.10
MEDICODE
October 9, 1996
Mr. Tom Martin
3280 Oakwood Court
Morgan Hills, CA 95037
Dear Tom:
On behalf of Medicode Inc., I am pleased to extend to you an offer to join
Medicode as the Vice President of Software Development, reporting directly to
Gene Cattarina. We believe that your active involvement and participation with
Medicode, Inc. will be an asset in the Company's overall success.
The compensation package which Medicode is prepared to offer consists of the
following components:
Base salary of $135,000 per annum
Executive bonus plan: Up to 50% of salary (similar to Alltel plan)
Stock Options: 50,000 shares of Medicode stock to be vested over 4 years.
The estimated strike price is $2.50/share. This will be confirmed at our
board meeting on 10/19/96.
Benefits package comprised of health insurance, paid holidays, paid
vacation, sick leave, 125 plan, company-contributing 401(k) plan, long-term
disability, short-term disability, life insurance and AD&D.
Travel expense reimbursement: Airfare between Salt Lake City and San Jose,
lodging and automobile rental for a period of six months.
Relocation expense reimbursement: Medicode will pay closing costs and
commission sales expenses on your home in California; all moving costs; and
closing costs for home or land in Utah. These amounts will be grossed up
to cover applicable taxes.
Up to $5,000 a year expense reimbursement for family to travel back and
forth from Salt Lake to California.
Six month salary severance if terminated by Medicode without cause.
A first year recoverable draw of $1,500/month against bonus plan.
We are excited about the prospect of having you join our Executive Management
Team and look forward to hearing from you. Please let me know if you have any
questions or need additional information.
Sincerely, Accepted:
/S/ Ann S. Bezdjian
Ann S. Bezdjian /S/ Tom Martin
---------------------------
Human Resource Director Tom Martin
10-10-96
---------------------------
Date
MED-INDEX
MEDICAL DATA RESEARCH
AND SOFTOUCH ARE
DIVISIONS OF MEDICODE, INC.
5225 WILEY POST WAY, SUITE 500
SALT LAKE CITY, UTAH 84116
(801) 536-1005
FAX (801) 536-1009
<PAGE>
EXHIBIT 10.11
MEDICODE
October 9, 1996
Mr. Terry L. Cameron
232 North Kings Hwy., #1006
St. Louis, MO 63108
Dear Terry:
On behalf of Medicode Inc., I am pleased to extend to you an offer to join
Medicode as Sr. Vice President of the Provider Division, reporting directly to
Gene Cattarina. We believe that your active involvement and participation with
Medicode, Inc., will be an asset in the Company's overall success.
The compensation package which Medicode is prepared to offer consists of the
following components:
Base salary of $130,000 per annum
Executive bonus plan: Up to 50% of salary
Stock Options: 40,000 shares of Medicode stock to be vested over 4 years.
Our estimate of the strike price is $2.50/share. This will be confirmed at
our board meeting on 10/19/96.
Benefits package comprised of health insurance, paid holidays, paid
vacation, sick leave, 125 plan, company-contributing 401(k) plan, long-term
disability, short-term disability, life insurance and AD&D.
Travel expense reimbursement: Airfare between Salt Lake City and St.
Louis, lodging and automobile rental for a period of three months.
Relocation expense reimbursement: Medicode will pay closing costs and
commission sales expenses on your residence in St. Louis; all moving costs;
and closing costs for home or land in Utah. These amounts will be grossed
up to cover applicable taxes.
Medicode will pay Washington University up to $30,000 to compensate for
expenses incurred by the University when relocating you to St. Louis.
Six month salary severance if terminated by Medicode without cause.
We would anticipate you joining Medicode on a full-time basis by December 15,
1996 or earlier. We are excited about the prospect of having you join our
Executive Management Team and look forward to hearing from you. Please let me
know if you have any questions or need additional information.
Sincerely, Accepted:
/S/ Ann S. Bezdjian
Ann S. Bezdjian /S/ Terry Cameron
---------------------------------
Human Resource Director Terry Cameron
10-31-96
---------------------------------
Date
MED-INDEX
MEDICAL DATA RESEARCH
AND SOFTOUCH ARE
DIVISIONS OF MEDICODE, INC.
5225 WILEY POST WAY, SUITE 500
SALT LAKE CITY, UTAH 84116
(801) 536-1005
FAX (801) 536-1009
<PAGE>
EXHIBIT 10.12
8670 Lake Glen Court
Alpharetta, GA 30201
December 19, 1995
Thomas F. Stephenson
Chairman of the Board
Medicode
c/o Sequoia Capital
3000 Sand Hill Road, Bldg. 4, Suite 208
Menlo Park, CA 94025
Dear Tom:
This is my formal acceptance to join Medicode as Chief Executive Officer
reporting directly to the Board of Directors. This acceptance is based on your
offer letter of December 5, 1995, as well as the discussion we had during our
dinner meeting on November 21, 1995, which includes the following:
1. Base salary of $200,000 per annum.
2. Guaranteed minimum $25,000 bonus for 1996. As discussed during our dinner,
the Executive Bonus plan, as approved by the Compensation Committee, will
provide for up to 50% of salary to be earned via bonuses.
3. Stock Options: 5% Medicode stock, based upon current stock option plan.
As agreed upon during dinner, these stock options will be "qualified" and,
if I desire, within six months of employment I will be allowed to buy
common shares at fair market value. (Note: this assumes a repurchase plan
in the event I leave prior to vesting.)
Also agreed at dinner was that if there were a change in control (see
attached definition) of Medicode, all my stock would be vested.
4. Benefits package includes health insurance, paid holidays, paid vacation,
sick leave, 125 Plan, 401(k) Plan, long-term disability, life insurance and
AD&D.
5. Travel expense reimbursement: Airfare (three trips per month), lodging and
incidentals for me and my wife until August 1996. We anticipate this
expense to be approximately $3,500 monthly.
6. Relocation expense reimbursement: Medicode will pay the selling commission
on my home in Georgia, reasonable moving expenses and closing costs in
conjunction with my purchase of a home or land in Utah.
<PAGE>
Mr. Thomas F. Stephenson
December 19, 1995
Page Two
7. Twelve-month salary severance if voluntary terminated without cause.
Please refer to the attached for definition of "cause."
If you agree to the above, I'll be officially joining Medicode starting Monday,
January 8, 1996.
Last, but not least, I'd like to thank you and the board for offering me this
opportunity to join the Executive Management Team of Medicode. I can assure you
and the Board that I'll commit to a 150% effort to make Medicode into a company
we can all be proud of.
Regards,
/S/ Eugene Santa Cattarina
Gene Cattarina
Attachment
Accepted:
/S/ Thomas F. Stephenson
- -------------------------------------
Tom Stephenson, Chairman of the Board
Medicode
<PAGE>
ATTACHMENT TO TOM STEPHENSON LETTER DATED 12/19/95
I. A "change in control" shall mean the occurrence of any of the following
events:
A. any "person" as such term is used in Section 13(d) and 14(d) of the
Exchange Act (as the term is defined below) (other than the Company, a
subsidiary of the Company, an affiliate of the Company, or a Company
employee benefit plan, including any trustee of such plan acting as
trustee) is or becomes the "beneficial owner" as defined in Rule 13d-3
under the Exchange Act, directly or indirectly, of securities of the
Company (or a successor to the Company) representing more than fifty
percent (50%) of the combined voting power of the then-outstanding
securities of the Company or such successor.
B. 1) the sale of assets involving fifty percent (50%) or more of the
assets in value of the company; 2) any merger or consolidation or
other reorganization of the Company where another entity is the
survivor; 3) a transaction pursuant to which the holders, as a group,
of all the securities of the Company outstanding prior to the
transaction hold, as a group, less than fifty percent (50%) of the
combined voting power of the Company or any successor company
outstanding after the transaction; or 4) any other event that the
Board determines in the Board's discretion would materially alter the
structure of the Company or the ownership of the Company.
II. "Termination for cause" means termination of Employee's employment by
Company as a result of: a) Employee's material dishonesty towards, fraud
upon, or deliberate injury or attempted injury to Company; b) Employee
being convicted of a felony; or c) Employee's willful, deliberate and
repeated failure to perform Employee's reasonable employment duties (other
than by reason of Employee's incapacity due to physical or mental illness)
where such failure is not remedied within a reasonable period of time after
receipt of written notice from Company; provided, that a Termination for
Cause shall not be deemed to have occurred if such termination is effected
as a result of an action or the failure of the Employee to act, while such
action or failure to act was believed, in good faith, by Employee to have
been in, or not opposed to, the best interest of Company.
<PAGE>
EXHIBIT 11.1
MEDICODE, INC
Calculation of net income (loss) per share
Historical
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ (112,000) $ 48,000 $1,629,000 $ (230,000) $ 281,000
========== ========== ========== ========== ==========
Weighted average shares
of common stock
outstanding............ 443,000 462,000 835,000 781,000 904,000
Dilutive common stock
equivalents and
convertible securities:
Stock options and
warrants............. -- 1,489,000 1,486,000 -- 1,444,000
Preferred stock....... -- 2,740,000 2,740,000 -- 2,740,000
Shares related to Staff
Accounting Bulletin
topic 4D:
Stock options......... 314,000 314,000 314,000 314,000 314,000
---------- ---------- ---------- ---------- ----------
Shares used in computing
net income (loss) per
share.................. 757,000 5,005,000 5,375,000 1,095,000 5,402,000
========== ========== ========== ========== ==========
Net income (loss) per
share.................. $ (0.15) $ 0.01 $ 0.30 $ (0.21) $ 0.05
========== ========== ========== ========== ==========
Pro Forma
Calculation of shares
outstanding for
computing pro forma net
income (loss) per
share:
Shares used in computing
net income (loss) per
share.................. 757,000 5,005,000 5,375,000 1,095,000 5,402,000
Adjusted to reflect the
effect of the assumed
conversion of preferred
stock.................. 2,740,000 -- -- 2,740,000 --
---------- ---------- ---------- ---------- ----------
Shares used in computing
pro forma net income
(loss) per share....... 3,497,000 5,005,000 5,375,000 3,835,000 5,402,000
========== ========== ========== ========== ==========
Pro forma net income
(loss) per share....... $ (0.03) $ 0.01 $ 0.30 $ (0.06) $ 0.05
========== ========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 3,038 5,191
<SECURITIES> 0 0
<RECEIVABLES> 5,840 1,715
<ALLOWANCES> (207) (268)
<INVENTORY> 1,036 388
<CURRENT-ASSETS> 10,855 8,090
<PP&E> 4,814 4,918
<DEPRECIATION> (3,553) (3,625)
<TOTAL-ASSETS> 12,309 9,606
<CURRENT-LIABILITIES> 9,874 6,962
<BONDS> 285 172
0 0
18,673 18,673
<COMMON> 2,112 2,153
<OTHER-SE> (18,635) (18,354)
<TOTAL-LIABILITY-AND-EQUITY> 12,309 9,606
<SALES> 0 0
<TOTAL-REVENUES> 32,618 13,989
<CGS> 11,053 4,027
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 18,949 9,533
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 46 (37)
<INCOME-PRETAX> 2,570 466
<INCOME-TAX> 941 185
<INCOME-CONTINUING> 1,629 281
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,629 281
<EPS-PRIMARY> 0.30 0.05
<EPS-DILUTED> 0 0
</TABLE>
