<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997.
REGISTRATION NO. 333-36293
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
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(3)
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<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value per share....... 2,300,000 $14.00 $32,200,000 $9,758
</TABLE>
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(1) Includes 300,000 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).
(3) A Registration fee of $7,667 was previously paid on September 24, 1997,
based on a proposed maximum aggregate offering price of $25,3000,000
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 OCTOBER 29, 1997
[LOGO OF MEDICODE APPEARS HERE]
2,000,000 SHARES
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby, 1,250,000 shares are
being issued and sold by Medicode, Inc. ("Medicode" or the "Company") and
750,000 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 $12.00 and $14.00 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.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO 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>
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(1) Before deducting expenses payable by the Company, estimated at $750,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 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 BancAmerica Robertson Stephens, San Francisco,
California on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
The date of this Prospectus is , 1997
<PAGE>
Front inside cover: graphic depiction of the flow of the reimbursement process
with the caption "The Reimbursement Process" and pictures depicting a patient
visit, documentation and coding, all of which involve utilization, outcomes
and accuracy. In addition, the flow chart reflects the "Fee For Service"
process which includes billing, payor review and payment, and the "Capitation"
process which includes review of encounter reports, MCO review and incentive
payment, all of which are influenced by compliance and pricing.
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>
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 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>
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. 1,250,000 shares
Common Stock Offered by the Selling
Stockholders....................... 750,000 shares
Common Stock Outstanding after the
Offering........................... 7,936,535 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue.......................... $21,035 $25,699 $32,618 $18,773 $22,791
Cost of revenue.................. 7,173 9,164 11,053 5,357 6,811
Selling, general and administra-
tive............................ 10,774 11,947 13,735 9,428 10,634
Research and development......... 3,141 4,335 5,214 4,148 4,229
Operating income (loss).......... (53) 253 2,616 (160) 1,117
Net income (loss)................ (112) 48 1,629 (128) 750
Pro forma net income per
share(2)........................ $ 0.21 $ 0.09
Shares used in computing pro
forma net income per share(2)... 7,873 7,909
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 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............. $5,345 $7,030 $21,578
Working capital..... 1,490 3,175 17,723
Total assets........ 12,702 14,387 28,935
Long-term liabili-
ties, less current
portion............ -- -- --
Stockholders' equi-
ty................. 2,945 4,630 19,178
</TABLE>
- --------
(1) Based upon shares outstanding as of September 30, 1997. Includes 1,060,386
shares issuable upon the exercise of outstanding warrants upon the
completion of this offering and 227,892 shares to be sold by certain
Selling Stockholders after the exercise of outstanding options immediately
prior to the completion of this offering. Excludes (i) 1,476,738 shares
issuable upon exercise of options outstanding at a weighted average
exercise price of $1.58 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 1,060,386 shares of Common
Stock upon the completion of this offering with expected proceeds of
$1,685,000.
(4) As adjusted to reflect the sale of (i) 1,250,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $13.00 per share and the receipt of the net proceeds therefrom, and (ii)
the exercise of options to purchase 227,892 shares by certain Selling
Stockholders immediately prior to the completion of this offering and the
receipt of the 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 1,060,386 shares of Common Stock upon the
completion of this offering, (v) a 1.466-for-one 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 in the following risk factors 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 by this
Prospectus .
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. In 1995 and 1996, approximately 75% of
the Company's annual revenue was repeat and recurring in nature. 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
terms that are renewable annually. Consequently, repeat revenue from these
products is dependent upon customers' decisions to renew their licenses each
year. 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
Company maintains key man life insurance on its Chief Executive Officer and
President, Eugene S. Cattarina. The amount of the policy is $1.0 million and
the Company is the named beneficiary. 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 has 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 51.9% of the outstanding shares
of the Company's Common Stock immediately following this offering (50.1% 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 7,936,535 shares of Common Stock assuming no exercise of
outstanding options after September 30, 1997 other than the exercise of an
aggregate of 227,892 options to purchase Common Stock by certain Selling
Stockholders, all of which shares will be sold in this offering. Of these
shares, the 2,000,000 shares offered hereby (2,300,000 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 in Rule 144 under the Securities Act.
The remaining 5,936,535 shares of Common Stock outstanding upon completion of
this offering are "restricted securities" as defined in Rule 144 adopted under
the Securities Act.
11
<PAGE>
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) no shares will be eligible for immediate sale on the date of this
Prospectus, (ii) 4,876,149 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 1,060,386
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 2,427,000 shares of Common Stock
reserved for issuance under the Company's stock option plans. Following the
closing of this offering, the holders of 5,076,649 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 $10.54 per share of Common Stock. See
"Dilution."
BENEFITS OF THIS OFFERING TO MANAGEMENT AND CURRENT STOCKHOLDERS
The completion of the offering will provide significant benefits to the
current stockholders of the Company, including certain of its directors and
officers. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. The completion of this offering will also
create a public market for the Common Stock and thereby is likely to increase
the market value of the investment by current stockholders in the Company.
Upon the closing of this offering, the difference between the aggregate
purchase price paid by the Company's management and other current stockholders
for their shares and the aggregate market value of such shares will be
approximately $7.3 million and $64.2 million, respectively. See "Dilution,"
"Management" and "Principal and Selling Stockholders."
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 1,250,000 shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $13.00 per share are estimated to be $14,363,000
($17,990,000 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
September 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 exercise of options to purchase 227,892 shares to be sold by
certain Selling Stockholders, and the sale of the 1,250,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $13.00 per share and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
PRO FORMA AS ADJUSTED
--------- -----------
(in thousands)
<S> <C> <C>
Long-term liabilities, less current portion.............. $ -- $ --
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; 6,458,643 shares issued and outstanding,
pro forma; 7,936,535 shares issued and outstanding, as
adjusted(1)........................................... 6,041 20,589
Accumulated deficit.................................... (1,082) (1,082)
Note receivable from stockholder....................... (329) (329)
------ -------
Total stockholders' equity........................... 4,630 19,178
------ -------
Total capitalization............................... $4,630 $19,178
====== =======
</TABLE>
- --------
(1) Common Stock outstanding pro forma includes 1,060,386 shares of Common
Stock issuable upon the exercise of outstanding warrants upon the
completion of this offering. Common Stock outstanding as adjusted includes
227,892 shares to be sold by certain Selling Stockholders after the
exercise of outstanding stock options immediately prior to the completion
of this offering. Excludes (i) 1,476,738 shares of Common Stock reserved
for issuance upon exercise of stock options outstanding as of September
30, 1997 at a weighted average exercise price of $1.58 per share, (ii)
200,000 shares reserved for future issuance under the Company's Purchase
Plan and (iii) 750,000 shares reserved for future issuance under the
Company's stock option plans. See "Management -- Stock Plans."
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 was approximately $4,630,000 or $0.72 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 1,250,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 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 September 30, 1997 would have been
approximately $18,993,000 or $2.46 per share. This represents an immediate
increase in pro forma net tangible book value per share of $1.74 per share to
existing stockholders and an immediate dilution of $10.54 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................ $13.00
Pro forma net tangible book value per share at September 30,
1997........................................................ $0.72
Increase per share attributable to new investors............. 1.74
-----
Pro forma net tangible book value per share after this offer-
ing........................................................... 2.46
------
Dilution to new investors...................................... $10.54
======
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by existing
stockholders and to be paid (at an assumed initial public offering price of
$13.00 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 stockhold-
ers(1)(2)................. 6,686,535 84.3% $22,700,000 58.3% $ 3.39
New investors.............. 1,250,000 15.7 16,250,000 41.7 13.00
--------- ----- ----------- -----
Total.................... 7,936,535 100.0% $38,950,000 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Includes 1,060,386 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. Also includes
227,892 shares of Common Stock issuable upon the exercise of outstanding
options by certain Selling Stockholders immediately prior to the
completion of this offering, all of which shares will be offered in this
offering. Proceeds from the exercise of such options are expected to be
$185,000.
(2) Sales by the Selling Stockholders will reduce the number of shares held by
existing stockholders to 5,936,535 or 74.8% of the total number of shares
of Common Stock outstanding and will increase the number of shares held by
new investors to 2,000,000 or 25.2% of the total number of shares of
Common Stock outstanding after the offering.
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
other than the options to purchase 227,892 shares of Common Stock which will
be exercised in connection with this offering. At September 30, 1997 there
were (i) options outstanding to purchase 1,476,738 shares of Common Stock at a
weighted average exercise price of $1.58 per share (ii) 200,000 shares
reserved for future issuance under the Company's Purchase Plan and (iii)
750,000 shares reserved for future issuance under the Company's stock option
plans. To the extent outstanding options are exercised, there will be further
dilution to new investors,. See "Management -- Stock Plans."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data presented below for the five
years ended December 31, 1996 and for the nine months ended September 30, 1997
and the consolidated balance sheet data for the five years ended December 31,
1996 and for the nine months ended September 30, 1997, are derived from the
Company's financial statements (except as otherwise noted) which have been
audited by Ernst & Young LLP, independent auditors. The consolidated statement
of operations data for the nine months ended September 30, 1996 has 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 period. The consolidated operating results for the
nine months ended September 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- ------
(in thousands, except per share data) (unaudited)
<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 $6,861 $8,926
Benchmarking databases
and software.......... 7,315 9,369 11,627 14,021 16,788 11,912 13,865
------- ------- ------- ------- ------- ------ ------
Total revenue.......... 14,994 16,904 21,035 25,699 32,618 18,773 22,791
Cost of revenue:
Syndicated data........ 4,049 4,281 5,001 6,544 8,455 3,448 4,390
Benchmarking database
and software.......... 791 1,772 2,172 2,620 2,598 1,909 2,421
------- ------- ------- ------- ------- ------ ------
Total cost of revenue.. 4,840 6,053 7,173 9,164 11,053 5,357 6,811
------- ------- ------- ------- ------- ------ ------
Gross profit........... 10,154 10,851 13,862 16,535 21,565 13,416 15,980
Other expenses:
Selling, general and
administrative........ 7,155 14,019 10,774 11,947 13,735 9,428 10,634
Research and develop-
ment.................. 1,689 2,211 3,141 4,335 5,214 4,148 4,229
------- ------- ------- ------- ------- ------ ------
Operating income (loss). 1,310 (5,379) (53) 253 2,616 (160) 1,117
Interest income (ex-
pense), net............ (97) (260) (165) (107) (46) (33) 83
------- ------- ------- ------- ------- ------ ------
Income (loss) before in-
come taxes............. 1,213 (5,639) (218) 146 2,570 (193) 1,200
Income tax provision
(benefit).............. 531 (1,576) (106) 98 941 (65) 450
------- ------- ------- ------- ------- ------ ------
Net income (loss)....... $ 682 $(4,063) $ (112) $ 48 $ 1,629 $ (128) $ 750
======= ======= ======= ======= ======= ====== ======
Pro forma net income per
share(1)............... $ 0.21 $ 0.09
======= ======
Shares used in computing
pro forma net income
(loss) per share (1)... 7,873 7,909
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ----------- ------
(in thousands, except per share data) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (defi-
cit)................... $(1,748) $ 566 $ (302) $ (808) $ 981 $ (996) $1,490
Total assets............ 9,014 8,116 8,179 9,923 12,000 8,157 12,702
Long-term liabilities,
less current portion... 2,700 2,274 1,546 691 285 376 --
Stockholders' equity.... 1,499 407 310 391 2,150 363 2,945
</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 terms that are renewable annually.
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. In 1995 and 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 terms that are
renewable annually, repeat revenue from these products is dependent upon
customers' decisions to renew their licenses for each year. 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
17
<PAGE>
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>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Syndicated data................. 44.7% 45.4% 48.5% 36.5% 39.2%
Benchmarking databases and soft-
ware........................... 55.3 54.6 51.5 63.5 60.8
------- ------- ------- ------ ------
Total revenue................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Syndicated data................. 53.2 56.0 53.4 50.3 49.2
Benchmarking databases and
software....................... 18.7 18.7 15.5 16.0 17.5
------- ------- ------- ------ ------
Total cost of revenue......... 34.1 35.7 33.9 28.5 29.9
------- ------- ------- ------ ------
Gross Profit.................... 65.9 64.3 66.1 71.5 70.1
Other expenses:
Selling, general and administra-
tive........................... 51.2 46.5 42.1 50.2 46.7
Research and development........ 14.9 16.9 16.0 22.1 18.6
------- ------- ------- ------ ------
Total other expenses.......... 66.1 63.4 58.1 72.3 65.3
Operating income (loss)........... (0.2) 0.9 8.0 (0.8) 4.8
Interest income (expense), net.... (0.8) (0.4) (0.1) (0.2) 0.4
------- ------- ------- ------ ------
Income (loss) before income taxes. (1.0) 0.5 7.9 (1.0) 5.2
Income tax provision (benefit).... (0.5) 0.4 2.9 (0.3) 2.0
------- ------- ------- ------ ------
Net income (loss)................. (0.5)% 0.1% 5.0% (0.7)% 3.2%
======= ======= ======= ====== ======
</TABLE>
Nine Months Ended September 30, 1997 and 1996
Revenue. Total revenue for the nine months ended September 30, 1997
increased 21.4% to approximately $22.8 million from $18.8 million for the
comparable nine month period ended September 30, 1996. Revenue from syndicated
data products for the 1997 period increased 30.1% to $8.9 million from $6.9
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 16.4% to
$13.9 million from $11.9 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 nine months ended September 30,
1997 increased to $6.8 million, or 29.9% of revenues, from $5.4 million, or
28.5% of revenue, for the nine months ended September 30, 1996. The increase
in cost of revenue on a percentage basis is due primarily to the change in
revenue mix. For the nine months ended September 30, 1997, syndicated data
products accounted for 39.2% of total revenue compared to 36.5% 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.
19
<PAGE>
Selling, General and Administrative. Selling, general and administrative
costs increased 12.8% to $10.6 million in the nine months ended September 30,
1997 from $9.4 million in the nine months ended September 30, 1996. As a
percentage of revenue, selling, general and administrative costs decreased
slightly to 46.7% in the 1997 period from 50.2% 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 increased 2.0% to
$4.2 million for the nine months ended September 30, 1997 from $4.1 million
for the nine months ended September 30, 1996. As a percentage of revenue,
research and development costs were 18.6% in the first nine months of 1997 as
compared to 22.1% 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, the
total cost of revenue 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 nine quarters ended September 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, SEPT. 30,
1995 1995 1996 1996 1996 1996 1997 1997 1997
--------- -------- -------- -------- --------- -------- -------- -------- ---------
(in thousands)
<S> <C> <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 $4,023
Benchmarking databases
and software.......... 3,090 3,954 4,311 3,631 3,970 4,876 4,886 4,200 4,779
----- ------ ------ ------ ------ ------ ------ ------ ------
Total revenue.......... 4,024 11,399 6,937 4,874 6,962 13,845 8,008 5,981 8,802
Cost of revenue:
Syndicated data........ 545 4,103 1,299 716 1,433 5,007 1,516 885 1,989
Benchmarking databases
and software.......... 646 650 713 584 612 689 851 775 795
----- ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenue.. 1,191 4,753 2,012 1,300 2,045 5,696 2,367 1,660 2,784
----- ------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 2,833 6,646 4,925 3,574 4,917 8,149 5,641 4,321 6,018
Other expenses:
Selling, general and
administrative........ 3,118 3,312 3,081 2,784 3,563 4,307 3,593 3,175 3,866
Research and develop-
ment.................. 1,062 1,560 1,518 1,445 1,185 1,066 1,626 1,139 1,464
Net income (loss)....... (525) 654 187 (417) 102 1,757 259 21 470
</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 nine months
ended September 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 $4.1 million for the nine months ended September 30,
1997. At September 30, 1997, cash and cash equivalents totaled $5.3 million.
Cash used in financing activities was $1.1 million in 1994, $900,000 in
1995, $800,000 in 1996 and $1.1 million in the nine months ended September 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 entered into a three year revolving line of
credit facility with a bank which provides for an initial principal amount of
$5.0 million and an interest rate of prime plus .25%. Beginning December 31,
1998 the available principal amount will decrease by $200,00 quarterly.
Borrowings are limited to a percentage of eligible accounts receivable,
inventory and equipment but in no event will the available credit be less than
$2.25 million provided that the company remains in compliance with certain
covenants. The covenants include liquidity, leverage and coverage ratios,
profitability requirements, restrictions on additional indebtedness, payment
of cash dividends on the Company's capital stock and certain restrictions on
acquisitions and investments. Borrowings are secured by substantially all of
the Company's assets. At September 30, 1997 the Company was eligible to borrow
$4.5 million under its line of credit facility and was in compliance with
covenants under the credit agreement.
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
$700,000 in the nine months ended September 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 1996. 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 the incidence of inaccurately or fraudulently
coded claims to be 3% to 10% of claims nationwide. 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. In 1995 and 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, 22% of the Company's benchmarking database customers
contribute data in exchange for credits against future database license fees.
The Company estimates and accrues for data credits at the time of revenue
recognition. 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 approximately
250 geographical and plan level groupings, differentiating between primary
care and specialty 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.
27
<PAGE>
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 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.
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<PAGE>
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 56 professionals as of
September 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 nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995 and 1994 were
$4.2, $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 September 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:
PAYORS/SELF-INSURED EMPLOYERS
PROVIDERS
Cleveland Clinic
Dartmouth Hitchcock
Boise Cascade
Empire Blue Cross/Blue Shield Duke University
Healthcare Compare Johns Hopkins University
HealthSource PhyCor
John Alden Insurance
Scripps Clinic
Kimberly Clark Stanford University
Motorola University of Chicago
Wal-Mart
29
<PAGE>
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 installation and training personnel. The customer support
group is also responsible for performing operative report coding reviews and
impact analysis studies.
30
<PAGE>
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 agreement has a 30-year term, and
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 September 30, 1997, the Company had 225 full time equivalent
employees, including 53 in cost of sales and customer support and fulfillment,
85 in sales and marketing positions, 56 in research and development activities
and 31 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
September 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas F. Stephenson (1) 55 Chairman of the Board of Directors
(III)....................
Eugene Santa Cattarina 50 President, Chief Executive Officer and Director
(III)....................
Kevin W. Pearson.......... 40 Chief Operating Officer, Chief Financial
Officer, Treasurer and Secretary
Eileen R. 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) (I). 67 Director
John H. Moragne (2) (I)... 40 Director
L. John Wilkerson (1) 54 Director
(II).....................
Carl Witonsky (2) (II).... 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 Chairman of the Board of Directors 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") a health care software company, 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 Chemistry 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 R. 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 1989 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 Mr. Hodge and Mr. Moragne, the Class II directors are
Mr. Wilkerson and Mr. Witonsky, and the Class III directors are Mr. Stephenson
and Mr. Cattarina. 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."
35
<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 $100,000 386,291 $54,000(1)
President and Chief Execu-
tive Officer
Kevin W. Pearson........... 150,000 67,500 21,990 2,000(2)
Executive Vice President,
Chief Operating Officer
and Chief Financial Offi-
cer
Eileen R. Shanon........... 130,000 68,000 -- 12,000(3)
Senior Vice President,
Purchaser and Payor Group
Jerold G. Seare............ 145,000 28,000 -- --
Medical Director
Kevin M. Marcum............ 120,000 60,000 51,310 --
Senior Vice President,
Syndicated Data Group
</TABLE>
- --------
(1) Represents reimbursement for relocation costs incurred in connection with
commencing employment with the Company.
(2)Represents long-term disability insurance premiums paid by the Company.
(3)Represents an automobile allowance and long-term disability insurance
premiums paid by the Company.
Option Grants in Last Fiscal Year. The following table sets forth each grant
of stock options made during the fiscal year ended December 31, 1996 to each
of the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM(4)
OPTIONS FISCAL PRICE EXPIRATION --------------------
GRANTED(#)(1) YEAR(%)(2) ($/SHARE)(3) DATE 5%($) 10%($)
------------- ------------ ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Eugene Santa Cattarina.. 386,291(5) 42.92% $ .85 N/A $ N/A $ N/A
Kevin W. Pearson........ 21,990 2.44 .85 1/18/06 12,000 30,000
Eileen Shanon........... -- -- -- -- -- --
Jerold G. Seare......... -- -- -- -- -- --
Kevin M. Marcum......... 14,660 1.63 .85 1/18/06 8,000 40,000
36,650 4.07 1.71 10/17/06 39,000 100,000
</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 the remaining shares vesting in equal monthly
installments over the next thirty-six months thereafter, subject to
continued employment with or services to the Company.
(2) Based on an aggregate of 900,124 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.
36
<PAGE>
(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 $.85 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........ 213,790 72,080 400,000 139,000
Eileen R. Shanon........ 116,233 18,325 247,000 34,000
Jerold G. Seare......... 46,727 11,912 94,000 26,000
Kevin M. Marcum......... 3,512 55,128 7,000 72,000
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities on December 31, 1996 of $2.73 per share, as determined by the
Company's Board of Directors, minus the exercise price.
STOCK PLANS
1991 Stock Option Plan. The Company's Amended and Restated 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 September 30, 1997, options to purchase an aggregate of 1,582,428
shares of Common Stock (plus options to purchase an additional 122,202 shares
which were granted prior to adoption of the 1991 Plan) were outstanding and
742,072 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
37
<PAGE>
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 607,500 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 or one of its committees, as applicable. 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 not assumed or an equivalent option
or right is not substituted by the successor corporation or an affiliate
thereof. The exercise price of options and stock purchase rights granted under
the 1997 Plan will be as determined by the plan administrator, 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) 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.
38
<PAGE>
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 1997 Stock Plan, has the authority to provide for accelerated vesting
of the shares of Common Stock subject to outstanding options held by the Named
Executive 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 shares subject to the Company's repurchase option so that such shares
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.
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.
39
<PAGE>
CERTAIN TRANSACTIONS
In January 1996, the Company sold 386,291 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 July 1997, Registrant granted stock options to employees and directors
under its stock plans covering an aggregate of 236,759 shares of Registrant's
Common Stock, at an exercise price of $4.09 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 September 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) each director,
(iii) each of the Named Executive Officers, (iv) all directors and executive
officers as a group and (v) each Selling Stockholder. 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 (1) THE OFFERING (1)
----------------------- NUMBER OF -----------------------
PERCENTAGE OF SHARES PERCENTAGE OF
NAME AND ADDRESS OF OUTSTANDING BEING OUTSTANDING
BENEFICIAL OWNER NUMBER SHARES OFFERED NUMBER SHARES
------------------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Entities Affiliated with
Sequoia Capital (2).... 1,624,008 24.3% -- 1,624,008 20.5%
Thomas F. Stephenson
3000 Sand Hill Road
Menlo Park, CA 94025
Entities Affiliated with
Galen Partners (3)..... 1,253,821 18.8 -- 1,253,821 15.8
L. John Wilkerson
666 Third Avenue
New York, NY 10017
Entities Affiliated with
Partech/Paribas (4).... 1,051,535 15.7 -- 1,051,535 13.2
101 California Street,
Suite 3150
San Francisco, CA 94111
Entities Affiliated with
Trident Capital (5).... 541,335 8.1 -- 541,335 6.8
John Moragne
2480 Sand Hill Road,
Suite 100
Menlo Park, CA 94025
St. Paul Fire and Marine
Ins. Co. (6)........... 501,530 7.5 -- 501,530 6.3
8500 Normandale Lake
Blvd.
Bloomington, MN 55437
Thomas F. Stephenson
(2).................... 1,624,008 24.3 -- 1,624,008 20.5
Sequoia Capital
3000 Sand Hill Road
Menlo Park, CA 94025
John H. Moragne (5)..... 541,335 8.1 -- 541,335 6.8
Trident Capital
One Bush Street, 15th
Floor
San Francisco, CA 94104
L. John Wilkerson (3)... 1,253,821 18.8 -- 1,253,821 15.8
666 Third Avenue
New York, NY 10017
Carl Witonsky (7)....... 68,144 1.0 -- 68,144 *
Melville H. Hodge(8).... 35,184 * -- 35,184 *
Eugene S. Cattarina (9). 386,291 5.8 386,291 4.9
Eileen R. Shanon (10)... 328,301 4.8 204,005 124,296 1.6
Kevin W. Pearson (11)... 250,746 3.6 250,746 3.1
Jerold G. Seare (12).... 56,806 * 56,806 *
Kevin M. Marcum (13).... 22,601 * 22,601 *
All current directors
and executive officers
as a group (12 persons)
(14)................... 4,605,718 63.7 204,005 4,401,713 51.9
Brent Anderson (15)..... 161,846 2.4 161,846 -- *
Edward Baker (16)....... 12,461 * 12,461 -- *
Charles J. Chamberlain.. 2,137 * 2,137 -- *
Stephen Ensign.......... 17,852 * 7,999 9,853 *
First Security Bank..... 58,028 * 51,591 6,437 *
Custodian FBO John H.
Flanders IRA Rollover
Barry Johnson........... 43,979 * 14,979 29,000 *
Kenneth D. Lame or Ruth
Dodge Lame joint
tenants with rights of
survivorship........... 185,693 2.8 24,999 160,694 2.0
Richard Mandahl......... 6,597 * 2,199 4,398 *
James T. Murphy......... 175,145 2.6 28,545 146,600 1.8
Smith Barney............ 6,718 * 3,665 3,053 *
Custodian for Barbara
Ray
Byron Smith (17)........ 259,524 3.8 129,762 129,762 1.6
William Tate (18)....... 105,812 1.6 105,812 -- *
</TABLE>
- -------
* Less than one percent.
41
<PAGE>
(1) Applicable percentage of ownership is based on (i) before this offering,
6,686,535 shares of Common Stock (which number includes (a) 5,398,257
shares outstanding on September 30, 1997, (b) 1,060,386 shares to be
issued prior to the closing of the Offering upon exercise of outstanding
warrants and (c) 227,892 shares to be sold by certain Selling
Stockholders after exercise of outstanding stock options); and (ii) after
this offering; 7,936,535 shares of Common Stock outstanding (assuming no
exercise of the Underwriters' over-allotment option). 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 currently
exercisable or exercisable within 60 days after September 30, 1997 are
deemed outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for computing the
percentage of any other person.
(2) Consists of (i) 796,983 shares and warrants exercisable within 60 days of
September 30, 1997 to purchase an aggregate of 220,726 shares held by
Sequoia Capital Growth Fund, (ii) 394,252 shares and warrants exercisable
within 60 days of September 30, 1997 to purchase an aggregate of 109,187
shares held by Sequoia Capital V, (iii) 50,886 shares and warrants
exercisable within 60 days of September 30, 1997 to purchase an aggregate
of 14,088 shares held by Sequoia Technology Partners III, (iv) 16,955
shares and warrants exercisable within 60 days of September 30, 1997 to
purchase an aggregate of 4,696 shares held by Sequoia XXIII, and (v)
12,716 shares and warrants exercisable within 60 days of September 30,
1997 to purchase an aggregate of 3,519 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 14,660 shares of Common Stock granted in July 1997.
(3) Consists of (i) 758,465 shares and warrants exercisable within 60 days of
September 30, 1997 to purchase an aggregate of 164,299 shares held by
Galen Partners II, L.P., (ii) 290,195 shares and warrants exercisable
within 60 days of September 30, 1997 to purchase an aggregate of 36,968
shares held by Galen Partners International II, L.P., and (iii) 3,267
shares and warrants exercisable within 60 days of September 30, 1997 to
purchase an aggregate of 627 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 14,660 shares of Common Stock
granted in July 1997.
(4) Consists of (i) 423,927 shares and warrants exercisable within 60 days of
September 30, 1997 to purchase an aggregate of 117,410 shares held by
U.S. Growth Fund Partners C.V., (ii) 239,518 shares and warrants
exercisable within 60 days of September 30, 1997 to purchase an aggregate
of 66,336 shares held by Parvest U.S. Partners II, C.V., (iii) 152,613
shares and warrants exercisable within 60 days of September 30, 1997 to
purchase an aggregate of 42,267 shares held by Paribus U.S. Partners
V.O.F., and (iv) 7,417 shares and warrants exercisable within 60 days of
September 30, 1997 to purchase an aggregate of 2,047 shares held by
Multinvest Limited.
(5) Consists of (i) 353,915 shares and warrants exercisable within 60 days of
September 30, 1997 to purchase an aggregate of 98,019 shares held by
Trident Capital Partners Fund--I, L.P., and (ii) 70,011 shares and
warrants exercisable within 60 days of September 30, 1997 to purchase an
aggregate of 19,390 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
42
<PAGE>
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
14,660 shares of Common Stock granted in July 1997.
(6) Consists of 420,771 shares and warrants exercisable within 60 days of
September 30, 1997 to purchase 80,759 shares.
(7) Consists of 17,445 shares and options to purchase 50,699 shares
exercisable within 60 days of September 30, 1997. Excludes options to
purchase 14,660 shares of Common Stock granted in July 1997.
(8) Consists of 35,184 shares, of which 23,456 shares are subject to a
repurchase option in favor of the Company as of September 30, 1997.
Excludes options to purchase 14,660 shares of Common Stock granted in July
1997.
(9) Consists of 386,291 shares, of which 225,336 shares are subject to a
repurchase option in favor of the Company as of September 30, 1997. See
"Management--Executive Compensation" and "Certain Transactions." Excludes
options to purchase 36,796 shares of Common Stock granted in July 1997.
(10) Consists of 204,005 shares and options to purchase 124,296 shares
exercisable within 60 days of September 30, 1997. Excludes options to
purchase 146 shares of Common Stock granted in July 1997 and 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 September 30, 1997.
Excludes options to purchase 11,141 shares of Common Stock granted in July
1997.
(12) Consists of options exercisable within 60 days of September 30, 1997.
Excludes options to purchase 146 shares of Common Stock granted in July
1997.
(13) Consists of options exercisable within 60 days of September 30, 1997.
Excludes options to purchase 29,466 shares of Common Stock granted in July
1997.
(14) Consists of 3,390,570 shares, warrants exercisable within 60 days of
September 30, 1997 to purchase 671,519 shares and options to purchase
543,629 shares exercisable within 60 days of September 30, 1997. Excludes
options to purchase 151,287 shares of Common Stock granted in July 1997.
(15) Consists of 103,206 shares and options to purchase 58,640 shares
exercisable within 60 days of September 30, 1997. Of the 161,846 shares
shown in this table as being offered by Mr. Anderson, 58,640 shares are
expected to be offered upon the exercise of options immediately prior to
this offering.
(16) Consists of options exercisable within 60 days of September 30, 1997. The
12,461 shares shown in this table as being offered by Mr. Baker are
expected to be offered upon the exercise of options immediately prior to
this offering.
(17) Consists of 121,862 shares and options to purchase 137,662 shares
exercisable within 60 days of September 30, 1997. Of the 129,762 shares
shown in this table as being offered by Mr. Smith, 68,831 shares are
expected to be offered upon the exercise of options immediately prior to
the offering.
(18) Consists of 17,852 shares and options to purchase 87,960 shares
exercisable within 60 days of September 30, 1997. Of the 105,812 shares
shown in this table as being offered by Mr. Tate, 87,960 shares are
expected to be offered upon the exercise of options immediately prior to
this offering.
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 September 30, 1997, 6,458,643
shares of Common Stock (including 4,016,263 shares issuable upon conversion of
outstanding Preferred Stock and 1,060,386 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 "Dividend 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 5,076,649 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 required 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, 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 7,936,535
outstanding shares of Common Stock assuming no exercise of outstanding options
after September 30, 1997 other than the exercise of an aggregate of 227,892
options to purchase Common Stock by certain Selling Stockholders, all of which
shares will be sold in this offering. Of these shares, the 2,000,000 shares
offered hereby (2,300,000 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 5,936,535
shares of Common Stock outstanding upon completion of this offering are
"restricted securities" as defined in Rule 144 ("Restricted Shares"), all of
which 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) no shares will be eligible for
immediate sale on the date of this Prospectus, (ii) 4,876,149 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 1,060,386 shares will be eligible for sale thereafter
upon expiration of their respective one-year holding periods.
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 79,365 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.
Assuming no currently outstanding options are exercised as of the date
hereof, the Company intends to file a registration statement on Form S-8 under
the Securities Act to register approximately 2,427,000 shares of Common Stock
reserved for issuance under the Company's 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
46
<PAGE>
within 90 days after the date of this Prospectus and will automatically become
effective upon filing. 90 days following the date of this Prospectus, no
shares issuable upon the exercise of vested options as of such date will be
eligible for sale pursuant to Rule 701. 180 days after the date of this
Prospectus, 961,097 shares issuable upon exercise of vested options that are
subject to the lock-up agreements will be eligible for sale.
After this offering, the holders of approximately 5,076,649 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,
BancAmerica Robertson Stephens, 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>
BancAmerica Robertson Stephens..................................
Hambrecht & Quist LLC...........................................
Wessels, Arnold & Henderson, L.L.C..............................
---------
Total....................................................... 2,000,000
=========
</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 300,000
additional shares of Common Stock at the same price per share as the Company
and the Selling Stockholders will receive for the 2,000,000 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 2,000,000 shares offered hereby. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the 2,000,000 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 6,458,643 shares
of the Company's Common Stock prior to the offering have agreed with the
Representatives that, except for 522,108 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 BancAmerica Robertson Stephens. 4,876,149
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 Rule 701 and 1,060,386 shares will be
eligible for sale thereafter upon expiration of their respective one-year
holding period. BancAmerica Robertson Stephens 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
48
<PAGE>
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 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 BancAmerica Robertson Stephens.
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, 1996 and
September 30, 1997 and for each of the three years in the period ended
December 31, 1996 and the nine months ended September 30, 1997 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 and Stockholders
Medicode, Inc.
We have audited the accompanying consolidated balance sheets of Medicode, Inc.
as of December 31, 1995 and 1996, and September 30, 1997 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, and the
nine months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Medicode, Inc.
at December 31, 1995 and 1996, and September 30, 1997 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996 and the nine months ended September 30,
1997 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
October 27, 1997
The foregoing report is in the form that will be signed upon the completion
of stockholder approval of changes to capital accounts described in Note 5 to
the financial statements.
/s/ Ernst & Young LLP
Salt Lake City, Utah
October 27, 1997
F-2
<PAGE>
MEDICODE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------ SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. $ 1,405 $ 3,038 $ 5,345
Accounts receivable, less
allowance for doubtful
accounts of $137, $207
and $262, respectively... 4,765 5,324 4,025
Inventories............... 1,002 1,036 487
Income tax receivable..... 46 -- --
Deferred income taxes..... 474 873 809
Prepaid expenses and other
assets................... 341 275 581
-------- -------- --------
Total current assets....... 8,033 10,546 11,247
Furniture and equipment,
net....................... 1,428 1,261 1,208
Deferred income taxes...... 462 193 247
-------- -------- --------
Total assets............... $ 9,923 $ 12,000 $ 12,702
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit....... $ 500 $ -- $ --
Accounts payable.......... 3,653 2,762 3,090
Deferred revenue.......... 1,718 1,931 2,935
Customer deposits......... 1,056 926 1,195
Accrued payroll and
related costs............ 520 998 1,263
Other accrued liabilities. 540 1,046 915
Income taxes payable...... -- 1,025 359
Current portion of long-
term debt and capital
lease obligations........ 854 877 --
-------- -------- --------
Total current liabilities.. 8,841 9,565 9,757
Long-term debt and capital
lease obligations, less
current portion........... 691 285 --
Commitments and
contingencies
Stockholders' equity:
Series A preferred stock,
no par value: 5,000,000
shares authorized;
4,016,263 shares issued
and outstanding at
December 31, 1995, 1996
and at September 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; 4,155,561
shares and 4,771,463
shares issued and
outstanding at
December 31, 1995 and
1996, respectively,
4,815,442 shares issued
and outstanding at
September 30, 1997; Pro-
forma unaudited: $0.001
par value, 50,000,000
shares authorized,
5,398,275 shares issued
and outstanding, at
amount paid in........... 1,653 2,112 2,157 4,356
Treasury stock, at cost:
3,433,448 common shares
at December 31, 1995,
1996 and at September 30,
1997, Pro forma
unaudited: no treasury
shares (16,474) (16,474) (16,474) --
Note receivable from
stockholder.............. -- (329) (329) (329)
Accumulated deficit....... (3,461) (1,832) (1,082) (1,082)
-------- -------- -------- -------
Total stockholders' equity. 391 2,150 2,945 $ 2,945
-------- -------- -------- =======
Total liabilities and
stockholders' equity...... $ 9,923 $ 12,000 $ 12,702
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MEDICODE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Syndicated data............... $ 9,408 $11,678 $15,830 $ 6,861 $ 8,926
Benchmarking databases and
software..................... 11,627 14,021 16,788 11,912 13,865
------- ------- ------- ------- -------
Total revenue................ 21,035 25,699 32,618 18,773 22,791
Cost of revenue:
Syndicated data............... 5,001 6,544 8,455 3,448 4,390
Benchmarking databases and
software..................... 2,172 2,620 2,598 1,909 2,421
------- ------- ------- ------- -------
Total cost of revenue........ 7,173 9,164 11,053 5,357 6,811
------- ------- ------- ------- -------
13,862 16,535 21,565 13,416 15,980
Operating expenses:
Selling, general and adminis-
trative...................... 10,774 11,947 13,735 9,428 10,634
Research and development...... 3,141 4,335 5,214 4,148 4,229
------- ------- ------- ------- -------
Operating income (loss)........ (53) 253 2,616 (160) 1,117
Interest income................ 66 68 55 38 125
Interest expense............... (231) (175) (101) (71) (42)
------- ------- ------- ------- -------
Income (loss) before income
taxes......................... (218) 146 2,570 (193) 1,200
Income tax expense (benefit)... (106) 98 941 (65) 450
------- ------- ------- ------- -------
Net income (loss).............. $ (112) $ 48 $ 1,629 $ (128) $ 750
======= ======= ======= ======= =======
Net income per share........... $ 0.21 $ 0.09
======= =======
Shares used in per share compu-
tations....................... 7,873 7,909
======= =======
</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................... 4,016,263 $18,673 4,073,370 $1,605 $ -- $(3,397) 3,433,448 $(16,474) $ 407
Issuance of common
stock................. -- -- 17,445 15 -- -- -- -- 15
Net loss............... -- -- -- -- -- (112) -- -- (112)
--------- ------- --------- ------ ----- ------- --------- -------- ------
Balances at December 31,
1994................... 4,016,263 18,673 4,090,815 1,620 -- (3,509) 3,433,448 (16,474) 310
Exercise of stock op-
tions................. -- -- 64,746 33 -- -- -- -- 33
Net income............. -- -- -- -- -- 48 -- -- 48
--------- ------- --------- ------ ----- ------- --------- -------- ------
Balances at December 31,
1995................... 4,016,263 18,673 4,155,561 1,653 -- (3,461) 3,433,448 (16,474) 391
Issuance of common
stock................. -- -- 421,475 359 (329) 30
Exercise of stock op-
tions................. -- -- 194,427 100 -- -- -- -- 100
Net income............. -- -- -- -- -- 1,629 -- -- 1,629
--------- ------- --------- ------ ----- ------- --------- -------- ------
Balances at December 31,
1996................... 4,016,263 18,673 4,771,463 2,112 (329) (1,832) 3,433,448 (16,474) 2,150
Exercise of stock op-
tions ................ -- -- 43,979 45 -- -- -- -- 45
Net income............. -- -- -- -- -- 750 -- -- 750
--------- ------- --------- ------ ----- ------- --------- -------- ------
Balances at September
30, 1997 .............. 4,016,263 $18,673 4,815,442 $2,157 $(329) $(1,082) 3,433,448 $(16,474) $2,945
========= ======= ========= ====== ===== ======= ========= ======== ======
</TABLE>
See accompanying notes.
F-5
<PAGE>
MEDICODE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............. $ (112) $ 48 $ 1,629 $ (128) $ 750
Adjustments to reconcile net
income (loss) to net cash
provided by operating activi-
ties:
Depreciation and amortiza-
tion........................ 873 1,015 985 732 704
Provision for losses on ac-
counts receivable and re-
turns....................... 247 171 547 376 200
(Gain) loss on disposition of
furniture and equipment..... (13) -- 8 -- --
Changes in operating assets
and liabilities:
Accounts receivable......... (1,869) (1,974) (1,106) 1,568 1,099
Income tax receivable....... 677 56 46 (22) --
Inventories................. (234) (51) (34) 687 549
Prepaid expenses and other
assets..................... 18 (97) 65 (118) (306)
Deferred income tax benefit. (97) (87) (130) (43) 10
Accounts payable............ 612 1,894 (891) (1,492) 328
Accrued payroll and related
costs...................... 68 (40) 478 467 265
Deferred revenue............ 301 491 213 (224) 1,004
Customer deposits........... (39) 281 (130) 189 269
Income taxes payable........ 3 (3) 1,025 -- (666)
Other accrued liabilities... 13 (58) 506 98 (131)
------- ------- ------- ------- -------
Net cash provided by operating
activities.................... 448 1,646 3,211 2,090 4,075
INVESTING ACTIVITIES
Purchase of furniture and
equipment.................... (731) (655) (825) (649) (651)
Proceeds from sale of furni-
ture and equipment........... 80 -- -- -- --
------- ------- ------- ------- -------
Net cash (used in) investing
activities.................... (651) (655) (825) (649) (651)
FINANCING ACTIVITIES
Payments on long-term debt and
capital leases............... (961) (903) (883) (776) (1,162)
Proceeds from issuance of
long-term debt............... -- -- 500 500 --
Payments on bank of line-of-
credit....................... (604) (500) (500) (500) --
Proceeds from bank line-of-
credit....................... 500 500 -- -- --
Proceeds from exercise of
stock options................ -- 33 100 100 45
Proceeds from issuance of com-
mon stock.................... 15 -- 30 -- --
------- ------- ------- ------- -------
Net cash used in financing ac-
tivities...................... (1,050) (870) (753) (676) (1,117)
------- ------- ------- ------- -------
Increase (decrease) in cash and
cash equivalents.............. (1,253) 121 1,633 765 2,307
Cash and cash equivalents at
beginning 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 $ 2,170 $ 5,345
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF OTHER CASH
FLOW INFORMATION
Interest paid.................. $ 285 $ 170 $ 129 $ 104 $ 57
Income taxes paid.............. 50 204 -- -- 1,107
</TABLE>
See accompanying notes.
F-6
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Principles of Consolidation
Medicode, Inc. (the "Company") 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 accompanying consolidated financial statements include the accounts of a
subsidiary, Softouch Software, Inc. (Softouch). Significant intercompany
transactions have been eliminated.
Interim Financial Data
The accompanying interim consolidated financial statements for the nine
months ended September 30, 1996 are unaudited. In the opinion of management,
the unaudited interim consolidated financial statements have been prepared on
the same basis as the annual consolidated financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the results of the Company's operations and its cash flows for
the nine months ended September 30, 1996.
The results of operations for the nine months ended September 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
Revenue from the sale of syndicated data products is generally recognized
when the products are shipped. Reserves for sales returns are estimated based
on historical experience and other available information and are reflected in
the financial statements as a reduction in revenue.
Revenue from benchmarking database products is derived from the license of
standardized database modules. Database licenses typically have a one-year
term with initial license fee revenue being recognized at the time the product
is shipped. Subsequent annual license fees are recognized on the contract
anniversary date. Revenue from services are recognized when the services are
performed. The Company accrues incidental customer support costs associated
with benchmarking database products when revenue is recognized. A voluntary
data contribution program is maintained whereby customers may receive a credit
against renewal license fees in exchange for raw data. Such amounts are
estimated and reduce revenue recognized at the time of initial shipment and
subsequent renewal dates.
The Company recognizes revenue in accordance with the provisions of
Statement of Position 91-1, "Software Revenue Recognition." License fees for
software products including, Claims Edit, ClaimsManager and Medical Bill
Advisor, 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.
Revenues from variable fee software contracts are recognized as earned.
Customer support costs for 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 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ---------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) per
share.................... $ (0.11) $ 0.01 $ 0.21 $ (0.08) $ 0.09
Shares used in computing
net income (loss) per
share.................... 1,042,000 7,329,000 7,873,000 1,591,000 7,909,000
</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 nine
months ended September 30, 1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods.
F-8
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", defines a fair value-based method of accounting for and
measuring compensation expense related to stock options or similar equity
instruments. The statement 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,
--------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
<S> <C> <C> <C>
Work in process.......................... $ 98,000 $ 39,000 $291,000
Finished goods........................... 904,000 997,000 196,000
---------- ---------- --------
$1,002,000 $1,036,000 $487,000
========== ========== ========
</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
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Computer equipment.................. $ 2,896,000 $ 3,451,000 $ 3,765,000
Furniture and fixtures.............. 622,000 640,000 639,000
Office equipment.................... 556,000 412,000 363,000
Computer software................... 165,000 165,000 147,000
Leasehold improvements.............. 140,000 146,000 140,000
----------- ----------- -----------
4,379,000 4,814,000 5,054,000
Less accumulated depreciation and
amortization....................... (2,951,000) (3,553,000) (3,846,000)
----------- ----------- -----------
$ 1,428,000 $ 1,261,000 $ 1,208,000
=========== =========== ===========
</TABLE>
3. BORROWINGS
Short-term Borrowing Arrangements
The Company has entered into a three year revolving line of credit facility
with a bank which provides for an initial principal amount of $5.0 million and
an interest rate of prime plus .25%. Beginning December 31, 1998 the available
principal amount will decrease by $200,000 quarterly. Borrowings are limited
to a percentage of eligible accounts receivable, inventory and equipment but
in no event will the available credit be less than $2.25 million provided that
the company remains in compliance with certain covenants. The covenants
include liquidity, leverage and coverage ratios, profitability requirements,
restrictions on additional indebtedness, payment of cash dividends on the
Company's capital stock and certain restrictions on acquisitions and
investments. Borrowings are secured by substantially all of the Company's
assets. At September 30, 1997, the Company was eligible to borrow $4.5 million
under its line of credit facility and was in compliance with covenants under
the credit agreement.
Long-term Debt
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
<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,
secured by equipment................... -- 482,000 --
Capital lease obligations with interest
at 6.25% to 17%, payable in monthly in-
stallments of $32,000 including inter-
est.................................... 689,000 252,000 --
--------- --------- ------
1,545,000 1,162,000 --
Less amounts due within one year........ (854,000) (877,000) --
--------- --------- ------
$ 691,000 $ 285,000 $ --
========= ========= ======
</TABLE>
F-10
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
Leases
The Company has entered into various long-term non-cancelable operating
leases 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 on these leases for fiscal years 1994, 1995 and 1996 and the
nine months ended September 30, 1997 of approximately, $653,000, $664,000,
$850,000 and $698,000, respectively.
Minimum future non-cancelable commitments under these leases as of September
30, 1997 are as follows:
<TABLE>
<CAPTION>
FACILITIES AND EQUIPMENT
YEAR ENDING DECEMBER 31, OPERATING LEASES
------------------------ ------------------------
<S> <C>
1997.............................................. $247,000
1998.............................................. 977,000
1999.............................................. 966,000
2000.............................................. 966,000
2001.............................................. 330,000
</TABLE>
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. STOCKHOLDERS' EQUITY
In September, 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. In
conjunction with the offering, the board of directors authorized, subject to
stockholder approval, the reincorporation of the Company in Delaware and a
1.466-for-one forward stock split of Common Stock. All share and per share
amounts, as well as the conversion ratio for the Series A Preferred Stock,
included in the accompanying financial statements have been retroactively
adjusted to reflect the forward stock split. 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. The preferred stock is issuable 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.
Preferred Stock
Under the terms of the Company's initial public offering as currently
contemplated, all shares of Series A Preferred Stock outstanding will
automatically convert on a 1.466-for-1 basis into 4,016,263 shares of common
stock upon completion of the offering. Such conversion is reflected in the pro
forma stockholders' equity at September 30, 1997 in the accompanying
consolidated balance sheet.
F-11
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Series A Preferred Stock (the Preferred Stock) is entitled to receive a
percentage dividend at the rate of 10% of the initial sales price of $4.76 per
share. Dividends on Preferred Stock are non-cumulative and are not payable
unless declared. To date, no dividends have been declared by the board of
directors. 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.
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.
In the event of any liquidation or dissolution of the Company, holders of
Preferred Stock are entitled to payment in an amount equal to $4.76 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
In connection with the issuance of Series A Preferred Stock, 1,060,386
warrants to purchase common stock were issued. The weighted average exercise
price of the warrants is $1.589. The warrants expire at the earlier of the
closing of the initial public offering of the Company's common stock, provided
that gross proceeds exceed $10 million, or 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 386,291 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 6.0% 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 Plans
The Company adopted a stock option plan in 1991 (the "1991 Plan") that
provides for the grant of incentive stock options to employees, and
nonstatutory options and stock purchase rights to employees, directors, and
consultants. As of September 30, 1997, the Company had reserved 2,932,000
shares of common stock under the 1991 Plan. Options are granted at an exercise
price of not less than the fair value per share of the common stock on the
date of grant and expire no later than ten years from the date of grant.
Options under the 1991 Plan generally vest 25% one year after the date of
grant and on a pro rata basis over the following 36 months. However, the board
of directors, at its discretion, may decide the period over which options
become exercisable. In some circumstances, options are immediately
exercisable, however the shares issuable upon exercise of the options are
subject to repurchase by the Company. The Company does not anticipate granting
additional options under the 1991 Plan after completion of its initial public
offering.
On September 16, 1997 the board of directors approved the 1997 Stock Plan
(the "1997 Plan"). A total of 750,000 shares of common stock (including the
607,500 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.
F-12
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1991, the Company granted two officers options to purchase 122,202
shares of common stock at an exercise price of $0.017 per share. These shares
were issued outside of the 1991 Plan and were issued at a discount to fair
market value.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, when the exercise
price of the Company's stock options equal the price set by the Company's
Board of Directors for the underlying stock as of the grant date, no
compensation expense is recognized.
For the fair value disclosure below, the compensation 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,
1996 and the nine months ended September 30, 1997, respectively; risk-free
interest rates of 7.75%, 6.5% and 6.25%, expected lives of 7 years, 6 years
and 6 years, expected dividend yields of 0% for all periods and expected
volatility of 60%, 70% and 70% (based on stock market prices for comparable
securities in the Company's industry).
Based on calculations using the Black-Scholes option pricing model, the
weighted-average fair value of options granted during 1995, 1996 and the nine
months ended September 30, 1997 was $0.58, $.82, and $2.66, respectively. The
pro forma impact on the Company's net income had compensation cost been
recorded under the fair value method is shown below.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996 1997
------- ---------- -------------
<S> <C> <C> <C>
Net income
As reported............................... $48,000 $1,629,000 $750,000
Pro forma................................. 22,000 1,555,000 645,000
Net income per share
As reported............................... .21 .09
Pro forma................................. .20 .08
</TABLE>
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 may not be representative of that to be
expected in future years.
The status of total stock options outstanding and exercisable as of
September 30, 1997 is as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
----------------------------- --------------------------
WEIGHTED
AVERAGE
REMAINING
RANGE OF NUMBER OF CONTRACTUAL WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES LIFE (YEAR) EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- --------------- ------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.017 - 3.33 628,463 3.65 1.04 628,462 $1.04
.51 - .85 370,408 6.92 .70 305,658 .68
.85 - 1.71 436,868 8.65 1.24 100,087 .85
2.73 - 4.09 268,891 9.75 3.93 -- --
--------------- ---------
1,704,630 1,034,207
=============== =========
</TABLE>
F-13
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING
----------------
SHARES AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
---------------- --------- ----------------
<S> <C> <C> <C>
Outstanding at December 31,
1993......................... 2,269,368 784,834 $ 1.49
Stock purchase agreement..... (17,445) -- --
Options granted.............. (636,730) 636,730 0.51
Options canceled............. 151,484 (151,484) (3.27)
--------- --------- ------
Balances at December 31, 1994. 1,766,677 1,270,080 0.80
Options granted.............. (187,648) 187,648 0.85
Options exercised............ -- (64,746) (.51)
Options canceled............. 103,844 (103,844) (.54)
--------- --------- ------
Balances at December 31, 1995. 1,682,873 1,289,138 0.84
Stock purchase agreements.... (421,475) -- --
Options granted.............. (478,649) 478,649 1.21
Options exercised............ -- (194,427) (0.52)
Options canceled............. 59,191 (59,191) (0.54)
--------- --------- ------
Balances at December 31, 1996. 841,940 1,514,169 1.01
Options granted.............. (268,891) 268,891 3.93
Options exercised............ -- (43,979) (1.00)
Options canceled............. 34,451 (34,451) (0.85)
--------- --------- ------
Balances at September 30,
1997.......................... 607,500 1,704,630 1.47
========= ========= ======
</TABLE>
The Company has adopted the 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 permits eligible employees to purchae 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. The price at
which common stock will be purchased under the Purchase Plan is equal to 85%
of the lower of the fair market value of the common stock on the first or last
day of each purchase period. The beginning of the first purchase period will
coincide with the closing of an initial public offering of the Company's
common stock.
F-14
<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,
--------------------- SEPTEMBER30,
1995 1996 1997
--------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued payroll and related costs....... $ 135,000 $ 95,000 $ 98,000
Reserve for bad debts................... 51,000 77,000 97,000
Reserve for sales returns............... 104,000 281,000 336,000
Inventory capitalization................ 65,000 56,000 44,000
Tax versus book depreciation............ 99,000 151,000 196,000
Losses and credits from subsidiary...... 285,000 285,000 285,000
Tax credits............................. 276,000 -- --
Other accrued expenses.................. 208,000 406,000 285,000
--------- ---------- ----------
Total deferred tax assets................ 1,223,000 1,351,000 1,341,000
Valuation allowance...................... (285,000) (285,000) (285,000)
--------- ---------- ----------
938,000 1,066,000 1,056,000
Deferred tax liabilities:
Other................................... (2,000) -- --
--------- ---------- ----------
Total deferred tax liabilities........... (2,000) -- --
--------- ---------- ----------
Net deferred tax asset................... $ 936,000 $1,066,000 $1,056,000
========= ========== ==========
</TABLE>
As of September 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."
F-15
<PAGE>
MEDICODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
--------- -------- ---------- -----------------
<S> <C> <C> <C> <C>
Current:
Federal................. $ (12,000) $155,000 $ 889,000 $382,000
State................... 3,000 30,000 182,000 58,000
--------- -------- ---------- --------
(9,000) 185,000 1,071,000 440,000
Deferred:
Federal................. (91,000) (74,000) (75,000) 7,000
State................... (6,000) (13,000) (55,000) 3,000
--------- -------- ---------- --------
(97,000) (87,000) (130,000) 10,000
--------- -------- ---------- --------
Provision for income tax-
es...................... $(106,000) $ 98,000 $ 941,000 $450,000
========= ======== ========== ========
The reconciliation of the statutory federal income tax rate to the provision
for income taxes is as follows:
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------------------- SEPTEMBER 30,
1994 1995 1997
--------- -------- -----------------
<S> <C> <C> <C> <C>
Tax provision computed at
the statutory rate of
34%..................... $ (74,000) $ 50,000 $ 874,000 $408,000
State taxes, net of fed-
eral benefit............ (8,000) 5,000 85,000 40,000
Increase (decrease) in
valuation allowance..... 139,000 90,000 -- --
Research credits......... (167,000) (67,000) (38,000) (20,000)
Other.................... 4,000 20,000 20,000 22,000
--------- -------- ---------- --------
$(106,000) $ 98,000 $ 941,000 $450,000
========= ======== ========== ========
</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.
In some plan years the Company may in its discretion make an additional
matching contribution. The Company's contribution vests over a five-year
period beginning with the employee's hire date. The Company recognized expense
for matching contributions of $78,000, $100,000, $104,000 and $87,000 for
fiscal 1994 , 1995, 1996 and the nine months ended September 30, 1997,
respectively. There have been no discretionary contributions made by the
Company since the inception of the 401(k) 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............................................ $ 9,758
NASD filing fee................................................. 3,720
Nasdaq National Market listing fee.............................. 40,000
Printing and engraving expenses................................. 175,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 150,000
Blue Sky fees and expenses...................................... 5,000
Transfer Agent and registrar fees............................... 10,000
Custodial fees.................................................. 5,000
Miscellaneous expenses.......................................... 101,522
--------
Total....................................................... $750,000
========
</TABLE>
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 1,661,868 shares of Registrant's Common Stock,
at exercise prices ranging from $0.51 to $4.09 per share. Since January
1, 1994, Registrant has issued 742,072 shares of Common Stock to
employees, consultants and directors upon exercise of stock options and
stock purchase rights.
(b) In January 1996, Registrant sold 386,291 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 35,184 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.
24.2 Supplemental Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed with the Commission.
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 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the 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 AMENDMENT NO. 1 TO 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 29TH DAY OF OCTOBER, 1997.
Medicode, Inc.
/s/ Eugene Santa Cattarina
By: _________________________________
Eugene Santa Cattarina,
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Eugene Santa Cattarina President, Chief
- ------------------------------------- Executive Officer October 29,
EUGENE SANTA CATTARINA and Director 1997
(Principal
Executive Officer)
/s/ Kevin W. Pearson Chief Financial
- ------------------------------------- Officer (Principal October 29,
KEVIN W. PEARSON Financial and 1997
Accounting Officer)
Director
* October 29,
- ------------------------------------- 1997
JOHN H. MORAGNE
Director
* October 29,
- ------------------------------------- 1997
MELVILLE H. HODGE
Director
* October 29,
- ------------------------------------- 1997
THOMAS F. STEPHENSON
Director
* October 29,
- ------------------------------------- 1997
L. JOHN WILKERSON
Director
* October 29,
- ------------------------------------- 1997
CARL WITONSKY
</TABLE>
/s/ Kevin W. Pearson
*By: ___________________________
Kevin W. Pearson, Attorney-in-fact
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our reports dated
October 27, 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 2,300,000 shares
its common stock.
Ernst & Young LLP
Salt Lake City, Utah
October 28, 1997
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of stockholder approval of changes to capital accounts described in Note 5 to
the financial statements.
/s/ Ernst & Young LLP
Salt Lake City, Utah
October 27, 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 September 30, 1997 and for each of the
three years in the period ended December 31, 1996, and the nine months ended
September 30, 1997 and have issued our report thereon dated October 27, 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.
Ernst & Young LLP
Salt Lake City, Utah
October 27, 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of stockholder approval of changes to capital accounts described in Note 5 to
the financial statements.
/s/ Ernst & Young LLP
Salt Lake City, Utah
October 27, 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
Nine months ended Sep-
tember 30, 1997........ 207,000 131,000 -- 76,000 262,000
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.
24.2 Supplemental Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed with the Commission.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 4.1
<S> <C> <C>
COMMON STOCK COMMON STOCK
MEDICODE(R)
POWER TO MAKE THE RIGHT DECISIONS(TM)
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN OPERATIONS
OF THE STATE OF DELAWARE AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVLEDGES AND
RESTRICTIONS ON SHARES
CUSIP 584691 10 9
______________________________________________________________________________________________________________________
THIS CERTIFIES THAT
is the record holder of
______________________________________________________________________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE PER SHARE, OF
MEDICODE, INC.
transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of
this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered
by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ /s/ Eugene Santa Catherine
CHIEF OPERATING OFFICER, [MEDICODE SEAL APPEARS HERE]
CHIEF FINANCIAL OFFICER AND SECRETARY CHIEF EXECUTIVE OFFICER AND PRESIDENT
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/ L.M. KAUFMAN
AUTHORIZED SIGNATURE
</TABLE>
<PAGE>
A statement of the powers, designations, preferences and 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 as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable lows or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ........................Custodian........................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of Under Uniform Gifts Minors
survivorship and not as tenants Act....................................
in common (State)
COM PROP -- as community property UNIF TRF MIN ACT -- ........................Custodian (until age.............)
(Cust)
........................under Uniform Transfers
(Minor)
to Minors Act..................................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________hereby sell, and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute end appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated__________________________
X ________________________________________
X ________________________________________
NOTICE: THE SIGNATURE(S) TO THE ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17AD-16.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI APPEARS HERE]
October 28, 1997
Medicode, Inc.
5225 Wiley Post Way, Suite 500
Salt Lake City, Utah 84116
RE: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 to be filed by you
with the Securities and Exchange Commission on September 24, 1997 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 2,300,000 shares of Common Stock of
Medicode, Inc. (the "Shares"), including 1,550,000 shares to be offered by the
Company and 750,000 shares to be offered by certain selling shareholders. As
your counsel in connection with this transaction, we have examined the
proceedings proposed to be taken in connection with said sale and issuance of
the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, the Shares when issued and sold in the manner referred to in the
Registration Statement will be legally and validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part hereof, and
any amendment thereto and any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) and all post-effective amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 10.6
FIFTH AMENDMENT TO LEASE
THIS FIFTH AMENDMENT TO LEASE ("FIFTH AMENDMENT")is made and entered the day
June 16, 1995 by and between E & H Investments, Inc. (hereinafter called
"Landlord"), and Medicode, Inc.(hereinafter called "Tenant").
WITNESSETH
WHEREAS, on the 28th day of December, 1990, Landlord and Tenant entered in a
Lease Agreement for certain premises located in Lakeside Plaza II, 5225 Wiley
Post Way, Salt Lake City, Utah ("Original Lease"), and,
WHEREAS, Landlord and Tenant desire to amend certain portions of said Original
Lease.
NOW, THEREFORE, the parties hereto, hereby agree that the Lease be amended as
follows:
DESIGNATED LEASE PREMISES:
Designated lease premises to be Suite 500 consisting of approximately
21,516 rentable square feet, Suite 200 consisting of approximately 21,516
rentable square feet, Suite 425 consisting of approximately 7332 rentable
square feet, totaling 50,364 rentable square feet, in Lakeside Plaza II,
5225 Wiley Post Way, Salt Lake City, Utah.
TERM EXPIRATION:
This lease is now renewed from May 1, 1996 for a period of five years
expiring May 1, 2001.
BASE RENT
Tenant's new lease rate per rentable square foot, full service, shall be as
follows: 11.56 per rsf-, subject to an annual CPI increase. Amortization
of tenant improvements of $300,000.00 to be paid at 1. 19 per sq. ft.
TENANT'S PERCENTAGE PRO RATE SHARE OF EXCESS OPERATING EXPENSES
In addition to Base Rent, Tenant will pay its pro rata share of Excess
Operating Expenses, at $3.00 per sq. ft. subject to CPI increases.
Except as amended herein, all other terms and conditions of the Lease shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed the Fifth Amendment to
Lease on the day and year first written above.
<PAGE>
FIFTH AMENDMENT TO LEASE
TENANT LANDLORD
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MEDICODE, INC. E & H INVESTMENTS, INC.
- -------------- -----------------------
By: /s/ Kevin W. Pearson By: /s/ Illegible
- --------------------------- ---------------------------
Its: C.F.O. Its: PRESIDENT
- --------------------------- ---------------------------
Attest: Attest:
- --------------------------- ---------------------------
<PAGE>
FOURTH AMENDMENT TO LEASE
THIS FOURTH AMENDMENT TO LEASE ("FOURTH AMENDMENT") is made and entered the 15th
day of June, 1995 by and between E & H Investments, Inc. (hereinafter called
"Landlord"), and Medicode, Inc. (hereinafter called "Tenant").
WITNESSETH
WHEREAS, on the 28th day of December, 1990, Landlord and Tenant entered in a
Lease Agreement for certain premises located in Lakeside Plaza II, 5225 Wiley
Post Way, Salt Lake City, Utah ("Original Lease"), and,
WHEREAS, Landlord and Tenant desire to amend certain portions of said Original
Lease.
NOW, THEREFORE, the parties hereto, hereby agree that the Lease be amended as
follows:
DESIGNATED LEASE PREMISES:
Suite 400 will be increased by adding approximately 1470 rentable square
feet (rsf) in Lakeside Plaza II as shown crosshatched on the drawing
attached as Exhibit "A" to this Amendment.
RENT
The rent for the additional space shall commence effective occupancy in
1995.
REQUIRED OCCUPANCY DATE
Occupancy will be immediately; after completion of the remodel of Suite
400.
Except as amended herein, all other terms and conditions of the Lease shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed the First Amendment to
Lease on the day and year first written above.
TENANT: LANDLORD:
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MEDICODE, INC. E & H INVESTMENTS INC.
- -------------- ----------------------
By: /s/ Kevin W. Pearson By: /s/ Illegible
- ---------------------------- ----------------------------
Its: C.F.O. Its: /s/ PRESIDENT
- ---------------------------- ----------------------------
Attest: Attest:
/s/ Illegible
- ---------------------------- -----------------------------
<PAGE>
THIRD AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE is made and entered into this first day of May, 1993, by
and between E & H INVESTMENTS (hereinafter called "Landlord"), and MEDICODE,
INC. (hereinafter called "Tenant").
WITNESSETH
WHEREAS, on December 28, 1990, Landlord and Tenant entered into Lease for
certain premises located in the Lakeside Plaza II Building at 5225 Wiley Post
Way, Salt Lake City, and,
WHEREAS, Landlord and Tenant desire to amend certain portions of said lease,
NOW, THEREFORE, the parties hereto, hereby agree as follows:
1. Designated Leased Premises:
This is amended to be Suite 500 consisting of approximately
21,227 rentable square feet, Suite 200 consisting of
approximately 21,227 rentable square feet, and Suite 400
consisting of approximately 5,242 rentable square feet located in
Lakeside Plaza II, 5225 Wiley Post Way, Salt Lake City, Utah.
1. Rent:
Tenant's new Lease rate per rentable square foot, full service,
shall be as follows:
$10.00 per rsf-$476,960.00, annually, subject to an annual
CPI increase.
2. Expense Stop:
Tenant's pro-rata share of expenses shall be computed as follows:
<TABLE>
<S> <C>
$2.50 expense stop (tenant pays first $2.50 per foot of expenses)
X 47,696 rentable square feet
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$119,240.00 annual expenses throughout term of Lease.
</TABLE>
This amount per foot shall remain throughout the entire term of
the Lease, and shall not be subject to expense increases of the
building, nor subject to any expense decreases.
3. Rental Increases:
Cost of Living Adjustment. Effective on the anniversary date of
this Amendment of each year during the term of this lease, the
Guaranteed Minimum Monthly Rental in effect immediately preceding
such adjustment that the consumer price index for the preceding
month bears to the consumer price index for the same month for
the prior year. However, in no event shall the rent be reduced
below the Guaranteed Minimum Monthly Rental in effect
<PAGE>
immediately preceding such adjustment. The consumer price index
to be used is the Consumer Price Index For all Urban Consumers -
All Items, for the United States, published monthly by the United
States Department of Labor, in which 1967 equals 100. The maximum
increase shall not exceed four (4%) percent. If said Consumer
Price Index is no longer published at the adjustment date, it
shall be that the Base Rent shall be increased automatically by
four (4%) percent upon each lease anniversary date.
4. All other terms and conditions of the Lease shall remain the same.
IN WITNESS WHEREOF, the parties hereto execute this Amendment to Lease on the
day and year first written above.
TENANT: LANDLORD:
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MEDICODE, INC. E & H INVESTMENTS, INC.
By: /s/ Illegible By: /s/ Illegible
--------------------------- --------------------------------------
Title: Secretary Title: PRESIDENT
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Date: 4/28/93 Date: 4-28-93
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<PAGE>
SECOND AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE is made and entered into this first day of May, 1992 by
and between E & H INVESTMENTS (hereinafter called "Landlord"), and MEDICODE,
INC. (hereinafter called "Tenant").
WITNESSETH
WHEREAS, on December 28, 1990, Landlord and Tenant entered into Lease for
certain premises located in the Lakeside Plaza II Building at 5225 Wiley Post
Way, Salt Lake City, and,
WHEREAS, Landlord and Tenant desire to amend certain portions of said lease,
NOW, THEREFORE, the parties hereto, hereby agree as follows:
1. Designated Leased Premises:
This is amended to be Suite 500 consisting of approximately
21,227 rentable square feet and Suite 200 consisting of
approximately 21,227 rentable square feet, located in Lakeside
Plaza II, 5225 Wiley Post Way, Salt Lake City, Utah.
1. Rent:
Tenant's new Lease rate per rentable square foot, full service,
shall be as follows:
$10.00 per rsf-$424,540.00 annually, subject to an annual
CPI increase.
2. Expense Stop:
Tenant's pro-rata share of expenses shall be computed as follows:
<TABLE>
<S> <C>
$2.50 expense stop (tenant pays first $2.50 per foot of expenses)
X 42454 rentable square feet
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$106,135.00 annual expenses throughout term of Lease.
</TABLE>
This amount per foot shall remain throughout the entire term of
the Lease, and shall not be subject to expense increases of the
building, nor subject to any expense decreases.
3. Rental Increases:
Cost of Living Adjustment. Effective on the anniversary date of
this Amendment of each year during the term of this lease, the
Guaranteed Minimum Monthly Rental in effect immediately preceding
such adjustment that the consumer price index for the preceding
month bears to the consumer price index for the same month for
the prior year. However, in no event shall the rent be reduced
below the Guaranteed Minimum Monthly Rental in effect immediately
preceding such adjustment. The consumer price index to be used
<PAGE>
is the Consumer Price Index For all Urban Consumers - All Items,
for the United States, published monthly by the United States
Department of Labor, in which 1967 equals 100. The maximum
increase shall not exceed four (4%) percent. If said Consumer
Price Index is no longer published at the adjustment date, it
shall be that the Base Rent shall be increased automatically by
four (4%) percent upon each lease anniversary date.
4. All other terms and conditions of the Lease shall remain the same.
IN WITNESS WHEREOF, the parties hereto execute this Amendment to Lease on the
day and year first written above.
TENANT: LANDLORD:
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MEDICODE, INC. E & H INVESTMENTS, INC.
By:/s/ Eileen Shanon By: /s/ Illegible
-------------------- ---------------------------
Title: President Title: PRESIDENT
----------------- -------------------------
Date: 5-1-92 Date: 1st May 1992
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2
<PAGE>
FIRST AMENDMENT TO LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT is made and entered into as of the
31 day of May, 1991 by and between E & H INVESTMENTS, INC., a Washington
- --
corporation ("Landlord") and MEDICODE OF UTAH, a Utah corporation (the
"Tenant").
WHEREAS, under that certain Lease Agreement dated December 28, 1990 (the
"Lease Agreement"), Landlord leased to Tenant the Designated Lease Premises (as
defined in such Lease Agreement); and
WHEREAS, Landlord and Tenant wish to amend the Lease Agreement as provided
herein to add to the Designated Lease Premises certain additional space located
on the Fourth Floor of Lakeside Plaza 2;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, and for good and valuable consideration the receipt and
sufficiency for which are hereby acknowledged, the parties agree as follows:
1. Description of the Premises. Section 1.05 of the Lease Agreement is
---------------------------
hereby amended in its entirety to read as follows:
1.05 Designated Lease Premises. Suite 500 consisting of approximately
-------------------------
21,227 rentable square feet, and Suite 425 consisting of approximately
5,242 rentable square feet, each located in Lakeside Plaza 2, at Salt Lake
International Center in Salt Lake City, Utah.
2. Base Rent. Section 1.09 of the Lease Agreement is hereby amended in its
---------
entirety to read as follows:
1.09 Base Rent (monthly amount). $18,748,88.
-------------------------
3. Additional Rent. Section 1.15 of the Lease Agreement is hereby amended
---------------
in its entirety to read as follows:
1.15 Tenant's Percentage Pro Rata Share of Excess Operating Expenses:
26%.
4. Leased Premises. Exhibit A of the Lease Agreement, which is referred to
---------------
in Section 2 of the Lease Agreement, is hereby amended to add the plat attached
hereto as Exhibit A-1.
The Lease Agreement shall remain in full force and effect as herein
modified or amended or except as has been previously modified or amended.
IN WITNESS WHEREOF, this First Amendment to Lease Agreement has been
executed the day and year first hereinabove written.
<PAGE>
LANDLORD
E & H Investments, Inc.,
By_____________________
Its____________________
TENANT
Medicode of Utah
By /s/ Illegible Eileen Shanon
---------------------------------------
Its Secretary President
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<PAGE>
Exhibit A-1
[IMAGE NOT SHOWN]
<PAGE>
LAKESIDE PLAZA
--------------
LEASE AGREEMENT
---------------
(Full Service)
THIS LEASE AGREEMENT is made by and between E & H INVESTMENTS, INC., a
Washington corporation (hereinafter called "Landlord"), and MEDICODE OF UTAH, a
Utah corporation (hereinafter called "Tenant"),
W I T N E S S E T H:
In consideration of the rents, covenants and agreements hereinafter set
forth, Landlord demises and leases to Tenant and Tenant leases from Landlord the
hereinafter described premises upon the following terms and conditions:
<TABLE>
<CAPTION>
1.00 FUNDAMENTAL LEASE PROVISIONS
----------------------------
<C> <S>
1.01 Date of Lease Agreement: December 28, 1990
1.02 Landlord's Address for Payment of Rent and for Notice: E & H Investments, Inc., 1220 116th N.E., Bellevue,
WA 98004
1.03 Tenant's Trade Name: MEDICODE, INC.
1.04 Tenant's Address for Notice: 5225 Wiley Post Way, Suite 500, Lakeside Plaza #2, Salt Lake City, UT
84116
1.05 Designated Lease Premises: Suite 500 consisting of approximately 21,227 rentable square feet, located in Lakeside
Plaza 2, at Salt Lake International Center in Salt Lake City, Utah.
1.06 Term Commencement: March 1, 1991
l.07 Term Expiration: February 28, 1996, for a term of 5 years.
1.08 Permitted Uses: General office use. Leased premises shall not be used for any other purposes whatsoever.
1.09 Base Rent (monthly amount): $15,035.80
1.10 Prepaid Rent: Rent due March 1, 1991
1.11 Rent Commencement Date: March 1, 1991
1.12 Security Deposit: None
1.13 Required Occupancy Date: March 1, 1991
l.l4 Parking: 110 unreserved stalls.
1.15 Tenant's Percentage Pro Rata Share of Excess Operating Expenses: 20.96%
</TABLE>
<PAGE>
1.16 Tenant's Base Year: 1991
1.17 Rider Summary: None
2.00 LEASED PREMISES
---------------
Landlord, for and in consideration of the covenants and agreements
hereinafter set forth to be kept and performed by Tenant, does hereby demise and
lease to Tenant (for the term hereinafter stipulated) the premises (herein
called the "premises") being that portion of a building, as shown crosshatched
on the plat attached hereto and made a part hereof as Exhibit A, to be located
in the building designated in Article 1.05 (hereinafter called the "Building")
which is a part of the development in the City of Salt Lake City, County of Salt
Lake and State of Utah, known as "Lakeside Plaza" and shown on the plat attached
hereto and made a part hereof as Exhibit B (the "Development"), said premises
being more particularly described in Article 1.05.
3.00 RENT
----
Tenant does hereby covenant and agree with Landlord to pay to Landlord
without deduction or set-off of any kind, rental comprised of both Base Rent and
Additional Rent as hereinafter described:
3.01 Base Rent. Base Rent in the amount designated in Article 1.09
---------
shall be paid in advance, the first installment being prepaid as set forth in
Article 1.10, upon the first day of each and every month during the term hereof,
commencing upon the date on which rental is determined to commence under the
provisions of Article 1.11 hereof and ending according to the provisions of
Article 1.07. In the event such rental shall be determined under the provisions
of Article 1.11 hereof to commence on a day other than the first day of a month,
then the monthly installment of the Base Rent for the period from such
commencement date until the first day of the month next following shall be
prorated accordingly.
3.02 Additional Rent. Tenant shall pay as Additional Rent its pro
---------------
rata share as set forth in Article 1.15 of Excess Operating Expenses over
Operating Expenses for the Base Year, all as defined in Article 20. Such
Additional Rent shall be paid in monthly installments on or before the first day
of each calendar month, in advance, in an amount estimated by Landlord. In
addition, amounts due under Articles 9 and 21 shall be paid upon demand as
Additional Rent.
3.03 Interest and Late Charges. If Tenant fails to pay within ten (10)
------------------------- --------
days of the date due ay rent or other amounts or charges which which Tenant is
obligated to pay under the terms of this lease Agreement, the unpaid amount
shall bear interest at the rate of eighteen (18%) per annum. Tenant acknowledges
that the late payment of any monthly installment of base rent will cause
Landlord to lose the use of that money and incur costs and expenses not
contemplated under this lease, including without limitation, administrative and
collection costs and processing and accounting expenses, the exact
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amount of which is extremely difficult to ascertain. Therefore, in addition to
interest, if any such installment is not received by Landlord within five (5)
ten (10) days from the date it is due, Tenant shall pay Landlord to partially
- --------
reimburse Landlord for the additional cost of handling such payment and for the
inconvenience and loss of the use of such money a late charge of $250.00.
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Acceptance of any interest or late charge shall not constitute a waiver
of Tenant's default with respect to such nonpayment by Tenant nor prevent
Landlord from exercising any other rights or remedies available to Landlord
under this lease.
3.04 Prepayment Prohibited. Tenant may not prepay any sums due
---------------------
hereunder more than one month in advance.
4.00 SECURITY DEPOSIT [NA]
----------------
5.00 CONSTRUCTION OF PREMISES
------------------------
Landlord agrees, at Landlord's expense, to perform Landlord's work in the
construction of the premises substantially in accordance with outlined
specifications entitled "Description of Landlord's Work," attached hereto and
made a part hereof as Exhibit C. All work on the premises other than that to be
so performed by Landlord is to be done by Tenant, at Tenant's expense
(hereinafter called "Tenant's Work"), and shall be subject to the provisions of
this lease and the exhibits incorporated herein.
5.01 Tenant's Contractor's Insurance. Tenant shall require any building
-------------------------------
contractor of Tenant performing work in, on or about the premises to obtain and
maintain at no expense to Landlord;
(a) Commercial General Liability Insurance, including a Broad Form
General Liability Endorsement in the amount of $1,000,000 naming Landlord and
Tenant as additional insured.
(b) Worker's Compensation Insurance for all contractor's employees
working in the premises in an amount sufficient to comply with applicable laws
or regulations.
(c) Employers Liability in an amount not less than $100,000.
(d) Any other insurance as Tenant, Landlord or its mortgagee may
require from time to time.
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<PAGE>
5.02 Rules and Regulations. In the construction of the premises, Tenant
---------------------
shall conform to, and comply with, all federal, state, county and local laws,
ordinances, permits, rules and regulations applicable thereto.
5.03 Liability. In the event Landlord's Work and Tenant's Work shall
---------
progress simultaneously, Landlord shall not be liable for any injury to person
or damage to property of Tenant, or of Tenant's employees, licensees or
invitees, from any cause whatsoever occurring upon or about the premises unless
------
caused by the negligent or intentional acts or omissions of Landlord's agents or
- --------------------------------------------------------------------------------
employees, and Tenant shall and will indemnify and save Landlord harmless from
- ---------
any and all liability and claims arising out of or connected with any such
injury or damage,
5.04 Delay. Tenant hereby releases Landlord from any claim whatsoever
-----
for damages against Landlord for any delay in the date on which the premises
shall be ready for delivery to Tenant.
5.05 Required Occupancy Date. Notwithstanding anything contained in this
-----------------------
lease to the contrary, Tenant is required to open for business to the public in
the leased premises on or before the date set forth in Article 1.13.
6.00 ADDITIONAL CONSTRUCTION
-----------------------
Landlord hereby reserves the right at any time to make repairs, alterations
or additions to, and to build additional stories on, the building in which the
premises are contained and to build adjoining the same. Landlord also reserves
the right to construct other buildings or improvements including elevated or
multiple-deck parking facilities on Landlord's property from time to time and
make alterations or additions thereto, and to build additional stories on any
such building or buildings, and to build adjoining same. Any such repairs,
alterations or additions may affect the locations and size of the common areas
without affecting the terms and conditions of this lease.
7.00 CONDITION OF PREMISES
---------------------
Prior to taking possession of the premises, Tenant shall inspect the
premises; Landlord may accompany Tenant during such inspection with a completion
punch list. Tenant's taking possession of the premises shall be conclusive
evidence of Tenant's acceptance thereof in good order and satisfactory
condition, subject only to those items noted during such inspection by Tenant
and Landlord on the punch list as an uncompleted item and the subsequent
------------------
completion of such items by Landlord to the reasonable satisfaction of Tenant.
- -----------------------------------------------------------------------------
Tenant agrees that no representations, respecting the condition of the premises
and no promises to decorate, alter, repair or improve the premises either before
or after the execution hereof, have been made by Landlord or its agents to
Tenant unless the same are expressly contained herein or made a part hereof or
so noted on the punch list.
Landlord is not aware of any hazardous wastes or substances or underground
storage tanks on the premises; however, Landlord has not performed an
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<PAGE>
environmental inspection or audit and makes no representations or warranties
regarding the existence or absence of hazardous wastes or substances or
underground storage tanks on the premises. Tenant acknowledges that it is of
sufficient sophistication and financial ability to evaluate the risk of the
presence of hazardous wastes or substances on the premises and determining
whether to employ its own experts to advise Tenant concerning such risks.
8.00 ALTERATIONS
-----------
Tenant shall not make any structural or mechanical alterations in any
portion of the premises, nor any alterations in the exterior of the premises,
nor any interior alterations without, in each instance, first obtaining the
written consent of Landlord. All alterations, additions, improvements, and
Tenant's Work provided for herein, shall become, upon completion, the property
of Landlord, subject to the terms of this lease. Any work so performed
hereunder by Tenant shall be in conformity with those portions of this lease
applicable to the initial construction of the premises.
9.00 REPAIRS AND MAINTENANCE
-----------------------
Landlord agrees, at its expense, to keep the roof, foundations, plumbing,
--------
sprinkler mains, structural systems, and curtain walls of the premises including
---------
plate glass in good condition and repair, but Landlord shall not be obligated to
- -----------
repair any such damage caused by the same being or becoming out of repair until
it has had reasonable opportunity to have the same repaired after being notified
in writing of the need of same by Tenant. In no way shall Landlord incur any
expense for such repairs and maintenance where such repair and maintenance is
occasioned by Tenant's negligence. Landlord shall not be liable to Tenant for
any damage to trade fixtures or personal property of Tenant in the premises
caused by water leakage from roof, water lines, sprinkler or heating and air
conditioning equipment. Landlord agrees to maintain all heating, ventilating and
cooling systems and all elevators and escalators within the Development and
Tenant agrees to reimburse Landlord for Tenant's pro rata share of said expenses
on a pro rata basis in the same manner as is set forth in Articles 3.02 and 20
herein. Tenant agrees, at Tenant's expense, to keep all other parts of the
premises, in good order and repair, clean, sanitary and safe, including the
replacement of equipment, fixtures and any non-standard electrical wiring
fixtures or equipment and to paint the interior when necessary in order to
maintain at all times a clean and sightly appearance. If Tenant refuses or
neglects to make repairs and/or maintain the premises, or any part thereof, in a
manner reasonably satisfactory to Landlord, Landlord shall have the right, upon
giving Tenant reasonable written notice of its election to do so, to make such
repairs or perform such maintenance on behalf of and for the account of Tenant.
In such event, such work shall be paid for by Tenant as Additional Rent promptly
upon receipt of a bill therefor, which shall include amounts for profit and
overhead.
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<PAGE>
10.00 FIXTURES AND PERSONAL PROPERTY
------------------------------
Any trade fixtures, signs or other personal property of Tenant not
permanently affixed to the premises shall remain the property of Tenant, and
Landlord agrees that Tenant shall have the right, provided Tenant is not in
default under the terms of this lease, at any time, and from time to time, to
remove any and all of its trade fixtures, signs and other personal property
which may be located or installed in the premises. Tenant at its expense shall
immediately repair any damage occasioned to the leased premises by reason of the
removal of any such trade fixtures, signs or other personal property, and upon
expiration or earlier termination of this lease, shall leave the leased premises
in a neat and clean condition, free of debris. Tenant shall pay before
delinquency all taxes, assessments, license fees and public charges levied,
assessed or imposed on its business operation in the leased premises as well as
upon its trade fixtures, leasehold improvements (including, but not limited to,
those Tenant is required to make in accordance with the provisions of Article 5
hereof), and other personal property in, on or about the leased premises. If
any such items of property are assessed with property of Landlord, then such
assessment shall be equitably divided between Landlord and Tenant to the end
that Tenant shall pay only its equitable proportion of such assessment.
Landlord shall determine the basis of so prorating any such assessments and such
determination shall be binding upon Landlord and Tenant. No taxes, assessments,
fees or charges referred to in this paragraph shall be considered as taxes under
the provisions of Article 20 hereof.
11.00 LIENS
-----
Tenant agrees to pay promptly for any work done by or for the account of
Tenant (or material furnished therefor) in or about the premises, and Tenant
shall not permit or suffer any lien to attach to the premises and shall within
ten (10) days cause any such lien, or any claim therefor to be released;
provided, however, that in the event Tenant contests any such claim, Tenant
agrees to indemnify Landlord and, if requested, to deposit with Landlord cash or
a surety bond in form and with a company satisfactory to Landlord in an amount
equal to twice the amount of such contested claim. Tenant agrees to indemnify
Landlord for, and hold Landlord harmless from and against, any and all loss,
costs, damage, liability or expense (including attorney's fees) arising out of
or in connection with any work done by or for the account of Tenant.
12.00 INSURANCE
---------
12.01 Insurance by Landlord. Landlord may maintain insurance for those
---------------------
perils and in amounts which would be considered prudent for similar income type
property situated in the general area of the Building or which is required by
any mortgagee or creditor of Landlord. The name insured on all policies of
insurance maintained by Landlord shall be the Landlord, and if required, any
mortgagee or creditor of Landlord. Cost of all insurance maintained by Landlord
shall be considered as a part of the Operating Expenses for the Building, as
referred to in Article 20.
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<PAGE>
12.02 Insurance by Tenant. Tenant shall during the term of this lease
-------------------
and at Tenant's cost, obtain and keep in effect, insuring Tenant, Landlord and
all mortgagees and any other person or entity designated by Landlord as having
an interest in the Building or land upon which it is situated (as their
interests may appear), the following insurance:
Insurance upon all property situated in the premises owned by
Tenant or for which Tenant is legally liable and on fixtures and improvements
installed in the premises by or on behalf of Tenant. Such policies shall be for
an amount of not less than 100% of the full replacement cost with coverage
against at least fire with standard extended coverage, vandalism, malicious
mischief, sprinkler leakage and water damage, If there is a dispute as to the
replacement cost amount, the decision of the Landlord acting in a reasonable
----------------------
manner shall be conclusive.
- ------
Business interruption insurance in an amount sufficient to
reimburse Tenant for direct or indirect loss of earnings attributable to perils
commonly insured against by prudent tenants or attributable to prevention of
access to the Building or premises as a result of such perils.
Commercial General Liability insurance including fire, legal
liability and contractual liability insurance coverage with respect to the
Building and the premises. The coverage is to include activities and operations
conducted by Tenant and any other person in the premises and Tenant and any
other person performing work on behalf of Tenant and those for whom Tenant is by
law responsible in any other part of the Building. Such insurance shall be
written on a comprehensive basis with inclusive limits of not less than
$1,000,000 Dollars for each occurrence for bodily injury and property damage or
such higher limits as the Landlord, acting reasonably, may require from time to
time. The limit of said insurance shall not, however, limit the liability of the
tenant hereunder. Landlord shall be named as an additional insured on all
liability policies maintained by Tenant.
Worker's Compensation insurance for all Tenant's employees working
in the premises in an amount sufficient to comply with applicable laws or
regulations.
Any other form of insurance as the Tenant, Landlord or its
mortgagee, acting reasonably may require from time to time. Such insurance shall
be in the form, amounts and for the risks which a prudent Tenant would insure.
All policies of insurance maintained by Tenant shall be in a form
acceptable to Landlord; issued by an insurer licensed to do business in Utah and
require at least 30 days written notice to Landlord of termination or material
alteration and waive, to the extent available, any right of subrogation against
Landlord. All policies shall provide that the interests of Landlord, its
mortgagee or those named insureds designated by Landlord shall not be
invalidated because of any breach or violation of any warranties,
representations, declarations or conditions contained in the policies. All
policies must contain a severability of interest clause, a cross-liability
clause and shall be primary and shall not call into contribution any other
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<PAGE>
insurance available to Landlord, its mortgagee, or those named insureds
designated by Landlord. If requested by Landlord, Tenant shall upon the
commencement date of this lease and thereafter within 15 days prior to the
expiration of each such policy, promptly deliver to Landlord certified copies or
other evidence of such policies and evidence satisfactory to Landlord that all
premiums have been paid and policies are in effect.
If Tenant fails to secure or maintain any insurance coverage
required by Landlord or should insurance secured not be approved by Landlord and
such failure or approval not be corrected within 48 hours after written notice
from Landlord, Landlord may, without obligation, purchase such insurance
coverage required at Tenant's expense. Tenant shall promptly reimburse Landlord
for any monies expended.
12.03 Plate Glass. Landlord shall be responsible for the maintenance,
----------- --------
repair and replacement of the plate glass in or on the premises but shall have
the option either to insure the risk or to self insure,
13.00 INDEMNIFICATION
---------------
Tenant shall and will indemnify and save harmless Landlord, and any other
lessee, owner, independent contractor and/or operator in the Office Building or
Development, their agents, officers and employees, from and against any and all
loss, cost and liability, claims, demands, expenses, fees, fines, penalties,
suits, proceedings, actions, and causes of action of any and every kind and
nature arising or growing out of or in any way connected with Tenant's use,
occupancy, management or control of the premises and/or Tenant's operations or
activities in the Office Building and/or Development; provided that the
foregoing provision shall not be construed to make Tenant responsible for
losses, claims and costs associated therewith resulting from the gross
negligence or willful misconduct of Landlord or of any officer, employee or
agent contractor of Landlord. Landlord shall not be liable for any loss or
damages incurred by Tenant as a result of the negligence or willful misconduct
of any third party including other tenants of Landlord.
This obligation to indemnify shall include but not be limited to
reasonable legal and investigation costs and all other reasonable costs, expense
and liabilities from the first notice that any claim or demand is to be made or
nay be made whether or not a claim is actually made.
14.00 ACCESS TO PREMISES
------------------
Tenant agrees that Landlord, its agents, employees, lenders, or servants,
or any person authorized by Landlord, may enter the premises for the purpose of:
(a) inspecting the condition of the same; (b) making such repairs, additions or
improvements thereto, or to the building of which they are a part, as Landlord
may elect or be required to make; (c) exhibiting the same to prospective
purchasers or prospective lenders of the building in which the promises are
contained; and (d) exhibiting the premises to prospective tenants during the
last sixty (60) days of the term hereof, and during such
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last 60 days placing notices in and upon said premises at such places as may be
determined by Landlord. Tenant agrees that neither Tenant nor any person within
Tenant's control will interfere with such notices. Landlord shall not disturb
Tenant's conduct of business except in cases of emergency. Landlord shall not be
liable to Tenant for any damage caused by any such entry except where such
damage is caused by Landlord's gross negligence or willful misconduct.
15.00 SURRENDER OF PREMISES
----------------------
Tenant shall, upon expiration of the term hereof, or earlier termination
of this lease for any cause, effect the following:
15.01 Building Apparatus. Surrender to Landlord the premises including,
------------------
without limitation, all building apparatus, equipment then upon the premises,
and all alterations, improvements and other additions thereto that may have been
made or installed by either party to, in, upon or about the premises. If Tenant
shall not be then in default, Tenant may remove its trade fixtures, signs and
other personal property including moveable partitions, but not including light
-----------------------------
fixtures, floor and wall coverings, and fixed permanent partitions, which items
---------------
shall remain in the premises and become the property of Landlord without any
payment therefore. The removal by Tenant of all such apparatus, equipment and
personal property shall be done under Landlord's supervision and any damage
occasioned by such removal shall be promptly repaired by Tenant at Tenant's
expense and to Landlord's specifications.
15.02 Tenant in Default. If Tenant shall be then in default, Tenant
-----------------
shall not have the right to remove any of said trade fixtures, signs and other
personal property and the same shall remain and become the property of Landlord.
Provided the Landlord agrees to execute a Landlord's waiver in favor of any
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seller of personal property or lender financing Tenant's purchase of personal
- -----------------------------------------------------------------------------
property, and such personal property shall not be subject to this provision.
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15.03 Damage to Premises. The premises and all said property (other
------------------
than the trade fixtures, signs and other personal property which Tenant has the
right to remove) shall be surrendered to Landlord by Tenant without any damage,
injury, or disturbance thereto, or payment therefor. Tenant at its expense shall
immediately repair any damage to the premises caused by his vacating the same or
by Tenant's removal of such trade fixtures, signs and other personal property,
and shall leave the premises in a neat and clean condition, free of debris.
15.04 Failure to Remove Fixtures. If Tenant fails to remove said trade
--------------------------
fixtures, signs and other personal property, which Tenant has a right to remove
pursuant hereto, at or prior to the termination of the term hereof, or earlier
termination of the lease, Landlord may, at its election (i) consider the same
abandoned and remove and dispose of the same as Landlord's property, or (ii)
remove and store the same for the account of Tenant and at Tenant's cost and
expense.
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15.05 Survival of Obligations. Tenant's obligation to observe and
-----------------------
perform any of the provisions of this Article shall survive the expiration of
the term hereof or earlier termination of this lease.
16.00 TENANT'S CONDUCT OF BUSINESS
----------------------------
Tenant covenants and agrees that it will operate during normal business
hours and such other hours as it desires and conduct within the premises the
----------------------------------
business it is permitted to operate and conduct under the provisions of this
lease, except while the premises are untenable by reason of fire or other
casualty. Tenant agrees to conduct its business at all times in a first class
manner consistent with reputable business standards and practices and that it
will keep the premises in a neat, clean and orderly condition.
17.00 RULES AND REGULATIONS
---------------------
Tenant covenants and agrees that Tenant will comply with reasonable rules
and regulations set by Landlord from time to time for the operation of the
Office Building and Development. A copy of the Building Rules and Regulations
as presently adopted by Landlord are attached hereto as Exhibit D. Landlord
shall not be liable to Tenant for the violation of any rules or regulations or
the breach of any provisions in any lease by any other Tenant of the Office
Building or Development.
18.00 TENANT'S PROPERTY
-----------------
Landlord, its agents or employees shall not be liable and Tenant waives
all claims for any damage to persons or property located on the premises,
sustained by Tenant or any person claiming through Tenant nor for the loss of or
damage to any property of Tenant or of others whether caused by the Building or
premises being out of repair or by the bursting or leakage of any water, gas,
sewer or steam pipe or by theft or otherwise, whether caused by other tenants or
persons in the Office Building or Development or in the premises, occupants of
adjacent property, or public or quasi-public work unless caused by the gross
negligence or willful misconduct of Landlord. All property of Tenant kept on the
---------------------
premises shall be so kept or stored at the risk of Tenant only and Tenant shall
hold Landlord harmless from any claims arising out of damage to the same or
damage to Tenant's business, including subrogation claims by Tenant's insurance
carrier.
19.00 HOLDING OVER
------------
If Tenant remains in possession of the premises after the expiration of
this lease without a new lease reduced to writing and duly executed, even if
Tenant shall have paid, and Landlord shall have accepted, rent in respect to
such holding over, Tenant shall be deemed to be occupying the premises only as a
tenant from month to month, subject to all covenants, conditions and agreements
of this lease. In such event, the rental set forth in Article 1.09 hereof shall
be increased by a factor of 1.25. Nothing contained in
-----------------------------
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this Article 19 shall relieve Tenant for liability of damages suffered by
Landlord on account of Tenant's holding over in the premises
20.00 OPERATING EXPENSES
------------------
For the purpose of this Article, Operating Expenses are defined as set
forth in Article 20.01.
20.01 Operating Expenses. All direct costs calculated on the accrual
------------------
basis of managing, operating, maintaining and repairing the Building and the
Development, as determined by generally accepted accounting practices,
including, by way of illustration and not limitation, the following: (a) for the
Development - wages, salaries, payroll and all other direct expenses of
employees engaged in the day-to-day management, operating and maintenance of the
Development; landscaping maintenance; costs and upkeep of all parking and common
areas, including driveways, sidewalks, malls, and courts but excluding the costs
of managing, operating, maintaining and repairing other buildings in the
Development; (b) for the Building - charges of independent contractors employed
in connection with the operation, maintenance and repair of the Building; real
property taxes and assessments; rent taxes; gross receipt taxes (whether
assessed against Landlord or assessed against Tenant, and collected by Landlord,
or both); and all other taxes, charges or fees for governmental services such
as, but not limited to, fire protection, street, sidewalk and road maintenance;
refuse removal; water and sewage charges; insurance premiums; utilities; glass
replacement, window washing, janitorial services and supplies; labor; costs
incurred in the management of the Building; security and/or other guard
services; the cost of air conditioning and heating as well as the maintenance of
the equipment; elevator and escalator maintenance; maintenance of energy and
utility saving devices and equipment; supplies, material, equipment and tools,
including maintenance; maintenance of ceiling light fixtures and replacement of
light bulbs and tubes therefore; the amortized cost of any capital improvements
---------
made to the Building after completion of its construction as a labor-saving
device or to affect other economies in the operation or maintenance of the
Building, or made to the Building after the date of this lease that are required
under any governmental law or regulation that was not applicable to the Building
at the time that permits for the construction thereof were obtained, such costs
to be amortized over such reasonable period as Landlord shall determine,
together with interest on the unamortized balance at a market rate; costs and
upkeep of building common areas including loading platforms, washrooms, lounges,
shelters and other facilities available for the common use of tenants,
employees, invitees and the public. The Operating Expenses shall be adjusted to
reflect an occupancy of 90% of the Building if the occupancy of the Building,
averaged over the calendar year, is less than 90%.
20.02 Base Year. The Base Year is defined as the calendar year set
---------
forth in Article 1.16.
20.03 Payment of Increases in Operating Expenses. Tenant shall pay as
------------------------------------------
Additional Rent during the term of this lease its pro rata share, as set forth
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in Article 1.15, of increases in Operating Expenses over the Operating Expenses
for the Base Year ("Excess Operating Expenses"). Said Excess Operating Expenses
shall be paid in monthly installments (together with the monthly Base Rent) on
or before the first day of each calendar month, in advance, in an amount
estimated by Landlord for each calendar year.
20.04 Statement. Within ninety (90) days following the end of each
---------
calendar year, Landlord shall furnish to Tenant a statement, certified as
correct by an officer of Landlord, showing the total amount of Operating
Expenses for the calendar year just expired, and for each year after the Base
Year, payments of Excess Operating Expenses made by Tenant during such calendar
year. If Tenant's share of such Excess Operating Expenses for such calendar year
shall exceed Tenant's payment so made, Tenant shall pay to Landlord the
deficiency within ten (10) days after receipt of said statement. If Tenant's
payments shall exceed Tenant's share of such Excess Operating Expenses, as shown
on such statement, Tenant shall be entitled to offset the excess against
payments next thereafter becoming due under this Article 20. Landlord shall use
its best efforts to minimize such costs of operation and maintenance and other
Operating Expenses in a manner consistent with good management practices.
20.05 Final Assessment. Tenant shall be liable for Excess Operating
----------------
Expenses for the year in which the lease terminates, even though the lease term
has expired and Tenant has vacated the premises at the time that such Excess
Operating Expenses are finally computed. Within ten (10) days after Tenant's
receipt of a statement of the final computation of the Operating Expenses for
the year in which the lease terminates, Tenant shall pay to Landlord or Landlord
shall pay to Tenant, as the case may be, the amount by which the estimated
payments made by Tenant were less than, or exceeded, Tenant's pro rata share of
the Excess Operating Expenses.
21.00 SERVICES AND UTILITIES
----------------------
Provided that Tenant is not in default hereunder and subject to the rules
and regulations of the Building, Landlord shall furnish to the premises
electricity for normal lighting and fractional horsepower office machines,
heating and air conditioning required in Landlord's judgment for the comfortable
use and occupation of the premises and janitorial services, five days per week,
Monday through Friday (except for holidays). Landlord shall also maintain and
keep lighted the common stairs, common entries and restrooms in the Building of
which the premises are a part except for damage occasioned by the act of Tenant,
which damage shall be repaired by Landlord at Tenant's expense. Landlord shall
not be liable for, and Tenant shall not be entitled to, any reduction of rental
by reason of Landlord's failure to furnish any of the foregoing when such
failure is caused by accident breakage, repairs, strikes, lockouts or other
labor disturbances or labor disputes of any character or by any other cause,
similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall
not be liable under any circumstances for a loss of or injury to property,
however, occurring, through or in connection with or incidental to failure to
furnish any of the foregoing. Wherever machines or
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equipment are used in the premises which generate heat or affect the temperature
otherwise maintained by the air conditioning system, or are an abnormal burden
upon such system, Landlord reserves the right, but shall have no obligation, to
install supplementary air conditioning units in the premises and the cost
thereof, including the cost of installation, and the cost of operation and
maintenance thereof shall be paid by Tenant to Landlord upon demand by Landlord.
21.01 Excess. Tenant will not, without written consent of Landlord, use
------
any apparatus or device in the premises, including, but without limitation
thereto, electronic data processing machines, punch card machines and machines
using in excess of One Hundred Twenty (120) volts, which will in any way
increase the amount of electricity usually furnished or supplied for the use of
the premises as general office space; nor connect with electric current except
through existing electrical outlets in the premises, any apparatus or device,
for the purpose of using electric current. If Tenant shall require water or
electric current in excess of that usually furnished or supplied for the use of
the premises as general office space, Tenant shall first procure the written
consent of Landlord, which Landlord may refuse, to the use thereof and Landlord
may cause a water meter or electrical current meter to be installed in the
premises to measure the amount of water and electric current consumed for any
such use. Landlord consents to Tenant installing at its expense a submeter on a
---------------------------------------------------------------------
220 volt line serving the premises. The purchase, installation, maintenance and
- ----------------------------------
repair cost of such meters upon demand shall be paid by Tenant. Tenant shall pay
to Landlord promptly upon demand therefor by Landlord for all such water and
electric current consumed as shown by said meters, at the rates charged for such
services by the local public utility furnishing the same, plus any additional
expense incurred in keeping account of the water and electric current so
consumed. If a separate meter is not installed, such excess cost for such water
and electric current will be established by an estimate made by Landlord as the
cost of furnishing electricity or service for the operation of such equipment or
water service.
21.02 Heating, Ventilating and Air Conditioning. Heating, ventilating
-----------------------------------------
and air conditioning ("HVAC"), to the premises shall be provided five (5) days a
week, Monday through Friday, from 7:00 a.m. to 6:00 p.m. (except for holidays).
Tenant shall pay, upon demand, the cost of any HVAC requested by Tenant to be
-------------------------
provided at times other than the normal business hours specified above. Should
Landlord consent to provide HVAC at times other than those specified above, such
costs shall be based upon the actual operating costs of HVAC supplied during
such non-business hours to the HVAC zones of the Building containing the
premises, which HVAC zones may be greater than the premises. Costs shall also
include the cost of personnel required to operate and maintain the HVAC during
such non-business hours.
22.00 PROPERTY TAXES
--------------
Tenant shall pay, or cause to be paid, before delinquency, any and all
taxes levied or assessed and which become payable during the term hereof upon
all Tenant's equipment, furniture, fixtures and
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personal property located in the premises; except that which has been paid for
by Landlord. In the event any or all of the Tenant's leasehold improvements,
equipment, furniture, fixtures and personal property shall be assessed and taxed
with the Building, Tenant shall pay to Landlord its share of such taxes within
ten (10) days after delivery to Tenant by Landlord of a statement in writing
setting forth the amount of such taxes applicable to Tenant's property. Tenant's
failure to pay said taxes within the herein referenced time period shall give to
Landlord all remedies available to it under Article 23.01. Landlord shall pay or
---------------------
cause to be paid, before delinquency, any and all real property taxes and
- -------------------------------------------------------------------------
assessments, including taxes on leasehold improvements in the promises, subject
- -------------------------------------------------------------------------------
to Landlord's right to withhold payment thereof if it is in good faith
- ----------------------------------------------------------------------
contesting the amount or validity thereof.
- -----------------------------------------
23.00 DEFAULTS BY TENANT
------------------
The occurrence of any of the following shall constitute a material
default and breach of this lease by Tenant:
(i) Tenant shall fail to pay any installment of rent, or any other
payment required to be made by Tenant hereunder within ten (10) days of the date
such payment, pursuant to the terms of this lease, is due.
(ii) The abandonment or vacation of the premises by Tenant; and/or
(iii) A failure by Tenant to observe and perform any other provision
of this lease to be observed or performed by Tenant, or the occurrence of a
prohibited event, where such failure or occurrence continues for fifteen (15)
------------
days after written notice thereof by Landlord to Tenant; provided, however, that
if the nature of such default is such that the same cannot reasonably be cured
within such fifteen (15) day period, Tenant shall not be deemed to be in default
------------
if Tenant shall within such period commence such cure and thereafter diligently
prosecute the same to completion; and/or
(iv) The making by Tenant of any general assignment for the benefit
of creditors; the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or of a petition for reorganization or arrangement under any
law relating to bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within sixty (60) days); the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the premises or of Tenant's interest in this lease, where possession
is not restored to Tenant within thirty (30) days; or the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at the
premises or of Tenant's interest in this lease, where such seizure is not
discharged within thirty (30) days; and/or
(v) If within any period of twelve (12) consecutive months of the term
hereof, Tenant shall have been in default in the payment of rent
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hereunder three times or more. A default under this subparagraph (v) shall be
deemed a non-curable default.
23.01 Remedies in the Event of Default.
--------------------------------
(1) In the event of any default under this lease as hereinabove
set forth or otherwise, Landlord may at any time thereafter, and without
limiting Landlord in the exercise of any other legal remedy under law or in
equity or otherwise which Landlord may have by reason of the default, serve
written notice on Tenant requiring Tenant to alternatively within three (3) days
after service of such notice (a) pay the rent or amount due or perform as
required by the provision of the lease which Tenant has failed to observe, or
(b) surrender the premises to Landlord, all in accordance with Title 78, Chapter
36 of the Utah Code. In such event Landlord may recover from Tenant:
(i) The worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of rental loss that Tenant proves could
have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which
the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this lease or which in the ordinary course of things
would be likely to result therefrom; and
(v) At Landlord's election, such other amounts in addition
or in lieu of the foregoing as may be permitted from time to time by
applicable law including treble damages as permitted by Title 78, Chapter
36.
The term "rent" as used herein shall be deemed to be and to mean the Base
Rent and all other sums, including but not limited to Additional Rent, required
to be paid by Tenant pursuant to the terms of this lease. All such sums, other
than the Base Rent, shall be computed on the basis of the average monthly amount
thereof accruing during the immediately preceding twenty-four (24) month period
prior to default, except that if it becomes necessary to compute such rental
before such twenty-four (24) month period has occurred, then such rental shall
be computed on the basis of the average monthly amount accruing during such
shorter period. As used in paragraphs (i) and (ii) above, the "worth at time of
award" is computed by allowing interest at the rate of the Federal Reserve Bank
of San Francisco at the time of award plus one percent (1%).
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(2) Landlord can continue this lease in full force and effect,
regardless of whether or not Tenant is in default or has abandoned the premises,
and the lease will continue in effect as long as Landlord does not terminate
Tenant's right to possession and Landlord shall have the right to collect rent
when due. In addition:
(i) During the period Tenant is in default, Landlord, at
its election may enter the premises and relet them or any part of them
upon such terms as Landlord in its sole discretion shall deem
appropriate. Any rentals received by Landlord from such reletting shall
be applied: first, to the payment of any indebtedness other than rent due
hereunder from Tenant to Landlord; second, to the payment of any cost of
such reletting, including, but not limited to leasing commissions and
attorney's fees incident to such default, re-entry and reletting; third,
to the payment of the cost of any alterations and repairs to the
premises; and fourth, to the payment of rent due and unpaid hereunder.
Tenant shall pay any deficiency in such amounts as determined by
Landlord, to Landlord within ten (10) days of receipt of a statement
setting forth the amount of such deficiency,
(ii) Neither Landlord's acts of maintenance or preservation
or efforts to relet the premises, nor the appointment of a receiver upon
the initiative of the Landlord to protect Landlord's interest under the
lease, nor re-entry or taking possession of the premises by Landlord
pursuant to this Article 23, shall be construed as an election to
terminate this lease or constitute a termination of Tenant's rights to
possession, nor shall it cause a forfeiture of rents and other amounts
remaining to be paid during the balance of the term of this lease unless
Landlord notifies Tenant in writing that Landlord elects to terminate
this lease, or unless termination is decreed by a court of competent
jurisdiction.
(iii) Notwithstanding any reletting without termination by
Landlord because of any default by Tenant, Landlord may at any time after
reletting elect to terminate this lease for any such default.
(3) In the event of any such default by Tenant, Landlord shall
also have the right to re-enter the premises and remove all persons and property
from said premises; such property may be removed and stored in a public
warehouse or elsewhere at the cost of and for the account of Tenant.
24.00 RECONSTRUCTION
--------------
24.01 Insured Casualty. If the premises or the Building of which the
----------------
premises are a part are damaged by fire or other perils fully covered by
extended coverage insurance, Landlord shall forthwith determine the amount of
time after the issuance of any requisite permits required to complete the repair
of such damage. Landlord shall notify Tenant in writing of such determination
("Landlord's Determination") within thirty (30) days after the occurrence of
such damage. If Landlord reasonably determines that such repairs can
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be accomplished within one hundred eighty (180) days after the issuance of any
requisite permits, Landlord shall forthwith repair the same. If Landlord
reasonably determines that such repairs could not be accomplished within one
hundred eighty (180) days after the issuance of any requisite permits or the
Insurance proceeds received by Landlord are not sufficient to effect such
repair, then Landlord shall have the option (i) to repair or restore such
damage, this lease continuing in full force and effect, or (ii) give notice to
Tenant, concurrently with Landlord's determination, terminating this lease as of
the date specified in such notice, which dates shall be not less than thirty
(30) days and no more than sixty (60) days after the giving of such notice. If
Landlord gives such notice, this lease shall expire and all interest of the
Tenant in the premises shall terminate on the date so specified in such notice
and Tenant shall pay the rent, reduced by an amount proportionate to the extent,
if any, to which such damage reduces Tenant's square footage of its premises up
to the date of such termination. If Landlord elects to give such notice of
Landlord's intent to cancel and terminate this lease, then Tenant shall have the
right, within ten (10) days after the receipt of such notice, to give written
notice to Landlord of Tenant's intention to repair such damage at Tenant's
expense, without reimbursement from Landlord, in which event this lease shall
continue in full force and effect, and Tenant shall proceed to make such repairs
as soon as reasonably possible. If Tenant does not give such notice within such
ten (10) day period, this lease shall be canceled and terminated as of the date
and on the conditions set forth above, Landlord shall not repair damages to
Tenant's fixtures or equipment, or Tenant Improvements made by Tenant. If
--
Landlord determines that repairs cannot be accomplished within the one hundred
- ------------------------------------------------------------------------------
eighty (180) day period or the insurance proceeds are not sufficient to effect
- ------------------------------------------------------------------------------
such repair, Tenant shall have the right to terminate this lease within 30 days
- -------------------------------------------------------------------------------
of such determination by giving written notice to Landlord of such termination.
- ------------------------------------------------------------------------------
24.02 Uninsured Casualty. If, at any time during the term hereof, the
------------------
premises are damaged, except by a negligent or intentional act or omission of
Tenant or any of Tenant's agents, employees or invitees, and such damage was
caused by a casualty not covered by fire and extended coverage insurance, or for
which there are insufficient insurance proceeds to fully pay for the cost of
such repairs, Landlord may, at Landlord's option, either (i) repair such damages
as soon as reasonably possible at Landlord's expense, in which event this lease
shall continue in full force and effect; or (ii) give written notice to Tenant
within thirty (30) days after the date of the occurrence of such damage of
Landlord's intention to cancel and terminate this lease. If Landlord has
exercised option (ii) above, Tenant shall have the right within ten (10) days
after the receipt of Landlord's notice of intention to cancel, to give written
notice to Landlord of Tenant's intention to repair such damage at Tenant's
expense, without reimbursement from Landlord, in which event this lease shall
continue in full force and effect and Tenant shall proceed to make such repairs
as soon as reasonably possible. If Tenant does not give such notice within such
ten (10) day period, this lease shall be cancelled and terminated as of the date
of the occurrence of such damage. Landlord shall have the option not to
terminate this lease in the event such destruction resulted from the negligent
or intentional acts or omissions of Tenant or any of
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Tenant's agents, employees or invitees, and in such event, Tenant shall continue
to be responsible for all rent and other obligations under this lease,
24.03 Casualty at End of Term. If the premises or the Building are
-----------------------
damaged during the last twelve (12) months of the term of this lease, Landlord
or Tenant may, at either's option, by giving written notice to the other party
- --------- -------- ---------------
within thirty (30) days after the date of occurrence of such damage, either (i)
cancel and terminate this lease as of the date of occurrence of such damage. If
--
this lease is not terminated the burden of the cost of repair of the damage
- ----------------------------
shall be allocated as provided in this Article 24.
24.04 Abatement of Rents; Tenant's Remedies. If the premises or the
-------------------------------------
Building is damaged, and Landlord or Tenant repairs or restores them pursuant to
the provisions of this Article 24, the rent payable hereunder while such damage,
repair or restoration continues shall be abated in proportion to the reduced
amount of useable square footage of Tenant's premises; provided, however, that
the aggregate amount of abatement hereunder shall not exceed the total of rent
payable under Article 1.09 for a period of six (6) months. Notwithstanding
anything to the contrary contained herein Tenant shall not be entitled to an
abatement of rent if the premises or Building was damaged due to the negligent
or intentional act or omission of Tenant or any of Tenant's agents or employees
or invitees.
24.05 Repair of Tenant's Property. Landlord shall not be required to
---------------------------
make any repairs or replacements of any other kind, or to make any repairs or
replacements of any panels, decoration, office fixtures, railings, floor
coverings, partitions, or any other property installed in the premises by
Tenant. Tenant shall obtain its own fire and casualty insurance to protect
against loss in the event of damage to such elements by fire or other perils
covered by extended coverage insurance. Tenant shall be obligated to either
------
obtain a waiver of subrogation in such policies or name Landlord as an
----------------------
additional insured on such policies, and hereby releases and indemnifies
- -----------------------------------
Landlord from any claims as a result of such casualty.
24.06 Exclusive Remedy. The Tenant shall not be entitled to any
----------------
compensation or damages from Landlord for loss of the use of the whole or any
part of the premises or of Tenant's personal property, or for any inconvenience
or annoyance occasioned by such damage, repair, reconstruction or restoration,
except the abatement of rent specified in this Article 24.
25.00 EMINENT DOMAIN
--------------
In the event the entire premises shall be appropriated or taken under the
power of eminent domain by any public or quasi-public authority, this lease
shall terminate and expire as of the date of such taking, and both Landlord and
Tenant shall thereupon be released from any liability thereafter
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<PAGE>
accruing hereunder. In the event more than twenty-five percent (25%) of the
square footage of floor area (including mezzanine, if any) of the premises is
taken under the power of eminent domain by any public or quasi-public authority,
or if by reason of any appropriation or taking, regardless of the amount so
taken, the remainder of the premises is not usable for the purposes for which
the premises were leased, then either Landlord or Tenant shall have the right to
terminate this lease as of the date Tenant is required to vacate a portion of
the premises so taken upon giving notice to the other in writing of such
election within sixty (60) days after the date of such taking. In the event of
such termination, both Landlord and Tenant shall thereupon be released from any
liability thereafter occurring hereunder.
25.01 Compensation. Whether or not this lease is terminated, Landlord
------------
shall be entitled to the entire award or compensation in such proceedings, but
nothing herein shall be deemed to affect Tenant's right to bring a separate
action to recover damages for the loss of its fixtures and personal property. If
this lease is terminated as hereinabove provided, and provided that Tenant is
not in default of any of the covenants, conditions or provisions of this lease
all items of rent, additional rent and other charges for the last month of
Tenant's occupancy shall be prorated, and Landlord agrees to refund to Tenant
any rent, additional or other charges paid in advance.
25.02 Non-termination. If both Landlord and Tenant elect not to so
---------------
terminate this lease, Tenant shall remain in that portion of the premises which
shall not have been appropriated or taken as herein provided and Landlord
agrees, at Landlord's cost and expense, to, as soon as reasonably possible,
restore the remaining portion of the premises to a complete unit of like quality
and character as existed prior to such appropriation or taking; and thereafter
the base Rent provided for in Article 1.09 hereof shall be adjusted on an
equitable basis, taking into account the relative value of the portion taken as
compared to the portion remaining. For the purpose of this Article 25, a
voluntary sale or conveyance in lieu of condemnation, but under threat of
condemnation, shall be deemed an appropriation or taking under the power of
eminent domain.
26.00 SUBORDINATION AND ATTORNMENT
----------------------------
This lease is subject and subordinate to all ground or underlying leases,
mortgages and deeds of trust which now affect the Building or any part of the
Building and to all renewals, modifications, consolidations, replacements and
extensions thereof. This lease may, at the option of Landlord, be subordinate
to any ground or underlying leases, mortgages, deeds of trust or other lien
which may hereafter affect the Building or any part thereof and Tenant will
execute and deliver upon the demand of Landlord from time to time any and all
instruments desired by Landlord, subordinating in the manner requested by
Landlord, this lease to such lease, mortgage, deed of trust or other lien,
provided such lease, mortgage, deed or trust or lien provides that in the event
of the termination of such lease or foreclosure of such mortgage, deed of trust
or lien, any successor to any interest of Landlord in the Building will not
disturb Tenant's possession of the premises if Tenant attorns to
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such successor as Landlord and otherwise performs its obligations under this
lease. Tenant agrees that Tenant shall attorn to any Landlord under any ground
lease affecting the Building in the event of the termination or cancellation of
such ground lease or to any purchaser upon foreclosure or sale pursuant to any
lien. In the event of termination of such ground lease or foreclosure of such
mortgage, deed of trust or other lien, any successor to any interest of Landlord
in the Building shall have no liability to repay to Tenant any security deposit
paid to any prior Landlord. Landlord may from time to time grant or declare
such restrictions or covenants as may be reasonably required by Landlord
relating to all or any portion of the Building and the provisions of all such
documents shall be senior to this lease and Tenant shall sign any of such
documents upon request of Landlord provided such documents do not unreasonably
interfere with the use of the premises by Tenant as permitted by this lease.
27.00 ASSIGNMENT, SUBLETTING AND OWNERSHIP
------------------------------------
Except with Landlord's prior written consent, Tenant shall not transfer,
assign, sublet, enter into license or concession agreements change ownership or
hypothecate, by operation of law or otherwise (collectively referred to in this
Article 27 as a "transfer"), this lease or any part thereof or interest therein
or the Tenant's interest in and to the premises. In the event Tenant desires to
transfer this lease or any part thereof or interest therein, Tenant shall give
Landlord written notice thereof including financial statements of the transferee
for the three most recent years and a current quarterly update, in reasonable
detail. Unless Landlord consents in writing to the transfer, any attempt to
transfer shall be void and confer no rights upon any third person. Landlord has
no obligation whatsoever to consent to an assignment or sublease and, without
limiting the generality of the foregoing, Landlord will refuse to consent to an
assignment or sublease if:
(i) the proposed use of the premises shall be different from that
permitted under Article 1.08 of this lease; and/or
(ii) the character, reputation or financial responsibility of the
proposed assignee is not satisfactory in Landlord's judgment; or, in any event,
not at least equal to those possessed by Tenant (or represented to be possessed
by Tenant) as of the date of execution of this lease; or
(iii) the proposed assignee fails to agree in writing to an increased
rental rate of other lease modification and to otherwise assume and be bound by
all of the other obligations of Tenant under the lease, as provided below.
Each transfer, to which Landlord has consented shall be by instrument in
writing, in form and content satisfactory to Landlord, and shall be executed by
the transferor, assignor, sublessor, licensor, concessionaire, hypothecator or
mortgagor and the transferee, assignee sublessee, licensee, concessionaire, or
mortgagee; the provisions of such transfer shall also be enforceable by Landlord
as a third party beneficiary.
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<PAGE>
27.01 Consent Not a Release of Tenant. Unless the terms of the lease
-------------------------------
have been modified by Landlord and agreed to by the transferee in writing no
consent to transfer given by Landlord pursuant to the foregoing shall be deemed
to release Tenant from any liability under this lease, nor, after any consent to
transfer, shall Landlord's failure to give Tenant notice of default under any of
the terms or conditions of this lease release Tenant from any liability
hereunder. Without limiting any of the Landlord's rights hereunder, Landlord
shall have the right, in the event of an attempted transfer to declare this
lease null and void and of no further force and effect thereby permitting
Landlord to negotiate with the prospective assignee for a lease on terms and
conditions acceptable to Landlord.
27.02 Attorney's Fees. Tenant agrees to reimburse Landlord for
---------------
Landlord's attorney's fees in an amount not less than $200.00 incurred in
conjunction with the processing and documentation of any such requested transfer
of this lease or tenant's interest in and to the premises. The consent by
Landlord to any transfer shall not constitute a waiver of the necessity for such
consent to any subsequent attempted transfer.
27.03 Change of Control. If Tenant is a corporation or partnership and
-----------------
if the control thereof through a change in the board of directors or partners
changes at any time during the term hereof, then Landlord, at its option, may
declare such a change a transfer and therefore a breach or default of this
lease, subject to the remedies provided for default in Article 23 hereof.
Landlord agrees that it will not unreasonably withhold its consent to such a
- ----------------------------------------------------------------------------
change of control, nor unreasonably delay making such a decision.
- -----------------------------------------------------------------
27.04 Involuntary Assignment. No interest of Tenant in this lease shall
----------------------
be assignable by operation of law, legal process, receivership, bankruptcy or
otherwise ("involuntary assignment"). An involuntary assignment shall include
but not be limited to the following:
(i) If Tenant is or becomes bankrupt or insolvent; makes an
assignment for the benefit of creditors, or institutes a proceeding under the
Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a partnership
or consists of more than one person or entity, if any partner of the partnership
or other person or entity is or becomes bankrupt or insolvent or makes an
assignment for the benefit of creditors; and/or
(ii) If a writ of attachment or execution is levied on this
lease; and/or
(iii) If, in any proceeding or action to which Tenant is a party,
a receiver is appointed with authority to take possession of the premises.
An involuntary assignment shall constitute a default by Tenant, and Landlord
shall have the right to elect to terminate this lease, in which case this lease
shall not be treated as an asset of Tenant. If a writ of attachment or
execution is levied on this lease or a receiver is appointed, Tenant shall have
thirty (30) days in which to cause the attachment or execution or
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<PAGE>
receiver to be removed. If any involuntary proceeding in bankruptcy is brought
against Tenant, Tenant shall have sixty (60) days in which to have the
involuntary proceedings dismissed.
28.00 LAWS AND ORDINANCES
-------------------
Tenant agrees to comply with all laws, ordinances, orders and regulations
affecting the use and occupancy of the premises and the cleanliness, safety, or
operation thereof. Tenant agrees to comply with the regulations and
requirements of any insurance underwriter, inspection bureau or similar agency
with respect to that portion of the premises installed or used by Tenant.
Tenant also agrees to permit Landlord to comply with such recommendations and
requirements with respect to that portion of the premises installed by Landlord.
In addition, Tenant agrees to comply, to the extent that the same may be
applicable to the premises, with the standards and requirements of the Williams-
Steiger Act (PL91-596), known as the "Occupational Safety and Health Act of
1970," notwithstanding the fact that Tenant may otherwise be exempted from the
provisions of said Act.
28.01 Use of leased Premises. Tenant agrees not to: (i) permit any
----------------------
immoral practice to be carried on or committed on the premises; (ii) make use of
or allow the premises to be used for any purposes other than that permitted
under Article 1.08; (iii) keep or use or permit to be kept or used on the
premises any inflammable fluids or explosives without the prior written
permission of Landlord; (iv) use the premises for any purpose whatsoever which
might create a nuisance or injure the reputation of the promises or of the
Building; (v) deface or injure the Building or the premises; (vi) overload the
floors; (vii) commit or suffer any waste; or (viii) install any electrical
equipment that overloads lines.
28.02 Electrical Requirements. In connection with the installation of
-----------------------
any electrical equipment at the premises, Tenant shall, at Tenant's own expense,
---------------
make from time to time whatever changes are necessary to comply with the
requirements of the insurance inspectors, underwriters and governmental
authorities.
29.00 WAIVER OF SUBROGATION
---------------------
Tenant does hereby covenant and agree with Landlord that it will either
------
(a) waive and does hereby waive the application to Landlord of any subrogation
- ---
clause arising out of any contract of property insurance into which the Tenant
has entered or may enter with any insurer, and hereby releases Landlord from any
subrogation claim any insurer might have, or claim against Landlord arising out
of any contract of property insurance or (b) name Landlord as an additional
-------------------------------------
insured on any insurance policy to be carried by Tenant as provided for herein.
- ------------------------------------------------------------------------------
Landlord on its parts covenants and agrees with Tenant that it will waive and
does hereby waive the application to Tenant of any subrogation clause arising
out of any contract of property insurance into which the Landlord has entered or
may enter with any insurer, and hereby releases said Tenant from any subrogation
claim that any insurer might have or claim against
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<PAGE>
Tenant arising out of any contract of insurance between the Landlord and such
insurer.
30.00 ATTORNEY'S FEES
---------------
In the event that at any time during the term of this lease or
thereafter, either Landlord or Tenant shall institute any action or proceeding
against the other relating to the provisions of this lease, on any default
hereunder, then and in that event, the unsuccessful party in such action or
proceeding agrees to reimburse the successful party for the reasonable expense
of attorney's fees and disbursements incurred therein by the successful party
whether or not the action is prosecuted to judgment. This Article 30 shall
survive the expiration of this lease.
31.00 SALE OF PREMISES BY LANDLORD
----------------------------
In the event of any sale or exchange of the Building of which the
premises are a part by Landlord and assignment by Landlord of this lease,
Landlord shall be and is hereby entirely freed and relieved of all liability
under any and all of its covenants and obligations contained in or derived from
this lease arising out of any act, occurrence or omission relating to the
premises or this lease occurring after the consummation of such sale or exchange
and assignment.
32.00 NOTICES
-------
Notices and demands required or permitted to be given hereunder shall be
given by certified mail or by a regular commercial air courier addressed, if to
Landlord, at the address at which the last rental payment was made or required
to be made as directed by Landlord, directly and specifically to the Vice
President, Property Management and Operations and if to Tenant, addressed to
Tenant at the premises, or such other address as was last specified by written
notice by Landlord or Tenant. All notices from Tenant to Landlord hereunder
shall also require Tenant to send a copy of such notice to Landlord's
mortgagee(s).
33.00 REMEDIES
--------
All rights and remedies of Landlord herein created or otherwise extending
at law are cumulative, and the exercise of one or more rights or remedies shall
not be taken to exclude or waive the right to the exercise of any other. All
such rights may be exercised and enforced concurrently and whenever and as often
as deemed desirable.
34.00 SUCCESSORS AND ASSIGNS
----------------------
All covenants, promises, conditions, representations and agreements
continued herein shall be binding upon, apply and inure to the parties hereto
and their respective heirs, executors, administrators, successors and assigns;
it
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<PAGE>
being understood and agreed, however, that the provisions of Article 27 hereof,
are in nowise impaired by this Article 34.
35.00 REPRESENTATIONS
---------------
It is understood and agreed by Tenant that Landlord and Landlord's agents
have made no representations or promises with respect to the premises, Building
Development or the making or entry into this lease, except as in this lease
expressly set forth, and that no claim or liability, or cause for termination,
shall be asserted by Tenant against Landlord for, and Landlord shall not be
liable by reason of, the breach of any representations or promises not expressly
stated in this lease.
36.00 WAIVER
------
The failure of Landlord to insist upon strict performance by Tenant of
any of the covenants, conditions, and agreements of this lease shall not be
deemed a waiver of any of Landlord's rights or remedies and shall not be deemed
a waiver of any subsequent breach or default by Tenant in any of the covenants,
conditions and agreements of this lease. No surrender of the premises shall be
effected by Landlord's acceptance of rental or by any other means whatsoever
unless the same be evidenced by Landlord's written acceptance of such as a
surrender.
37.00 INTERPRETATION
--------------
The parties hereto agree that it is their intention hereby to create only
the relationship of Landlord and Tenant, and no provision hereof, or act of
either party hereunder, shall ever be construed as creating the relationship of
principal and agent, or a partnership, or a joint venture or enterprise between
the parties hereto.
38.00 COVENANT OF TITLE
-----------------
Landlord covenants that it has full right, power and authority to make
this lease, and that Tenant upon payment of the rentals and performance of the
covenants upon Tenant's part to be performed hereunder, shall and may peaceably
and quietly have, hold and enjoy the premises and improvements thereon during
the term or any renewal or extension hereof. The above referenced covenants
shall apply only to the Tenant hereunder and shall not be assignable to any
assignee or subtenant under this lease should Landlord permit such an event.
39.00 WAIVER OF REDEMPTION
--------------------
Tenant hereby expressly waives any and all rights of redemption granted
by or under any present or future laws in the event of Tenant being evicted or
dispossessed for any cause, or in event of Landlord obtaining possession of the
premises by reason of the violation by Tenant of any of the covenants and
conditions of this lease or otherwise. The rights given to Landlord herein
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<PAGE>
are in addition to any rights that may be given to Landlord by any statute or
otherwise.
40.00 FEES
----
Tenant warrants and represents that it has not had negotiations with or
dealt with any realtor, broker or agent in connection with the negotiation and
execution of this lease, and Tenant agrees to pay and to hold Landlord harmless
from any cost, expense or liability (including cost of suit and reasonable
attorney's fees) for any compensation commissions or charges claimed by any
realtor, broker or agent with respect to this lease and negotiation thereof with
the exception of Landlord's broker, Coldwell Banker Commercial Real Estate
Services, Salt Lake City, Utah, whose fees are paid by Landlord.
41.00 LEASE STATUS
------------
Within ten (10) days and upon request of Landlord, Tenant will execute,
acknowledge and deliver to Landlord a tenant estoppel prepared by Landlord,
stating, if the same be true, that this lease is a true and exact copy of the
lease between the parties hereto, that there are no amendments hereof (or
stating what amendments there may be), that the same is then in full force and
effect and that, to the best of Tenant's knowledge, there are then no offsets,
defenses or counterclaims with respect to the payment of rent reserved hereunder
or in the performance of the other terms, covenants and conditions hereof on the
part of Tenant to be performed, and that as of such date no default has been
declared hereunder by either party hereto and that Tenant at the time has no
knowledge of any facts or circumstances which it might reasonably believe would
give rise to a default by either party. Tenant's failure to execute such
statement within the time period set forth herein shall be conclusively deemed
an admission that the lease is in full force and effect and that there are no
offsets, defenses or counterclaims with respect to Landlord. Tenant hereby
acknowledges that said certificate may be relied upon by any existing or
prospective lender or purchaser. Landlord will similarly execute, acknowledge
--------------------------------------------
and deliver to Tenant a Landlord estoppel, at the request of Tenant.
- --------------------------------------------------------------------
42.00 RECORDING
---------
Tenant shall not record this lease without the written consent of
Landlord; however, upon the request of either party hereto the other party shall
join in the execution of a memorandum or so-called "short form" of this lease
for the purposes of recordation. Said memorandum or short form of this lease
shall describe the parties, the premises and the term of this lease and shall
incorporate this lease by reference. Upon such a request by Tenant, Tenant shall
execute a quit claim deed in favor of Landlord or such other instrument as
Landlord may designate upon the expiration or sooner termination of the lease.
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43.00 FORCE MAJEURE
-------------
In the event that Landlord shall be delayed or hindered in or prevented
from the performance of any act required hereunder by reason of strikes, lock-
outs, labor troubles, inability to procure materials, failure of power,
restrictive governmental laws or regulations, riots, insurrection, war or other
reason of a like nature not the fault of the party delayed in performing work or
doing acts required under the terms of this lease, then performance of such act
shall be excused for the period of delay and the period for the performance of
any such act shall be extended for a period equivalent to the period of such
delay. The provisions of this Article shall not operate to excuse Tenant from
the prompt payment of Base Rent, or Additional Rent or any other payments
required by the terms of this lease.
44.00 MORTGAGE PROTECTION CLAUSE
--------------------------
Tenant agrees to give any mortgagee and/or trust deed holders, by
certified mail or by a regular commercial air courier, a copy of any notice of
default served upon Landlord provided that prior to such notice Tenant has been
notified, in writing (by way of notice of assignment of rents and leases or
otherwise), of the address of such mortgagees and/or trust-deed holders. Tenant
further agrees that if Landlord shall have failed to cure such default within
the time provided for in this lease, then the mortgagees and/or trust deed
holder shall have an additional 30 days within which to cure such default or if
such default cannot be cured within that time, then such additional time as may
be necessary, if within such 30 days, any mortgagee and/or trust deed holder has
commenced and is diligently pursuing the remedies necessary to cure such default
(including, but not limited to commencement of foreclosure proceedings, if
necessary to effect such cure); in such event this lease shall not be terminated
while such remedies are being so diligently pursued.
45.00 PARKING
-------
Landlord shall provide Tenant with parking spaces as designated in
Article 1.14. Said parking spaces shall be located within the Development and
shall be subject to Landlord's designation. Landlord reserves the right at any
time to change the location and designation but not the quantity of said spaces
--------------------
throughout the entire term of this lease. In the event that Landlord should
change such location, Tenant agrees to comply with such change the day following
notification of such change, provided that the new location and designation are
--------------------------------------------------
in reasonable proximity to the premises and are generally of the same quality as
- --------------------------------------------------------------------------------
before the change.
- -----------------
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<PAGE>
47.00 CAPTIONS
--------
Captions throughout this instrument are for convenience and reference
only and the words contained therein shall in no way be held to explain, modify,
amplify or aid in the interpretation, construction or meaning of the provisions
of this lease.
48.00 PARTIAL INVALIDITY
------------------
If any term or provision of this lease or the application thereof be
invalid or unenforceable, the remainder of this lease or the application of such
term or provision to the persons or circumstances other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this lease shall be valid and enforced to the fullest extent
permitted by law.
49.00 GOVERNING LAW
-------------
This lease shall be governed by the laws of the State of Utah.
50.00 ENTIRE AGREEMENT
----------------
This lease contains all of the agreements of the parties hereto with
respect to any matter covered or mentioned in this lease, and no prior
agreements or understanding pertaining to any such matters shall be effective
for any purpose. No provision of this lease may be modified, waived, amended or
added to except by an agreement in writing signed by the parties hereto or their
respective successors in interest. Furthermore, oral modifications, which are
prohibited and invalid, may not be asserted by either party to this lease
against any successor or assigns of either party to this lease. This lease
shall not be effective or binding on any party until fully executed by both
parties hereto.
51.00 NO OPTION
---------
The submission of this lease for examination does not constitute a
reservation of or option for the premises and this lease becomes effective as a
lease only upon execution and delivery thereof by Landlord and Tenant.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease Agreement
on the day and year first above mentioned.
LANDLORD:
E & H INVESTMENTS, INC.
a Washington corporation
Attest:
________________________ By__________________________
TENANT:
MEDICODE OF UTAH.
a Utah corporation
Attest:
________________________ BY /s/ Illegible Secretary
---------------------------------------
/s/ Illegible Vice President
----------------------------------------
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease Agreement
on the day and year first above mentioned.
LANDLORD:
E & H INVESTMENTS, INC.
a Washington corporation
Attest:
By /s/ Illegible
______________________ ---------------------------
TENANT:
MEDICODE OF UTAH.
a Utah corporation
Attest:
______________________ By______________________
--------
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<PAGE>
I N D E X
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1.00 FUNDAMENTAL LEASE PROVISIONS................... 1
----------------------------
2.00 LEASED PREMISES................................ 2
---------------
3.00 RENT........................................... 2
----
4.00 SECURITY DEPOSIT............................... 3
----------------
5.00 CONSTRUCTION OF PREMISES....................... 3
------------------------
6.00 ADDITIONAL CONSTRUCTION........................ 4
-----------------------
7.00 CONDITION OF PREMISES.......................... 4
---------------------
8.00 ALTERATIONS.................................... 5
-----------
9.00 REPAIRS AND MAINTENANCE........................ 5
-----------------------
10.00 FIXTURES AND PERSONAL PROPERTY................. 6
------------------------------
11.00 LIENS.......................................... 6
-----
12.00 INSURANCE...................................... 6
---------
13.00 INDEMNIFICATION................................ 8
---------------
14.00 ACCESS TO PREMISES............................. 8
------------------
15.00 SURRENDER OF PREMISES.......................... 9
---------------------
16.00 TENANT'S CONDUCT OF BUSINESS................... 10
----------------------------
17.00 RULES AND REGULATIONS.......................... 10
---------------------
18.00 TENANT'S PROPERTY.............................. 10
-----------------
19.00 HOLDING OVER................................... 10
------------
20.00 OPERATING EXPENSES............................. 11
------------------
21.00 SERVICES AND UTILITIES......................... 12
----------------------
22.00 PROPERTY TAXES................................. 13
--------------
23.00 DEFAULTS BY TENANTS............................ 14
-------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
24.00 RECONSTRUCTION............................. 16
--------------
25.00 EMINENT DOMAIN............................. 18
--------------
26.00 SUBORDINATION AND ATTORNMENT............... 19
----------------------------
27.00 ASSIGNMENT, SUBLETTING AND OWNERSHIP....... 20
------------------------------------
28.00 LAWS AND ORDINANCES........................ 22
-------------------
29.00 WAIVER OF SUBROGATION...................... 22
---------------------
30.00 ATTORNEY'S FEES............................ 23
---------------
31.00 SALE OF PREMISES BY LANDLORD............... 23
----------------------------
32.00 NOTICES.................................... 23
-------
33.00 REMEDIES................................... 23
--------
34.00 SUCCESSORS AND ASSIGNS..................... 24
----------------------
35.00 REPRESENTATIONS............................ 24
---------------
36.00 WAIVER..................................... 24
------
37.00 INTERPRETATION............................. 24
--------------
38.00 COVENANT OF TITLE.......................... 24
-----------------
39.00 WAIVER OF REDEMPTION....................... 24
--------------------
40.00 FEES....................................... 25
----
41.00 LEASE STATUS............................... 25
------------
42.00 RECORDING.................................. 25
---------
43.00 FORCE MAJEURE.............................. 26
-------------
44.00 MORTGAGE PROTECTION CLAUSE................. 26
--------------------------
45.00 PARKING.................................... 26
-------
47.00 CAPTIONS................................... 27
--------
48.00 PARTIAL INVALIDITY......................... 27
------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
49.00 GOVERNING LAW.............................. 27
-------------
50.00 ENTIRE AGREEMENT........................... 27
----------------
51.00 NO OPTION.................................. 27
---------
</TABLE>
EXHIBIT A: FLOOR PLAN
----------
EXHIBIT B: TRIAD CENTER
------------
EXHIBIT C: LANDLORD'S WORK
---------------
EXHIBIT D: BUILDING RULES AND REGULATIONS
------------------------------
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<PAGE>
EXHIBIT D
ATTACHED TO AND FORMING A PART OF
LEASE AGREEMENT
DATED AS OF MAY 1, 1990
BETWEEN
E & H INVESTMENTS, INC.
AND
MEDICODE OF UTAH, AS TENANT
BUILDING RULES AND REGULATIONS
------------------------------
The following Building Rules are additional provisions of the foregoing
lease Agreement to which they are attached. The terms used herein have the same
meanings as these terms are given in the lease.
l. Use of Common Areas. Tenant will not obstruct the sidewalks, halls,
-------------------
passages, exits and entrances, elevators or stairways of the Building ("Common
Areas"), and Tenant will not use the Common Areas for any purpose other than
ingress and egress to and from the premises. The Common Areas, except for the
sidewalks, are not open to the general public and Landlord reserves the right to
control and prevent access to the Common Areas of any person whose presence, in
Landlord's opinion, would be prejudicial and interests of the Building and its
tenants.
2. No Access to Roof. Tenant has no right of access to the roof of the
-----------------
Building and will not install, repair or replace any antenna, aerial, aerial
wires, fan, air-conditioner or other device on the roof of the Building, without
prior written consent of Landlord. Any such device installed without such
written consent is subject to the removal at Tenant's expense without notice at
any time. In any event Tenant will be liable for any damages or repairs incurred
or required as a result of its installation, use or removal of such devices on
the roof.
3. Signage. No sign, placard, picture, name, advertisement or notice
-------
visible from the exterior of the premises will be inscribed, painted, affixed or
otherwise displayed by Tenant on or in any part of the Building without the
prior written consent of Landlord. Landlord reserves the right to adopt and
furnish Tenant with general guidelines relating to signs in or on the Building.
All approved signage will be inscribed, painted or affixed at Tenant's expense
by a person approved by Landlord, which approval will not be unreasonably
withheld. Tenant signage at each entrance shall be building standard as
established by Landlord.
4. Prohibited Uses. The premises will not be used for manufacturing for
---------------
the storage of merchandise held for sale to the general public, for lodging or
for the sale of goods to the general public. Tenant will not permit any food
preparation on the premises except that Tenant may use Underwriters' Laboratory
approved equipment for brewing coffee, tea, hot chocolate and similar beverages
so long as such use is in accordance with all applicable federal, state and city
laws, codes, ordinances, rules and regulations.
<PAGE>
5. Janitorial Services. Tenant will not employ any person for the
-------------------
purpose of cleaning the premises or permit any person to enter the Building for
such purpose other than the Landlord's janitorial service, except with
Landlord's prior written consent. Tenant will not necessitate, and will be
liable for the cost of, any undue amount of janitorial labor by reason of
Tenant's carelessness in or indifference to the preservation of good order and
cleanliness in the premises. Janitorial service shall mean ordinary dusting and
cleaning, normal vacuuming, window washing and emptying of waste receptacles,
replacement of standard ceiling lights but shall exclude cleaning of carpets,
washing dishes, moving furniture, plant maintenance, cleaning of mirrors,
replacement of other light bulbs and other special services. Tenant shall not
have access to Landlord's janitorial equipment and supplies.
6. Keys, Locks and Security Cards. Landlord will furnish Tenant, free of
------------------------------
charge, two (2) keys to each door or lock into the premises. Landlord may make a
reasonable charge for any additional or replacement keys and access cards.
Tenant will not duplicate any keys, alter any locks or install any new or
additional lock or bolt on any door of its premises or on any other part of the
Building without the prior written consent of Landlord and, in any event, Tenant
will provide Landlord with a key for any such lock. On the termination of the
lease, Tenant will deliver to Landlord all keys and access cards to any locks or
doors in the Building which have been obtained by Tenant.
7. Freight. Upon not less than twenty-four hours notice to Landlord,
-------
which notice may be verbal, the freight elevator will be available for Tenant's
use, subject to such scheduling as Landlord in its discretion deems appropriate.
Landlord reserves the right to prescribe the weight, size and position of all
equipment, materials, furniture or other property brought into the Building, and
no property will be received in the Building or carried up or down the freight
elevator or stairs except during such hours and along such routes and by such
persons as may be designated by Landlord. Landlord reserves the right to require
that heavy objects will stand an wood strips of such length and thickness as is
necessary to properly distribute the weight. Landlord will not be responsible
for loss of or damage to any such property from any cause, and Tenant will be
liable for all damage or injuries caused by moving or maintaining such property.
8. Nuisances and Dangerous Substances. Tenant will not conduct itself or
----------------------------------
permit its agents, employees, contractors or invitees to conduct themselves, in
the premises or anywhere on or in the Development in a manner which is offensive
or unduly annoying to any other Tenant or Landlord's property managers. Tenant
will not install or operate any phonograph, radio receiver, musical instrument,
or television or other similar device in any part of the Common Areas and shall
not operate any such device installed in the premises in such manner as to
disturb or annoy other tenants of the Building. Tenant will not use or keep in
the premises any kerosene, gasoline or other combustible fluid or material other
than limited quantities thereof reasonably necessary for the maintenance of
office equipment, or, without Landlord's prior written approval, use any method
of heating or air conditioning other than that supplied by Landlord. Tenant will
not use or keep any foul or noxious gas or substance in the premises or permit
or suffer the premises to be occupied or used in a manner offensive or
objectionable to Landlord or other
-2-
<PAGE>
occupants of the Building by reason of noise, odors or vibrations, or interfere
in any way with other tenants or those having business therein. Tenant will not
bring or keep any animals in or about the premises.
9. Building Name and Address. Without Landlord's prior written consent,
-------------------------
Tenant will not use the name of the Building in connection with or in promoting
or advertising Tenant's business except as Tenant's address. Landlord reserves
the right, exercisable without notice and without liability to Tenant, to change
the name and street address of the Building.
10. Building Directory. A directory for the Building will be provided for
------------------
the display of the name and location of tenants and a reasonable number of the
principal officers and employees of tenants. Landlord reserves the right to
approve any additional names Tenant desires to place in the directory and, if so
approved, Landlord may impose a reasonable charge for adding such additional
names.
11. Window Coverings. No curtains, draperies, blinds, shutters, shades,
----------------
screens or other coverings, hangings or decorations shall be attached to, hung
or placed in, or used in or with any window of the Building without the prior
written consent of Landlord.
12. Floor Coverings. Tenant will not lay or otherwise affix linoleum,
---------------
tile, carpet or any other floor covering to the floor of the premises in any
manner except as approved in writing by Landlord and, if Landlord has furnished
carpeting for the premises, will use carpet protectors under all desk chairs.
Tenant will be liable for the cost of repair of any damage resulting from the
violation of this rule or the removal of any floor covering by Tenant or its
contractors, employees or invitees.
13. Electrical Installations. Landlord will direct Tenant's electricians
------------------------
as to where and how telephone, telegraph and electrical wires are to be
installed. No boring or cutting for wires will be allowed without the prior
written consent of Landlord. The location of burglar alarms, smoke detectors,
telephones, call boxes and other office equipment affixed to the premises shall
be subject to the written approval of Landlord.
14. Office Closing Procedures. Tenant will see that the doors of the
-------------------------
premises are closed and locked and that all water faucets, water apparatus and
utilities are shut off before Tenant or its employees leave the premises, so as
to prevent waste or damages. Tenant will be liable for all damage or injuries
sustained by other tenants or occupants of the Building or Landlord resulting
from Tenant's carelessness in this regard or violation of this rule. Tenant will
keep the doors to the Building corridors closed at all times except for ingress
and egress.
15. Plumbing Facilities. The toilet rooms, toilets urinals, wash bowls
-------------------
and other apparatus shall not be used for purpose other than that for which they
were constructed and no foreign substance of any kind whatsoever shall be
disposed of therein. Tenant will be liable for any breakage, stoppage or damage
resulting from the violation of this rule by Tenant, its employees or invitees.
-3-
<PAGE>
16. Use of Hand Trucks. Tenant will not use or permit to be used in the
------------------
premises or in the Common Areas any hand trucks, carts of dollies except those
equipped with rubber tires and side guards or such other equipment as Landlord
may approve.
17. Refuse. Tenant will store all its trash and garbage within the
------
premises. No material will be placed in the trash boxes or receptacles if such
material may not be disposed of in the ordinary and customary manner of removing
and disposing of trash and garbage in Salt Lake City without being in violation
of any law or ordinance governing such disposal. All trash and garbage removal
will be only through such Common Areas provided for such purposes and at such
times as Landlord may designate.
18. Soliciting. Canvassing, peddling, soliciting and distribution of
----------
handbills or any other written materials in the Building are prohibited, and
Tenant will cooperate to prevent the same.
19. Parking. Tenant will use, and will cause its agents, employees,
-------
contractors, invitees and visitors to use, the parking spaces to which it is
entitled under the lease in a manner consistent with Landlord's directional
signs and markings in the parking areas. Specifically, but without limitations,
Tenant will not park, in a manner that impedes access to and from the Building
or the parking areas or that violates space reservations for handicapped
drivers. Landlord may use such reasonable means as may be necessary to enforce
the directional signs and markings in the parking areas, including but not
limited to towing services, and Landlord will not be liable for any damage to
vehicles towed as a result of non-compliance with such parking regulations.
20. Fire, Security and Safety Regulations. Tenant will comply with all
-------------------------------------
safety, security, fire protection and evacuation measures and procedures
established by Landlord or any governmental agency.
21. Responsibility for Theft. Tenant assumes any and all responsibility
------------------------
for protecting the premises from theft, robbery and pilferage, which includes
keeping doors locked and other means of entry to the premises closed.
22. Sales and Auctions. Tenant will not display or sell merchandisee
------------------
outside the exterior walls and doorways of the premises nor use such areas for
storage. Tenant will not install any exterior lighting, amplifiers or similar
devices or use in or about the premises an advertising medium which may be heard
or seen outside the premises, including flashing lights, searchlights,
loudspeakers, phonographs or radio broadcasts. Tenant will not conduct or permit
to be conducted any sale by auction in, upon or from the premises or elsewhere
in the project, whether auction be voluntary, involuntary, pursuant to any
assignment for the payment of creditors or pursuant to any bankruptcy or other
insolvency proceeding.
23. Enforcement. Landlord may waive any one or more of these Building
-----------
Rules for the benefit of any particular tenant or tenants, but no such waiver by
Landlord will be construed as a waiver of such Building Rules in favor of any
other tenant or tenants nor prevent Landlord from enforcing or waiving these
Rules with regard to any other tenant or tenants.
-4-
<PAGE>
24. Effect on lease. These Building Rules are in addition to, shall not
---------------
be construed to in any way modify or amend, in whole or in part, the terms,
covenants, agreements and conditions of the lease. Violation of these Building
Rules constitutes a failure to fully perform the provisions of the lease, as
referred to in Article 23.0 - "Defaults by Tenant," subparagraph (iii).
25. Additional and Amended Rules. Landlord reserves the right to rescind
----------------------------
or amend these Building Rules and/or adopt any other and reasonable rules and
regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building and for the preservation of good order
therein.
-5-
<PAGE>
EXHIBIT 10.8
CORPORATE RESOLUTION TO BORROW
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
I, THE UNDERSIGNED SECRETARY or ASSISTANT SECRETARY OF MEDICODE, INC. (the
"CORPORATION"), HEREBY CERTIFY THAT the Corporation is organized and existing
under and by virtue of the laws of the State of Utah as a corporation for
profit, with its principal office at 5225 WILEY POST WAY, SUITE 500, SALT LAKE
CITY, UT 84116, and is duly authorized to transact business in the State of
Utah.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held on AUGUST 29, 1997, at which a quorum was present and voting, or
by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
Kevin W. Pearson Treasurer /s/ Kevin W. Pearson
--------------------------
Eugene Santa Cattarina President /s/ Eugene Santa Cattarina
--------------------------
</TABLE>
acting for and on behalf of the Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from ZIONS FIRST NATIONAL BANK
("Lender"), on such terms as may be agreed upon between the Corporation and
Lender, such sum or sums of money as in their judgment should be borrowed;
however, not exceeding at any one time the amount of FIVE MILLION & 00/100
DOLLARS ($5,000,000.00), in addition to such sum or sums of money as may be
currently borrowed by the Corporation from Lender.
EXECUTE NOTES. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accomodations of the Corporation, on
Lender's forms, at such rates of interest and on such terms as may be
agreed upon, evidencing the sums of money so borrowed or any indebtedness
of the Corporation to Lender, and also to execute and deliver to Lender one
or more renewals, extensions, modifications, refinancings, consolidations,
or substitutions for one or more of the notes, any portion of the notes, or
any other evidence of credit accomodations.
GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit accomodations so obtained, any promissory notes so
executed (including any amendments to or modifications, renewals, and
extensions of such promissory notes), or any other or further indebtedness
of the Corporation to Lender at any time owing, however the same may be
evidenced, any property now or hereafter belonging to the Corporation or in
which the Corporation now or hereafter may have an interest, including
without limitation all real property and all personal property (tangible or
intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered.
EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written instruments,
any chattel paper, or any other collateral, of any kind or nature, which
they may in their discretion deem reasonably necessary or proper in
connection with or pertaining to the giving of the liens and encumbrances.
NEGOTIATE ITEMS. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Lender, or
to cause such other disposition of the proceeds derived therefrom as they
may deem advisable.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or
proper in order to carry into effect the provisions of these Resolutions.
The following person or persons currently are authorized to request
advances and authorize payments under the line of credit until Lender
receives written notice of revocation of their authority: Kevin W. Pearson,
Treasurer; Eugene Santa Cattarina, President; and Kent K. Jones,
Controller.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation,, (d) change in the authorized signer(s), (e)
conversion of the Corporation to a new or different type of business entity, or
(f) change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever. The Corporation has no corporate seal, and therefore,
no seal is affixed to this certificate.
<PAGE>
08-26-1997 CORPORATE RESOLUTION TO BORROW Page 2
(Continued)
================================================================================
IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND ON AUGUST 26, 1997 AND ATTEST
THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE
SIGNATURES.
CERTIFIED TO AND ATTESTED BY:
X /s/ Kevin W. Pearson Secretary
---------------------------------------
X
---------------------------------------
NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, it is advisable to have
this certificate signed by a second Officer or Director of the Corporation.
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 9.24 (c) 1997 CFI ProServices, Inc.
All rights reserved, [UT-C10 MEDICODE.LN C3.OVL]
<PAGE>
PROMISSORY NOTE
---------------
SALT LAKE CITY, UTAH AUGUST 29, 1997
$5,000,000.00
For value received, MEDICODE, INC., a Utah Corporation, (hereinafter
referred to as "Borrower"), promises to pay to the order of ZIONS FIRST NATIONAL
BANK, a national banking association (hereinafter referred to as "Zions" or
'Lender") at its office in Salt Lake City, Utah, the sum of Five Million and
00/1 00 Dollars ($5,000,000.00) or such other principal balance as may be
outstanding hereunder in lawful money of the United States with interest thereon
at an interest rate hereinafter described. This Promissory Note evidences a
revolving line of credit under which Borrower may repeatedly borrow and repay
pursuant to the terms hereunder provided an event of default has not occurred.
The initial principal amount available for advances hereunder will be
$5,000,000.00. This principal amount will be reduced by $200,000.00 on a
quarterly basis, beginning December 31, 1998 and continuing on the last day of
each quarter thereafter.
At Borrower's option, an advance made hereunder for the purchase of
equipment may be converted to an individual term loan. Such advances will be
evidenced by a separate Promissory Note, the amount of which will be equal to
100% of the invoice cost of the equipment for which the advance is made, will be
repaid on a fully amortizing schedule with payments of principal plus interest
at the rate specified below, and will mature three (3) years from the date of
the advance. These individual term loans are referred to hereinafter,
collectively as the "Term Notes".
Payments. Commencing October 1, 1997, and continuing on the same day
--------
of each month thereafter, accrued interest on those amounts advanced hereunder
which have not been converted to Term Notes shall be due and payable. In
addition, if at any time the aggregate principal amount of outstanding advances
made hereunder exceed the applicable Borrowing Base (as defined in the Loan
Agreement executed in conjunction with this Promissory Note), Borrower,
immediately upon written or oral notice from Lender, shall pay to Lender an
amount equal to the difference between the outstanding principal balance of the
advances and the Borrowing Base. In any event, the unpaid balance of principal
and any accrued but unpaid interest on amounts which have not been converted to
Term Notes shall be due and payable no later than September 1,2000. The specific
payment term and maturity date for each Term Note will be established in the
individual promissory note which will evidence each Term Note.
Interest Rate. Prime Rate means an index which is determined daily by
-------------
the published commercial loan variable rate index held by any two of the
following banks: Chase Manhattan Bank, Wells Fargo Bank N.A., and Bank of
America N.T. & S.A. In the event no two of the above banks have the same
published rate, the bank having the median rate will establish the Prime Rate.
If, for any reason beyond the control of Zions, any of the aforementioned banks
becomes unacceptable as a reference for the purpose of determining the Prime
Rate used herein, Zions may, five days after posting notice, substitute another
comparable bank for the one determined unacceptable. As used in this paragraph,
"comparable bank" shall mean one of the ten largest commercial banks
headquartered in the United States of America. This definition of Prime Rate is
to be strictly interpreted and is not intended to serve any purpose other than
providing an index to determine the variable interest rate used herein. It is
not the lowest rate at which Zions may make loans to any of its customers,
either now or in the future.
All advances made hereunder which are not converted to a Term Note
will bear interest at a variable rate equal to the Prime Rate plus one-quarter
percent (.25%) per annum. So long as Borrower maintains a ratio of Total
Liabilities to Tangible Net Worth of less than 1.0 to 1.0, this interest rate
will be reduced to a variable rate equal to the Prime Rate, per annual. Changes
to the interest rate based upon Borrower's compliance or non-compliance with
this ratio will only become effective after Lender has made a determination of
such compliance or non-compliance. The variable interest rate will change
immediately and automatically with each change in the Prime Rate.
For each advance that is converted into a Term Note, Borrower shall
have the option of
<PAGE>
choosing the variable rate of interest set forth above or a fixed rate of
interest equal to the three (3) year London Interbank Offered Rate (LIBOR) plus
2.75% per annum. So long as Borrower maintains a ratio of Total Liabilities to
Tangible Net Worth of less than 1.0 to 1.0, this interest rate will be reduced
to a fixed rate equal to the three (3) year LIBOR plus 2.50% per annum. Changes
to the interest rate based upon Borrower's compliance or non-compliance with
this ratio will only become effective after Lender has made a determination of
such compliance or non-compliance. In the event that the three (3) year LIBOR
Rate is not available on such dates, the interest rate shall be the applicable
variable rate. Zions will maintain records, which may be computerized, which
will specify the interest rates payable hereon. Borrower will promptly notify
Zions of any possible error contained in any records which are provided to
Borrower.
As used herein, Lender's three (3) year LIBOR Rate shall mean the rate
per annum quoted by Lender as Lender's three (3) year LIBOR Rate based upon
quotes for the London Interbank Offered Rate from the British Bankers
Association Interest Settlement Rates, Lasser Marshall Inc., or other comparable
services. This definition of Lender's three (3) year LIBOR Rate is to be
strictly interpreted and is not intended to serve any purpose other than
providing an index to determine the interest rate used herein. Lender's three
(3) year LIBOR Rate may not necessarily be the same as the quoted offer side in
the eurodollar time deposit market by any particular institution or service
applicable to any interest period.
Notwithstanding any other provision in this Promissory Note, if the
adoption of any applicable law, rule, or regulation, or any change therein, or
any change in the interpretation or administration thereof by any governmental
authority, central bank, or comparable agency charged with the interpretation or
administration thereof, or compliance by Lender with any request or directive
(whether or not having the force of law) of any such authority, central bank, or
comparable agency shall make it unlawful or impossible for Lender to maintain or
fund advances based on Lender's three (3) year LIBOR Rate, then upon notice to
Borrower by Lender, interest accruing on a Term Note under the fixed rate LIBOR
option, together with interest already accrued thereon, shall, at the election
of Lender, be immediately converted to the variable rate set forth above.
Notwithstanding anything to the contrary herein, if Lender determines
(which determination shall be conclusive) that Lender's three (3) year LIBOR
Rate does not accurately cover the cost to Lender of making or maintaining
advances based on Lender's three (3) year LIBOR Rate, then Lender shall give
notice thereof to Borrower, whereupon, until Lender notifies Borrower that the
circumstances giving rise to such suspension no longer exist, the interest rate
hereunder shall be converted to the variable rate set forth above.
Any advance under this Promissory Note which accrues interest at the
variable rate may be prepaid in whole or in part without penalty provided that
any partial prepayment will not defer any monthly installments.
Interest on this Promissory Note is computed on a 365/360 simple
interest basis; that is, interest is computed by applying the ratio of the
annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at lender's address located at #1
South Main Street, Salt Lake City, UT 84101, or at such other place as Lender
maintains Banking Centers.
Application of Payments. Any and all payments by Borrower under this
-----------------------
Promissory Note for advances that have not been converted into Term Notes shall
be applied as follows: first, to the repayment of any Lender Expenditures
advanced by Lender hereunder or pursuant to the loan documents relating to the
Promissory Note; second, to the payment of any late charges; third, to the
payment of accrued interest on the principal indebtedness; and fourth, to the
payment of the principal indebtedness hereunder.
Lender's Expenditures. Borrower agrees to pay on demand any
---------------------
expenditures made by Lender in accordance with the loan documents relating to
this Promissory Note, including, but not limited to, the payment of taxes,
insurance premiums, costs of maintenance and preservation of the collateral,
common expense and other assessments relating to the collateral, and attorney
fees and costs incurred in connection
2
<PAGE>
with any matter pertaining hereto or to the security pledged to secure the
principal indebtedness under this Promissory Note or any portion thereof
(collectively the "Lender Expenditures"). At the election of Lender, all Lender
Expenditures may be added to the unpaid balance of this Promissory Note and
become a part of and on a parity with the indebtedness secured by the collateral
and shall accrue interest at such rate as may be computed from time to time in
the manner prescribed in this Promissory Note.
Zions shall maintain appropriate records of advances, repayments and
the interest rates applicable to the advances. Such records may consist of
computer records and shall be deemed correct.
Default. Borrower will be in default if any of the following happens: (a)
-------
Borrower fails to make any payment when due hereunder or under any Term Note;
(b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails
to comply with or to perform when due any other term, obligation, covenant, or
condition contained in this Note or any agreement related to this Note, or in
any other agreement or loan Borrower has with Lender. (c) Any representation or
statement made or furnished to Lender by Borrower or on Borrower's behalf is
false or misleading in any material respect either now or at the time made or
furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part
of Borrower's property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or against Borrower
under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest. This
includes a garnishment of any of Borrower's accounts with Lender. (f) Any
guarantor dies or any of the other events described in this default section
occurs with respect to any guarantor of this Note. (g) A material adverse change
occurs in Borrower's financial condition, or Lender believes the prospect of
payment or performance of the indebtedness is impaired. (h) Lender in good faith
deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
Lender's Rights. Upon default, Lender may declare the entire unpaid
---------------
principal balance on this Promissory Note and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that amount. Upon
default, including failure to pay upon final maturity, Lender, at it option, may
also, if permitted under applicable law, increase the variable interest rate on
this Promissory Note 3.000 percentage points. The interest rate will not exceed
the maximum rate permitted by applicable law. Lender may hire or pay someone
else to help collect this Promissory Note if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's reasonable attorney's fees and Lender's legal expenses
whether or not there is a lawsuit, including reasonable attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or vacate
any automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. If not prohibited by applicable law, Borrower also will pay
any court costs, in addition to all other sums provided by law.
Right of Setoff. Borrower grants to Lender a contractual possessory
---------------
security interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some other
account), including without limitation all accounts held jointly with someone
else and all accounts Borrower may open in the future, excluding however all IRA
and Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
If any payment of this Promissory Note becomes due and payable on a
Saturday, Sunday or legal holiday for commercial banks under applicable banking
laws, the maturity thereof shall be extended to the next succeeding business day
and interest thereon shall be payable at the then applicable rate during such
extension.
Borrower and all endorsers, sureties, and guarantors hereof hereby
jointly and severally waive
3
<PAGE>
presentment for payment, demand, protest, notice of protest and of non-payment
and of dishonor, and consent to extensions of time, renewal, waivers, or
modifications without notice and further consent to the release of any
collateral or any part thereof, with or without substitution.
This Note has been delivered to Lender and accepted by Lender in the
State of Utah. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction and venue of the courts of SALT LAKE County, the
State of Utah. This Promissory Note shall be governed by and construed in
accordance with the laws of the State of Utah except as modified by the
arbitration provisions.
Arbitration Disclosures:
- -----------------------
1. Arbitration is usually final and binding on the parties and subject to
only very limited review by a court.
2. The parties are waiving their right to litigate in court, including
their right to a jury trial.
3. Pre-arbitration discovery is generally more limited and different from
court proceedings.
4. Arbitrators' awards are not required to include factual findings or
legal reasoning and any party's right to appeal or to seek
modification of rulings by arbitrators is strictly limited.
5. A panel of arbitrators might include an arbitrator who is or was
affiliated with the banking industry.
6. If you have questions about arbitration, consult your attorney or the
American Arbitration Association.
Arbitration Provisions:
- ----------------------
(a) Any controversy or claim between or among the parties, including but
not limited to those arising out of or relating to this Promissory Note or any
agreements or instruments relating hereto or delivered in connection herewith,
and including but not limited to a claim based on or arising from an alleged
tort, shall at the request of any party be determined by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitration proceedings shall be conducted in Salt Lake City,
Utah. The arbitrators shall have the qualifications set forth in subparagraph
(c) hereto. All statutes of limitations which would otherwise be applicable in
a judicial action brought by a party shall apply to any arbitration or reference
proceeding hereunder.
(b) In any judicial action or proceeding arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered in
connection herewith, including but not limited to a claim based on or arising
from an alleged tort, if the controversy or claim is not submitted to
arbitration as provided and limited in subparagraph (a) hereto, all decisions of
fact and law shall be determined by a reference in accordance with Rule 53 of
the Federal Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil
Procedures or other comparable, applicable reference procedure. The parties
shall designate to the court the referee(s) selected under the auspices of the
American Arbitration Association in the same manner as arbitrators are selected
in Association-sponsored arbitration proceedings. The referee(s) shall have the
qualifications set forth in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance with
the rules of the American Arbitration Association from panels maintained by the
Association. A single arbitrator or referee shall be knowledgeable in the
subject matter of the dispute. Where three arbitrators or referees conduct an
arbitration or reference proceeding, the claim shall be decided by a majority
vote of the three arbitrators or referees, at least one of whom must be
knowledgeable in the subject matter of the dispute and at least one of whom must
be a practicing attorney. The arbitrator(s) or referee(s) shall award recovery
of all costs and fees (including reasonable attorneys' fees, administrative
fees, arbitrators' fees, and court costs). The arbitrator(s) or referee(s) also
may grant provisional or ancillary remedies such as, for example, injunctive
relief, attachment, or the appointment of a receiver, either during the pendency
of the arbitration or reference proceeding or as part of the arbitration or
reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following limitation: the arbitration
or reference award is binding upon the parties only if the amount does not
exceed Four Million Dollars ($4,000,000); if the award exceeds that limit,
either party may commence legal action for a court trial de novo. Such legal
action must be filed within thirty (30) days following the date of the
arbitration or reference award; if such legal action is not filed within that
time period, the amount of the arbitration or reference award shall be binding.
The computation of the total amount of an arbitration or reference award shall
include amounts awarded for arbitration fees, attorneys' fees, interest, and all
other related costs.
(e) At Zions option, foreclosure under a deed of trust or mortgage may be
accomplished either by
4
<PAGE>
exercise of a power of sale under the deed of trust or by judicial foreclosure.
The institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.
(f) Notwithstanding the applicability of other law to any other provision
of this Promissory Note, the Federal Arbitration Act, 9 U.S.C.s 1 et seq. shall
-- ---
apply to the construction and interpretation of this arbitration section.
This Promissory Note is secured by a Commercial Security Agreement of even
date.
This note is made in accordance with a Loan Agreement of even date
Medicode, Inc.
By: /s/ Kevin W. Pearson
----------------------------
Kevin W. Pearson, Treasurer
5
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
LOAN TYPE. This is a Variable Rate (0.250% over ZIONS FIRST NATIONAL BANK PRIME
RATE, making an initial rate of 8.750%), Revolving Line of Credit Loan to a
Corporation for $5,000,000.00 due on September 1, 2000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT.
[X] BUSINESS (INCLUDING REAL ESTATE INVESTMENT).
SPECIFIC PURPOSE. The specific purpose of this loan is: TO PROVIDE REDUCING
REVOLVING LINE OF CREDIT FOR WORKING CAPITAL.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lenders conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $5,000,000.00 as follows:
UNDISBURSED FUNDS: $5,000,000.00
-------------
NOTE PRINCIPAL: $5,000,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
PREPAID FINANCE CHARGES PAID IN CASH: $2,500.00
$2,500.00 Loan Fees
OTHER CHARGES PAID IN CASH: $ 30.00
$46.00 UCC-1 Filing
$24.00 Post Search
---------
TOTAL CHARGES PAID IN CASH: $2,530.00
FINAL AGREEMENT. Borrower understands that the loan documents signed in
connection with this loan are the final expression of the agreement between
Lender and Borrower and may not be contradicted by evidence of any alleged oral
agreement.
DISBURSEMENT AUTHORIZATION. BORROWER HEREBY AUTHORIZES LENDER TO DISBURSE ANY
FUNDS PURSUANT TO FACSIMILE WIRE INSTRUCTIONS WHICH BEARS THE SIGNATURE OF ANY
AUTHORIZED SIGNER.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED AUGUST 26, 1997.
BORROWER:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
---------------------------
Kevin W. Pearson, Treasurer
================================================================================
Variable Rate, Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24
(c) 1997 CFI ProServices, Inc. All rights reserved. (UT-120 MEDICODE.LN C3.OVL)
<PAGE>
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN MEDICODE, INC.
(REFERRED TO BELOW AS "GRANTOR"); AND ZIONS FIRST NATIONAL BANK (REFERRED TO
BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A
SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT
LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE
COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitations any of the Events of Default all set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means MEDICODE, INC., its successors and
assigns
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the
word "Indebtedness" includes all other obligations, debts and liabilities,
plus interest thereon, of Grantor, or any one or more of them, to Lender,
as well as all claims by Lender against Grantor, or any one or more of
them, whether existing now or later; whether they are voluntary or
involuntary, due or not due, direct or indirect, absolute or contingent,
liquidated or unliquidated; whether Grantor may be liable individually or
jointly with others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
NOTE. The word "Note" means the note or credit agreement dated August 26,
1997, in the principal amount of $5,000,000.00 from MEDICODE, INC. to
Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. Lender may at any time, and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a
<PAGE>
08-26-1997 COMMERCIAL SECURITY AGREEMENT Page 2
(Continued)
================================================================================
financing statement. Grantor will reimburse Lender for all expenses for
the perfection and the continuation of the perfection of Lender's security
interest in the Collateral. Grantor promptly will notify Lender before any
change in Grantor's name including any change to the assumed business names
of Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND
EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of Utah, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest, encumbrance, or change, other than
the security interest provided for in this Agreement, without the prior
written consent of Lender. This includes security interests even if junior
in right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, reasonable attorneys' fees or other charges that could
accrue as a result of foreclosure or sale of the Collateral. In any
contest Grantor shall defend itself and Lender and shall satisfy any final
adverse judgment before enforcement against the Collateral. Grantor shall
name Lender as an additional obligee under any surety bond furnished in the
contest proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
Interest In the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub.L. No. 99-499 ("SARA"), the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for [unreadable] or other costs under any such laws, and (b) agree
to indemnity and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment
<PAGE>
08-26-1997 COMMERCIAL SECURITY AGREEMENT Page 3
(Continued)
================================================================================
of the indebtedness and the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate, including if it so
chooses "single interest insurance," which will cover only Lender's
interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
indebtedness, and shall pay the balance to Grantor. Any proceeds which
have not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest in
such Collateral. Until otherwise notified by Lender, Grantor may collect any of
the Collateral consisting of accounts. At any time and even though no Event of
Default exists, Lender may exercise its rights to collect the accounts and to
notify account debtors to make payments directly to Lender for application to
the indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as Lender,
in Lender's sole discretion, shall deem appropriate under the circumstances, but
failure to honor any request by Grantor shall not of itself be deemed to be a
failure to exercise reasonable care. Lender shall not be required to take any
steps necessary to preserve any rights in the Collateral against prior parties,
nor to protect, preserve or maintain any security interest given to secure the
indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due
on the indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrowers or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the
<PAGE>
08-26-1997 COMMERCIAL SECURITY AGREEMENT Page 4
(Continued)
================================================================================
dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Utah Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the Collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in its
own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of the time after which any
private sale or any other intended disposition of the Collateral is to be
made. The requirements of reasonable notice shall be met if such notice is
given at least ten (10) days before the time of the sale or disposition.
All expenses relating to the disposition of the Collateral, including
without limitation the expenses of retaking, holding, insuring, preparing
for sale and selling the Collateral, shall become a part of the
Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the
Collateral consists of accounts, general intangibles, insurance policies,
instruments, chattel paper, choses in action, or similar property, Lender
may demand, collect, receipt for, settle, compromise, adjust, sue for,
foreclose, or realize on the Collateral as Lender may determine, whether or
not Indebtedness or Collateral is then due. For these purposes, Lender
may, on behalf of and in the name of Grantor, receive, open and dispose of
mail addressed to Grantor; change any address to which mail and payments
are to be sent; and endorse notes, checks, drafts, money orders, documents
of title, instruments and items pertaining to payment, shipment, or storage
of any Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and
may exercise any or all other rights and remedies it may have available at
law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of Utah. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of SALT LAKE
County, the State of Utah. Subject to the provisions on arbitration, this
Agreement shall be governed by and construed in accordance with the laws of
the State of Utah.
ARBITRATION DISCLOSURES:
1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS THE
LENDER, ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND
ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND
SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT
FROM COURT PROCEEDINGS.
<PAGE>
08-26-1997 COMMERCIAL SECURITY AGREEMENT Page 5
(Continued)
================================================================================
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS
OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR
THE AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, including
but not limited to those arising out of or relating to this Agreement
or any agreements or instruments relating hereto or delivered in
connection herewith, and including but not limited to a claim based on
or arising from an alleged tort, shall at the request of any party be
determined by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The
arbitration proceedings shall be conducted in Salt Lake City, Utah.
The arbitrator(s) shall have the qualifications set forth in
subparagraph (c) hereto. All statutes of limitations which would
otherwise be applicable in a judicial action brought by a party shall
apply to any arbitration or reference proceedings hereunder.
(b) In any judicial action or proceeding arising out of or relating to
this Agreement or any agreements or instruments relating hereto or
delivered in connection herewith, including but not limited to a claim
based on or arising from an alleged tort, if the controversy or claim
is not submitted to arbitration as provided and limited in
subparagraph (a) hereto, all decisions of fact and law shall be
determined by a reference in accordance with Rule 53 of the Federal
Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil
Procedure or other comparable, applicable reference procedure. The
parties shall designate to the court the referee(s) selected under the
auspices of the American Arbitration Association in the same manner as
arbitrators are selected in Association-sponsored arbitration
proceedings. The referee(s) shall have the qualifications set forth
in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance
with the rules of the American Arbitration Association from panels
maintained by the Association. A single arbitrator or referee shall
be knowledgeable in the subject matter of the dispute. Where three
arbitrators or referees conduct an arbitration or reference
proceeding, the claim shall be decided by a majority vote of the three
arbitrators or referees, at least one of whom must be knowledgeable in
the subject matter of the dispute and at least one of whom must be a
practicing attorney. The arbitrator(s) or referee(s) shall award
recovery of all costs and fees (including reasonable attorneys' fees,
administrative fees, arbitrators' fees, and court costs). The
arbitrator(s) or referee(s) also may grant provisional or ancillary
remedies such as, for example, injunctive relief, attachment, or the
appointment of a receiver, either during the pendency of the
arbitration or reference proceeding or as part of the arbitration or
reference award.
(d) Judgment upon an arbitration or reference award may be entered in
any court having jurisdiction, subject to the following limitation:
the arbitration or reference award is binding upon the parties only if
the amount does not exceed Four Million Dollars ($4,000,000.00); if
the award exceeds that limit, either party may commence legal action
for a court trial de novo. Such legal action must be filed within
thirty (30) days following the date of the arbitration or reference
award; if such legal action is not filed within that time period, the
amount of the arbitration or reference award shall be binding. The
computation of the total amount of an arbitration or reference award
shall include amounts awarded for arbitration fees, attorneys' fees,
interest, and all other related costs.
(e) At the Lender's option, foreclosure under a deed of trust or
mortgage may be accomplished either by exercise of a power of sale
under the deed of trust or by judicial foreclosure. The institution
and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the
right of any party, including the plaintiff, to submit the controversy
or claim to arbitration if any other party contests such action for
judicial relief.
(f) Notwithstanding the applicability of other law to any other
provision of this Agreement, the Federal Arbitration Act, 9 U.S.C.
Section 1 et seq., shall apply to the construction and interpretation
-- ---
of this arbitration paragraph.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including reasonable attorneys' fees and
Lender's legal expenses, incurred in connection with the enforcement of
this Agreement. Lender may pay someone else to help enforce this
Agreement, and Grantor shall pay the costs and expenses of such
enforcement. Costs and expenses include Lender's reasonable attorneys'
fees and legal expenses whether or not a salaried employee of Lender and
whether or not there is a lawsuit, including reasonable attorneys' fees and
legal expenses for bankruptcy proceedings (and including efforts to modify
or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor also shall pay all court costs
and such additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current address(ees).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns.
<PAGE>
08-26-1997 COMMERCIAL SECURITY AGREEMENT Page 6
(Continued)
================================================================================
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Agreement. No prior waiver by Lender, nor
any course of dealing between Lender and Grantor, shall constitute a waiver
of any of Lenders rights or of any of Grantor's obligations as to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AUGUST 26,
1997.
GRANTOR:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
---------------------------
Kevin W. Pearson, Treasurer
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24 (c) 1997 CFI ProServices, Inc.
All rights reserved, (UT-E40 MEDICODE.LN C3.OVL)
<PAGE>
LANDLORD'S CONSENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
THIS LANDLORD'S CONSENT IS ENTERED INTO AMONG MEDICODE, INC. ("BORROWER"), WHOSE
ADDRESS IS 5225 WILEY POST WAY, SUITE 500, SALT LAKE CITY, UT 84116; ZIONS FIRST
NATIONAL BANK ("LENDER"), WHOSE ADDRESS IS #1 SOUTH MAIN STREET, P.O. BOX 25822,
SALT LAKE CITY, UT 84125; AND Z & D INTERNATIONAL L.C. ("LANDLORD"), WHOSE
ADDRESS IS 11115 JUSTIN PARK DRIVE, SANDY, UT. 84092. Borrower and Lender have
entered into, or are about to enter into, an agreement whereby Lender has
acquired or will acquire a security interest or other interest in the
Collateral. Some or all of the Collateral may be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower
against such security interest in the Collateral and for other valuable
consideration, Landlord hereby agrees with Lender and Borrower as follows.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Landlord's Consent, as this
Landlord's Consent may be amended or modified from time to time, together
with all exhibits and schedules attached to this Landlord's Consent from
time to time.
BORROWER. The word "Borrower" means MEDICODE, INC..
COLLATERAL. The word "Collateral means certain of Borrower's personal
property in which Lender has acquired or will acquire a security interest,
including without limitation the following specific property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES
LANDLORD. The word "Landlord" means Z & D INTERNATIONAL L.C.. The term
"Landlord" is used for convenience purposes only. Landlord's interest in
the Premises may be that of a fee owner, lessor, sublessor or lienholder,
or that of any other holder of an interest in the Premises which may be, or
may become, prior to the interest of Lender.
LEASE. The word "Lease" means that certain lease of the Premises, dated
August 2, 1994, between Landlord and Borrower.
LENDER. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
LOAN. The word "Loan" means the loan, or any other financial
accommodations, Lender has made or is making to Borrower.
PREMISES. The word "Premises" means the real property located in SALT LAKE
County, State of Utah, commonly known as 5032 WEST AMELIA EARHART DRIVE,
SALT LAKE CITY, UT 84116.
BORROWER'S ASSIGNMENT OF LEASE. Borrower hereby assigns to Lender all of
Borrower's- rights in the Lease as partial security for the Loan. The parties
intend that this assignment will be a present transfer to Lender of all of
Borrower's rights under the Lease, subject to Borrower's rights to use the
Premises and enjoy the benefits of the Lease while not in default on the Loan or
Lease. Upon full performance by Borrower under the Loan, this assignment shall
be ended, without the necessity of any further action by any of the parties.
This assignment includes all renewals of and amendments to the Lease or the
Loan, until the Loan is paid in full. No amendments may be made to the Lease
without Lenders prior written consent, which shall not be unreasonably withheld
or delayed.
CONSENT OF LANDLORD. Landlord consents to the above assignment. if Borrower
defaults under the Loan or the Lease, Lender may reassign the Lease, and
Landlord agrees that Landlord's consent to any such reassignment will not be
unreasonably withheld or delayed. So long as Lender has not entered the
Premises for the purpose of operating a business, Lender will have no liability
under the Lease, including without limitation liability for rent. Whether or
not Lender enters into possession of the Premises for any purpose, Borrower will
remain fully liable for all obligations of Borrower as lessee under the Lease.
While Lender is in possession of the Premises, Lender will cause all payments
due under the Lease and attributable to that period of time to be made to
Landlord. if Lender later reassigns the Lease or vacates the Premises, Lender
will have no further obligation to Landlord.
LEASE DEFAULTS. Both Borrower and Landlord agree and represent to Lender that,
to the best of their knowledge, there is no breach or offset existing under the
Lease or under any other agreement between Borrower and Landlord. Landlord
agrees not to terminate the Lease, despite any default by Borrower, without
giving Lender written notice of the default and an opportunity to cure the
default within a period of sixty (60) days from the receipt of the notice. if
the default is one that cannot reasonably be cured by Lender (such as
insolvency, bankruptcy, or other judicial proceedings against Borrower), then
Landlord will not terminate the Lease so long as Landlord receives all sums due
under the Lease for the period during which Lender is in possession of the
Premises, or so long as Lender reassigns the Lease to a new lessee reasonably
satisfactory to Landlord.
DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest
(or other interest) in the Collateral and disclaims all interests, liens and
claims which Landlord now has or may hereafter acquire in the Collateral.
Landlord agrees that any lien or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lender's security interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.
ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender in this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral in such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.
MISCELLANEOUS PROVISIONS. This Agreement shall extend to and bind the
respective heirs, personal representatives, successors and assigns of the
parties to this Agreement. The covenants of Borrower and Landlord respecting
subordination of the claim or claims of Landlord in favor of Lender shall extend
to, include, and be enforceable by any transferee or endorsee to whom Lender may
transfer any claim or claims to which this Agreement shall apply. Lender need
not accept this Agreement in writing or otherwise to make it effective. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Utah. If Landlord is other than an individual, any agent or other
person executing this Agreement on behalf of Landlord represents and warrants to
Lender that he or she has full power and authority to execute this Agreement on
Landlord's behalf. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is in writing and signed by Lender. Without
notice to Landlord and without affecting the validity of this Consent, Lender
may do or not do anything it deems appropriate or necessary with respect to the
Loan, any
<PAGE>
08-26-1997 LANDLORD'S CONSENT Page 2
(Continued)
================================================================================
obligors on the Loan, or any Collateral for the Loan; including without
limitation extending, renewing, rearranging, or accelerating any of the Loan
indebtedness. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not constitute a waiver of or
prejudice Lender's right otherwise to demand strict compliance with that
provision or any other provision. Whenever consent by Lender is required in
this Agreement, the granting of such consent by Lender in any one instance shall
not constitute continuing consent to subsequent instances where such consent is
required.
BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS. THIS
AGREEMENT IS DATED AUGUST 26, 1997.
BORROWER:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
-----------------------------
Kevin W. Pearson, Treasurer
LANDLORD: LENDER:
Z & D INTERNATIONAL L.C. ZIONS FIRST NATIONAL BANK
X By: /s/ Illegible
---------------------- -----------------------------
Landlord's Signature Authorized Officer
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24 (c) 1997 CFI ProServices, Inc.
All rights reserved. (UT-E4s MEDICODE.LN C3.OVL)
<PAGE>
LANDLORD'S CONSENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
THIS LANDLORD'S CONSENT IS ENTERED INTO AMONG MEDICODE, INC. ("BORROWER"), WHOSE
ADDRESS IS 5225 WILEY POST WAY, SUITE 500, SALT LAKE CITY, UT 84116; ZIONS FIRST
NATIONAL BANK ("LENDER"), WHOSE ADDRESS IS #1 SOUTH MAIN STREET, P.O. BOX 25822,
SALT LAKE CITY, UT 84125; AND Z & D INTERNATIONAL L.C. ("LANDLORD"), WHOSE
ADDRESS IS 11115 JUSTIN PARK DRIVE, SANDY, UT. 84092. Borrower and Lender have
entered into, or are about to enter into, an agreement whereby Lender has
acquired or will acquire a security interest or other interest in the
Collateral. Some or all of the Collateral may be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower
against such security interest in the Collateral and for other valuable
consideration, Landlord hereby agrees with Lender and Borrower as follows.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Landlord's Consent, as this
Landlord's Consent may be amended or modified from time to time, together
with all exhibits and schedules attached to this Landlord's Consent from
time to time.
BORROWER. The word "Borrower" means MEDICODE, INC..
COLLATERAL. The word "Collateral means certain of Borrower's personal
property in which Lender has acquired or will acquire a security interest,
including without limitation the following specific property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES
LANDLORD. The word "Landlord" means Z & D INTERNATIONAL L.C.. The term
"Landlord" is used for convenience purposes only. Landlord's interest in
the Premises may be that of a fee owner, lessor, sublessor or lienholder,
or that of any other holder of an interest in the Premises which may be, or
may become, prior to the interest of Lender.
LEASE. The word "Lease" means that certain lease of the Premises, dated
August 2, 1994, between Landlord and Borrower.
LENDER. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
LOAN. The word "Loan" means the loan, or any other financial
accommodations, Lender has made or is making to Borrower.
PREMISES. The word "Premises" means the real property located in SALT LAKE
County, State of Utah, commonly known as 5032 WEST AMELIA EARHART DRIVE,
SALT LAKE CITY, UT 84116.
BORROWER'S ASSIGNMENT OF LEASE. Borrower hereby assigns to Lender all of
Borrower's- rights in the Lease as partial security for the Loan. The parties
intend that this assignment will be a present transfer to Lender of all of
Borrower's rights under the Lease, subject to Borrower's rights to use the
Premises and enjoy the benefits of the Lease while not in default on the Loan or
Lease. Upon full performance by Borrower under the Loan, this assignment shall
be ended, without the necessity of any further action by any of the parties.
This assignment includes all renewals of and amendments to the Lease or the
Loan, until the Loan is paid in full. No amendments may be made to the Lease
without Lenders prior written consent, which shall not be unreasonably withheld
or delayed.
CONSENT OF LANDLORD. Landlord consents to the above assignment. If Borrower
defaults under the Loan or the Lease, Lender may reassign the Lease, and
Landlord agrees that Landlord's consent to any such reassignment will not be
unreasonably withheld or delayed. So long as Lender has not entered the
Premises for the purpose of operating a business, Lender will have no liability
under the Lease, including without limitation liability for rent. Whether or
not Lender enters into possession of the Premises for any purpose, Borrower will
remain fully liable for all obligations of Borrower as lessee under the Lease.
While Lender is in possession of the Premises, Lender will cause all payments
due under the Lease and attributable to that period of time to be made to
Landlord. If Lender later reassigns the Lease or vacates the Premises, Lender
will have no further obligation to Landlord.
LEASE DEFAULTS. Both Borrower and Landlord agree and represent to Lender that,
to the best of their knowledge, there is no breach or offset existing under the
Lease or under any other agreement between Borrower and Landlord. Landlord
agrees not to terminate the Lease, despite any default by Borrower, without
giving Lender written notice of the default and an opportunity to cure the
default within a period of sixty (60) days from the receipt of the notice. If
the default is one that cannot reasonably be cured by Lender (such as
insolvency, bankruptcy, or other judicial proceedings against Borrower), then
Landlord will not terminate the Lease so long as Landlord receives all sums due
under the Lease for the period during which Lender is in possession of the
Premises, or so long as Lender reassigns the Lease to a new lessee reasonably
satisfactory to Landlord.
DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest
(or other interest) in the Collateral and disclaims all interests, liens and
claims which Landlord now has or may hereafter acquire in the Collateral.
Landlord agrees that any lien or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lender's security interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.
ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender in this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral in such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.
MISCELLANEOUS PROVISIONS. This Agreement shall extend to and bind the
respective heirs, personal representatives, successors and assigns of the
parties to this Agreement. The covenants of Borrower and Landlord respecting
subordination of the claim or claims of Landlord in favor of Lender shall extend
to, include, and be enforceable by any transferee or endorsee to whom Lender may
transfer any claim or claims to which this Agreement shall apply. Lender need
not accept this Agreement in writing or otherwise to make it effective. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Utah. If Landlord is other than an individual, any agent or other
person executing this Agreement on behalf of Landlord represents and warrants to
Lender that he or she has full power and authority to execute this Agreement on
Landlord's behalf. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is in writing and signed by Lender. Without
notice to Landlord and without affecting the validity of this Consent, Lender
may do or not do anything it deems appropriate or necessary with respect to the
Loan, any
<PAGE>
08-26-1997 LANDLORD'S CONSENT Page 2
(Continued)
================================================================================
obligors on the Loan, or any Collateral for the Loan; including without
limitation extending, renewing, rearranging, or accelerating any of the Loan
indebtedness. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not constitute a waiver of or
prejudice Lender's right otherwise to demand strict compliance with that
provision or any other provision. Whenever consent by Lender is required in
this Agreement, the granting of such consent by Lender in any one instance shall
not constitute continuing consent to subsequent instances where such consent is
required.
BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS THIS AGREEMENT
IS DATED AUGUST 21 1997.
BORROWER:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
-----------------------------
Kevin W. Pearson, Treasurer
LANDLORD: LENDER:
Z & D INTERNATIONAL L.C. ZIONS FIRST NATIONAL BANK
X /s/ Illegible By:
--------------------------- ----------------------
Landlord's Signature Authorized Officer
Registered Agent
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24 (c) 1997 CFI ProServices, Inc.
All rights reserved. (UT-E4s MEDICODE.LN C3OVL)
<PAGE>
LANDLORD'S CONSENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
THIS LANDLORD'S CONSENT IS ENTERED INTO AMONG MEDICODE, INC. ("BORROWER"), WHOSE
ADDRESS IS 5225 WILEY POST WAY, SUITE 500, SALT LAKE CITY, UT 84116; ZIONS FIRST
NATIONAL BANK ("LENDER"), WHOSE ADDRESS IS #1 SOUTH MAIN STREET, P.O. BOX 25822,
SALT LAKE CITY, UT 84125; AND E & H INVESTMENTS, INC. ("LANDLORD"), WHOSE
ADDRESS IS 1220 116TH N.E., BELLEVUE, WA 98004. Borrower and Lender have
entered into, or are about to enter into, an agreement whereby Lender has
acquired or will acquire a security interest or other interest in the
Collateral. Some or all of the Collateral may be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower
against such security interest in the Collateral and for other valuable
consideration, Landlord hereby agrees with Lender and Borrower as follows.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Landlord's Consent, as this
Landlord's Consent may be amended or modified from time to time, together
with all exhibits and schedules attached to this Landlord's Consent from
time to time.
BORROWER. The word "Borrower" means MEDICODE, INC..
COLLATERAL. The word "Collateral means certain of Borrower's personal
property in which Lender has acquired or will acquire a security interest,
including without limitation the following specific property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES
LANDLORD. The word "Landlord" means E & H INVESTMENTS, INC. The term
"Landlord" is used for convenience purposes only. Landlord's interest in
the Premises may be that of a fee owner, lessor, sublessor or lienholder,
or that of any other holder of an interest in the Premises which may be, or
may become, prior to the interest of Lender.
LEASE. The word "Lease" means that certain lease of the Premises, dated
December 28, 1990, between Landlord and Borrower.
LENDER. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
LOAN. The word "Loan" means the loan, or any other financial
accommodations, Lender has made or is making to Borrower.
PREMISES. The word "Premises" means the real property located in SALT LAKE
County, State of Utah, commonly known as 5225 WILEY POST WAY, SUITE 500,
SALT LAKE CITY, UT 84116.
BORROWER'S ASSIGNMENT OF LEASE. Borrower hereby assigns to Lender all of
Borrower's- rights in the Lease as partial security for the Loan. The parties
intend that this assignment will be a present transfer to Lender of all of
Borrower's rights under the Lease, subject to Borrower's rights to use the
Premises and enjoy the benefits of the Lease while not in default on the Loan or
Lease. Upon full performance by Borrower under the Loan, this assignment shall
be ended, without the necessity of any further action by any of the parties.
This assignment includes all renewals of and amendments to the Lease or the
Loan, until the Loan is paid in full. No amendments may be made to the Lease
without Lenders prior written consent, which shall not be unreasonably withheld
or delayed.
CONSENT OF LANDLORD. Landlord consents to the above assignment. if Borrower
defaults under the Loan or the Lease, Lender may reassign the Lease, and
Landlord agrees that Landlord's consent to any such reassignment will not be
unreasonably withheld or delayed. So long as Lender has not entered the
Premises for the purpose of operating a business, Lender will have no liability
under the Lease, including without limitation liability for rent. Whether or
not Lender enters into possession of the Premises for any purpose, Borrower will
remain fully liable for all obligations of Borrower as lessee under the Lease.
While Lender is in possession of the Premises, Lender will cause all payments
due under the Lease and attributable to that period of time to be made to
Landlord. if Lender later reassigns the Lease or vacates the Premises, Lender
will have no further obligation to Landlord.
LEASE DEFAULTS. Both Borrower and Landlord agree and represent to Lender that,
to the best of their knowledge, there is no breach or offset existing under the
Lease or under any other agreement between Borrower and Landlord. Landlord
agrees not to terminate the Lease, despite any default by Borrower, without
giving Lender written notice of the default and an opportunity to cure the
default within a period of sixty (60) days from the receipt of the notice. If
the default is one that cannot reasonably be cured by Lender (such as
insolvency, bankruptcy, or other judicial proceedings against Borrower), then
Landlord will not terminate the Lease so long as Landlord receives all sums due
under the Lease for the period during which Lender is in possession of the
Premises, or so long as Lender reassigns the Lease to a new lessee reasonably
satisfactory to Landlord.
DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest
(or other interest) in the Collateral and disclaims all interests, liens and
claims which Landlord now has or may hereafter acquire in the Collateral.
Landlord agrees that any lien or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lender's security interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.
ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender in this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral in such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.
MISCELLANEOUS PROVISIONS. This Agreement shall extend to and bind the
respective heirs, personal representatives, successors and assigns of the
parties to this Agreement. The covenants of Borrower and Landlord respecting
subordination of the claim or claims of Landlord in favor of Lender shall extend
to, include, and be enforceable by any transferee or endorsee to whom Lender may
transfer any claim or claims to which this Agreement shall apply. Lender need
not accept this Agreement in writing or otherwise to make it effective. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Utah. If Landlord is other than an individual, any agent or other
person executing this Agreement on behalf of Landlord represents and warrants to
Lender that he or she has full power and authority to execute this Agreement on
Landlord's behalf. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is in writing and signed by Lender. Without
notice to Landlord and without affecting the validity of this Consent, Lender
may do or not do anything it deems appropriate or necessary with respect to the
Loan, any
<PAGE>
08-26-1997 LANDLORD'S CONSENT Page 2
(Continued)
===============================================================================
obligors on the Loan, or any Collateral for the Loan; including without
limitation extending, renewing, rearranging, or accelerating any of the Loan
indebtedness. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not constitute a waiver of or
prejudice Lender's right otherwise to demand strict compliance with that
provision or any other provision. Whenever consent by Lender is required in
this Agreement, the granting of such consent by Lender in any one instance shall
not constitute continuing consent to subsequent instances where such consent is
required.
BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS THIS AGREEMENT
IS DATED AUGUST 26, 1997.
BORROWER:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
--------------------------------
Kevin W. Pearson, Treasurer
LANDLORD: LENDER:
E & H INVESTMENTS, INC. ZIONS FIRST NATIONAL BANK
X By: /s/ Illegible
--------------------------- ----------------------------
Landlord's Signature Authorized Officer
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.24 (c) 1997 CFI ProServices, Inc.
All rights reserved. (UT-E4s MEIDCODE.LN C3.OVL)
<PAGE>
LANDLORD'S CONSENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
THIS LANDLORD'S CONSENT IS ENTERED INTO AMONG MEDICODE, INC. ("BORROWER"), WHOSE
ADDRESS IS 5225 WILEY POST WAY, SUITE 500, SALT LAKE CITY, UT 84116; ZIONS FIRST
NATIONAL BANK ("LENDER"), WHOSE ADDRESS IS #1 SOUTH MAIN STREET, P.O. BOX 25822,
SALT LAKE CITY, UT 84125; AND E & H INVESTMENTS, INC. ("LANDLORD"), WHOSE
ADDRESS IS 1220 116TH N.E., BELLEVUE, WA 98004. Borrower and Lender have
entered into, or are about to enter into, an agreement whereby Lender has
acquired or will acquire a security interest or other interest in the
Collateral. Some or all of the Collateral may be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower
against such security interest in the Collateral and for other valuable
consideration, Landlord hereby agrees with Lender and Borrower as follows.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Landlord's Consent, as this
Landlord's Consent may be amended or modified from time to time, together
with all exhibits and schedules attached to this Landlord's Consent from
time to time.
BORROWER. The word "Borrower" means MEDICODE, INC..
COLLATERAL. The word "Collateral means certain of Borrower's personal
property in which Lender has acquired or will acquire a security interest,
including without limitation the following specific property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL
INTANGIBLES
LANDLORD. The word "Landlord" means E & H INVESTMENTS, INC.. The term
"Landlord" is used for convenience purposes only. Landlord's interest in
the Premises may be that of a fee owner, lessor, sublessor or lienholder,
or that of any other holder of an interest in the Premises which may be, or
may become, prior to the interest of Lender.
LEASE. The word "Lease" means that certain lease of the Premises, dated
December 28, 1990, between Landlord and Borrower.
LENDER. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
LOAN. The word "Loan" means the loan, or any other financial
accommodations, Lender has made or is making to Borrower.
PREMISES. The word "Premises" means the real property located in SALT LAKE
County, State of Utah, commonly known as 5225 WILEY POST WAY, SUITE 500,
SALT LAKE CITY, UT 84116.
BORROWER'S ASSIGNMENT OF LEASE. Borrower hereby assigns to Lender all of
Borrower's- rights in the Lease as partial security for the Loan. The parties
intend that this assignment will be a present transfer to Lender of all of
Borrower's rights under the Lease, subject to Borrower's rights to use the
Premises and enjoy the benefits of the Lease while not in default on the Loan or
Lease. Upon full performance by Borrower under the Loan, this assignment shall
be ended, without the necessity of any further action by any of the parties.
This assignment includes all renewals of and amendments to the Lease or the
Loan, until the Loan is paid in full. No amendments may be made to the Lease
without Lenders prior written consent, which shall not be unreasonably withheld
or delayed.
CONSENT OF LANDLORD. Landlord consents to the above assignment. if Borrower
defaults under the Loan or the Lease, Lender may reassign the Lease, and
Landlord agrees that Landlord's consent to any such reassignment will not be
unreasonably withheld or delayed. So long as Lender has not entered the
Premises for the purpose of operating a business, Lender will have no liability
under the Lease, including without limitation liability for rent. Whether or
not Lender enters into possession of the Premises for any purpose, Borrower will
remain fully liable for all obligations of Borrower as lessee under the Lease.
While Lender is in possession of the Premises, Lender will cause all payments
due under the Lease and attributable to that period of time to be made to
Landlord. if Lender later reassigns the Lease or vacates the Premises, Lender
will have no further obligation to Landlord.
LEASE DEFAULTS. Both Borrower and Landlord agree and represent to Lender that,
to the best of their knowledge, there is no breach or offset existing under the
Lease or under any other agreement between Borrower and Landlord. Landlord
agrees not to terminate the Lease, despite any default by Borrower, without
giving Lender written notice of the default and an opportunity to cure the
default within a period of sixty (60) days from the receipt of the notice. If
the default is one that cannot reasonably be cured by Lender (such as
insolvency, bankruptcy, or other judicial proceedings against Borrower), then
Landlord will not terminate the Lease so long as Landlord receives all sums due
under the Lease for the period during which Lender is in possession of the
Premises, or so long as Lender reassigns the Lease to a new lessee reasonably
satisfactory to Landlord.
DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest
(or other interest) in the Collateral and disclaims all interests, liens and
claims which Landlord now has or may hereafter acquire in the Collateral.
Landlord agrees that any lien or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lender's security interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.
ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender in this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral in such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.
MISCELLANEOUS PROVISIONS. This Agreement shall extend to and bind the
respective heirs, personal representatives, successors and assigns of the
parties to this Agreement. The covenants of Borrower and Landlord respecting
subordination of the claim or claims of Landlord in favor of Lender shall extend
to, include, and be enforceable by any transferee or endorsee to whom Lender may
transfer any claim or claims to which this Agreement shall apply. Lender need
not accept this Agreement in writing or otherwise to make it effective. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Utah. If Landlord is other than an individual, any agent or other
person executing this Agreement on behalf of Landlord represents and warrants to
Lender that he or she has full power and authority to execute this Agreement on
Landlord's behalf. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is in writing and signed by Lender. Without
notice to Landlord and without affecting the validity of this Consent, Lender
may do or not do anything it deems appropriate or necessary with respect to the
Loan, any
<PAGE>
08-26-1997 LANDLORD'S CONSENT Page 2
(Continued)
================================================================================
obligors on the Loan, or any Collateral for the Loan; including without
limitation extending, renewing, rearranging, or accelerating any of the Loan
indebtedness. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not constitute a waiver of or
prejudice Lender's right otherwise to demand strict compliance with that
provision or any other provision. Whenever consent by Lender is required in
this Agreement, the granting of such consent by Lender in any one instance shall
not constitute continuing consent to subsequent instances where such consent is
required.
BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS THIS AGREEMENT
IS DATED AUGUST 26, 1997.
BORROWER:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
------------------------------
Kevin W. Pearson, Treasurer
LANDLORD: LENDER:
E & H INVESTMENTS, INC. ZIONS FIRST NATIONAL BANK
X /s/ Illegible By:
----------------------------- ------------------------
Landlord's Signature Authorized Officer
President
===============================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 9.24 (c) 1997 CFI ProServices, Inc.
All rights reserved, [UT-C10 MEDICODE.LN C3.OVL]
<PAGE>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
- ------------------------------------------------
1. Debtor(s) (Last Name First) and address(es)
MEDICODE, INC. SSN/TlN: 87-0459623
5225 WILEY POST WAY, SUITE 500
SALT LAKE CITY, UT 84116
- ------------------------------------------------
2. Secured Party(ies) and address(es)
ZIONS FIRST NATIONAL BANK
#1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
- ------------------------------------------------
4. This Financing Statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL INTANGIBLES;
WHETHER ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS,
ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL
RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO
ANY OF THE FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER
ACCOUNTS PROCEEDS).
The secured party is is not X a seller or purchase money lender of the
----- ----
collateral.
- ------------------------------------------------
5. Assignee(s) of Secured party and Address(es)
- ------------------------------------------------
6. Gross sales price of collateral
$ _________________
$ _________________Sales
or use tax paid to State of ______________
- --------------------------------------------------------------------------------
For Filing Officer (Date, Time, Number, and Filing Office)
- --------------------------------------------------------------------------------
This statement is filed without the debtor's signature to perfect a security
interest in collateral. (Check [X] if so)
[ ] already subject to a security interest in another jurisdiction when it
was brought into this state.
[ ] which is proceeds of the original collateral described above in which
a security interest was perfected:
- --------------------------------------------------------------------------------
Check [X] if covered: [X] Proceeds of Collateral are also covered. [X] Products
of collateral are also covered. No. of additional Sheets presented:
- --------------------------------------------------------------------------------
3. Maturity date (if any): Approved by Department of Commerce Division
of Corporations and Commercial Code.
- --------------------------------------------------------------------------------
ZIONS FIRST NATIONAL BANK
By: /s/ Kevin W. Pearson By: /s/ Illegible
--------------------------- -----------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
STANDARD FORM - FORM UCC-1.
(4) SECURED PARTY COPY
<PAGE>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
- ------------------------------------------------
1. Debtor(s) (Last Name First) and address(es)
MEDICODE, INC. SSN/TlN: 87-0459623
5225 WILEY POST WAY, SUITE 500
SALT LAKE CITY, UT 84116
- ------------------------------------------------
2. Secured Party(ies) and address(es)
ZIONS FIRST NATIONAL BANK
#1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
- ------------------------------------------------
4. This Financing Statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT AND GENERAL INTANGIBLES;
WHETHER ANY OF THE FOREGOING IS OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS,
ADDITIONS, REPLACEMENTS, AND SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL
RECORDS OF ANY KIND RELATING TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO
ANY OF THE FOREGOING (INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER
ACCOUNTS PROCEEDS).
The secured party is is not X a seller or purchase money lender of the
----- ----
collateral.
- ------------------------------------------------
5. Assignee(s) of Secured party and Address(es)
- ------------------------------------------------
6. Gross sales price of collateral
$ _________________
$ _________________Sales
or use tax paid to State of ______________
- --------------------------------------------------------------------------------
For Filing Officer (Date, Time, Number, and Filing Office)
- --------------------------------------------------------------------------------
This statement is filed without the debtor's signature to perfect a security
interest in collateral. (Check [X] if so)
[ ] already subject to a security interest in another jurisdiction when it
was brought into this state.
[ ] which is proceeds of the original collateral described above in which
a security interest was perfected:
- --------------------------------------------------------------------------------
Check [X] if covered: [X] Proceeds of Collateral are also covered. [X] Products
of collateral are also covered. No. of additional Sheets presented:
- --------------------------------------------------------------------------------
3. Maturity date (if any): Approved by Department of Commerce Division
of Corporations and Commercial Code.
- --------------------------------------------------------------------------------
ZIONS FIRST NATIONAL BANK
By: /s/ Kevin W. Pearson By: /s/ Illegible
--------------------------- ------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
STANDARD FORM - FORM UCC-1.
(5) DEBTOR COPY
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 08-26-1997 09-01-2000 9001 Z 7380 6412424 5477
- ---------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
5225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
INSURANCE REQUIREMENTS. MEDICODE, INC. ("Grantor") understands that insurance
coverage is required in connection with the extending of a loan or the providing
of other financial accommodations to Grantor by Lender. These requirements are
set forth in the security documents. The following minimum insurance coverages
must be provided on the following described collateral (the "Collateral"):
COLLATERAL ALL INVENTORY AND EQUIPMENT.
TYPE. All risks, including fire, theft and liability.
AMOUNT. Full insurable value.
BASIS. Replacement value.
ENDORSEMENTS. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Lender.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, fifteen (15)
days from the date of this Agreement, evidence of the required insurance as
provided above, with an effective date of August 26, 1997, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required insurance
or fails to continue such insurance in force, Lender may do so at Grantor's
expense as provided in the applicable security document. The cost of any such
insurance, at the option of Lender, shall be payable on demand or shall be added
to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES
THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE
LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE
OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor
authorizes Lender to provide to any person (including any insurance agent or
company) all information Lender deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO PROVIDE
INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AUGUST 26,1997.
GRANTOR:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
------------------------------
Kevin W. Pearson, Treasurer
- --------------------------------------------------------------------------------
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE: ___________________________ PHONE: ________________
AGENTS NAME:_________________________________
INSURANCE COMPANY: _____________________________________________
POLICY NUMBER: _________________________________________________
EFFECTIVE DATES:________________________________________________
COMMENTS:_______________________________________________________
- --------------------------------------------------------------------------------
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 9.24 (c) 1997 CFI ProServices, Inc.
All rights reserved, [UT-C10 MEDICODE.LN C3.OVL]
<PAGE>
LOAN AGREEMENT
Borrower: MEDICODE, INC. Lender: ZIONS FIRST NATIONAL BANK
6225 WILEY POST WAY, SUITE 500 HEAD OFFICE/COMMERCIAL LOANS
SALT LAKE CITY, UT 84116 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
THIS LOAN AGREEMENT BETWEEN MEDICODE, INC. ("BORROWER") AND ZIONS FIRST NATIONAL
BANK ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS.
BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO
LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS,
INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO
THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL
FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED
TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS."
BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING
ANY LOAN, LENDER IS RELYING UPON BORROWERS REPRESENTATIONS, WARRANTIES, AND
AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR
EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE
JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND SHALL REMAIN
SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT.
TERM. This Agreement shall be effective as of August 29, 1997, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used In
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means MEDICODE, INC. The word "Borrower"
also includes, as applicable, all subsidiaries and affiliates of Borrower
as provided below in the paragraph listed "Subsidiaries and Affiliates."
BORROWING BASE. The words "Borrowing Base" mean as determined by Lender
from time to time, the lesser or (a) $5,000,000.00, or the applicable
reduced amount of the Line of Credit in effect from time to time pursuant
to the terms set forth under the Section entitled "Line of Credit" below,
or (b) the sum of (i) 80.000% of the aggregate amount of Eligible Accounts,
plus (ii) 20.000% of the aggregate amount of Eligible inventory, not to
exceed $500,000.00, plus (iii) 60.000% of the aggregate amount of the net
book value of Eligible Equipment (not to include any Equipment purchased
with an Advance that is issued as a Term Note). Provided, however, that in
the event the aggregate outstanding principal amount of Advances (excluding
the aggregate outstanding principal balance of all Term Notes) is less than
$2,250,OO0.00 and Borrower is in compliance with the covenants set forth
below in this section, the Borrowing Base shall be the lesser of (a)
$2,250,000.00; or (b) that amount which would remain after reducing the
aggregate outstanding principal balance of all Term Notes from the
applicable Line of Credit amount in effect from time to time pursuant to
the terms set forth under the section entitled "Line of Credit" below.
a) BORROWER MAINTAINS MINIMUM TRADING CAPITAL OF $4,000,000.00 UNTIL MAY
31,1998, INCREASING TO $4,500,000.00 ON JUNE 1, 1998 AND TO $5,000,000.00
ON JUNE 1, 1999. "TRADING CAPITAL" SHALL BE DEFINED AS CASH PLUS ACCOUNTS
RECEIVABLE PLUS INVENTORY (INVENTORY NOT TO EXCEED $2,000,000.00) MINUS
TRADE PAYABLES.
(b) BORROWER MAINTAINS A MINIMUM RATIO OF EARNINGS BEFORE INTEREST, TAXES
AND DEPRECIATION TO TOTAL DEBT SERVICE OF 2.25 TO 1.0, MEASURED AS OF THE
LAST DAY OF EACH QUARTER, BASED ON THE CURRENT QUARTER AND THE IMMEDIATELY
PRECEEDING THREE QUARTERS.
c) BORROWER MAINTAINS A MAXIMUM RATIO OF TOTAL LIABILITIES MINUS DEFERRED
REVENUE TO TANGIBLE NET WORTH OF 2.5 TO 1.0.
(d) BORROWER SHALL MAINTAIN A POSITIVE NET PROFIT CALCULATED QUARTERLY
BASED ON THE CURRENT QUARTER AND THE IMMEDIATELY PRECEDING THREE QUARTERS.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
<PAGE>
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust,
factors lien, equipment trust, conditional sale, trust receipt, lien, charge,
lien or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether created by
law, contract, or otherwise. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL."
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may borrow
shall exclude all returns, discounts, credits, and offsets of any nature. Unless
otherwise agreed to by Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts are
supported by insurance, bonds or other assurances satisfactory to
Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian,
or receiver for the assets of such Account Debtor, or who has made an
assignment for the benefit of creditors or has become insolvent or
fails generally to pay its debts (including its payrolls) as such
debts become due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 60 DAYS FROM DUE
DATE OR 90 DAYS from the invoice date. The entire balance of any
Account of any single Account debtor will be ineligible whenever the
portion of the Account which has not been paid within 60 DAYS FROM DUE
DATE OR 90 DAYS from the invoice date is in excess of 20.000% of the
total amount outstanding on the Account.
(l) That portion of the Accounts of any single Account Debtor which
exceeds 10.000% of all of Borrower's Accounts.
(m) Accounts with respect to which the Account Debtor is not a
resident of the following Canadian Provinces: British Columbia,
Alberta, Saskatchewan, Manitoba and Ontario, except to the extent such
Accounts are supported by insurance, bonds or other assurances
satisfactory to Lender Accounts which Lender in its sole discretion
reasonably deems ineligible.
ELIGIBLE EQUIPMENT. The words "Eligible Equipment" mean, at any time, all
of Borrowers Equipment as defined below except:
(a) Equipment which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Equipment which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for operation.
2
<PAGE>
(c) Fixtures, including any equipment or trade fixtures which may be
attached or affixed to the realty upon which the equipment is situate.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all
of Borrower's inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
(c) Work in progress.
(d) Inventory which is not for direct resale including but not limited
to packaging, labeling and manufacturing supplies. Inventory which is
prohibited from being sold by any federal, state or local governmental
agency. Inventory which Lender in its sole discretion reasonably
deems ineligible.
(e) Software inventory shall be ineligible.
EQUIPMENT. The word "Equipment" means all of Borrower's goods used or
bought for use primarily in Borrower's business and which are not included
in inventory, whether now or hereafter existing.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination
of Lenders commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security interest in any
Collateral for the indebtedness, including without limitation all Borrowers
granting such a Security interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may be
liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety or otherwise; whether recovery upon such
indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such indebtedness may be or hereafter may become
otherwise unenforceable.
INVENTORY. The word "Inventory" means all of Borrowers raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes inventory
temporarily out of Borrower's custody or possession and all returns on
Accounts.
LENDER. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrowers
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of
3
<PAGE>
business to secure indebtedness outstanding on the date of this Agreement
or permitted to be incurred under the paragraph of this Agreement titled
"Indebtedness and Liens"; (e) liens and security interests which, as of the
date of this Agreement, have been disclosed to and approved by the Lender
in writing; and (f) those liens and security interests which in the
aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
TERM NOTE. The words "Term Note" mean any Note which evidences an Advance
used by Borrower to purchase Equipment which, at the option of Borrower has
been executed by Borrower as an individual term loan. Each Advance
evidenced by a Term Note will be in an amount no greater than 100% of the
invoice cost of the applicable Equipment less any invoice items
constituting softs costs such as software, development, training, etc.,
will be repaid on a fully amortizing schedule in accordance with the terms
and conditions set forth in the Term Note, and will mature three (3) years
from the date of the Advance.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. The initial amount of the Line of Credit will be $5,000,000.00. This
amount will be reduced by $200,000.00 on a quarterly basis, beginning December
31, 1998 and continuing on the last day of each quarter thereafter. Within the
foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow
under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lenders obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be in
full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrowers Accounts, Inventory, Equipment books,
records, and operations, and Lender shall be satisfied as to their
condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable, including without limitation the following loan fees:
Borrower shall pay in arrears a quarterly loan fee equal to .25%, of
the average unused portion of the Line of Credit during the applicable
quarter. This loan fee shall be calculated on the last day of each
quarter, beginning December 31, 1997, and shall be paid by Borrower on
or before the last day of the first month following the end of each
quarter. This loan fee shall be reduced by .125% for every
$1,500,000.00 in average collected balances held by Borrower on
deposit Zions First National Bank during the applicable quarter.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
orally by authorized persons. Lender may, but need not, require that all
oral requests be confirmed in writing. Each Advance shall be conclusively
deemed to have been made at the request of and for
4
<PAGE>
the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL, To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"). Lender's Security Interests in
the Collateral shall be continuing liens and shall include the proceeds and
products of the Collateral, including without limitation the proceeds of any
insurance. With respect to the Collateral, Borrower agrees and represents and
warrants to Lender.
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lenders Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Borrower will note Lenders interest upon any and all chattel paper if not
delivered to Lender for possession by Lender. Contemporaneous with the
execution of this Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations Borrower hereby
appoints Lender as its irrevocable attorney-in-fact for the purpose of
executing any documents necessary to perfect or to continue any Security
Interest. Lender may at any time, and without further authorization from
Borrower file a carbon, photograph, facsimile, or other reproduction of any
financing statement for use as a financing statement. Borrower will
reimburse Lender for all expenses for the perfection, termination, and the
continuation of the perfection of Lender's security interest in the
Collateral. Borrower promptly will notify Lender of any change in
Borrowers name including any change to the assumed business names of
Borrower. Borrower also promptly will notify Lender of any change in
Borrower's Social Security Number or Employer Identification Number.
Borrower further agrees to notify Lender in writing prior to any change in
address or location of Borrowers principal governance office or should
Borrower merge or consolidate with any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and agings. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible inventory and
records itemizing and describing the kind, type, quality, and quantity of
inventory, Borrower's Inventory costs and selling prices, and the daily
withdrawals and additions to Inventory. With respect to the Equipment,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Equipment and
records itemizing and describing the kind, type, quality, and quantity of
Equipment. Borrower's Equipment costs, and the daily withdrawals and
additions to Equipment The following is an accurate and complete list of
all locations at which Borrower keeps or maintains business records
concerning Borrowers Accounts, Inventory and Equipment: 5225 Wiley Post
Way, Suite 500, Salt Lake City, Ut.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts, Inventory and Equipment and schedules of Eligible Accounts,
Eligible Inventory and Eligible Equipment, in form and substance
satisfactory to the Lender. Thereafter Supplemental schedules shall be
delivered according to the following schedule: EVERY 30 DAYS.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account Information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on
approval, or sale or return; (e) Except as reflected in the inventory
schedules delivered to Lender, all Eligible Inventory is now and at
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all times hereafter will be of good and merchantable quality, free from
defects; (f) Eligible Inventory is not now and will not at any time
hereafter be stored with a bailee, warehouseman, or similar party without
Lenders prior written consent, and, in such event, Borrower will
concurrently at the time of bailment cause any such bailee, warehouseman,
or similar party to issue and deliver to Lender, in form acceptable to
Lender, warehouse receipts in Lender's name evidencing the storage of
inventory; and (g) Lender, its assigns, or agents shall have the right at
any time and at Borrowers expense to inspect and examine the inventory and
to check and test the same as to quality, quantity, value, and condition.
REPRESENTATIONS AND WARRANTIES CONCERNING EQUIPMENT. With respect to the
Equipment, Borrower represents and warrants to Lender: (a) All Equipment
represented by Borrower to be Eligible Equipment for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Equipment; (b) All Equipment values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Equipment will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Equipment is now and at all times hereafter will be in Borrowers physical
possession; (e) Except as reflected in the Equipment schedules delivered to
Lender, all Eligible Equipment is now and at all times hereafter will be of
good and merchantable quality, free from defects; (f) Eligible Equipment is
not now and will not at any time hereafter be stored with a bailee,
warehouseman, or similar party without Lender's prior written consent, and,
in such event, Borrower will concurrently at the time of bailment cause any
such bailee, warehouseman, or similar party to issue and deliver to Lender,
in form acceptable to Lender, warehouse receipts in Lenders name evidencing
the storage of Equipment; and (g) Lender, its assigns, or agents shall have
the right at any time and at Borrowers expense to inspect and examine the
Equipment and to check and test the same as to quality, quantity, value,
and conditions
NOTIFICATION BASIS. Borrower agrees and understands that this Loan shall
be on a notification basis pursuant to which Lender shall directly collect
and receive all proceeds and payments from the Accounts in which Lender has
a security interest. In order to facilitate the foregoing, Borrower agrees
to deliver to Lender, upon demand, any and all of Borrowers records, ledger
sheets, payment cards, and other documentation, in the form requested by
Lender, with regard to the Accounts. Borrower further agrees that Lender
shall have the right to notify each Account Debtor, pay such proceeds and
payments directly to Lender, and to do any and all other things as Lender
may deem to be necessary and appropriate, within its sole discretion, to
carry out the terms and intent of this Agreement. Lender shall have the
further right, where appropriate and within Lenders sole discretion, to
file suit, either in its own name or in the name of Borrower, to collect
any and all such Accounts. Borrower further agrees that Lender may take
such other actions, either in Borrowers name or Lenders name, as Lender may
deem appropriate within its sole judgment, with regard to collection and
payment of the Accounts, without affecting the liability of Borrower under
this Agreement or on the indebtedness.
REMITTANCE ACCOUNT. Borrower agrees that Lender may at any time require
Borrower to institute procedures whereby the payments and other proceeds of
the Accounts shall be paid by the Account Debtors under a remittance
account or lock box arrangement with Lender, or Lender's agent, or with one
or more financial institutions designated by Lender. Borrower further
agrees that, if no Event of Default exists under this Agreement, any and
all of such funds received under such a remittance account or lock box
arrangement shall, at Lenders sole election and discretion, either be (a)
paid or turned over to Borrower, (b) deposited into one or more accounts
for the benefit of Borrower (which deposit accounts shall be subject to a
security assignment in favor of Lender); (c) deposited into one or more
accounts for the joint benefit of Borrower and Lender (which deposit
accounts shall likewise be subject to a security assignment in favor of
Lender); (d) paid or turned over to Lender to be applied to the
indebtedness in such order and priority as Lender may determine within its
sole discretion; or (e) any combination of the foregoing as Lender shall
determine from time to time. Borrower further agrees that, should one or
more Events of Default exist, any and all funds received under such a
remittance account or lock box arrangement shall be paid or turned over to
Lender to be applied to the indebtedness, again in such order and priority
as Lender may determine within its sole discretion.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duty organized, validly
existing and in good standing under the laws of the State of Utah and is
validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body, and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrowers financial condition as of
the date of the statement, and there has been no material adverse change in
Borrowers financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will
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constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title
to all of Borrower's properties free and clear of all security interests,
and has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrowers legal name, and Borrower has not used, or filed a financing
statement under, any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 , et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above.
Borrower authorizes Lender and its agents to enter upon the properties to
make such inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower, or to any
other person. The representations and warranties contained herein are
based on Borrower's due diligence in investigating the properties for
hazardous waste and hazardous substances. Borrower hereby (a) releases and
waives any future claims against Lender for indemnity or contribution in
the event Borrower becomes liable for cleanup or other costs under any such
laws, and (b) agrees to indemnify and hold harmless Lender against any and
all claims, losses, liabilities, damages, penalties, and expenses which
Lender may directly or indirectly sustain or suffer resulting from a breach
of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened release
occurring prior to Borrowers ownership or interest in the properties,
whether or not the same was or should have been known to Borrower. The
provisions of this section of the Agreement, including the obligation to
indemnify, shall survive the payment of the indebtedness and the
termination or expiration of this Agreement and shall not be affected by
Lenders acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrowers Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (IQ Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 5225 WILEY POST WAY, SUITE 500, SALT LAKE CITY,
UT 84116. Unless Borrower has designated otherwise in writing this
location is also the office or offices where Borrower keeps its records
concerning the Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
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will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such information
is or will be incomplete by omitting to state any material fact necessary
to make such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force and
effect until such time as Borrowers indebtedness shall be paid in full, or
until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrowers books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event later than thirty (30) days after the
end of each month, Borrower's balance sheet and profit and loss statement
for the period ended, prepared and certified as correct to the best
knowledge and belief by Borrower's chief financial officer or other officer
or person acceptable to Lender. All financial reports required to be
provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (1O) days', prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation of the following: (a) name
of the insurer, (b) the risks insured; (c) the amount of the policy; (d)
the properties insured; (e) the then current property values on the basis
of which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHANGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
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OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrowers' books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation a such records) in the possession of a
third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least monthly within twenty (20) days of the end of each month with a
certificate executed by Borrowers chief financial officer, or other officer
or person acceptable to Lender, certifying that the representations and
warranties set forth in this Agreement are true and correct as of the date
of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist as a
result of an intentional or unintentional action or omission on its port or
on the port of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed an Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Document, or
(c) reduce the rate of return on Lenders capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
[unreadable], then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefore, within (5) days after Lender's written demand for
such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity in excess of $500,000.00, or (c) make any product
acquisitions in excess of $500,000.00, or (d)incur any obligation as surety
or guarantor other than in the ordinary course of business.
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CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower whether under this Agreement or under any other agreement, Lender shall
have no obligation to make Loan Advances or to disburse Loan proceeds if: (a)
Borrower or any Guarantor is in default under the terms of this Agreement or any
of the Related Documents or any other agreement that Borrower or any Guarantor
has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a
petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c)
there occurs a material adverse change in Borrower's financial condition, in the
financial condition of any Guarantor, or in the value of any Collateral securing
any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify
or revoke such Guarantor's guaranty of the Loan or any other loan with Lender;
or (e) Lender in good faith deems itself insecure, even though no Event of
Default shall have occurred.
ACCOUNTS RECEIVABLE AGING. BORROWER SHALL FURNISH TO LENDER A MONTHLY ACCOUNTS
RECEIVABLE AGING REPORT WITHIN TWENTY (20) DAYS OF THE END OF EACH MONTH IN A
FORM ACCEPTABLE TO LENDER. SO LONG AS THE AGGREGATE PRINCIPAL AMOUNT OF
OUTSTANDING ADVANCES (EXCLUDING THE AGGREGATE OUTSTANDING PRINCIPAL BALANCE OF
ALL TERM NOTES) IS LESS THAN $2,250,000.00 AND BORROWER IS IN COMPLIANCE WITH
THE COVENANTS SET FORTH UNDER THE DEFINITION FOR "BORROWING BASE" ABOVE. THIS
REPORT SHALL BE PROVIDED IN A SUMMARY FORMAT ACCEPTABLE TO LENDER.
ACCOUNTS PAYABLE AGING. BORROWER SHALL FURNISH TO LENDER A QUARTERLY ACCOUNTS
PAYABLE AGING REPORT WITHIN THIRTY (30) DAYS OF THE END OF EACH QUARTER IN A
FORM ACCEPTABLE TO LENDER WHENEVER THE AGGREGATE PRINCIPAL AMOUNT OF OUTSTANDING
ADVANCES (EXCLUDING THE AGGREGATE OUTSTANDING PRINCIPAL BALANCE OF ALL TERM
NOTES) EXCEEDS $2,250,000.00 AND/OR WHEN BORROWER IS OUT OF COMPLIANCE WITH THE
ADVANCE COVENANTS.
CUSTOMER LIST. BORROWER SHALL FURNISH TO LENDER ON A SEMI-ANNUAL BASIS A LIST
OF BORROWER'S ACCOUNTS RECEIVABLE CUSTOMERS AND THEIR ADDRESSES IN A FORM
ACCEPTABLE TO LENDER WITHIN THIRTY (30) DAYS OF THE END OF EACH HALF-YEAR
PERIOD, WHENEVER THE AGGREGATE PRINCIPAL AMOUNT OF OUTSTANDING ADVANCES
(EXCLUDING THE AGGREGATE OUTSTANDING PRINCIPAL BALANCE OF ALL TERM NOTES)
EXCEEDS $2,250,000.00 AND/OR WHEN BORROWER IS OUT OF COMPLIANCE WITH THE ADVANCE
COVENANTS.
BORROWING BASE CERTIFICATE. BORROWER SHALL FURNISH TO LENDER A MONTHLY
BORROWING BASE CERTIFICATE CERTIFIED BY AN AUTHORIZED OFFICER/EMPLOYEE OF
BORROWER, WITHIN TWENTY (20) DAYS OF THE END OF EACH MONTH IN A FORM ACCEPTABLE
TO LENDER, WHENEVER THE AGGREGATE PRINCIPAL AMOUNT OF OUTSTANDING ADVANCES
(EXCLUDING THE AGGREGATE OUTSTANDING PRINCIPAL BALANCE OF ALL TERM NOTES)
EXCEEDS $2,250,000.00 AND/OR WHEN BORROWER IS OUT OF COMPLIANCE WITH THE ADVANCE
COVENANTS, UNLESS LENDER SPECIFICALLY REQUESTS OTHERWISE IN WRITING TO BORROWER.
EARNINGS. BORROWER SHALL MAINTAIN A RATIO OF EARNINGS BEFORE INTEREST, TAXES
AND DEPRECIATION TO TOTAL DEBT SERVICE OF NO LESS THAN 1.5 TO 1.0, MEASURED AS
OF THE LAST DAY OF EACH QUARTER BASED ON THE CURRENT QUARTER AND THE IMMEDIATELY
PRECEDING THREE QUARTERS.
TOTAL LIABILITIES. BORROWER SHALL MAINTAIN A RATIO OF TOTAL LIABILITIES MINUS
DEFERRED REVENUE TO TANGIBLE NET WORTH OF NOT MORE THAN 3.45 TO 1.0 AT ALL
TIMES.
PROFITABILITY. BORROWER SHALL MAINTAIN A POSITIVE NET PROFIT CALCULATED
QUARTERLY BASED ON THE CURRENT QUARTER AND THE IMMEDIATELY PROCEEDING THREE
QUARTERS.
INVENTORY REPORTS. BORROWER SHALL FURNISH TO LENDER A MONTHLY INVENTORY REPORT
WITHIN TWENTY (20) DAYS OF THE END OF EACH MONTH IN FORM AND CONTENT ACCEPTABLE
TO LENDER, WHENEVER THE AGGREGATE PRINCIPAL AMOUNT OF OUTSTANDING ADVANCES
(EXCLUDING THE AGGREGATE OUTSTANDING PRINCIPAL BALANCE OF ALL TERM NOTES)
EXCEEDS $2,250,0000.00 AND/OR BORROWER IS OUT OF COMPLIANCE WITH THE ADVANCE
COVENANTS.
TRADING CAPITAL BORROWER SHALL MAINTAIN MINIMUM TRADING CAPITAL OF
$3,000,000.00. TRADING CAPITAL SHALL BE DEFINED AS CASH PLUS ACCOUNTS RECEIVABLE
PLUS INVENTORY (INVENTORY NOT TO EXCEED $2,000,000.00), MINUS TRADE PAYABLES,
MEASURED MONTHLY.
WAIVER OF CLAIMS. Borrower (i) represents that they have no defenses to or
setoffs against any indebtedness or other obligations owing to Lender or its
affiliates (the "Obligations"), nor claims against Lender or its affiliates for
any matter whatsoever, related or unrelated to the Obligations, and (ii)
releases Lender and its affiliates from all claims, causes of action, and costs,
in law or equity, existing as of the date of this Agreement, which Borrower has
or may have by reason of any matter of any conceivable kind or character
whatsoever, related or unrelated to the Obligations, including the subject
matter of this Agreement. This provision shall not apply to claims for
performance of express contractual obligations owing to Borrower by Lender or
its affiliates.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts.
10
<PAGE>
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on
or of any of Borrower's deposit accounts with Lender. However, this Event
of Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor or any of the indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the indebtedness. Lender, at its option,
may, but shall not be required to, permit the Guarantors estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a)cures the default within fifteen(15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lenders option, all
indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's
rights and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
11
<PAGE>
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Utah. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of SALT LAKE
County, the State of Utah. Subject to the provisions on arbitration, this
Agreement shall be governed by and construed in accordance with the laws of the
State of Utah.
ARBITRATION DISCLOSURES:
1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS THE
LENDER, ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND
SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT
FROM COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS
OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR
THE AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, including
but not limited to those arising out of or relating to this Agreement
or any agreements or instruments relating hereto or delivered in
connection herewith, and including but not limited to a claim based on
or arising from an alleged tort, shall at the request of any party be
determined by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The
arbitration proceedings shall be conducted in Salt Lake City, Utah.
The arbitrator(s) shall have the qualifications set forth in
subparagraph (c) hereto. All statutes of limitations which would
otherwise be applicable in a judicial action brought by a party shall
apply to any arbitration or reference proceedings hereunder.
(b) In any judicial action or proceeding arising out of or relating to
this Agreement or any agreements or instruments relating hereto or
delivered in connection herewith, including but not limited to a claim
based on or arising from an alleged tort, if the controversy or claim
is not submitted to arbitration as provided and limited in
subparagraph (a) hereto, all decisions of fact and law shall be
determined by a reference in accordance with Rule 53 of the Federal
Rules of Civil Procedure or Rule 53 of the Utah Rules of Civil
Procedure or other comparable, applicable reference procedure. The
parties shall designate to the court the referee(s) selected under the
auspices of the American Arbitration Association in the same manner as
arbitrators are selected in Association-sponsored arbitration
proceedings. The referee(s) shall have the qualifications set forth
in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance
with the rules of the American Arbitration Association from panels
maintained by the Association. A single arbitrator or referee shall
be knowledgeable in the subject matter of the dispute. Where three
arbitrators or referees conduct an arbitration or reference
proceeding, the claim shall be decided by a majority vote of the three
arbitrators or referees, at least one of whom must be knowledgeable in
the subject matter of the dispute and at least one of whom must be a
practicing attorney. The arbitrator(s) or referee(s) shall award
recovery of all costs and fees (including reasonable attorneys' fees,
administrative fees, arbitrator's fees, and court costs). The
arbitrator(s) or referee(s) also may grant provisional or ancillary
remedies such as, for example, injunctive relief, attachment, or the
appointment of a receiver, either during the pendency of the
arbitration or reference proceeding or as part of the arbitration or
reference award.
(d) Judgment upon an arbitration or reference award may be entered in
any court having jurisdiction, subject to the following limitations:
the arbitration or reference award is binding upon the parties only if
the amount does not exceed Four Million Dollars ($4,000,000.00); if
the award exceeds that limit, either party may commence legal action
for a court trial de novo. Such legal action must be filed within
thirty (30) days following the date of the arbitration or reference
award; if such legal action is not filed within that time period, the
amount of the arbitration or reference award shall be binding. The
computation of the total amount of an arbitration or reference award
shall include amounts awarded for arbitration fees, attorneys' fees,
interest, and all other related costs.
12
<PAGE>
(e) At the Lender's option, foreclosure under a deed of trust or
mortgage may be accomplished either by exercise of a power of sale
under the deed of trust or by judicial foreclosure. The institution
and maintenance of an action for judicial relief for pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the
right of any party, including the plaintiff, to submit the controversy
or claim to arbitration if any other party contests such action for
judicial relief.
(f) Notwithstanding the applicability of other law to any other
provision of this Agreement, the Federal Arbitration Act, 9 U.S.C.
REWRITE 1 et seq., shall apply to the construction and interpretation
-- ---
of this arbitration paragraph.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lenders'
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any right to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well as
all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such interests in the Loans and will
have all the rights granted under he participation agreement or agreements
governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or later
against Lender or against any purchaser of such a participation interest
and unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation reasonable attorneys' fees, incurred
in connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that amount.
This includes, subject to any limits under applicable law, Lender's
reasonable attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including reasonable attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other
sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not
however have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf. Time is of the Essence. Time is of the
essence in the performance of this Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or
13
<PAGE>
any other provision of this Agreement. No prior waiver by Lender nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
FINAL AGREEMENT. Borrower understands that this Agreement and the related loan
documents are the final expression of the agreement between Lender and Borrower
and may not be contradicted by evidence of any alleged oral agreement.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF AUGUST 15, 1997.
BORROWER:
MEDICODE, INC.
By: /s/ Kevin W. Pearson
---------------------------------
Kevin W. Pearson Treasurer
LENDER:
ZIONS FIRST NATIONAL BANK
By: /s/ Illegible
---------------------------------
Authorized Officer
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver 3.24(c) 1997 CFI ProServices, Inc.
All rights reserved. [UT-C40 MEDICORE LN C3 OVL]
14
<PAGE>
EXHIBIT 11.1
MEDICODE, INC
Calculation of net income (loss) per share
Historical
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ (112,000) $ 48,000 $1,629,000 $ (128,000) $ 750,000
========== =========== ========== ========== ==========
Weighted average shares
of common stock
outstanding............ 649,000 677,000 1,225,000 1,198,000 1,333,000
Dilutive common stock
equivalents and
convertible securities:
Stock options and
warrants............. -- 2,243,000 2,239,000 -- 2,167,000
Preferred stock....... -- 4,016,000 4,016,000 -- 4,016,000
Shares related to Staff
Accounting Bulletin
topic 4D:
Stock options......... 393,000 393,000 393,000 393,000 393,000
---------- ----------- ---------- ---------- ----------
Shares used in computing
net income (loss) per
share.................. 1,042,000 7,329,0000 7,873,000 1,591,000 7,909,000
========== =========== ========== ========== ==========
Net income (loss) per
share.................. $ (0.11) $ 0.01 $ 0.21 $ (0.08) $ 0.09
========== =========== ========== ========== ==========
Pro Forma
Calculation of shares
outstanding for
computing pro forma net
income (loss) per
share:
Shares used in computing
net income (loss) per
share.................. 1,042,000 7,329,000 7,873,000 1,591,000 7,909,000
Adjusted to reflect the
effect of the assumed
conversion of preferred
stock.................. 4,016,000 -- -- 4,016,000 --
---------- ----------- ---------- ---------- ----------
Shares used in computing
pro forma net income
(loss) per share....... 5,058,000 7,329,000 7,873,000 5,607,000 7,909,000
========== =========== ========== ========== ==========
Pro forma net income
(loss) per share....... $ (0.02) $ 0.01 $ 0.21 $ (0.02) $ 0.09
========== =========== ========== ========== ==========
</TABLE>
<PAGE>
EXHIBIT 24.2
MEDICODE, INC.
SUPPLEMENTAL POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Eugene Santa Cattarina and Kevin W.
Pearson and each of them, his attorneys-in-fact, each with the power of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to the S-1 Registration Statement of Medicode, Inc. filed September 24, 1997
(the "Registration Statement"), and to sign any registration statement for the
same offering covered by the Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto in all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ---------------------------------- ---------------
<S> <C> <C>
- ---------------------------- President, Chief Executive Officer ______ __, 1997
Eugene Santa Cattarina and Director (Principal Executive
Officer)
- ---------------------------- Chief Financial Officer ______ __, 1997
Kevin W. Pearson (Principal Financial
and Accounting Officer)
- ---------------------------- Director ______ __, 1997
John Moragne
- ---------------------------- Director ______ __, 1997
Melville H. Hodge
- ---------------------------- Director ______ __, 1997
Thomas F. Stephenson
- ---------------------------- Director ______ __, 1997
L. John Wilkerson
- ---------------------------- Director ______ __, 1997
Carl Witonsky
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 3,038 5,345
<SECURITIES> 0 0
<RECEIVABLES> 5,531 4,287
<ALLOWANCES> (207) (262)
<INVENTORY> 1,036 487
<CURRENT-ASSETS> 10,546 11,247
<PP&E> 4,814 5,054
<DEPRECIATION> (3,553) (3,846)
<TOTAL-ASSETS> 12,000 12,702
<CURRENT-LIABILITIES> 9,565 9,757
<BONDS> 285 0
0 0
18,673 18,673
<COMMON> 2,112 2,157
<OTHER-SE> (18,635) (17,885)
<TOTAL-LIABILITY-AND-EQUITY> 12,000 12,702
<SALES> 0 0
<TOTAL-REVENUES> 32,618 22,791
<CGS> 11,053 6,811
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 18,949 14,863
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 46 (83)
<INCOME-PRETAX> 2,570 1,200
<INCOME-TAX> 941 450
<INCOME-CONTINUING> 1,629 750
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,629 750
<EPS-PRIMARY> 0.21 0.09
<EPS-DILUTED> 0 0
</TABLE>
