-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S7Zy7WNAsR4dvHI3+uNH8GCMZKGTeZAwm+JvQNlZkFN0oWf2Wr6VUFNFXt0sRA3V Oo8iawvNTZwgW05ETXBArQ== 0000893877-99-000610.txt : 19990920 0000893877-99-000610.hdr.sgml : 19990920 ACCESSION NUMBER: 0000893877-99-000610 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19990917 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICALOGIC INC CENTRAL INDEX KEY: 0000923899 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 930890696 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-87285 FILM NUMBER: 99713020 BUSINESS ADDRESS: STREET 1: 20500 NW EVERGREEN PARKWAY CITY: HILLSBORO STATE: OR ZIP: 97124 BUSINESS PHONE: 5036456442 MAIL ADDRESS: STREET 1: 20500 NW EVERGREEN PARKWAY CITY: HILLSBORO STATE: OR ZIP: 97124 S-1 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1999 REGISTRATION NO. 333-_______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- MEDICALOGIC, INC. (Exact name of registrant as specified in its charter) OREGON 7374 93-0890696 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification incorporation Classification Number) or organization) Code Number) ----------- 20500 NW EVERGREEN PARKWAY HILLSBORO, OREGON 97124 (503) 531-7000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ----------- MARK K. LEAVITT CHIEF EXECUTIVE OFFICER 20500 NW EVERGREEN PARKWAY HILLSBORO, OREGON 97124 (503) 531-7000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------- COPIES TO: STEPHEN E. BABSON ROY W. TUCKER TODD A. BAUMAN Perkins Coie LLP Stoel Rives LLP 1211 SW Fifth Avenue, Suite 1500 900 SW Fifth Avenue, Suite 2600 Portland, OR 97204 Portland, Oregon 97204 (503) 727-2000 (503) 224-3380 ----------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ----------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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, check the following box. [ ] -----------
CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- Proposed Maximum Title of Each Class Aggregate Amount of Of Securities to Be Registered Offering Price(1) Registration Fee - ------------------------------ ---------------- ----------------- Common Stock $60,000,000 $16,680 - -------------------------------------------------------------------------------- (1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933.
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 HEREAFTER 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 SUCH SECTION 8(A), MAY DETERMINE. ================================================================================ - -------------------------------------------------------------------------------- The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1999 Prospectus , 1999 MEDICALOGIC, INC. [LOGO] ____________ Shares of Common Stock - -------------------------------------------------------------------------------- Market & Proposed Symbol: The Offering: o We have applied for listing on o We are offering __________ shares the Nasdaq National Market with of our common stock. the symbol MDLI. o The underwriters have an option to purchase an additional __________ shares from us to cover over-allotments. o We anticipate that the initial public offering price will be between $______ and $_______ per share. - -------------------------------------------------------------------------------- Per Share Total - -------------------------------------------------------------------------------- Public offering price: $ $ Underwriting fees: Proceeds to MedicaLogic: This investment involves risk. See "Risk Factors" beginning on Page 9. Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- Donaldson, Lufkin & Jenrette BancBoston Robertson Stephens U.S. Bancorp Piper Jaffray DLJdirect Inc. TABLE OF CONTENTS Page Page Prospectus Summary .............. 3 Business ........................ 40 Risk Factors .................... 9 Management ...................... 60 Use of Proceeds ................. 22 Certain Transactions ............ 70 Dividend Policy ................. 22 Principal Shareholders .......... 72 Capitalization .................. 23 Description of Capital Stock .... 75 Dilution ........................ 24 Shares Eligible for Future Sale . 79 Selected Consolidated Underwriting .................... 81 Financial Data ............... 25 Additional Information .......... 84 Management's Discussion and Legal Matters ................... 84 Analysis of Financial Experts ......................... 84 Condition and Results of Index to Financial Statements ... F-1 Operations ................... 27 "MedicaLogic," "Practice With Knowledge," "Logician," "SIMPL," "Quickstep," "ScheduLogic," "LinkLogic," "KnowledgeBank," "AboutMyHealth" and the MedicaLogic logo are trademarks or service marks of MedicaLogic. Other trademarks or service marks appearing in this prospectus are the property of their respective holders. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements for reasons such as those set forth under "Risk Factors." MedicaLogic, Inc. Our Business Our business is connecting physicians and patients through the Internet. For physicians, we offer a line of enterprise and Internet-based electronic medical record products and services for use at the point of care in the exam room, with configurations suitable for practices of all sizes. For patients, we will provide a Web site that will allow them to access certain healthcare information from their physician-generated medical record, enter personal medical information and effectively communicate with their physician. For both physicians and patients, we will provide focused healthcare content and commerce opportunities, keyed to information in a selectively shared database that unites physicians and patients. Together, these products, services and databases will comprise our Internet Health Services Center. We believe we can increase the efficiency and quality of healthcare and enhance the physician-patient relationship through our Internet Health Services Center. Founded in 1985, MedicaLogic has been developing, marketing and supporting electronic medical records for over a decade and has products in daily use by physicians across the country. While most healthcare information systems have primarily supported financial and administrative functions, we have focused exclusively on the challenge of providing clinical solutions that are used by physicians at the point of care to create and access the electronic medical record. Our customers include academic medical centers such as Baylor College of Medicine in Houston, Texas, integrated healthcare delivery systems such as Providence Health System in Portland, Oregon, and other customers such as the NASA space shuttle program. More than 7,000 health professionals, including approximately 3,000 physicians, now maintain electronic medical records with our enterprise electronic medical record software, constituting an estimated base of over 7 million electronic patient records. Our technology will use the Internet to link healthcare consumers to physicians using either our enterprise or Internet-based electronic medical record. We believe we are the leading provider of electronic medical record software in the healthcare industry. 3 Our Market Opportunity The patient medical record developed and maintained by the physician is of paramount importance in the U.S. healthcare system. Despite increased needs by the healthcare industry for more accurate and accessible clinical information, the vast majority of clinical data is still recorded in handwritten or hand-typed notes filed within paper charts which cannot be accessed, aggregated or organized electronically. We believe the Internet has made computerized tools more useful and more affordable than traditional client-server applications to the 600,000 practicing physicians in the United States and will facilitate the widespread adoption of an electronic medical record. The Internet is also an efficient means to distribute medical information to healthcare consumers, whose interest in such information is growing rapidly. According to a 1997 survey in the Journal of the American Medical Association, 43% of U.S. adults who used the Internet were seeking health information. According to Cyber Dialogue, 78% of Internet users with health insurance are interested in managing their health insurance benefits online and 23% of all Internet users are interested in purchasing prescription drugs online. Also according to Cyber Dialogue, 90% of all Internet users have health insurance. Our Solution Our solution is the Internet Health Services Center, which will provide the following benefits: Improved Quality of Care. Our solution is designed to increase patient medical information flows among all healthcare participants, which ultimately will result in more accurate diagnoses and more timely and appropriate treatments. Using our solution, physicians will be able to enter and access patient-specific data online at the point of care, allowing them, for example, to review data regarding potentially harmful drug interactions, without manually searching through the often unorganized and incomplete paper records. We believe this and other benefits provided by our solution will result in improved quality of care. Empower Healthcare Consumers with Information Regarding their Healthcare. Whether they see a physician themselves on a regular or episodic basis, or act as a coordinator of healthcare for a child, elderly parent or other relative, healthcare consumers want more information and more control over their healthcare needs. Through the use of the Internet, our solution is designed to increase information flows among all healthcare participants, including patients, which ultimately gives patients greater control. Our solution will permit consumers to communicate electronically with other healthcare participants, such as physicians, payers and suppliers, giving them quicker, more efficient and more effective access to patient records, prescription drugs, payment services and information and other health-related supplies and services. Improved Physician-Patient Relationship. Our Internet solution is designed to facilitate communication between physicians and patients, which has been reduced by the widespread adoption of managed care. We believe improved physician access to information at the point of care will result in higher-quality clinical interaction between physicians and patients. Likewise, 4 providing patients with better access to information and electronic communication with physicians will result in a better understanding of physician instructions by patients and, ultimately, a lower risk of treatment error. Reduced Healthcare Costs. Our solution is designed to reduce healthcare costs and improve the management of patient records by: o Reducing the inefficiencies of manual and paper-based transactions; o Eliminating redundant data entry; o Reducing transcription costs; o Reducing hospitalizations related to harmful drug interaction events; o Reducing duplicative and unnecessary laboratory tests resulting from inaccurate or misplaced records; o Rationalizing entry and availability of Health Care Financing Administration-mandated patient chart and account coding information; o Decreasing the communication inefficiencies created by isolated proprietary systems; and o Improving health maintenance through greater efficiency and better access to patient medical records. Our Strategy Our objective is to be the leading provider of Internet-based electronic health record information. Our strategy to achieve this objective has the following key elements: o Gain rapid adoption by physicians of our electronic medical records solutions; o Offer the most compelling Internet destination for healthcare consumers; o Become a leading driver of clinical e-commerce transactions; and o Capitalize on the value of our large, clinically-rich database. Strategic Relationships Because our products and services are used at the point of care, we are well positioned to offer electronic transaction services to both physicians and their patients. To pursue these opportunities, we will form relationships with strategic partners who can provide these electronic transaction services, including electronic processing of claims, automatic filling and refilling of prescriptions and electronic transmission of laboratory results. In addition, we will enter into strategic partnerships with vendors who will provide medical content to our customers as well as partnerships that will allow our physician customers to have access to computer hardware on which they may use our products and services. To date, we have entered into the following strategic relationships: 5 o CVS.com. CVS.com, a leading online pharmacy, will fill orders for prescriptions received from physicians and patients using our Internet-based products. o Dell. Dell is a preferred provider of notebooks, personal computers and other hardware, and we granted Dell a nonexclusive right and license to reproduce and install our software programs and related materials on Dell branded hardware products. o Envoy. Envoy Corporation, a leader in electronic transaction processing in the healthcare industry, will provide us with a nonexclusive and nontransferable license to its services for the processing of certain healthcare transactions, including patient eligibility and referral checks and medical claims submissions. These services will become available in early 2000. MedicaLogic, Inc. was incorporated in Oregon in May 1985 and commenced operations that year. Our executive offices are located at 20500 NW Evergreen Parkway, Hillsboro, Oregon 97124. Our telephone number is (503) 531-7000. The Offering Common stock offered by MedicaLogic......... __________ shares Common stock to be outstanding after the offering............................. __________ shares Nasdaq National Market Symbol............... MDLI Use of proceeds............................. o working capital; o general corporate purposes; and o potential acquisitions. See "Use of Proceeds" on page 22. The number of shares of common stock to be outstanding after the offering excludes an aggregate of 13,994,384 shares of common stock reserved for issuance under our stock plans, of which 4,359,651 shares of common stock were subject to outstanding options as of September 15, 1999 at a weighted average exercise price of $2.48 per share. See "Management-Stock Incentive Plans," and Notes 7 and 13 of Notes to Consolidated Financial Statements. Assumptions which Apply to this Prospectus Unless we indicate otherwise, all information in this prospectus reflects the following: o the conversion of our outstanding preferred stock on a one-for-one basis into common stock; and o no exercise by the underwriters of their over-allotment option to purchase up to ____ additional shares of common stock. 6 Summary Consolidated Financial Data (In thousands, except per share data) The summary consolidated historical financial information below was derived from the Consolidated Financial Statements beginning on page F-1. This summary should be read together with the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 27. We completed our acquisition of PrimaCis Health Information Technology, Inc. in January 1999. The unaudited pro forma consolidated statements of operations data combine MedicaLogic's and PrimaCis' historical statements of operations for the year ended December 31, 1998 and give effect to the acquisition as if it occurred on January 1, 1998. This information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have actually occurred if the acquisition had been completed as of the dates indicated, nor is it necessarily indicative of the future operating results of the combined company.
Years Ended December 31, Six Months Ended ---------------------------------------------- June 30, Pro Forma ---------------------- 1996 1997 1998 1998 1998 1999 ---------- -------- -------- --------- --------- -------- (unaudited) (unaudited) Consolidated Statement of Operations Data: Revenues................................. $ 9,664 $ 12,807 $ 16,160 $ 16,408 $ 6,659 $ 8,975 Operating expenses: Cost of revenues.................... 6,120 7,756 6,754 6,770 3,283 3,418 Marketing and sales................. 6,498 7,539 7,579 9,166 3,630 7,946 Research and development............ 6,583 7,047 8,016 8,575 3,858 5,092 General and administrative.......... 718 865 1,044 2,100 451 1,255 ---------- -------- -------- --------- --------- -------- Operating loss........................... (10,255) (10,400) (7,233) (10,203) (4,563) (8,736) Net loss................................. $ (10,315) $(10,670) $ (7,035) $ (10,126) $ (4,497) $ (7,993) ========== ======== ======== ========= ========= ======== Basic and diluted net loss per common share(1)................................. $ (0.78) $ (0.80) $ (0.51) $ (0.66) $ (0.34) $ (0.47) ========== ======== ======== ========= ========= ======== Weighted average shares used in computing basic and diluted net loss per common share(1)................................. 13,153 13,269 13,766 15,231 13,358 16,841 Pro forma basic and diluted net loss per common share(1).......................... $ (0.20) $ (0.21) ======== ======== Weighted average shares used in computing pro forma basic and diluted net loss per common share(1).......................... 34,957 38,919
7
Consolidated Balance Sheet Data: June 30, 1999 ------------- (unaudited) Actual As Adjusted (2) --------- --------------- Cash and cash equivalents.................................. $ 9,922 $ Working capital............................................ 38,424 Total assets............................................... 59,203 Long-term obligations, net of current portion.............. 984 Convertible redeemable preferred stock..................... 83,687 Total stockholders' equity (deficit)....................... (35,841) (1) For a description of the computation of the net loss per share and number of shares used in per share calculations, see Note 1 of the Notes to the Consolidated Financial Statements. Pro forma basic and diluted net loss per share includes shares of common stock issued on the conversion of our outstanding preferred stock on a one-for-one basis into common stock. (2) As adjusted to reflect the conversion of all outstanding shares of preferred stock into common stock and the sale by us of _____ shares of common stock offered by this prospectus at an initial public offering price of $___ per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.
8 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our financial statements and related notes, before you purchase any shares of our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would likely suffer. In such case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock. Risks Related to MedicaLogic Our Internet-based business model may not be successfully implemented, and it is difficult to evaluate because it is new and unproven. We have only recently implemented our Internet-based business model, and we do not have an operating history with this model upon which you can evaluate our prospects. In attempting to implement our Internet-based business model, we are significantly changing our business operations, sales and implementation practices, customer service and support operations and management focus. We are also facing new risks and challenges, including a lack of meaningful historical financial data upon which to plan future budgets, the need to develop strategic relationships and other risks described below. For each of the last three fiscal years and the first six months of 1999, all of our revenue was generated from the sale of licenses on and services related to our enterprise software and no revenue was derived from our Logician Internet system or other Internet-based products and services. Accordingly, our operating history is not indicative of our future performance under our Internet-based business model, and you should not rely upon our past performance to predict our future performance. We may not be able to implement our business model successfully. We may not achieve broad acceptance of our products and services by physicians, patients and other healthcare stakeholders. Our business model depends on our ability both to sell our Logician and Logician Internet systems to physicians and other healthcare providers and to generate usage by a large number of physicians. Achieving market acceptance for our products and services will require substantial marketing efforts and the expenditure of significant financial and other resources to create awareness and demand by physicians and healthcare consumers. Use of our products and services requires physicians to adopt different behavior patterns and new methods of conducting business and exchanging information. Physicians may not choose to integrate our products and services into their office work flow. Failure to achieve broad acceptance of our products and services by physicians and other healthcare stakeholders would have a material adverse effect on our business, financial condition and results of operations. 9 We are dependent on a small number of customers. We currently derive and expect to continue to derive a significant portion of our revenues from a limited number of customers. To the extent that any significant customer spends less money on licenses for Logician or related services, or terminates its relationship with us, our revenues could decline substantially. In 1998, we derived 21% of our revenue from VHA, Inc., a distribution partner, and in the first six months of 1999, we derived approximately 50% of our revenue from Baylor College of Medicine. The loss of any of these large customers could have a material adverse effect on our business, financial condition and results of operations. In the near term, we expect to continue to derive a significant portion of our future revenues from sales of our Logician enterprise product to a limited number of large integrated healthcare delivery networks. Failure to make such sales during any quarter could cause our revenues and results of operations to fall short of expectation, which could adversely affect the price of our common stock. We have a history of net operating losses and may not be profitable in the future. Failure to achieve or maintain profitability could materially and adversely affect the market price of our common stock. We have experienced net losses of approximately $10.3 million, $10.7 million, $7.0 million and $8.0 million in 1996, 1997, 1998 and the first six months of 1999, respectively. At June 30, 1999, we had a retained deficit of $43.1 million. We are investing heavily to develop our Internet-based products and services and expand our sales and marketing capabilities related to our Internet-based business. To date, we have not achieved any revenue on Internet-based products or services. We expect to continue to experience net losses for the foreseeable future, and we are not certain when we will become profitable, if at all. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis. Our results of operations are likely to fluctuate significantly. Because of the emerging nature of our Internet-based business, we may be unable to forecast accurately our revenues. In addition, the sales cycle for our products and services varies widely, particularly for sales of our Logician product to large integrated healthcare delivery networks, and it is difficult for us to predict the timing of particular sales. Since most of our costs are based on projected revenue levels, small variations in the timing of revenue recognition could cause significant variations in results of operations from quarter to quarter. Sales and results of operations may fluctuate from quarter to quarter depending on: o The amount and timing of operating costs and capital expenditures relating to development and expansion of our business; o Our introduction of new or enhanced services and products, and similar introductions by our competitors; o The budgetary cycles of large healthcare providers and other healthcare organizations; o Our ability to upgrade and develop our systems and infrastructure; o Government regulations; and o General economic conditions. 10 As a result, we believe that quarter-to-quarter comparisons of our sales and results of operations are not necessarily meaningful and that such comparisons may not be accurate indicators of future performance. Since we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, any significant decrease in revenue would likely have an immediate and material adverse effect on our business, financial condition and results of operations. In addition, if our future results of operations are below the expectations of securities analysts or investors our stock price may decline. Our business prospects depend on our ability to introduce successfully new products and services and enhance current products and services. The implementation of our Internet-based business model depends on our ability to introduce successfully new products and services. These include Logician Internet, which we began to offer on a commercial basis in September 1999, and our consumer Web site code-named AboutMyHealth.net, which is currently being tested in a pilot program and which will be released commercially in late 1999. We may not be able to introduce these products and services or our other products and services under development on schedule, or at all. Any failure by us to introduce planned products or to introduce such products on schedule could have a material adverse effect on our business, financial condition and results of operations. In addition, early releases of software often contain errors or defects. Despite our extensive testing, errors could be found in our new product releases and services before or after commercial release, which would result in product redevelopment costs and loss of, or delay in, market acceptance. In addition, we must enhance our product and service offerings to add functionality in such areas as interfacing with the products of our strategic partners. Our products and services often must be integrated and customized to operate with existing customer legacy computer systems. Developing, integrating and customizing our products and services will be expensive and time consuming. We are also working on enhancements that will allow our Logician and Logician Internet products to communicate with each other, thereby facilitating connections between physicians in integrated healthcare delivery networks, who primarily use Logician, and physicians who use Logician Internet. Failure to achieve these goals could have a material adverse effect on our business, financial condition and results of operations. We rely on strategic relationships that may not provide anticipated benefits. To be successful, we must establish and maintain strategic relationships with leaders in a number of healthcare and Internet industry segments. We will depend upon these relationships to, among other things, extend the reach of our products and services to a larger number of participants in the healthcare industry, develop and deploy new products and generate additional revenue. To date, we have established only a limited number of strategic relationships, and these relationships are in the early stages of development. We have limited experience in establishing and maintaining strategic relationships with healthcare and Internet industry participants. Entering into strategic relationships is complicated by several factors, including the following: 11 o Current or future strategic partners may decide to compete with us in some or all of our markets; o Key participants in the healthcare industry may refuse to establish strategic relationships with us if we have entered into such relationships with their competitors; and o Potential strategic partners may be reluctant to work with us until our products and services have obtained widespread market acceptance. If we lose any of our existing strategic relationships or fail to establish additional relationships, or if our strategic relationships fail to benefit us as expected, we may not be able to execute our business plan, which would have a material adverse effect on our business, financial condition and results of operations. See "Business-Sales and Marketing" and "Business-Strategic Relationships." Potential integrated healthcare delivery network customers could take a long time to evaluate the purchase of our products and services and to complete the purchase even after a decision has been made. One element of our strategy is to market our services directly to large healthcare organizations. The sale and implementation of our products and services are often subject to delays due to these organizations' internal budgets and procedures for approving large capital expenditures and deploying new technologies within their networks. We do not control many of the factors that will influence their buying decisions or affect the timing of implementation. Intense competition in our markets may lead to reduced sales of our products and services. Our industry is intensely competitive and subject to fragmentation, high growth and rapid technological change. We may face significant competition from traditional healthcare information system vendors and Internet healthcare companies as they expand their product offerings. Many of these companies have significantly greater financial resources, well-established brand names and large installed customer bases. We may be unable to compete successfully against these organizations. We believe that, to be successful, we must gain significant market share with our products and services before our competitors introduce alternative products and services with features similar to ours. Failure to achieve a significant market share may materially reduce our ability to compete successfully, if at all, with other market participants and could have a material adverse effect on our business, financial condition and results of operations. Our failure to keep pace with advances in technology could harm our business. If we cannot adapt to changing technologies, our business, financial condition and results of operations could be materially adversely affected. The Internet and healthcare information markets are characterized by rapid technological change, changes in users' and customers' requirements, frequent new service and product introductions embodying new technologies and 12 the emergence of new industry standards and practices that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our products and services, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. We may not be successful in using new technologies effectively or adapting our proprietary technology to evolving customer requirements or emerging industry standards. We may not be able to manage our growth effectively. We will need to expand our operations if we successfully achieve market acceptance for our products and services. Difficulties in managing any future growth could have a significant negative impact on our business, financial condition and results of operations. We cannot be certain that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. Our future results of operations will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. We may not be able to project the rate or timing of increases in the use of our products and services accurately or to expand and upgrade our systems and infrastructure to accommodate such increases. Our success depends on our key personnel. Our success depends in large part on the continued service of our management and other key personnel and our ability to continue to attract, motivate and retain highly qualified employees. In particular, the services of Mark K. Leavitt, our President and Chief Executive Officer, David C. Moffenbeier, our Chief Operating Officer, Harvey J. Anderson, our Senior Vice President, General Manager of Internet Operations, and Cameron Lewis, our Vice President, Internet Marketing and eCommerce Strategies, are integral to the execution of our business strategy. If one or more of our key employees leaves MedicaLogic, we will have to find a replacement with the combination of skills and attributes necessary to execute our strategy. Because competition for skilled employees is intense, and the process of finding qualified individuals can be lengthy and expensive, we believe that the loss of the services of key personnel could negatively affect our business, financial condition and results of operations. We do not maintain key person life insurance on any of our employees. We may not be able to hire or retain skilled personnel. Our future success depends on our ability to attract and retain skilled management and other highly qualified personnel who are responsible for day-to-day development and maintenance of our products and technologies, marketing our products and services and servicing our customers. Competition is intense for employees with experience and expertise related to software and the Internet. We may not be able to hire and retain sufficiently skilled personnel to support the development and growth of our business. 13 Our competitive position depends on our ability to protect our intellectual property rights. Our ability to compete depends upon our proprietary systems and technology, including Logician Internet and Logician. We protect our proprietary rights through a combination of trademark, trade secret and copyright law, confidentiality agreements and technical measures. In addition, we are preparing six patent applications for filing with the U.S. Patent and Trademark Office. Any steps we take to protect our intellectual property may be inadequate, time consuming and expensive. Despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. Misappropriation of our intellectual property would have a material adverse effect on our business, financial condition and results of operations. In addition, we may have to engage in litigation in the future to enforce or protect our intellectual property rights or to defend against claims of invalidity, and we may incur substantial costs as a result. Intellectual property infringement claims against us can be costly and result in the loss of significant rights. We could be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our applications overlaps with competing products. One party has recently filed a patent infringement lawsuit against us and several other companies asserting broad proprietary rights in processes similar to our electronic medical record solutions. While we do not believe that we have infringed or are infringing on any valid proprietary rights of third parties, similar infringement claims may be asserted against us and may be successful. We could incur substantial costs and diversion of management resources defending any infringement claims. In addition, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. This type of judgment would have a material adverse effect on our business, financial condition and results of operations. Licenses for intellectual property of third parties that might be required for our products or services may not be available on commercially reasonable terms, or at all. We are vulnerable to interruptions in our operations. To succeed, we must be able to operate our systems without interruption. Our operations are vulnerable to interruption from a variety of sources, many of which are not within our control, including: o Power loss and telecommunications failures; o Software and hardware errors, failures or crashes; o Computer viruses and similar disruptive problems; and o Fire, flood and other natural disasters. We have not yet completed comprehensive plans addressing these contingencies. In addition, certain of our communications and information services are provided through our service providers. We expect to depend on independent service providers for many of the services we provide through our Internet Health Services Center system, including the routing of transaction data to third-party payers. Any problems experienced by our providers that result in interruptions of our services or a failure of our services to function as desired could have a 14 material adverse effect on our business, financial condition and results of operations. We may have no means of replacing services on a timely basis or at all if they are inadequate or in the event of a service interruption or failure. Although we attempt to limit our liability for service interruptions, we may face liability for the failure of our system to function for any of the above reasons. We may be liable for use of data we provide. We provide data for use by physicians, consumers and other healthcare stakeholders. This data may be obtained from our physician customers, strategic partners, other third parties or, with patient consent, from the aggregation of patient health records. Although no claims have been brought against us to date regarding injuries related to the use of this data, claims may be made in the future. While we attempt to limit our liability in our license and service agreements, these measures may not prove to be adequate, and we may not be able to insure adequately against these claims. A claim brought against us that is uninsured or under-insured could materially harm our business, financial condition and results of operations. Our Internet infrastructure is unproven and may not accommodate high levels of use. To date, we have processed a limited number and variety of Internet-based transactions. In addition, our Internet products and services have only been used by a limited number of physicians and healthcare consumers. Our infrastructure may not accommodate increased use while maintaining acceptable overall performance. To successfully implement our Internet-based business model, we must continue to expand and adapt our network infrastructure to accommodate additional users, increased transaction volumes and changing customer requirements. An unexpectedly large increase in the volume or pace of traffic on our Web site, the number of physicians using Logician Internet or our other Internet-based products and services, or orders placed by customers may require us to expand and further upgrade our technology. This expansion and adaptation would be expensive and will divert our attention from other activities. Failure to expand and adapt our Internet infrastructure could have a material adverse effect on our business, results of operations and financial condition. We may not be able to prevent security breaches. The difficulty of securely transmitting confidential information over the Internet has been a significant barrier to conducting e-commerce and engaging in sensitive communications. We believe that any well-publicized compromise of Internet security may deter people from using our products and services to conduct transactions that involve transmitting confidential healthcare information over the Internet. It is also possible that third parties could penetrate our network security or otherwise misappropriate our patient and other information. If this happens, our operations could be interrupted, and we could be subject to liability. We may have to devote significant financial and other resources to protect against security breaches or to alleviate problems caused by breaches. We could face financial loss, litigation and other liabilities to the extent that our activities or the 15 activities of third-party contractors involve the storage and transmission of confidential information like patient records or credit information. If we are unable to obtain additional financing for our future needs, our business may be adversely affected. We expect the net proceeds of this offering, together with our available cash, to be sufficient to meet our anticipated needs for working capital and other cash requirements for at least the next 12 months. We may need to raise additional funds, however, in order to: o Fund more rapid expansion; o Develop new or enhance existing services or products; o Respond to competitive pressures; or o Acquire complementary products, businesses or technologies. We cannot be certain that additional financing will be available on favorable terms, or at all. If adequate financing is not available or is not available on acceptable terms, our ability to fund our expansion, take advantage of potential acquisition opportunities, develop or enhance services or products, or respond to competitive pressures would be significantly limited. This limitation could have a material adverse effect on our business, financial condition and results of operations. We may not be able to implement our new management information systems in a timely manner and the new systems may not be adequate to support our operations. The growth in the complexity of our business has placed and will continue to place a significant strain on our operational, financial and management information systems. In June, 1999 we purchased a new management information system from Oracle Corporation and the required hardware to support it. This system includes accounting, operations, purchasing and project billing capability. We must integrate this system with our Internet products and services and with our existing customer relationship management system. The successful implementation of this system is expected to be crucial to our operations. We may not be able to implement this new system in an efficient and timely manner and the new system may not be adequate to support our operations. Year 2000 problems may adversely affect us. We may discover Year 2000 compliance problems that will require substantial revisions to our systems, products or services. In addition, third-party software, hardware or services that we rely on may need to be revised or replaced, all of which could be time consuming and expensive. Failure to address any problems that may arise on a timely basis could result in lost revenue, increased operating costs, the loss of customers and other business interruptions, any of which could have a material adverse effect on our business, results of operations and financial condition. 16 In addition, systems and software used by physicians, payers, Internet access companies, business partners and others outside our control may not be Year 2000 compliant. The failure of these entities to be Year 2000 compliant could result in a systemic failure beyond our control, such as a prolonged Internet or communications failure, which could also prevent us from delivering our services to customers, decrease the use of the Internet or prevent users from accessing our services. This failure could have a material adverse effect on our business, financial condition and results of operations. As the Year 2000 issue has many elements and potential consequences, some of which are not reasonably foreseeable, the ultimate impact of the Year 2000 on our operations could differ materially from our expectations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Year 2000 Compliance." Risks Related to the Healthcare Industry and the Internet Government regulation of the healthcare industry could adversely affect our business. We are subject to government regulation of the healthcare industry. Existing and new laws and regulations applicable to the healthcare industry could have a material adverse effect on our business, financial condition and results of operations. The federal and state governments extensively regulate the confidentiality and release of patient records. Additional legislation governing the distribution of medical records has been proposed at both the state and federal level. It may be expensive to implement security or other measures designed to comply with any new legislation. Moreover, we may be restricted or prevented from delivering patient records electronically. Legislation currently being considered at the federal level could affect our business. For example, the Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions and identifiers, prescribed security measures and other provisions within two years after the adoption of final regulations by the Department of Health and Human Services. We are designing our platform and applications to comply with these proposed regulations; however, until these regulations become final, they could change, which could cause us to use additional resources and lead to delays in order to revise our platform and applications. In addition, our success depends on other healthcare participants complying with these regulations. Some computer applications and software are considered medical devices and are subject to regulation by the United States Food and Drug Administration. We do not believe that our current applications or services are subject to FDA regulation. We may, however, expand our application and service offerings into areas that subject us to FDA regulation. We have no experience in complying with FDA regulations. We believe that complying with FDA regulations would be time consuming, burdensome and expensive and could delay our introduction of new applications or services. See "Business-Governmental Regulation and Healthcare Reform." 17 A federal law commonly known as the Medicare/Medicaid antikickback law, and several similar state laws, prohibit payments that are intended to induce physicians or others to acquire, arrange for or recommend the acquisition of healthcare products or services. Another federal law, commonly known as the "Stark" law, prohibits physicians from referring Medicare and Medicaid patients for designated health services to entities with which they have a financial relationship, unless that relationship qualifies for an explicit exception to the referral ban. The application and interpretation of these laws are complex and difficult to predict and could constrain our financial and marketing relationships. Government regulation of the Internet could adversely affect our business. Our business is subject to evolving government regulation of the Internet. Existing as well as new laws and regulations could adversely affect our business, financial condition and results of operations. Laws and regulations may be adopted with respect to the Internet or other online services covering issues such as: o User privacy; o Pricing; o Content; o Copyrights; o Distribution; and o Characteristics and quality of products and services. The applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Demand for our applications and services may be affected by additional regulation of the Internet. For example, until recently Health Care Financing Administration guidelines prohibited transmission of Medicare eligibility information over the Internet. We could be subject to sales or other taxes on Internet transactions. The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local levels and by certain foreign governments that could impose taxes on online sales of goods and services and certain other Internet activities. A recently enacted federal law places a temporary moratorium on certain types of taxation on Internet commerce. We cannot predict the effect of current attempts at taxing or regulating commerce over the Internet. Any legislation that substantially impairs the growth of e-commerce could have a material adverse effect on our business, financial condition and results of operations. See "Business-Government Regulation and Healthcare Reform." Consolidation in the healthcare industry could adversely affect our business. Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense. 18 These industry participants may try to use their market power to negotiate price reductions for our products and services. If we were forced to reduce our prices, our business, financial condition and results of operations could suffer unless we were able to achieve corresponding reductions in our expenses. In addition, the acquisition by third parties of any of our customers could have an adverse effect on our relationship with that customer. We depend on continued improvements in the Internet infrastructure. If the Internet continues to experience significant growth in the number of users and the level of use, then the Internet infrastructure may not be able to continue to support the demands placed on it. The Internet may not prove to be a viable commercial medium because of: o Inadequate development of the necessary infrastructure; o Lack of timely development of complementary products like high speed modems; and o Delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or increased government regulation. Risks Related to This Offering and Our Common Stock The public market for our common stock may be volatile. Prior to this offering, there has been no public market for our common stock. We cannot guarantee that an active trading market will develop or be sustained or that the market price of our common stock will not decline. Even if an active trading market develops, the market price of our common stock is likely to be highly volatile and could fluctuate significantly in response to various factors, including: o Actual or anticipated variations in our quarterly results of operations; o Announcements of technological innovations or new services or products by us or our competitors; o Timeliness of our introductions of new products; o Changes in financial estimates by securities analysts; o Conditions and trends in the electronic healthcare information, Internet and e-commerce markets; and o General market conditions and other factors. In addition, the stock markets, especially the Nasdaq National Market, have experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many technology companies, and Internet-related companies in particular. These fluctuations have often been unrelated or disproportionate to operating performance. The trading prices of many technology companies' stocks are at or near historical highs. These high trading prices may not be sustained. These broad market factors may materially affect the trading price of our common stock. General economic, political and market conditions like recessions and interest rate fluctuations may also have an adverse effect on the market price of our common stock. In the past, following periods of volatility in the market price for a company's securities, 19 shareholders have often initiated securities class action litigation. Any securities class action litigation could result in substantial costs and the diversion of management's attention and resources, which would have a material adverse effect on our business, financial condition and results of operations. We may have substantial sales of our common stock after the offering. Sales of substantial amounts of our common stock in the public market after this offering, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it more difficult for us to raise funds through equity offerings in the future. After the offering, based on shares outstanding on August 31, 1999, the holders of approximately 32,655,933 of our shares of common stock will be entitled to registration rights with respect to these shares until the holders may sell the shares under Rule 144 or 144(k) of the Securities Act. On the 181st day after the date of this prospectus, 32,958,907 shares of our common stock, including 22,279,090 of the shares subject to registration rights, will be eligible for sale in the public market subject in some cases to volume limitations, based on shares outstanding on August 31, 1999. In addition, a substantial number of outstanding shares of common stock and shares issuable upon exercise of outstanding options will become available for resale in the public market at prescribed times. After the offering, we intend to register 13,994,384 shares of common stock reserved for issuance under our stock incentive plans. See "Shares Eligible for Future Sale." Investors will suffer immediate and substantial dilution. The initial public offering price will be substantially higher than the net tangible book value per share of common stock. If we sell _______ shares in the offering at an assumed initial public offering price of $_______ per share, our net tangible book value per share will be $_______, which is $_______ below the assumed initial public offering price. If we issue additional common stock in the future, or outstanding options to purchase our common stock are exercised, there will be further dilution. See "Dilution." The anti-takeover provisions of our articles of incorporation, bylaws and Oregon law could delay or prevent an acquisition of our company. Our articles of incorporation, bylaws and the anti-takeover provisions of Oregon law could make it more difficult for a party to gain control of MedicaLogic, even if doing so would be beneficial to our shareholders. Our articles of incorporation and bylaws contain the following anti-takeover provisions: o The authority to issue up to 50 million shares of preferred stock, with preferences, limitations and relative rights fixed by the board of directors without any vote or action by the shareholders; o A classified board of directors, which is divided into three classes with each class standing for election every three years; 20 o The requirement that directors may only be removed for cause or with the affirmative vote of at least 75% of the voting power of the outstanding shares of our capital stock; and o The requirement that the above provisions may only be amended by an affirmative vote of the holders of not less than 75% of the voting power of the outstanding shares of our capital stock. See "Description of Capital Stock." Forward-looking statements may prove inaccurate. This prospectus contains forward-looking statements that involve risks and uncertainties, including those discussed above and elsewhere in this prospectus. These statements often contain words like believe, expect, anticipate, intend, contemplate, seek, plan, estimate or similar expressions. Forward-looking statements do not guarantee future performance. Because we cannot predict all of the risks and uncertainties that may affect us, or control the ones we do predict, these risks and uncertainties can cause our results to differ materially from the results we express in our forward-looking statements. Recognize these statements for what they are and do not rely on them as facts. We are not obligated to update forward-looking statements. 21 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $_______ million, or approximately $______ million if the underwriters' overallotment option is exercised in full, from the sale of shares of common stock offered by us. These estimates assume an initial public offering price of $____ per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We expect to use the net proceeds from this offering for working capital and other general corporate purposes. In addition, although we are not currently participating in any active negotiations and have no commitments or agreements with respect to any acquisition, we might in the future use a portion of the remaining proceeds to pay for acquisitions. We intend to invest the net proceeds from this offering in short-term, investment grade, interest-bearing instruments until they are used. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and we do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain earnings, if any, to fund the development and growth of our business. 22 CAPITALIZATION The following table sets forth as of June 30, 1999 our capitalization (1) on an actual basis and (2) on an as adjusted basis after giving effect to the conversion of all outstanding shares of preferred stock into common stock, the sale by us of the ___________ shares of common stock offered by this prospectus at an initial public offering price of $______ per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us and the filing upon the closing of the offering of Amended and Restated Articles of Incorporation to increase the number of authorized shares of common stock to 150 million. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes appearing elsewhere in this prospectus. The shares issued and outstanding do not include 3,883,489 shares issuable on the exercise of outstanding options.
June 30, 1999 -------------------------- Actual As Adjusted --------- ----------- (Dollars in thousands) Cash, cash equivalents and short-term investments.......................... $ 41,199 $ ========= =========== Capital leases and notes payable, less current portion............................ $ 984 $ --------- ----------- Convertible redeemable preferred stock; 50,000,000 shares authorized, $85,918 aggregate liquidation preference, 46,091,527 shares designated, 29,059,283 issued and outstanding at June 30, 1999, actual; no shares issued or outstanding, as adjusted..................................... 83,687 Shareholders' equity (deficit): Common stock, no par value, 100,000,000 shares authorized, 17,542,422 issued and outstanding at June 30, 1999, actual; 150,000 shares authorized, _______ shares issued and outstanding, as adjusted........ 14,211 Common stock notes receivable................ (5,959) Deferred compensation........................ (956) Accumulated deficit.......................... (43,137) --------- ----------- Total shareholders' equity (deficit)..... (35,841) --------- ----------- Total capitalization..................... $ 48,830 $ ========= ===========
23 DILUTION Our pro forma net tangible book value as of June 30, 1999 was approximately $44,046,000 or $0.95 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the total pro forma number of shares of common stock outstanding after giving effect to the conversion of all outstanding shares of preferred stock into common stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of ________ shares of common stock offered by this prospectus and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value would have been approximately $_______, or approximately $_____ per share. This represents an immediate increase in pro forma net tangible book value of $_____ per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $______ per share to new investors.
Assumed initial public offering price per share.............................. $_______ Pro forma net tangible book value per share as of June 30, 1999..... $0.95 Increase attributable to this offering.............................. _____ Pro forma net tangible book value per share after this offering.............. _______ Dilution to new investors.................................................... $
The following table summarizes, as of June 30, 1999 on the pro forma basis described above, the total number of shares of common stock purchased from us, the total consideration paid and the average price paid per share by the existing shareholders and by the new investors based upon an initial public offering price of $_____ per share before deducting the estimated underwriting discounts and commissions and offering expenses payable by us:
Shares Purchased Total Consideration -------------------- -------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ---------- ------- ------------- (In thousands) Existing shareholders............ 46,601,705 ______% $ 96,942 _____% $2.08 New investors.................... __________ ______ ________ _____ $_____ Total....................... __________ 100.0% $________ 100.0% ========== ====== ======== =====
These tables exclude all options that will remain outstanding upon completion of this offering. See Note 7 to Notes to the Consolidated Financial Statements. The exercise of outstanding options having an exercise price less than the offering price would increase the dilutive effect to new investors. 24 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Consolidated Financial Statements and accompanying Notes, which are included elsewhere in this prospectus. The consolidated statements of operations data for the three-year period ended December 31, 1998 and the consolidated balance sheet data as of December 31, 1997 and 1998 are derived from, and are qualified by reference to, the audited Consolidated Financial Statements included elsewhere in this prospectus. The consolidated statements of operations data for the two-year period ended December 31, 1995 and the consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are derived from, and are qualified by reference to, audited Consolidated Financial Statements that are not included in this prospectus. The consolidated statements of operations data for the six-month periods ended June 30, 1998 and 1999 and the balance sheet data as of June 30, 1999 are derived from unaudited financial statements included elsewhere in this prospectus and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the financial position and results of operations for these periods. Historical results of operations are not necessarily indicative of results in the future, and the results for interim periods are not necessarily indicative of the results that may be expected for the entire year.
Six Months Ended Years Ended December 31, June 30, ---------------------------------------------------- -------------------- 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- -------- --------- (In thousands, except per share data) (Unaudited) Consolidated Statements of Operations Data: Revenues: Software........................ $ 2,084 $ 6,765 $ 6,845 $ 7,617 $ 10,410 $ 3,989 $ 5,787 Service and support............. 366 772 2,819 5,190 5,750 2,670 3,188 -------- -------- -------- -------- -------- -------- --------- Total revenues............. 2,450 7,537 9,664 12,807 16,160 6,659 8,975 Operating expenses: Cost of revenue................. 987 3,141 6,120 7,756 6,754 3,283 3,418 Marketing and sales............. 2,755 5,061 6,498 7,539 7,579 3,630 7,946 Research and development........ 1,024 2,980 6,583 7,047 8,016 3,858 5,092 General and administrative...... 376 582 718 865 1,044 451 1,255 -------- -------- -------- -------- -------- -------- --------- Total operating expenses... 5,142 11,764 19,919 23,207 23,393 11,222 17,711 -------- -------- -------- -------- -------- -------- --------- Operating loss............. (2,692) (4,227) (10,255) (10,400) (7,233) (4,563) (8,736) -------- -------- -------- -------- -------- -------- --------- Other income (expense): Interest expense................ (88) (176) (251) (240) (187) (106) (93) Interest income................. 70 172 456 617 707 313 494 Other, net...................... (22) (30) (265) (647) (322) (141) 342 -------- -------- -------- -------- -------- -------- --------- Total other income (expense)................ (40) (34) (60) (270) 198 66 743 -------- -------- -------- -------- -------- -------- --------- Loss before income taxes... (2,732) (4,261) (10,315) (10,670) (7,035) (4,497) (7,993) Provision for income taxes.......... - - - - - - - ======== ======== ======== ======== ======== ======== ========= Net loss................... $ (2,732) $ (4,261) $(10,315) $(10,670) $ (7,035) $ (4,497) $ (7,993) ======== ======== ======== ======== ======== ======== ========= Net loss per share: $ Basic and diluted.............. $ (3.30) $ (0.34) $ (0.78) $ (0.80) $ (0.51) $ (0.34) $ (0.47) ======== ======== ======== ======== ======== ======== ========= Weighted average shares--basic and diluted.................... 827 12,603 13,153 13,269 13,766 13,358 16,841
25
December 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 June 30, 1999 -------- --------- -------- -------- -------- ------------- Consolidated Balance Sheet (Dollars in thousands) (Unaudited) Data: Cash and cash equivalents..... $ 3,545 $ 10,614 $ 18,651 $ 4,924 $ 4,718 $ 9,922 Working capital............... 4,159 10,245 19,096 14,870 16,091 38,424 Total assets.................. 6,242 14,787 26,074 22,072 24,308 59,203 Long-term obligations, net of current portion............... 406 1,454 977 278 679 984 Convertible redeemable preferred stock............... 5,698 15,795 35,818 42,593 49,387 83,687 Total shareholders' deficit... (869) (4,995) (15,268) (25,895) (32,044) (35,841)
26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of MedicaLogic should be read in conjunction with "Selected Consolidated Financial Data" and the Consolidated Financial Statements and related Notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors that include, but are not limited to, those set forth under "Risk Factors" and elsewhere in this prospectus. Overview MedicaLogic was founded in 1985 and released its first DOS-based electronic medical record product in 1989. In 1996, we released Logician, our Windows-based electronic medical record product. From 1994 through 1998, we concentrated on building our development and implementation capabilities by hiring additional engineering and sales personnel, improving the functionality of Logician through the release of three major upgrades, and implementing our product at customer sites. During the first six months of 1999, we released our current version of Logician and expect to ship an upgrade in September 1999. Our revenues totaled approximately $16.2 million and $9.0 million for the year ended December 31, 1998 and the six months ended June 30, 1999, respectively. All of this revenue was derived from the sale and associated support and services of our Logician software product, both directly and through resellers, to physicians in integrated healthcare delivery systems. We receive software license revenues from licensing our software products both directly to end-users and indirectly through resellers. We receive service revenues from two major sources: customer support contracts and consulting contracts. Customer support revenue, which consists of annual subscription fees for ongoing support of the product, including upgrades, is recognized ratably over the term of the contract, which is typically one year. We derive consulting revenues primarily from the implementation services performed on a time-and-materials basis under separate service arrangements related to the implementation of our software products. We recognize revenues from consulting services as the services are performed. During 1996, four customers accounted for approximately 41% of total revenues. During 1997, two customers accounted for approximately 32% of our total revenues and in 1998, one customer accounted for approximately 21% of our total revenues. During the first six months of 1999, one customer accounted for approximately 50% of our total revenues. Costs of revenues consist of licensing fees paid to third-party software vendors, the cost of product media, product duplication, order fulfillment personnel, manuals and implementation and support personnel and third-party service provider costs related to customer support. Marketing and sales expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, travel and promotional expenses and facility and communication 27 costs. Research and development expenses consist primarily of salaries and benefits paid to software developers, quality assurance personnel and technical writers, equipment for software developers and payments to outside contractors. General and administrative expenses consist primarily of salaries, benefits and related costs for our finance and administrative personnel and professional services fees. We recognize software license revenue in accordance with Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-4. These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and have been applied to transactions entered into after January 1, 1998. The application of SOP 97-2 has not had a material impact on our results of operations. With the implementation of our Internet business model, we expect that our historical revenue sources, sales of software licenses and services, will gradually be replaced by sources of revenue related to our Internet business model. Our first Internet product, Logician Internet, was not commercially introduced until September 1999. Our consumer Web site code-named AboutMyHealth.net is being tested in a pilot program and will not be introduced until late 1999. Because our Internet business model is in an emerging stage, revenue and income potential from our Internet products and services is unproven. For this reason, we expect our historical revenue sources will continue to be major contributors to our overall revenues for the foreseeable future. Despite the continued importance of our historical revenue sources, you should not use our past results as a basis to predict our future performance due to the implementation of our Internet business model. In addition to our historical revenue sources, we expect to generate future revenue from the following sources: o Subscription fees for use of Logician, rather than the one-time license fees we have historically charged; o Subscription fees for Logician Internet, our hosted application that allows physicians and other healthcare providers to create and manage electronic medical records over the Internet; o Transaction fees for drug prescriptions transmitted through the Internet Health Services Center; o Transaction fees to process payment claims through our Internet Health Services Center; and o Fees charged to advertisers for posting banner and other forms of advertising on our physician- and consumer-oriented Web sites. Since inception, but increasingly during the past year, we have made substantial investments in infrastructure and in staffing and management to accommodate current and anticipated future growth. From January 1, 1999 to August 31, 1999, we hired 73 employees, or approximately 33% of our current workforce, and invested approximately $8.5 million in capital assets. A large portion of these assets is dedicated to the development of our Internet Health Services Center. Our planned growth will require additional staff and infrastructure. 28 We have incurred net losses each year since we began operations. We had a net loss of approximately $7.0 million for the year ended December 31, 1998 and $8.0 million for the six months ended June 30, 1999 and, as of June 30, 1999, had an accumulated deficit of $43.1 million. We intend to increase further our spending on technology infrastructure development, marketing and promotion, services development and strategic relationships, all of which are related to the establishment of our Internet Health Services Center. As a result, we expect to continue incurring net losses and negative cash flows from operations at least through 2000. Effective January 1999, we acquired PrimaCis Health Information Technology, Inc. in a transaction that was accounted for as a purchase. PrimaCis, which was founded by faculty members of the Baylor College of Medicine, was a developer of electronic medical record software and had developed in-depth Internet-based oncology content for its Internet site. We paid PrimaCis shareholders total consideration of $6.3 million and paid $153,000 in merger-related costs to acquire the outstanding shares of PrimaCis capital stock. These amounts consisted of $2.1 million in cash, the issuance of shares of MedicaLogic common stock valued at $3.3 million and the assumption of $1.1 million in PrimaCis' liabilities. Goodwill in the amount of $3.2 million, reflecting the excess of the purchase price for PrimaCis over the fair value of the net tangible and other intangible assets acquired, will be amortized on a straight-line basis over a four-year period. Concurrently, in a transaction facilitated by our acquisition of PrimaCis, Baylor College of Medicine purchased 1,500 licenses of Logician from us for $4.5 million. Because the PrimaCis transaction facilitated the Baylor College of Medicine transaction, we allocated approximately $2.3 million of the purchase price for PrimaCis as a sales commission, which was recognized during the first six months of 1999. At about the time of the PrimaCis acquisition, we entered into an agreement with the Baylor College of Medicine providing that for each purchase of licenses of Logician prior to January 1, 2003 by Baylor College of Medicine or any other institution or health care provider in the Houston, Texas area, we will issue as payment to Baylor College of Medicine shares of our common stock having a then-current fair market value equal to 50% of the license fees received from that sale, up to an aggregate maximum of $12 million of our stock. Accordingly, when we sell additional licenses to Baylor College of Medicine, the amount of revenue we recognize reflects a sales discount equal to 50% of the license fee. When we sell licenses covered by this agreement to others, we reflect the payment to Baylor College of Medicine in the form of a sales commission. At June 30, 1999, we recorded aggregate deferred compensation of $956,000 for the grant of stock options at exercise prices less than the deemed fair value on the grant date. We expect to record additional deferred compensation of approximately $1.0 million in the third quarter of 1999 to reflect additional option grants at exercise prices less than the deemed fair value of common stock on the grant date through September 1999. The deferred compensation is being amortized over the vesting period of the options, which is generally three years. Of the total deferred compensation, none was amortized in the second quarter and approximately $127,000 will be amortized in the third quarter of 1999. 29 Results of Operations
Six Months Ended Years Ended December 31, June 30, ------------------------------------------ --------------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (Unaudited) Revenues: Software 70.8 % 59.5 % 64.4 % 59.9 % 64.5 % Service and support 29.2 40.5 35.6 40.1 35.5 --------- --------- --------- --------- --------- Total revenues 100.0 100.0 100.0 100.0 100.0 Operating expenses: Cost of revenue 63.3 60.6 41.8 49.3 38.1 Marketing and sales 67.2 58.9 46.9 54.5 88.5 Research and development 68.1 55.0 49.6 57.9 56.7 General and administrative 7.4 6.8 6.5 6.8 14.0 --------- --------- --------- --------- --------- Total operating expenses 206.1 181.2 144.8 168.5 197.3 Operating loss (106.1) (81.2) (44.8) (68.5) (97.3) Other income (expense): Interest expense (2.6) (1.9) (1.2) (1.6) (1.0) Interest income 4.7 4.8 4.4 4.7 5.5 Other, net (2.7) (5.1) (2.0) (2.1) 3.8 --------- --------- --------- --------- --------- Total other income (expense): (0.6) (2.1) 1.2 1.0 8.3 Loss before income taxes (106.7) (83.3) (43.5) (67.5) (89.1) Provision for income taxes - - - - - --------- --------- --------- --------- --------- Net loss (106.7)% (83.3)% (43.5)% (67.5)% (89.1)% --------- --------- --------- --------- ---------
Six Months Ended June 30, 1999 and 1998 Revenues Total revenues, which consisted of software licenses and service revenues, increased to $9.0 million for the first six months of 1999 from $6.7 million for the first six months of 1998. This increase primarily resulted from an increase of $1.8 million in software revenue, which in turn was primarily attributable to increases in the average selling price of Logician, partly offset by a decrease in the total licenses sold. The increase in the average selling price resulted primarily from a higher percentage of products sold through direct channels versus products sold through reseller channels. Total service revenue increased to $3.2 million for the first six months of 1999 from $2.7 million for the first six months of 1998, due primarily to an increase in our Logician installed base to 6,790 users on June 30, 1999 from 4,740 users on June 30, 1998. Service revenue represented 36% of our total revenues for the first six months of 1999 and 40% for the same period in 1998. The decrease as a percentage of total revenue was due primarily to the relatively higher increase in software license revenue compared to service revenue. 30 Operating Expenses Costs of Revenues Costs of revenues increased slightly to $3.4 million for the first six months of 1999 from $3.3 million for the first six months of 1998. Costs of revenues as a percentage of revenues was 38% for the six months ended June 30, 1999 and 49% for the six months ended June 30, 1998. The decrease in cost of revenues as a percentage of revenue resulted primarily from an average decrease of 53% in a third-party's licensing fees which took effect April 1, 1998 and from the decreasing marginal cost of service on each additional installed license. The cost of providing service to customers as a percentage of associated revenues often varies between periods because the costs of implementation and support personnel are relatively fixed and, at any given time, the staff may not be fully utilized. If we are required to hire additional support staff to service installed licenses on support contracts, we may experience short term increases in costs relative to the revenue produced. Marketing and sales Marketing and sales expenses increased to $7.9 million for the first six months of 1999 from $3.6 million for the first six months of 1998. Marketing and sales expenses represented 89% of our total revenues for the six months ended June 30, 1999 and 55% of our total revenues for the six months ended June 30, 1998. The increase in dollar amount and percentage of our marketing and sales expenses resulted primarily from sales commissions of $2.3 million associated with our sale of licenses to Baylor College of Medicine, incremental expenses of $1.5 million related to our new Internet business, including the hiring of 19 new employees and an increase in other marketing activities, including trade shows and public relations. We believe that we need to increase significantly our sales and marketing efforts to expand our market penetration and increase acceptance of our Internet products and services. Accordingly, we anticipate that marketing and sales expenses will continue to increase in future periods. Research and development Research and development expenses increased to $5.1 million for the first six months of 1999 from $3.9 million for the first six months of 1998. The increase resulted from an increase in the number of software developers and quality assurance personnel to 65 as of June 30, 1999 from 52 as of June 30, 1998 and the use of outside contractors to support our product development and testing activities. Research and development costs represented 57% of total revenue for the six months ended June 30, 1999 and 58% of total revenues for the six months ended June 30, 1998. General and administrative General and administrative expenses increased to $1.3 million for the first six months of 1999 from $451,000 for the first six months of 1998. The increase resulted from amortization of $335,000 of goodwill related to the PrimaCis acquisition and an increase in finance and administrative personnel to 17 as of June 30, 1999 from 11 as of June 30, 1998, to support the 31 growth of our business. General and administrative cost represented 14% of our total revenues for the six months ended June 30, 1999 and 7% of our total revenues for the six months ended June 30, 1998. We believe our general and administrative expenses will continue to increase as we expand our administrative staff and incur expenses associated with becoming a public company, including, but not limited to, annual and other public reporting costs, director and officer liability insurance, investor relations programs and professional services fees. Other Income (Expense) Other income consists of earnings on our cash and cash equivalents and short-term investment balances offset by interest expense associated with debt obligations and other non-operating costs. Other income was $743,000 for the first six months of 1999 compared to an expense of ($66,000) for the first six months of 1998. The increase in other income is mainly attributable to an increase of $200,000 in interest earned on cash and cash equivalents and short term investments and the settlement of litigation related to two customer contracts for $350,000 less than we had reserved for that expense. Provision for Income Taxes As a result of our net operating losses, no provision for income taxes during the six month periods ended June 30, 1999 and 1998 was recorded. Years Ended December 31, 1996, 1997, and 1998 Revenues Total revenues increased from $9.7 million in 1996 to $12.8 million in 1997, and to $16.2 million in 1998. Software revenue increased from $6.8 million in 1996 to $7.6 million in 1997, and to $10.4 million in 1998. The increase in software revenues from 1996 to 1997 primarily resulted from an increase in the average selling price from 1996 to 1997 due to more sales through direct rather than reseller channels. The increase in software revenues from 1997 to 1998 continued the trend of realizing higher average selling prices through our direct sales channel. Service revenues increased from $2.8 million in 1996 to $5.2 million in 1997, and to $5.8 million in 1998. The increase in the dollar value of service revenues is the result of support contracts on newly installed licenses that have been added each year. Service revenue represented 29% of total revenues in 1996, 41% in 1997 and 36% in 1998. The fluctuation in service revenues as a percentage of total revenues reflects purchasing and implementation cycles of our customers and a lower level of revenues during the early period of our business. 32 Operating Expenses Costs of Revenues Costs of revenues increased from $6.1 million in 1996 to $7.8 million in 1997, and decreased to $6.8 million in 1998. Costs of revenues as a percentage of revenues was 63% in 1996, 61% in 1997 and 42% in 1998. The decrease in dollar amounts and percentage of revenue amounts from 1997 to 1998 reflects the more favorable license fee terms negotiated with a third-party software product provider and the reorganization of our consulting practice, which included personnel changes, the relocation of personnel to in-home offices from rented space and the reduction of our use of third-party contractors and the decreasing marginal cost of service on each additional installed license. Marketing and sales Marketing and sales expenses increased from $6.5 million in 1996 to $7.5 million in 1997, and to $7.6 million in 1998. The increases in marketing and sales expenses from 1996 to 1998 resulted primarily from an increase in commissions paid to sales staff based on increased sales and marketing activities, including trade shows and public relations. Marketing and sales expenses represented 67% of our total revenues in 1996, 59% in 1997 and 47% in 1998. The decrease in marketing and sales expenses as a percentage of total revenues reflects the more rapid growth in our revenues compared to the growth of marketing and sales expenses due to our early investment in marketing activities to create product awareness. Research and development Research and development expenses increased from $6.6 million in 1996 to $7.0 million in 1997, and to $8.0 million in 1998. The increases in research and development expenses from 1996 to 1998 resulted from an increase in the number of software developers and quality assurance personnel and the use of outside contractors to support our product development and testing activities. Research and development costs represented 68% of total revenues for 1996, 55% in 1997 and 50% in 1998. The decrease in research and development expenses as a percentage of total revenues primarily reflects the higher increase in revenues relative to the increase in research and development staff to develop and enhance our Logician product. General and administrative General and administrative expenses increased from $718,000 in 1996 to $865,000 in 1997, and to $1.0 million in 1998. The increases from 1996 to 1998 resulted primarily from the addition of finance and administrative personnel and professional services to support the growth of our business during these periods. General and administrative expenses represented approximately 7% of total revenues in 1996, 1997 and 1998. 33 Other Income (Expense) Other expense increased from ($60,000) in 1996 to ($270,000) in 1997, compared to other income of $198,000 in 1998. The increased expense in 1997 primarily reflects an accrual of $450,000 for litigation costs related to two customer contracts. Excluding the impact of this accrual, net other income has improved over time due to interest on investments of cash, cash equivalents and short term investments and improved financing rates. Provision for Income Taxes As a result of our net operating loss in 1998 and prior years, we made no provision or benefit for federal or state income taxes. As of December 31, 1998 we had net operating loss carryforwards for tax reporting purposes of approximately $33.7 million and research and experimentation credits of approximately $1.3 million which expire through 2018. Approximately $7.1 million of the net operating losses is subject to an annual utilization limitation due to ownership changes in prior years. 34 Quarterly Results of Operations The following table presents our unaudited quarterly results of operations for 1998 and the first six months of 1999. You should read the following table in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited Consolidated Financial Statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and results of operations for the quarters presented. You should not draw any conclusions about our future results from the results of operations for any quarter.
Three Months Ended ------------------------------------------------------------------------------------ March 31, June 30, September 30, December 31, March 31, June 30, 1998 1998 1998 1998 1999 1999 ----------- ----------- ------------ ------------- ------------ ------------ (Dollars in thousands) Revenues: Software $ 1,417 $ 2,572 $ 2,545 $ 3,876 $ 2,137 $ 3,650 Service and support 1,394 1,276 1,555 1,525 1,490 1,698 ----------- ----------- ------------ ------------- ------------ ------------ Total revenues 2,811 3,848 4,100 5,401 3,627 5,348 Operating expenses: Costs of revenue 1,654 1,629 1,679 1,792 1,602 1,816 Marketing and sales 1,742 1,888 1,962 1,987 3,211 4,735 Research and development 1,886 1,972 2,068 2,090 2,292 2,800 General and administrative 203 248 284 309 462 793 ----------- ----------- ------------ ------------- ------------ ------------ Total operating expenses 5,485 5,737 5,993 6,178 7,567 10,144 ----------- ----------- ------------ ------------- ------------ ------------ Loss from operations (2,674) (1,889) (1,893) (777) (3,940) (4,796) Other income (expense), net 36 29 144 (11) 538 205 ----------- ----------- ------------ ------------- ------------ ------------ Loss before income taxes (2,638) (1,860) (1,749) (788) (3,402) (4,591) Income tax provision - - - - - - ----------- ----------- ------------ ------------- ------------ ------------ Net loss $ (2,638) $ (1,860) $ (1,749) $ (788) $ (3,402) $ (4,591) =========== =========== ============ ============= ============ ============
35 Liquidity and Capital Resources Since our inception, we have primarily financed our operations through private placements of equity securities with investors such as Continental Casualty Company; Dell Computer Corporation; Franklin Capital Associates III, L.P.; Furman Selz SBIC, L.P.; Glynn Ventures III, L.P.; New Enterprise Associates VI, Limited Partnership; Sequoia funds; Soros investment funds; and VHA, Inc. As of August 31, 1999, net proceeds from these private placements totaled $97.0 million. As of August 31, 1999, we had cash and cash equivalents of $13.2 million and short term investments of $33.1 million. We have a $3.3 million term loan facility with General Electric Capital Business Asset Funding Corporation to finance the purchase of new capital equipment. We have borrowed $1.7 million under this facility, and $1.6 million remains available. Notes issued under this facility are payable in two years if they relate to the purchase of computer equipment and in three years if they relate to other office equipment. Interest accrues annually at rates ranging from 9.4% to 10.4%. Principal and interest are payable monthly in arrears and amortized over the term of the note. In August 1999, we entered into a leasing arrangement for the purpose of leasing computer equipment for the development of our Internet products and services. The cost of the financed equipment totaled $1.8 million with a lease term of two years. We paid $430,000 of this amount as a down payment. The remaining principal and interest is amortized over the life of the lease. Our operating activities resulted in net cash inflows of $3.4 million for the first six months of 1999 and in cash outflows of $6.8 million in 1998 and $11.6 million in 1997. The net cash inflow during the first six months of 1999 resulted from improved collections on customer contracts and an increase in accounts payable due to the timing of invoice due dates. Cash outflows in 1997 and 1998 resulted from our continued investment in research and development, consulting services and sales and marketing, which led to operating losses. Investing activities used cash of $33.7 million in the first six months of 1999. Of that amount, $6.3 million was used to purchase fixed assets, $3.2 million was used for the acquisition of PrimaCis and $24.2 million was invested in short term investment instruments. Financing activities provided cash of $35.5 million in the six months ended June 30, 1999, $7.8 million in 1998 and $5.6 million in 1997, primarily through the issuance of equity securities and partially offset by payments on capital equipment lease and note obligations. We currently anticipate that we will continue to experience significant growth in our operating expenses for the foreseeable future as we: o Enter new markets for our products and services; o Increase marketing activities; o Increase research and development spending; o Develop new distribution channels; 36 o Expand our infrastructure; and o Improve our operational and financial systems. These operating expenses will consume a material amount of our cash resources, including a large portion of the proceeds of this offering. We believe the net proceeds of this offering, together with our existing cash and cash equivalents, and available bank borrowings, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financing or from other sources. We may not be able to obtain adequate or favorable financing at that time. Any financing we obtain may dilute your ownership interest. Year 2000 Compliance Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, beginning on January 1, 2000, computer systems and software used by many companies and organizations in a wide variety of industries including technology, transportation, utilities, finance and telecommunications, will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. Significant uncertainty exists in the software industry and other industries concerning the scope and magnitude of problems associated with the century change. We recognize the need to ensure our operations will not be adversely affected by Year 2000 software failures. We are assessing the potential overall impact of the impending century change on our business, financial condition and results of operations. Based on our assessment to date, we believe the current versions of our software products are Year 2000 compliant; that is, they are capable of adequately distinguishing 21st century dates from 20th century dates. However, our products are generally integrated into enterprise systems involving sophisticated hardware and complex software products that may not be Year 2000 compliant. We may face claims based on Year 2000 problems in other companies' products or issues arising from the integration of multiple products within an overall system. Although we have not been a party to any litigation or arbitration proceeding involving our products or services on Year 2000-related disputes, any liability we have for Year 2000 related damages, including consequential damages, could materially adversely affect our business, financial condition and results of operations. In addition, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those we offer. To the extent Year 2000 issues cause a significant delay in, or cancellation of, decisions to purchase our products or services, our business, financial condition and results of operations would be materially adversely affected. We periodically review our internal management information and other systems to identify any products, services or systems that are not Year 2000 compliant and to take 37 corrective action. To date, we have not encountered any material Year 2000 problems with our computer systems or any other equipment that might be subject to such problems. We also verify compliance by external vendors that supply us with any material software and information systems and communicate with significant suppliers to determine their Year 2000 readiness. As part of our assessment, we periodically evaluate the level of validation we require of third parties to ensure their Year 2000 readiness. To date, we have not encountered any material Year 2000 problems with software and information systems provided to us by third parties. The majority of our Internet development and marketing groups will be moving into a new facility in the fourth quarter of 1999 at a location currently under construction. Before the relocation, we will complete our evaluation of whether the infrastructure and building systems associated with the facility, such as security and sprinkler systems, and all information technology systems, such as telephone and computer network systems, are Year 2000 compliant. We do not expect the total cost of these Year 2000 compliance activities to be material to our business, financial condition and results of operations. To date, we have spent approximately $450,000 on Year 2000 compliance issues and expect to incur approximately $200,000 in additional expenses to evaluate and address these issues. These costs and the timing of when we plan to complete our Year 2000 modifications and testing processes are based on our management's estimates. However, we may not identify and correct all significant Year 2000 problems before January 1, 2000. Year 2000 compliance efforts may involve significant time and expense and unremediated problems could materially adversely affect our business, financial condition and results of operations. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because we currently hold no derivative financial instruments and do not currently engage in hedging activities, adoption of SFAS No. 133 is expected to have no material impact on our financial condition or results of operations. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133." Statement No. 137 defers the effective date of Statement No. 133 for one year. Statement No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In March 1998, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position, or SOP, 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal use software once certain criteria have been met. We are required to implement SOP 98-1 for the year ending December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact on our financial condition or results of operations. 38 In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9 requires recognition of revenue using the "residual method" in a multiple-element software arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the "residual method," the total fair value of the undelivered elements is deferred and recognized in accordance with SOP 97-2. We are required to implement SOP 98-9 for the year ending December 31, 2000. SOP 98-9 also extends the deferral of the application of SOP 97-2 to certain other multiple-element software arrangements through our fiscal year ending December 31, 1999. Adoption of SOP 98-9 is expected to have no material impact on our financial condition or results of operations. 39 BUSINESS Overview Our business is connecting physicians and patients through the Internet. For physicians, we offer a line of enterprise and Internet-based electronic medical record products and services for use at the point of care in the exam room, with configurations suitable for practices of all sizes. For patients, we will provide a Web site that will allow them to access certain healthcare information from their physician-generated medical record, enter personal medical information and effectively communicate with their physician. For both physicians and patients, we will provide focused healthcare content and commerce opportunities, keyed to information in a selectively shared database that unites physicians and patients. Together, these products, services and databases will comprise our Internet Health Services Center. We believe we can increase the efficiency and quality of healthcare and enhance the physician-patient relationship through our Internet Health Services Center. Founded in 1985, MedicaLogic has been developing, marketing and supporting electronic medical records for over a decade and has products in daily use by physicians across the country. While most healthcare information systems have primarily supported financial and administrative functions, we have focused exclusively on the challenge of providing clinical solutions that are used by physicians at the point of care to create and access the electronic medical record. Our customers include academic medical centers such as Baylor College of Medicine in Houston, Texas, integrated healthcare delivery systems such as Providence Health System in Portland, Oregon, and other customers such as the NASA space shuttle program. More than 7,000 health professionals, including approximately 3,000 physicians, now maintain electronic medical records with our enterprise electronic medical record software, constituting an estimated base of over 7 million electronic patient records. Our technology will use the Internet to link healthcare consumers to physicians using either our enterprise or Internet-based electronic medical record. We believe we are the leading provider of electronic medical record software in the healthcare industry. The Internet, with its open architecture and broadening availability at home, in the workplace and at the point of care, makes it possible for us to create our Internet Health Services Center and make electronic medical records more useful and cost-effective for physicians who practice alone, in small groups or with integrated healthcare delivery networks. As a result, we believe we can substantially accelerate the rate of adoption of electronic medical record technology by physicians. As these electronic medical records are created, our Internet Health Services Center will make available to consumers for the first time accurate and timely access to their physician-created medical information. By connecting physicians and consumers around this shared database of Internet health records, we can enhance the physician-patient relationship and make common communications processes, such as prescription refills or appointment requests, much more convenient. Finally, we will be able to offer healthcare consumers a combination of health news, education, goods and services that will be precisely tailored to their health status and interests because it will be based on the physician-created clinical information included in their personal health record. 40 The products and services that will comprise our Internet Health Services Center are: o Logician, our proprietary client-server electronic medical record enterprise software; o Logician Internet, our product for creating and managing electronic medical records over the Internet; o AboutMyHealth.net, our code-named Web site for healthcare consumers currently being tested in a pilot program, through which patients will be able to maintain their own personal health portfolio based on their physician-created electronic medical record and access specific healthcare information as well as commerce opportunities; and o MedicaLogic.com, our Web site for physicians and other medical professionals, providing for physician access to patient electronic medical records and, over time, a range of healthcare information and commerce opportunities and services. Historically, we sold Logician to integrated healthcare delivery networks. Going forward, we will offer both Logician and Logician Internet to these customers depending on their needs. We intend to allow Logician and Logician Internet to communicate with each other, thereby facilitating connections between physicians in such networks and affiliated physicians who use Logician Internet. Logician and Logician Internet will also support communications between physicians and consumers who use our Web site for healthcare consumers code-named AboutMyHealth.net, which we expect to introduce commercially in late 1999. Industry Background Overview of the Healthcare Industry. According to the Health Insurance Association of America, healthcare is the largest single sector of the U.S. economy, consuming approximately $1 trillion annually, or 14% of the country's gross domestic product. The participants include: o Patients: the individual consumers of healthcare services. o Providers: physicians and organizations such as hospitals, rehabilitation centers and nursing homes. o Suppliers: manufacturers and distributors of goods such as pharmaceuticals, medical devices and healthcare supplies, and providers of ancillary services such as laboratories and others. o Payers: the Medicare and Medicaid programs, indemnity insurers, health plans, employers, individuals, government agencies, insurance companies, managed care organizations and other enterprises that pay the bills for healthcare. In the midst of this complex industry, and despite additional complexity introduced by managed care programs, the physician remains the ultimate decision-maker. Based on data contained in 1999 Environmental Assessment, a joint publication of VHA and Deloitte & Touche, 85% of the dollars spent on healthcare, such as admitting patients and ordering lab tests, are initiated by the attending physician. However, the information the physician relies upon to 41 make healthcare decisions is largely contained in a paper record that often is unorganized and cannot be sorted or retrieved easily or effectively. Inefficiencies within the healthcare system consume enormous amounts of time, resources and money. In a recent report to Congress and the General Accounting Office dated November 1998, the Health Care Financing Administration, or HCFA, estimated that over $250 billion, or 25% of every healthcare dollar, is wasted through the delivery of unnecessary care, performance of redundant tests and procedures and excessive administrative costs. As a result, HCFA has instituted a program to monitor physician billing practices, which has forced physicians to spend more time writing and dictating to comply with strict documentation requirements. Because of this regulatory burden and other administrative burdens created by managed care, the length of a typical physician-patient encounter has been reduced. The Patient Medical Record. The patient medical record developed and maintained by the physician is of paramount importance in the U.S. healthcare system. This medical record chronicles all patient history, encounters, medication orders, procedures, referrals and vital statistics. All transactions, from the order of laboratory tests, medical procedures and medication prescriptions to invoice generation, payment requests, payer documentation compliance and clinical research data compilation are recorded in the patient's medical record. Physicians require this information about specific patients to diagnose accurately and prescribe appropriate treatments. Despite increasing needs by the healthcare industry for information about its processes and outcomes, the vast majority of clinical data is still recorded today in handwritten or hand-typed notes filed within paper charts which cannot be accessed or aggregated and organized electronically. Recent studies have demonstrated that paper charts are unavailable for patient encounters up to 30% of the time, and that the data within them is frequently inaccurate and incomplete, missing diagnoses, allergies, medication details, and plans for follow-up. Studies show that six out of every 100 hospital admissions are the result of an adverse drug event of which 28% were preventable. Besides the obvious impact on quality, studies have also shown cost consequences, such as laboratory tests being unnecessarily duplicated 11% of the time solely because results have been misfiled. Growth of the Internet and Applicability to Healthcare. The Internet's open architecture, accessibility and growing acceptance make it an increasingly important means of information exchange for both business-to-business and business-to-consumer interaction. Use of the Internet is rapidly expanding from simple information publishing, messaging and data gathering to critical business transactions and confidential communications. We believe that the Internet has changed the electronic medical records software environment and made computerized tools more useful and acceptable to physicians. In the past, several factors have limited the rate of adoption by physicians of computerized tools for creating and accessing the medical record. First, the cost of acquiring, installing and maintaining the workstations, servers and networks required for a conventional client-server product exceeds the capital budgets of most physician practices. Second, there has been a shortage of personnel skilled in implementing advanced information technology within the physician office sector. 42 Internet-hosted applications have the potential to dramatically lower the capital and resources required of customers, insulating them from the cost and complexity of server configuration and administration. In addition, the availability and falling cost of personal computers, and the simple point-and-click paradigm of the Internet have raised the level of computer usage within the general population and clearly shown the benefit of easily accessible digital information. Physicians have not been left behind in this diffusion of new technology: a 1998 survey published in Modern Physician magazine reported that 84% of doctors surveyed used the Internet for e-mail and 78% used the Internet for educational purposes. Moreover, reports indicate that this trend will continue as a new generation of physicians who are more familiar with Internet technology enter the profession. Consumer Interest in Healthcare Information. Consumer interest in healthcare information is growing rapidly, driven in part by consumers' needs to form their own opinions about treatment options and restrictions imposed by their health plan, as well as a perception that physicians have less time to explain their health conditions and treatments to them. According to a 1997 survey in the Journal of the American Medical Association, 43% of U.S. adults who used the Internet were seeking health information. According to Cyber Dialogue, 78% of Internet users with health insurance are interested in managing their health insurance benefits online and 23% of all Internet users are interested in purchasing prescription drugs online. Also according to Cyber Dialogue, 90% of all Internet users have health insurance. In addition, the Department of Health and Human Services has recently adopted guidelines stipulating that individuals have a right to access their own or their dependents' medical information. Finally, as healthcare payment models shift more of the financial responsibility for healthcare to the consumer, we expect consumer interest in healthcare information and treatment options to increase. 43 The MedicaLogic Solution Our solution is the Internet Health Services Center, which will integrate the following: o Electronic Medical Records - for physicians, Internet-hosted applications and Internet-enabled client-server applications, used at the point of care to document physician-patient encounters and manage clinical information. o Personal Health Portfolio - for consumers, a compelling Internet application that will let them maintain a personal health portfolio, combining portions of their physician-created electronic medical record with personally entered information. o Context-specific Content and eCommerce - for both consumers and physicians, health information content and e-commerce opportunities, precisely tailored to the patient's clinical conditions and needs based on data in the Internet Health Record. The content and e-commerce will be provided through strategic relationships with our e-healthcare partners. o Internet Health Record - a highly secure, clinically rich and deeply structured core database for use by physicians, patients and our strategic partners that will combine data from the electronic medical record, the personal health portfolio and our strategic partners. This core database will allow for the sharing of selective data among all the participants in the Internet Health Services Center. The MedicaLogic Internet Health Services Center [Graphic omitted] 44 The MedicaLogic solution provides the following key benefits: Improved Quality of Care. Our solution is designed to increase patient medical information flows among all healthcare participants, which ultimately will result in more accurate diagnoses and more timely and appropriate treatments. Online access to ccurate, up-to-date healthcare records will facilitate timely and accurate determinations by physicians regarding a patient's condition and appropriate treatment. In particular, this access could significantly enhance the ability of providers in remote areas to provide quality care. Using our solution, physicians will be able to enter and access patient-specific data online at the point of care, allowing them, for example, to review data regarding potentially harmful drug interactions, without manually searching through the often unorganized and incomplete paper records. We believe these and other benefits provided by our solution will result in improved quality of care. Empower Healthcare Consumers with Information Regarding their Healthcare. Whether they see a physician themselves on a regular or episodic basis, or act as a coordinator of healthcare for a child, elderly parent or other relative, healthcare consumers want more information and more control over their healthcare needs. Through the use of the Internet, our solution is designed to increase information flows among all healthcare participants, including patients, which ultimately gives patients greater control. For healthy adults, our solution will help them gather their medical and family history and set and achieve wellness goals. For those with significant illness together with these persons' healthcare coordinators, our solution will allow them to manage multiple patient records generated by different physicians, provide a physician-patient communication channel for managing disease, deliver educational information and offer a convenient way to purchase healthcare products. With the adoption of legislation and guidelines that will require providers to give patients access to their medical records, the electronic access to healthcare records that will be provided to patients and others through our solution is timely and significant. Likewise, our solution will permit consumers to communicate electronically with other healthcare participants, such as payers and suppliers, giving them quicker, more efficient and more effective access to prescription drugs, payment services and information and other health-related supplies and services. Improved Physician-Patient Relationship. Our Internet solution is designed to facilitate communication between physicians and patients. We believe improved physician access to information at the point of care will result in higher-quality clinical interaction between physicians and patients. Likewise, providing patients with better access to information and electronic communication with physicians will result in a better understanding of physician instructions by patients and, ultimately, a lower risk of treatment error. Reduced Healthcare Costs. Our solution is designed to reduce healthcare costs and improve the management of patient records by reducing the inefficiencies of manual and paper-based transactions, eliminating redundant data entry, reducing transcription costs, reducing hospitalizations related to harmful drug interaction events, reducing repetitive and unnecessary laboratory tests resulting from inaccurate or misplaced records, rationalizing entry and availability of Health Care Financing Administration-mandated patient chart and account coding information and decreasing the communication inefficiencies created by isolated proprietary 45 systems. In addition, through greater efficiency and better access to patient medical records, health maintenance should be improved, thereby reducing the costs of treatment. Our Growth Strategy Our objective is to be the leading provider of Internet-based electronic health record information. Our strategy to achieve this objective has the following key elements: Gain Rapid Adoption by Physicians of our Electronic Medical Records Solutions. We intend to build on our position as the leading provider of electronic medical record solutions to define the industry standard for this service. Using Internet technology, we are delivering a solution at a dramatically lower cost than was previously possible, which will allow the physician to reduce his or her operating costs from the first month of use. We believe the value of our solution to physicians will increase and its adoption rate will accelerate as physicians standardize on electronic records and it becomes possible to exchange electronic medical records in the course of referrals and transfers of care. Another key component of creating physician-friendly software is our unique KnowledgeBank, an Internet-based community repository that allows physicians to submit their ideas for the design and layout of clinical encounter forms. The best ideas are implemented and then made available to all physician customers at no additional cost. As a result of KnowledgeBank, the refinement and applicability of our product for specific practices has been continually increasing. As of August 31, 1999, our electronic medical record solutions were being used by more that 7,000 health professionals, including approximately 3,000 physicians, constituting an estimated base of over 7 million electronic patient records. Offer the Most Compelling Web Destination for Healthcare Consumers. We believe that our Web-site, code-named AboutMyHealth.net, will be highly valued by consumers. This Web site is currently being tested in a pilot program and will be released commercially in late 1999. The Web site will provide consumers with access to portions of their physician-generated medical records, enable consumers to communicate with physicians and contain highly personalized content surrounding a patient's personal health data. We also believe that as word spreads among consumers of this new level of healthcare service, consumers' usage will increase physician interest in adopting the electronic medical records solutions that make the Internet Health Record possible. Become a Leading Driver of Clinical e-Commerce Transactions. Because of our unique position at the point of care, where clinical decisions are made that influence the majority of healthcare expenditures, our systems can provide decision support that makes healthcare more consistent and efficient. For example, in Logician, the physician can quickly select a drug, screen the patient's medical record for harmful drug interactions, check the cost and confirm the acceptability of the chosen drug within the formulary of that patient's health plan, all before the physician has released the prescription to the patient. Without electronic medical records, none of the automatic checks are made, and prescriptions may be rejected when the patient arrives at the pharmacy, creating inefficiencies and frustrations. The desirability of using our systems at the point of care will position us to become a leading driver of clinical e-commerce transactions, 46 which will be completed through strategic partnerships with the appropriate healthcare stakeholders, such as pharmacies, laboratories and electronic claims clearinghouses. Capitalize on the Value of our Large, Clinically-Rich Database. As physicians and patients use our systems, we will develop a large and clinically-rich database. With the consent of providers and patients, and in accordance with legal requirements, the aggregated statistical and epidemiological data may be marketed to a range of interested parties in the healthcare industry. These include clinical research organizations, pharmaceutical companies and governmental agencies. We believe that the information in this database has the potential to become one of the most valuable resources in the healthcare industry. Products and Markets The primary target markets for our solution consist of healthcare providers and healthcare consumers. The healthcare provider market is divided into two segments: physicians in private practice and physicians in integrated healthcare delivery systems. In addition, with appropriate patient consent, and in compliance with applicable law, we intend to aggregate anonymous data contained in the Internet Health Record and market the information to a variety of parties in the healthcare industry. Physicians in Private Practice. There are approximately 450,000 physicians in private practice, constituting approximately 75% of the practicing physician population in the United States. Our product offering for this market is Logician Internet, which we introduced commercially in September 1999. Logician Internet provides the following benefits: o The creation of required documentation at a lower cost and with higher quality than is currently possible with handwriting or dictation/transcription; o The ability to verify automatically compliance with Health Care Financing Administration documentation guidelines for the level of service billed; o The ability to obtain secure and rapid access to key patient clinical information from any Web browser; o The ability to be used at the point of care in the exam room, without requiring a continuous Internet connection; o The ability to securely store electronic records at our data center; and o Additional planned benefits in future releases including integration of laboratory results, electronic prescription transmission, claims submission and eligibility checking as well as the ability of physicians to communicate with patients using AboutMyHealth.net by sharing records data and exchanging messages via patients' Personal Health Portfolios. To minimize the challenges for nontechnical users in installing software and obtaining Internet access, Logician Internet will be available as a complete, ready-to-run solution. For a monthly fee, a physician will receive a complete package that includes an ultramobile laptop computer from Dell Computer Corporation, pre-installed voice recognition software, Internet access service and the Logician Internet hosted application with storage for an unlimited number 47 of charts. For users who already have a suitable computer and Internet access, the hosted application and storage service will be made available at a lower monthly fee. Physicians in Integrated Healthcare Delivery Systems. Integrated healthcare delivery systems currently employ approximately 150,000 physicians. Our solutions for this market include Logician, a comprehensive client-server based electronic medical record software solution, and Logician Internet, depending on the needs of the institution. Clients will be able to migrate between Logician and Logician Internet in future releases. After delivering first-generation electronic medical record products for the PC-DOS environment from 1990 to 1995, we released Logician for the Windows client-server environment in 1996 and have delivered three major upgrade releases since then. Our current customers include Allina Health System, Baylor College of Medicine, Carilion Health System, Providence Health System, Riverside Health System and more than 30 others. Logician provides the following benefits specially designed for this market: o Extensive clinical decision support to improve outcomes, including preventive care reminders, drug interaction and allergy checking and formulary management; o Enhanced ability to measure and manage patient populations using query, reporting and intervention tools; o The creation of required documentation at a lower cost and with higher quality than is currently possible with handwriting or dictation/transcription; o The ability to automatically verify compliance with Health Care Financing Administration documentation guidelines for the level of service billed, which will help capture revenue for which physicians are not being adequately reimbursed today; and o The ability to be used at the point of care, in the exam room. In the future, Logician will also provide the following benefits: o The ability to obtain secure and rapid access to key patient clinical information from any Web browser; o The ability to store electronic records at our data center securely; o The ability of physicians to communicate with patients using AboutMyHealth.net by sharing records data and exchanging messages via their Personal Health Portfolio; and o Additional planned benefits in future releases including integration of laboratory results, electronic prescription transmission, claims submission and eligibility checking. Logician interfaces have been developed and implemented with major vendor systems encountered in the integrated healthcare delivery system environment, including laboratory systems, practice management systems and transcription systems. We intend to expand the interfacing capabilities of Logician to include e-commerce transaction capabilities such as electronic prescription transmission. We will continue to deliver an enterprise-wide electronic 48 medical record solution to this market, evolving from its traditional license-based pricing to monthly subscription pricing. We also expect to enhance the enterprise product's compatibility with the Internet and the interconnectivity between Logician and Logician Internet. Healthcare Consumers. We estimate that at least 75% of Americans are healthcare consumers, whether they see a physician themselves on a regular or episodic basis, or act as a coordinator of healthcare for a child, elderly parent, or other relative. Healthcare consumers want more information and more control over their healthcare. To provide this, we will offer a Web site code-named AboutMyHealth.net, which is currently in a pilot program and which we expect to be commercially available in late 1999. AboutMyHealth.net will provide the following benefits for healthcare consumers: o The ability to securely view summary data from the physician, including medications, diagnoses, allergies, health directives and laboratory results; o The ability to enter information about medical and family history, wellness goals and behaviors into a Personal Health Portfolio; o The ability to integrate these two sources of data into the Internet Health Record, providing useful information that can be shared selectively with other individuals and health professionals; o The ability to conveniently communicate with their personal physician, to request appointments, obtain medication refills, ask questions or clarify their records; o The ability to access health information content that is tailored to their personal needs through data in the Internet Health Record; and o The ability to engage in commerce, which would also be tailored to specific medical needs through data in the Internet Health Record. The Personal Health Portfolio will have the appeal of a personalized Web page while providing specialized tools for health data entry and display, and specific viewing privileges controlled by the individual. For a child, it will provide a visual record of growth and development as well as a timeline of medical incidents. For healthy adults, it will help them gather their medical and family history and set and achieve wellness goals. For those with significant illness together with these persons' healthcare coordinators, it will allow them to manage multiple patient records generated by different physicians, provide a physician-patient communication channel for managing disease, deliver educational information and offer a convenient way to purchase medical products. Other Healthcare Stakeholders. As a result of our position as a provider and custodian of personal and professional health data on the Internet, we have the opportunity to become a driver of healthcare e-commerce transactions, such as placing prescription orders with pharmacies, and to become a healthcare infomediary, providing aggregated and anonymous health data to organizations such as clinical research organizations. Subject to the consent of individual patients and physicians, and compliance with applicable legal requirements, these opportunities include: 49 o Pharmacy - delivery of new and refill prescription orders from physicians and patients to pharmacies and/or pharmacy benefit managers; o Laboratory - delivery of orders and return of results to physicians and patients; o Payers - direct submission of claims from physicians via electronic data interchange claims clearinghouses and electronic bill presentment/payment for patients via their Personal Health Portfolio; o Clinical research organizations - enhanced recruitment of patients for studies through automated screening and notification; o Healthcare organizations (government and private) - aggregated and anonymous data about the health of certain populations for epidemiologic research, planning and management; o Pharmaceutical marketing research - more accessible data on the use and outcomes of drugs; and o Advertising/sponsorship - highly personalized and targeted marketing to consumers and physicians for healthcare-related products or services. Customer Service and Support We believe effective customer service is essential to both attracting and retaining physician usage of our electronic healthcare applications as well as attracting consumers and retaining them as customers of our Internet-based services. We are acutely sensitive to the demands for person-to-person responsiveness of the healthcare community. We provide a wide range of customer support services through a staff of customer service personnel, multiple call centers and an e-mail help desk. We also offer Web-based support services that are available 24 hours a day, seven days a week and are frequently updated to improve existing information and to support new services. Our ongoing telephone support is accessible by a toll-free telephone number and is available from either 5 a.m. to 6 p.m. Pacific Time, Monday through Friday or, for an additional charge 24 hours a day, seven days a week. Our operators screen all requests for telephone support and direct the call to the appropriate customer service personnel. Technical support personnel are responsible for consulting with our strategic partners regarding technical support issues and for resolving technical problems encountered by users, strategic partners or other parties. We also employ technical support personnel who work closely with our direct sales force, distribution partners and customers. We provide our customers with the ability to purchase maintenance for our applications and services, which includes technical support and upgrades. We also provide training programs for our customers. In addition, we provide enterprise planning, site evaluation, work flow preparation, hardware and software installation, interface development and installation and training of physicians and their staff in connection with the implementation of our Logician application. Enterprise and site evaluation helps us understand how best to implement our Logician application within the enterprise and physician's office work flow. The objective of the implementation process is to maximize the value of electronic medical records to the enterprise and the physician's practice. 50 Significant Customers We market our products and services to physicians and large integrated healthcare delivery networks. See "-Products and Markets." Because of our historical reliance on large integrated healthcare delivery networks, a large portion of our revenue has been derived from relatively few customers. In 1997, we derived approximately 20% of our revenue from VHA, Inc., one of our distribution partners, and approximately 12% from Wake Forest Baptist Medical Center. In 1998, we derived approximately 21% of our revenue from VHA. In the first six months of 1999, we derived approximately 50% of our revenue from Baylor College of Medicine. Our products and services are currently being used by 40 integrated healthcare delivery networks, including: o Allina Health System; o Baylor College of Medicine; o Carilion Health System; o Christiana Care Health System; o Eastern Maine Healthcare; o MeritCare Health System; o Promina Health System; o Providence Health System; o Riverside Physician Services; and o Wake Forest University Baptist Medical Center. Sales and Marketing Our sales and marketing programs are organized around our main customer segments: integrated healthcare delivery systems, physicians in private practice and healthcare consumers. Our products and services are distributed by a nationwide direct sales force, a complementary inside sales team and a select number of strategic distribution partners, and directly through the Internet. We also partner with national consulting firms and systems integrators to deliver complete information technology solutions for large system customers. Physicians in Private Practice. We promote our products and services to physicians in private practice with programs designed to take advantage of the value of peer-to-peer relationships in the physician community. In contrast to the national image-building campaign required for sales to large health systems, we are building our individual physician sales and marketing campaign around activities that will stimulate physician referrals of Logician Internet. Sales will be offered primarily through online subscription capabilities supported by an inside telephone sales team. Programs for this market segment will include: o A team of physicians who use our products and who are trained and compensated to present at more than 200 national, state and local physician society meetings from the fourth quarter of 1999 through 2000; 51 o Promotion of free trial periods and low cost bundled hardware packages; o A physician incentive program that offers every physician subscribing to Logician Internet a points-based redeemable reward for referring fellow physicians; o An affiliate program for e-commerce partners and professional associations; o A media relations campaign targeted at physician publications and local media; and o Online and offline brand and product advertising aimed at early adopters and high volume specialties. Integrated Healthcare Delivery Systems. We approach the integrated healthcare delivery system market primarily through direct sales and distribution partners. Our access to premier reference accounts plays a large part in the success of the sales process. Direct sales are supported by marketing programs that include: o Participation at national health information technology trade conferences; o A speakers program placing current customers and executives before key decision makers of prospective customers; o An editorial and news presence in the healthcare information technology press supported by targeted advertising of our brand; o Publication of industry-reference briefs and texts addressing critical adoption issues; and o Internet access to online product and service information, demonstrations and promotional trials and offline publications. Healthcare Consumers. Marketing programs for the healthcare consumer market are likely to be more successful when they are supported by the existing relationship between the physician or local health system and their patients. Based on that premise, we will be launching a Web site code-named AboutMyHealth.net, which is currently being tested in a pilot program and which we expect to release commercially in late 1999, that is co-branded with local integrated healthcare delivery networks. In addition, promotion of AboutMyHealth.net will include a national brand building campaign designed to create interest by healthcare consumers through physicians. Consumers will register for membership at no charge at the AboutMyHealth.net site or through a co-branded provider partner site. Marketing programs will include: o Co-branded direct mail and point of service promotional campaigns developed and sponsored by us and executed with provider partners; o Consumer brand building in communities with a high concentration of physician users of electronic medical record products that can be interfaced to AboutMyHealth.net; o Online advertising with consumer e-commerce and content partners; and o An aggressive, locally-based media relations campaign targeting people with chronic disease and women, who tend to be the primary health coordinators of their families. 52 Our executive sales and marketing management is located in our Hillsboro, Oregon office with significant Internet marketing and business development resources located in our San Francisco, California facilities, while our account representatives are deployed across the United States. As of August 31, 1999, we employed 60 people in the areas of sales and marketing. Strategic Relationships Because our products and services are used at the point of care, we are well positioned to offer electronic transaction services to both physicians and their patients. To pursue these opportunities, we will form relationships with strategic partners who can provide these electronic transaction services, including electronic processing of claims, automatic filling and refilling of prescriptions and electronic transmission of laboratory results. In addition, we will enter into strategic partnerships with vendors who will provide medical content to our customers as well as partnerships that will allow our physician customers to have access to computer hardware on which they may use our products and services. To date, we have entered into strategic relationships with the following companies: CVS.com. CVS.com, a subsidiary of CVS Corporation, is a leading online pharmacy and source of health, beauty and wellness products. We have entered into an agreement with CVS.com that provides access to an online licensed pharmacy that will receive and fill orders for prescriptions generated from physicians and patients using our Internet-based products. The one year agreement provides that CVS will pay a transaction fee to us for each prescription filled by its pharmacy pursuant to an order received through our Internet-based products. The agreement may be renewed for subsequent one-year terms. Dell. Dell Marketing L.P. is a subsidiary of Dell Computer Corporation, a leading manufacturer of personal computers and related equipment and a shareholder of our company. We have entered into a nonexclusive agreement with Dell Marketing L.P. providing for a mutual marketing relationship to promote our respective products and services, including hyperlinks between our respective Web sites and cooperative marketing efforts which may include trade shows, direct mail campaigns and sales training. Pursuant to the agreement, we designated Dell as a preferred provider of notebooks, personal computers and other hardware, and we granted Dell a nonexclusive right and license to reproduce and install our software programs and related materials on Dell branded hardware products. We will promote the Dell products with our pre-installed software programs. Envoy. Envoy Corporation is a leader in electronic transaction processing in the healthcare industry. We have entered into an agreement with Envoy that provides us with a nonexclusive and nontransferable license to Envoy's services for the processing of certain healthcare transactions, including patient eligibility and referral checks and medical claims submissions. Envoy will also provide technical assistance in developing new functionality to facilitate claims submission. Envoy will charge us transaction fees for use of its services. These fees will be passed on to our Logician Internet customers who elect to subscribe to this premium service, for which we will charge an additional fee. 53 Pursuant to the agreement, Envoy will rebate to us a portion of the transaction fees received by Envoy for batch electronic transactions generated through Logician Internet that are submitted by Envoy to its participating payers. We expect this service to become available to our Logician Internet subscribers in early 2000. Competition High growth, intense competition, and technological change characterize the market for electronic healthcare information services and e-commerce. In addition to direct competitors in the electronic medical records market, none of which has a significant share of the market, we face competition from many companies with significantly greater financial resources, well-established brand names and large installed customer bases. We expect significant competition from: Traditional Healthcare Information System Vendors. These vendors, including Cerner Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC, Medic, a division of Misys PLC, and Shared Medical Systems Corporation, focus on providing information systems to large healthcare enterprises and physician practice groups. They have large installed bases of customers. Although they have not traditionally focused on providing electronic medical record solutions, they have begun to pursue a variety of Internet strategies, some of which could provide functions competitive with our products and services. Internet Healthcare Companies. Internet healthcare companies are focusing on a wide variety of areas, including: o Automating financial, administrative and clinical transactions, such as Healtheon Corporation and CareInsite, Inc.; o Attracting physicians with journalistic content, such as Medscape, Inc. and Physicians Online, Inc.; and o Targeting the health consumer area, including drkoop.com, Inc. and iVillage Inc. for content, as well as online pharmacies, such as drugstore.com, Inc. Each of these companies can be expected to compete with us within certain segments of the evolving Internet healthcare market, but it is also likely that some of them will serve in the role of our partner or vendor. Major Internet companies, including those not currently specializing in the healthcare industry, may also enter our markets. We may be unable to compete successfully against these companies. The most significant competitive factors include clinical focus, service reliability, breadth of product offerings, price/performance, network security, ease of access and use, content bundling, customer support, brand recognition and operating experience. We believe we will be able to compete favorably with respect to these factors. 54 Technology Our Internet Health Services Center consists of a fault tolerant configuration of Web and database server computers interconnected through redundant, high speed network components. The Center is currently located at a secure third-party data center. A new, state-of-the-art data center is being constructed at our San Francisco office, together with backup facilities at our corporate headquarters in Hillsboro, Oregon. All data centers incorporate advanced technology to provide a high degree of security in the transmission of highly sensitive and confidential patient medical record data over the Internet. This includes strict authentication, sophisticated data encryption techniques, strong network firewalls, stringent personnel policies, tightly controlled physical access to the data centers and independent overall security audits of those sites. All of our services will be linked to advanced storage systems that provide data protection through techniques such as replication. We also will maintain on-site backup power systems in the San Francisco data center and will install similar facilities in our back-up data center in Oregon. These safeguards are designed to provide a reliable and secure environment for the storage and exchange of confidential patient and customer data. Although we believe our facilities are highly resistant to systems failure and sabotage, we are developing, and are in the process of implementing, a disaster recovery and contingency operations plan. Development and Engineering We believe our future success will depend on our ability to continue to maintain and enhance our Internet Health Services Center, Logician applications and collateral services. We have developed applications and services in house, although future extensions to our products and services may come through acquisitions as well. In any event, we will continue to work closely with other companies in our development efforts. We have several significant projects currently in development. These include the continued enhancement of Logician, development of new services such as Logician Internet and our physician and consumer oriented Web sites and development of interfaces with our strategic partners' and others' technology. As of August 31, 1999, we employed 100 people in the areas of applications design, research and development, quality assurance and technical support. Rapid technological developments and evolving industry standards characterize the emerging market for Internet-based electronic medical records and associated transaction processing. The emerging nature of this market and its rapid evolution will require that we continually improve the performance, features and reliability of Logician and the Internet Health Services Center, particularly in response to competing offerings. 55 We must maintain a high standard and appetite for the most effective and innovative technologies. The success of new product and service introductions is dependent on several factors, including: o Proper definition of new applications or services; o Appropriate staffing of expertise on the particular assignment; o Timely completion and introduction of new products and services; and o Differentiation of new products and services from those of our competitors. Government Regulation and Healthcare Reform The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare organizations. Proposals to reform the U.S. healthcare system have been and will continue to be considered by the U.S. Congress. These programs may contain proposals to increase or decrease government involvement in healthcare or otherwise change the operating environment for our potential customers. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for our products and services. On the other hand, changes in the regulatory environment have in the past increased and may continue to increase the needs of healthcare organizations for cost-effective information management and thereby enhance the marketability of our applications and services. We cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on our business, financial condition and results of operations. The Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions and identifiers, prescribed security measures and other provisions within two years after the adoption of final regulations by the Department of Health and Human Services. It will be necessary for our products and services to be in compliance with the proposed regulations. Congress is also likely to consider legislation that would establish uniform, comprehensive federal rules about individuals' rights to access their own or someone else's medical information within a "Patient Bill of Rights." This legislation would likely define what is to be considered protected health information and outline steps to ensure the confidentiality of this information. The proposed Health Information Modernization and Security Act would provide for establishing standards and requirements for the electronic transmission of health information. In addition, the Department of Health and Human Services has recently adopted guidelines stipulating that individuals have a right to access their own or their dependents' medical information. The United States Food and Drug Administration is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. We do not believe that any of our current applications or services are subject to FDA jurisdiction or regulation; however, we plan to expand our 56 application and service offerings into areas that may subject us to FDA regulation. We have no experience in complying with FDA regulations. Our compliance with FDA regulations could prove to be time consuming, burdensome and expensive, which could have a material adverse effect on our ability to introduce new applications or services in a timely manner. The confidentiality of patient records and the circumstances under which records may be released for inclusion in our databases are subject to substantial regulation by the federal and state governments. State laws and regulations govern both the disclosure and the use of confidential patient medical record information. Regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of this information to implement security measures that may require substantial expenditures by us. Changes to state or federal laws may materially restrict the ability of healthcare providers to submit information from patient records using our applications. There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted in the future that address issues such as online content, user privacy, pricing and characteristics and quality of applications and services. For example, although it was held unconstitutional, the Communications Decency Act of 1996 prohibited the transmission over the Internet of some types of information and content. Internet user privacy has become an issue in the United States. Current United States privacy law consists of a few disparate statutes directed at specific industries that collect personal data, none of which specifically covers the collection of personal information online. The United States or any state may adopt legislation purporting to protect such privacy. Any such legislation could affect the way in which we are allowed to conduct our business, especially those aspects that involve the collection or use of personal information, and could have a material adverse effect on our business, financial condition and results of operations. Moreover, it may take years to determine the extent to which existing laws governing issues such as property ownership, libel, negligence and personal privacy are applicable to the Internet. International regulations with respect to the Internet, privacy and transborder data flows are considerably more developed than regulations in the United States. We intend to develop applications and services to be used on a worldwide basis and, consequently, will be required to comply with international regulations regarding the Internet and electronic commerce, as well as with U.S. regulations. We have not evaluated the effect that these regulations would have on our business. These regulations also may have an adverse effect on our ability to compete internationally. The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by certain foreign governments that could impose taxes on the sale of goods and services and some other Internet activities. A recently passed law places a temporary moratorium on certain types of taxation on Internet commerce. We cannot predict the effect of current attempts at taxing or regulating commerce 57 over the Internet. Any legislation that substantially impairs the growth of e-commerce could have a material adverse effect on our business, financial condition and results of operations. We expect to conduct our healthcare e-commerce business in substantial compliance with all material federal, state and local laws and regulations governing our operations. However, the impact of regulatory developments in the healthcare industry is complex and difficult to predict. We cannot assure you that we will not be materially adversely affected by existing or new regulatory requirements or interpretations. These requirements or interpretations could also limit or prohibit our ability to use the Internet for the methods of healthcare e-commerce we are developing. Intellectual Property Rights We believe patent, trade secret and copyright protection are less significant to our success than our ability to develop new products and services. We rely on a combination of trademark, trade secret and copyright law, and contractual restrictions to protect the proprietary aspects of our technology. We presently have several federal trademark registrations, including "MedicaLogic," "Practice With Knowledge," "Logician," "SIMPL" and "LinkLogic" and numerous pending trademark applications, including "KnowledgeBank," "AboutMyHealth," "Quickstep" and "ScheduLogic." We are currently preparing six applications for U.S. patents. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We presently have nine pending copyright applications for our software, tools and KnowledgeBank forms, reports and templates. We license our software under signed license agreements, which impose restrictions on the licensee's ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. The steps taken by us to protect our proprietary rights may be inadequate, we may not be able to secure trademark or service mark registrations for marks in the United States or in foreign countries and third parties may infringe upon or misappropriate our copyrights, trademarks, service marks and similar proprietary rights. In addition, effective copyright and trademark protection may be unenforceable or limited in certain foreign countries, and the global nature of the Internet makes it impossible to control the ultimate destination of our services. Our competitors or others may adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Moreover, because domain names derive value from the individual's ability to remember such names, our domain name may lose its value if, for example, users begin to rely on mechanisms other than domain names to access online resources. Our inability to protect our marks adequately could have a material adverse effect on the acceptance of our brand and on our business, financial condition and results of operations. In the future, litigation may be necessary to enforce and protect our trade secrets, copyrights and other intellectual property rights. Litigation would divert management resources and be expensive and may not effectively protect our intellectual property. 58 Employees As of August 31, 1999, we employed 225 persons on a full-time basis, of whom there were 100 in technical development and support, 60 in sales and marketing, 26 in professional services, 17 in operations and networks and 22 in finance and administration. None of our employees is a member of a labor union or is covered by a collective bargaining agreement and we have never experienced a work stoppage. We believe we have good relations with our employees. Facilities Our executive offices are located in Hillsboro, Oregon in approximately 103,000 square feet of leased space under a lease that expires in December 2007. We also lease approximately 38,000 square feet of office space in San Francisco, California under a lease that expires in May 2009. We believe our facilities are adequate for our current operations. Legal Proceedings We have been named as a defendant in an action filed by AllCare Health Management Systems, Inc. in the United States District Court for the Northern District of Texas. The complaint alleges that MedicaLogic and eleven other named defendants are infringing a patent relating to an integrated healthcare system. Pursuant to the complaint, the plaintiff is seeking to recover damages in an unspecified amount. We believe the suit against MedicaLogic is without merit and intend to vigorously defend against such claims. This litigation, whether or not determined in our favor or settled by us, may be costly and may divert the efforts and attention of our management from normal business operations. We are not currently subject to any other material legal proceedings. 59 MANAGEMENT Executive Officers, Directors and Key Employees The following table sets forth information with respect to our executive officers, directors and key employees as of August 31, 1999.
Name Age Position ---- --- -------- Mark K. Leavitt....................... 49 Chairman of the Board and Chief Executive Officer David C. Moffenbeier.................. 48 Chief Operating Officer and Director Harvey J. Anderson.................... 35 Senior Vice President, General Manager of Internet Operations Blackford Middleton................... 41 Senior Vice President, Clinical Informatics Richard L. Samco...................... 49 Senior Vice President and Chief Technology Officer Thomas M. Watson...................... 49 Senior Vice President, Worldwide Sales and Professional Services Eliot H. Bergson...................... 40 Vice President, Internet Content Programming Guy E. Field.......................... 44 Vice President, Finance Joseph M. Godsil...................... 34 Vice President, Network Architecture and Data Center Operations D. Cameron Lewis...................... 48 Vice President, Internet Marketing and eCommerce Strategies C. Sue Reber.......................... 53 Vice President, Marketing and Corporate Communications Charles D. Burwell.................... 54 Director Bruce M. Fried........................ 49 Director Ronald H. Kase........................ 41 Director Neal Moszkowski....................... 33 Director Mark A. Stevens....................... 39 Director Ronald R. Taylor...................... 51 Director David W. Wroe......................... 52 Director
Mark K. Leavitt founded MedicaLogic in 1985 and has served as its Chairman of the Board and Chief Executive Officer since its inception. From December 1997 to June 1998, Dr. Leavitt served as a director of Physician Partners, Inc., a physician practice management company. From 1992 to 1996, Dr. Leavitt served as a faculty member for St. Vincent Internal Medicine Practice and concurrently served as Medical Director and Regional Information Systems Director for Sisters of Providence Health System from 1992 to 1994. Dr. Leavitt operated a private practice of internal medicine from 1982 to 1992. Dr. Leavitt received a B.S. from the University of Arizona and an M.S. and a Ph.D. in electronic engineering from Stanford University. Dr. Leavitt received an M.D. from the University of Miami and served as a resident in internal medicine at Oregon Health Sciences University from 1979 to 1982. 60 David C. Moffenbeier has served as Chief Operating Officer and as a Director since 1994. From 1993 to 1994, Mr. Moffenbeier served as chairman of the board of directors of Summit Design Inc., a supplier of software tools for integrated circuits. Previously, Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of hardware and software for electronic design automation, where he served as a director from 1981 to 1993 and the company's chief financial officer from 1981 to 1984, its vice president of international sales from 1985 to 1988 and its vice president of worldwide sales from 1989 to 1993. He currently serves on the board of directors of Providence Good Health Plan, a health care management organization, and North Pacific Group, Inc., a wholesale distributor of commodities. Mr. Moffenbeier received a B.A. from Wesleyan University and an M.B.A. from Harvard University. Mr. Moffenbeier is a certified public accountant. Harvey J. Anderson has served as Senior Vice President, General Manager of Internet Operations since March 1999. From 1996 to 1999, Mr. Anderson served as the assistant general counsel for Netscape Communications Corp., a provider of software, services and Web site resources for the Internet. From 1993 to 1996, Mr. Anderson practiced intellectual property law with McCutchen Doyle Brown & Enersen, LLP, a law firm in San Francisco, California. Mr. Anderson received a B.S. from Marquette University and a J.D. from the University of San Francisco School of Law. Blackford F. Middleton has served as Senior Vice President, Clinical Informatics since March 1999. From 1994 to 1999, Dr. Middleton served as our Vice President, Clinical Informatics. From 1992 to 1994, Dr. Middleton served as the medical director for information management and technology at Stanford University. Since 1995, Dr. Middleton has served on the Computer-based Patient Record Institute board of directors and currently serves as its chairman. Dr. Middleton is a general internist who practiced in academic medical centers for over 15 years and received a B.A. from the University of Colorado and an M.D. from Stanford University and additional training in epidemiology and public health at Yale University. Richard L. Samco has served as Senior Vice President and Chief Technology Officer since March 1999. From 1991 to 1999, Mr. Samco served as our Vice President, Engineering and Vice President, Product Development. Mr. Samco was a co-founder of Mentor Graphics Corp. in 1981 and served in various engineering and management positions from 1981 to 1991. Prior to 1981, Mr. Samco held various engineering management positions with Tektronix Inc., a maker of high technology products, and Burroughs Corp., a leading computer corporation now known as Unisys Corporation. Mr. Samco received a B.S. from Stanford University. Thomas M. Watson has served as Senior Vice President, Worldwide Sales and Professional Services since March 1999. From 1997 to 1999, Mr. Watson served as our Vice President, Sales. From 1989 to 1997, Mr. Watson served as vice president of sales at Phamis Inc., a leading provider of healthcare information systems solutions. Mr. Watson received a B.A. from Drexel University. Eliot H. Bergson has served as Vice President, Internet Content Programming since May 1999. From 1998 to 1999, Mr. Bergson served as acting director of content and production at Network Associates, Inc., a network security and management software company. From 1995 to 61 1998, he served as editor-in-chief at Netscape Communications Corp. From 1994 to 1995, Mr. Bergson served as editor for both Online Design, a publication for professional designers, photographers and illustrators, and HotWired, an Internet site on Web technology and culture. From 1992 to 1994, Mr. Bergson served as editor for NeXTWORLD, a publication covering the NEXT and NEXTSTEP markets. Mr. Bergson received a B.A. from the University of Vermont. Guy E. Field has served as Vice President, Finance since 1998. From 1994 to 1997, Mr. Field served as the Corporate Controller of MedicaLogic. From 1983 to 1994, Mr. Field held management positions in treasury, finance, marketing and major account management with Mentor Graphics Corp. He has served on the board of directors of the Software Association of Oregon since 1998. Mr. Field received a B.A. from Loyola University in Los Angeles and is a certified public accountant. Joseph M. Godsil has served as Vice President, Network Architecture and Data Center Operations since May 1999. From 1996 to 1999, Mr. Godsil served as area engineering manager at Netscape Communications Corp. From 1994 to 1996, he served as regional engineer for Sun Microsystems, Inc., a leading provider of hardware, software and services for the Internet. Mr. Godsil received a B.S. from Millikin University in Decatur, Illinois. D. Cameron Lewis has served as Vice President, Internet Marketing and eCommerce Strategies since May 1999. From 1998 to 1999, Mr. Lewis served as director of electronic commerce and Internet operations at Network Associates, Inc. From 1995 to 1998, Mr. Lewis served as group manager of the electronic commerce group and acting vice president of customer marketing at Netscape Communications Corp. From 1994 to 1995, Mr. Lewis served as vice president of sales and marketing for Magellan Interactive. Mr. Lewis received a B.A. from the University of Western Ontario and an executive business degree from the University of Toronto. C. Sue Reber has served as Vice President, Strategic Marketing and Corporate Communications since March 1999. From 1993 to 1999, Ms. Reber served as Vice President of Marketing. Prior to joining MedicaLogic, Ms. Reber had more than 15 years of experience in healthcare sales and marketing in managed care, medical equipment distribution and hospital management. She received a nursing degree from the Johns Hopkins Hospital School of Nursing and received an M.B.A. from St. Mary's College in Emmitsburg, Maryland. Charles D. Burwell has been a director since 1997. Since 1993, Mr. Burwell has served as Senior Vice President of VHA, Inc., a healthcare alliance. As head of Information Services, he oversees activities associated with VHA's healthcare information technologies and VHA's management information systems team. Mr. Burwell received a B.A. from Northeastern Oklahoma University. Bruce M. Fried has been a director since 1998. Mr. Fried is a partner and chair of the healthcare practice group at Shaw Pittman Potts & Trowbridge, a law firm in Washington, D.C. From 1995 to 1998, Mr. Fried served as the Health Care Financing Administration's Director of the Center for Health Plans and Providers, where he was responsible for policy development and execution and operations for the Medicare program. From 1994 to 1995, Mr. Fried was vice 62 president of federal affairs at FHP International Corporation, one of the nation's largest managed care organizations. Mr. Fried received a B.A. and a J.D. from the University of Florida. Ronald H. Kase has been a director since July 1994. Mr. Kase joined New Enterprise Associates, a venture capital investment firm in 1990 and has been a general partner since May 1995. Mr. Kase serves on the board of directors of Endocardial Solutions, Inc., a manufacturer of minimally invasive diagnostic healthcare equipment, and several privately-held information technology and healthcare companies. Mr. Kase received a B.S. from Purdue University and received an M.B.A. from the University of Chicago. Neal Moszkowski has been a director since May 1999. Since 1998, Mr. Moszkowski has served as a partner of Soros Private Equity Partners, LLC, a venture capital investment firm. From 1993 to 1998, Mr. Moszkowski was an executive director in the Principal Investment Area of Goldman, Sachs International and a vice president of Goldman, Sachs & Co. Mr. Moszkowski serves on the board of directors of Integra Life Sciences Holdings Corporation, a developer and marketer of medical products, implants and biomaterials, Crystal Gas Storage, Inc., a natural gas storage company, Bluefly, Inc., an off-price apparel Internet retailer, and several private companies. Mr. Moszkowski earned his B.A. from Amherst College and an M.B.A. from Stanford University. Mark A. Stevens has been a director since 1994. Since 1989, Mr. Stevens has been a principal of Sequoia Capital venture funds. Mr. Stevens serves on the boards of directors of Aspect Development, Inc., a provider of solutions for component and supplier management, Nvidia Corp., a supplier of 3D graphics processors and software, Pixelworks, Inc., an electronic media production company, StratumOne Communications, Inc., a broadband networking company, MP3.com, Inc., a digital music Internet company, Terayon Communication Systems, Inc., a provider of cable modem systems, Medibuy.com, an Internet healthcare commerce company, Billpoint, Inc., an Internet credit card payment processor, and Teragen Pty. Ltd., an Internet networking company. Mr. Stevens received a B.S.E.E., a B.A. and an M.S. in Computer Engineering from the University of Southern California and an M.B.A. from Harvard University. Ronald R. Taylor has been a director since 1995. Since 1998, Mr. Taylor has been a general partner of Enterprise Partners, a venture capital firm. In 1987, Mr. Taylor founded Pyxis Corporation, a medical information systems company, and served as its chairman and chief executive officer until it merged with Cardinal Health, Inc. in 1996. Mr. Taylor serves on the boards of directors of Watson Pharmaceuticals, Inc., a pharmaceutical company, and Cavanaugh's Hospitality Corporation, a leading owner of full service hotels in the Northwest. He received a B.A. from the University of Saskatchewan and an M.A. from the University of California at Irvine. David W. Wroe has been a director since 1999. Since 1996, he has served as a senior vice president and chief technology officer for Continental Casualty Company, an insurance company. From 1983 to 1996, Mr. Wroe served as chief executive officer of Agency Management Services, Inc., a CCC majority-owned automation company, and Mr. Wroe continues to serve as the chairman of its board of directors. Mr. Wroe serves on the boards of directors of Rogers & Gray Insurance Company, an insurance company, Home Financial 63 Network, a software company, and Healthware Solutions International, Inc., a software company. Mr. Wroe earned a B.A. from Providence College. Executive officers serve at the discretion of the board of directors and hold office until their successors have been duly elected and qualified. There are no family relationships among any of the directors, officers or key employees of MedicaLogic. Directors are elected at the annual shareholders meeting and hold office until their successors are elected and qualified. Committees of the Board of Directors The board of directors has an audit committee and a compensation committee. The audit committee, among other things, reviews and makes recommendations to the board of directors concerning our internal accounting procedures, reviews and consults with our independent accountants on the accounting principles and auditing practices used for our financial statements and makes recommendations to the board of directors concerning the engagement of independent accountants and the scope of the audit to be undertaken by such accountants. The current members of the audit committee are Bruce M. Fried, Neal Moszkowski and Ronald R. Taylor. The compensation committee reviews and makes recommendations to the board of directors concerning the policies, practices and procedures relating to the compensation and benefits of our officers and managerial employees. The compensation committee exercises all authority under our stock incentive plans and advises and consults with our officers regarding personnel policies. The current members of the compensation committee are Charles D. Burwell, Ronald H. Kase and Mark A. Stevens. Compensation Committee Interlocks and Insider Participation Prior to establishing the compensation committee, the board of directors as a whole performed the functions delegated to the compensation committee. No member of the board of directors or the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more directors serving as an executive officer of our company. See "Certain Transactions." Director Compensation Generally, directors do not receive any cash compensation from us for their service as members of the board of directors, but directors are reimbursed for expenses incurred in connection with their attendance at board and committee meetings. Under our stock incentive plan, non-employee directors are granted a one-time option to purchase 60,000 shares of our common stock upon initial election to the board. In addition, we have entered into an arrangement pursuant to which we pay Enterprise Partners, of which Ronald R. Taylor serves as a general partner, $2,000 for each directors meeting attended by Mr. Taylor. Directors' fees 64 totaling $4,000 have been paid to Enterprise Partners for Mr. Taylor's attendance at board meetings. We carry an insurance policy for the protection of our officers and directors against any liability asserted against them in their official capacities. See "-Stock Incentive Option Plans" and "-Limitations on Directors' Liability and Indemnification." Executive Compensation The following table sets forth the total compensation paid or accrued for services rendered to us in all capacities by our Chief Executive Officer and our four other most highly compensated executive officers whose salary and bonus exceeded $100,000 during the year ended December 31, 1998 (collectively, the "Named Executive Officers").
Summary Compensation Table Annual Compensation ----------------------- All Other Name and Principal Position Salary Bonus Compensation (1)(2) - --------------------------- --------- --------- ------------------- Mark K. Leavitt, Chairman of the Board and Chief Executive Officer..................... $ 210,000 --- --- David C. Moffenbeier, Chief Operating Officer..................................... $ 190,000 --- $ 50,000 Blackford Middleton, Senior Vice President, Clinical Informatics........................ $ 160,000 $ 20,000 $ 48,621 Richard L. Samco, Senior Vice President and Chief Technology Officer.................... $ 185,000 --- --- Thomas M. Watson, Senior Vice President, Worldwide Sales and Professional Services... $ 150,000 $ 75,559 (3) --- - -------------- (1) Comprised of commission payments. (2) See "Long-Term Incentive Plans-Awards in Last Fiscal Year." (3) Includes $20,000 payment for 1997 performance.
We have entered into an employment agreement with Dr. Leavitt. The agreement is terminable at will on 60-days notice. 65
Long-Term Incentive Plans-Awards in Last Fiscal Year Percent of Total Restricted Stock Per Share Restriction Name and Principal Position Number of Shares(1) Granted Price Expiry(4) - --------------------------- ------------------- ---------------- --------- ------------ Mark K. Leavitt, Chairman of the Board and Chief Executive Officer... 30,000 18% $ 2.00 July 1, 2000 David C. Moffenbeier, Chief Operating Officer................... 30,000 18% $ 2.00 July 1, 2000 Blackford Middleton, Senior Vice President, Clinical Informatics..... 15,000 (2) 9% $ 2.00 July 1, 2000 Richard L. Samco, Senior Vice President and Chief Technology Officer............................. 30,000 18% $ 2.00 July 1, 2000 Thomas M. Watson, Senior Vice President, Worldwide Sales and Professional Services............... 30,000 (3) 18% $ 2.00 July 1, 2000 - -------------- (1) Except as otherwise provided, shares of restricted stock are subject to MedicaLogic's right of repurchase if specific performance criteria are not met. Our option to repurchase is exercisable for all of the shares in the event the holder voluntarily terminates his or her employment within two years of the date the shares were originally granted unless we complete an initial public offering, release an Internet version of Logician and release a consumer based Internet product prior to December 31, 1999. If all performance criteria are met on or before December 31, 1999, the shares will be released from the repurchase option. As of December 31, 1998, the named executive officers beneficially owned 469,000 shares of restricted stock with an aggregate value of $779,000. (2) Does not include 25,000 shares of restricted stock issued to Mr. Middleton on July 1, 1998 upon his surrender of 25,000 outstanding options to purchase common stock. Of these 25,000 shares of restricted stock, 11,111 were not subject to a right of repurchase, and 13,889 shares were subject to a right of repurchase by MedicaLogic and have been released from the repurchase option ratably over a period of 20 months beginning July 1, 1998. (3) Does not include 150,000 shares of restricted stock issued to Mr. Watson on July 1, 1998 upon his surrender of 150,000 outstanding options to purchase common stock. Of these 150,000 shares of restricted stock, 66,667 shares were not subject to a right of repurchase, and 83,333 were subject to a right of repurchase by MedicaLogic and have been released from the repurchase option ratably over a period of 20 months beginning July 1, 1998. (4) Unless the repurchase option is terminated earlier upon satisfaction of performance criteria.
Option Grants in Last Fiscal Year No options were granted to, or exercised by, any of the Named Executive Officers during the year ended December 31, 1998. 66 Stock Incentive Plans An aggregate of 13,994,384 shares of common stock have been reserved for issuance under our three stock incentive plans described below. The Stock Incentive Plan was adopted February 9, 1993 and, as amended, allowed for issuance of 4,494,384 shares. Under the 1996 Stock Incentive Plan, adopted December 27, 1996, 1,000,000 shares were originally reserved for issuance. The 1996 Plan was amended in 1998 to reserve an additional 700,000 shares for issuance and in 1999 to reserve an additional 3,800,000 shares for issuance, bringing the total number of shares reserved under the 1993 Plan and the 1996 Plan to 9,994,384. The stock option plans were approved by the board of directors and the shareholders. The 1996 Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, for the granting to employees and consultants of nonstatutory stock options and for the issuance of stock bonuses, restricted stock and stock appreciation rights. Unless terminated earlier, the 1996 stock incentive plan will terminate automatically in December 2006. As of August 31, 1999, options to purchase 4,359,651 shares of common stock at a weighted average exercise price of $2.48 per share were outstanding and 1,525,000 shares of restricted stock had been issued under the stock incentive plans. The stock incentive plans are administered by the board of directors. The board has the power to determine the terms of the options or rights granted, including the exercise price, the number of shares subject to each option or right, the character of the grant, the exercisability of the grant and the form of consideration payable upon exercise of options. The board of directors may delegate administration of the stock incentive plans to a committee. The exercise price of incentive stock options must not be less than the fair market value of the common stock at the date of the grant or, in the case of incentive stock options issued to holders of more than 10% of the outstanding common stock, 110% of the fair market value. The maximum term of incentive stock options is 10 years, or five years in the case of 10% shareholders. The aggregate fair market value, on the date of the grant, of the common stock for which incentive stock options are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Options become exercisable over a period of time in accordance with the terms of the option agreements entered into at the time of grant. Options issued to existing employees become exercisable ratably over a 36-month period. Before March 1, 1999, stock options awarded to new employees vested ratably over 30 months beginning six months from the date of hire. For options granted to an employee hired after March 1, one-sixth of the shares vest on the six-month anniversary of the hire date, and the remaining five-sixths of the options vest ratably over the remaining 30 months. These new hire options also include an acceleration clause, which allows 100% of the shares to become exercisable upon termination without cause. Stock option awards to non-employee directors also generally become exercisable over a 36-month period. 67 Options granted under the stock incentive plans are generally nontransferable by the optionee and, unless otherwise determined by the board of directors, must be exercised by the optionee during the period of the optionee's employment or service with MedicaLogic or within 90 days of termination thereof. The stock incentive plans provide that in the event we merge with or into another corporation, or we sell substantially all of our assets, each outstanding option will be assumed by the successor corporation. The 1999 Stock Incentive Plan authorizes the issuance of 4 million shares of our common stock. The 1999 Plan was approved by the board of directors and the shareholders. The 1999 Plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, for the granting to employees and consultants of nonstatutory stock options and for the issuance of stock bonuses, restricted stock and stock appreciation rights. Unless terminated earlier, the 1999 Plan will terminate automatically in September 2009. The 1999 Plan is administered by the board of directors. The board has the power to determine the terms of the options or rights granted, including the exercise price, the number of shares subject to each option or right, the character of the grant, the exercisability of the grant and the form of consideration payable upon exercise of options. The board of directors has delegated administration of the stock incentive plans to the compensation committee. The exercise price of incentive stock options must not be less than the fair market value of the common stock at the date of the grant or, in the case of incentive stock options issued to holders of more than 10% of the outstanding common stock, 110% of the fair market value. The maximum term of incentive stock options is 10 years, or five years in the case of 10% shareholders. The aggregate fair market value, on the date of the grant of the common stock for which incentive stock options are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Options become exercisable over a period of time in accordance with the terms of the option agreements entered into at the time of grant. Options granted under the 1999 Plan are generally nontransferable by the optionee and, unless otherwise determined by the board of directors, must be exercised by the optionee during the period of the optionee's employment or service with MedicaLogic or within 90 days of termination thereof. The 1999 Plan provides that in the event we merge with or into another corporation, or we sell substantially all of our assets, each outstanding option will be assumed by the successor corporation. 68 Limitations on Directors' Liability and Indemnification Our articles of incorporation eliminate, to the fullest extent permitted by Oregon law, liability of a director to MedicaLogic or its shareholders for monetary damages resulting from conduct as a director. Although liability for monetary damages has been eliminated, equitable remedies such as injunctive relief or rescission remain available. In addition, a director is not relieved of his or her responsibilities under any other law, including the federal securities laws. Our articles of incorporation require us to indemnify our directors to the fullest extent permitted by law. We believe that the limitation of liability provisions in our articles of incorporation enhance our ability to attract and retain qualified individuals to serve as directors. We carry an insurance policy for the protection of our officers and directors against any liability asserted against them in their official capacities. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of MedicaLogic pursuant to the foregoing provisions, or otherwise, MedicaLogic 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. 69 CERTAIN TRANSACTIONS We have accepted promissory notes from the following persons in the amounts set forth below as consideration for restricted stock issued to such persons:
Principal Name Amount of Note Date of Note ---- -------------- ------------ Harvey J. Anderson $385,000 March 31, 1999 Harvey J. Anderson 66,000 March 31, 1999 Guy E. Field 30,000 February 2, 1995 Guy E. Field 100,000 July 1, 1998 Guy E. Field 30,000 July 1, 1998 Guy E. Field 33,000 March 31, 1999 Mark K. Leavitt 60,000 July 1, 1998 Mark K. Leavitt 66,000 March 31, 1999 Berkeley T. Merchant 125,000 June 29, 1994 Berkeley T. Merchant 120,000 July 1, 1998 Blackford F. Middleton 159,000 August 11, 1995 Blackford F. Middleton 50,000 July 1, 1998 Blackford F. Middleton 30,000 July 1, 1998 Blackford F. Middleton 33,000 March 31, 1999 David C. Moffenbeier 60,000 July 1, 1998 David C. Moffenbeier 66,000 March 31, 1999 Richard L. Samco 60,000 July 1, 1998 Richard L. Samco 66,000 March 1, 1999 Thomas M. Watson 300,000 July 1, 1998 Thomas M. Watson 60,000 July 1, 1998 Thomas M. Watson 66,000 March 1, 1999
All of the above non-negotiable promissory notes accrue interest at 6% per annum on the unpaid principal balance from the date of the note until the principal balance is paid in full. Interest is payable quarterly in arrears. The notes are payable in full 10 years from the date of the loan and each note can be prepaid without penalty. We loaned Harvey Anderson $103,800 to pay for relocation expenses pursuant to an unsecured promissory note that accrues interest at 6% per annum on the unpaid principal balance from the date of the note until the principal is paid in full. The entire unpaid principal balance and all accrued interest is due and payable on the earlier to occur of (1) the closing of the sale of a residence located in Portland, Oregon, (2) the cessation or termination of his employment by us for any reason, or (3) July 1, 2001. The note is prepayable in full without penalty. In September 1999, we entered into a separate agreement with Mr. Anderson in consideration of Mr. Anderson relocating to San Francisco, California. Under the terms of this agreement, we agreed to (1) reimburse Mr. Anderson for a specified amount in improvements to his Portland, Oregon residence, any shortfall between the sales price on his Portland, Oregon residence and the original purchase price paid by Mr. Anderson and any transaction costs not covered by the sales 70 price of this residence, unless the sales price is greater than the purchase price, (2) forgive the interest accrued on the unsecured promissory note referred to above, which will be repaid from the proceeds of the sale of the Portland, Oregon residence and (3) pay the mortgage payment on Mr. Anderson's residence in Portland, Oregon until it is sold. In connection with our Series C Preferred Stock financing, we sold an aggregate of 2,505,970 additional shares of Series C Preferred Stock at a price of $2.25 per share in May 1996, including 514,445 shares of Series C Preferred Stock to New Enterprise Associates IV Limited Partnership, a beneficial owner of greater than 5% of our common stock on a converted basis, and an aggregate of 514,445 shares of Series C Preferred Stock to entities associated with Sequoia Funds, a group of affiliated entities beneficially owning greater than 5% of our common stock on a converted basis. See "Principal Shareholders." In August 1998, we entered into Stock Purchase Agreements with Enterprise Partners IV Associates, L.P. and Enterprise Partners IV, L.P. for the issuance of an aggregate of 350,000 shares of our common stock at a price of $2.00 per share. We also granted an option to purchase 16,000 shares of our common stock at a price of $2.00 per share to Enterprise Partners IV Associates, L.P. and granted an option to purchase 184,000 shares of common stock to Enterprise Partners IV, L.P. The options were exercised on April 14, 1999. Directors Ronald R. Taylor and Ronald H. Kase are affiliated with the Enterprise funds. See "Principal Shareholders." In connection with our Series J Preferred Stock financing, we sold an aggregate of 1,052,632 shares of Series J Preferred Stock in May 1999 to Sequoia Capital Franchise Fund and Sequoia Capital Franchise Partners, both of which are affiliates of Mark A. Stevens, a director of the Company. See "Principal Shareholders." Bruce M. Fried, a member of our board of directors, is a partner in a law firm retained by us to provide legal counsel regarding certain regulatory and intellectual property issues. 71 PRINCIPAL SHAREHOLDERS The following table presents the beneficial ownership of our common stock as of August 31, 1999 and as adjusted to reflect the common stock offered by this prospectus, by (a) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock on a converted basis; (b) each director and named executive officer; and (c) all directors and officers as a group.
Shares Beneficially Owned(1) ---------------------------- Percentage Percentage Name Number Prior to Offering After Offering ---- --------- ----------------- -------------- Entities associated with Sequoia Funds........................... 5,607,679(2) 11.3% 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 New Enterprise Associates......... 4,707,189 9.5% 2490 Sand Hill Road Menlo Park, CA 94025 Continental Casualty Company......................... 4,000,000(3) 8.1% CNA Insurance CNA Plaza Chicago, IL 60685 Quantum Industrial Partners LDC.................... 3,136,842 6.3% Kaya Flamboyan 9 Willemstad, Curacao Netherlands Antilles SFM Domestic Investment LLC.................. 3,136,842 6.3% c/o Soros Fund Management LLC 888 Seventh Avenue New York, NY 10016 Mark A. Stevens................... 5,661,012(4) 11.4% 3000 Sand Hill Rd., Bldg.4, Ste. 280 Menlo Park, CA 94025 Ronald H. Kase.................... 4,760,522(5) 9.6% 2490 Sand Hill Road Menlo Park, CA 94025 David W. Wroe..................... 4,000,000(3) 8.1% CNA Insurance CNA Plaza Chicago, IL 60685 Mark K. Leavitt................... 3,040,000(6) 6.1% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 72 Shares Beneficially Owned(1) ---------------------------- Percentage Percentage Name Number Prior to Offering After Offering ---- --------- ----------------- -------------- Richard L. Samco.................. 1,940,606(7) 3.9% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 David C. Moffenbeier.............. 1,317,903(8) 2.7% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 Ronald R. Taylor.................. 1,042,111(9) 2.1% Enterprise Partners 7979 Ivanhoe Ave., Ste. 550 La Jolla, CA 92037 Blackford F. Middleton............ 216,500(10) * 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 Thomas M. Watson.................. 210,000 * 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 Bruce M. Fried.................... 3,333(11) * 2300 N. Street, NW Washington, DC 20037 Charles D. Burwell................ 53,333(12) * 220 East Las Colinas Blvd. Irving, TX 75039 Neal Moszkowski................... 0(13) * 888 Seventh Avenue Suite 3300 New York, NY 10106 All Executive Officers and Directors as a group (14 persons).............. 22,632,389(14) 45.7% - -------------- * Less than 1%. (1) Shares that the person or entity has the right to acquire within 60 days after August 31, 1999 are deemed to be outstanding in calculating the percentage ownership of the person or entity but are not deemed to be outstanding as to any other person or entity. (2) Includes 3,550,016 shares of common stock held of record by Sequoia Capital Growth Fund; 716,541 shares of common stock held of record by Sequoia Capital VI; 31,497 shares of common stock held of record by Sequoia 1995; 39,370 shares of common stock held of record by Sequoia Technology Partners VI; 217,623 shares of common stock held of record by Sequoia Technology Partners III; 894,737 shares of common stock held of record by Sequoia Capital Franchise Fund; and 157,895 shares of common stock held of record by Sequoia Capital Franchise Partner. (3) Includes 4,000,000 shares of common stock held of record by Continental Casualty Company. Mr. Wroe is Senior Vice President and Chief Technology Officer of Continental Casualty Company. (4) Includes 5,607,679 shares of common stock held of record by entities associated with Sequoia funds, of which Mr. Stevens disclaims beneficial ownership, except to the extent of his pecuniary interest therein. See note (2). Mr. Stevens is a general partner of Sequoia Capital VI and Sequoia Technology Partners VI and is a managing member of Sequoia Capital Franchise Fund and Sequoia Capital Franchise Partners. Mr. Stevens participates in the voting control of the shares held of record by Sequoia Capital Growth Fund, 73 Sequoia 1995 and Sequoia Technology Partners III. The share amount also includes 5,000 shares subject to an option held of record by Mr. Stevens that is exerciseable within 60 days of August 31, 1999. (5) Includes 4,726,268 shares of common stock held of record by New Enterprises Associates VI, LP, of which Mr. Kase disclaims beneficial ownership. Includes 53,333 shares subject to an option held of record by Mr. Kase that is exerciseable within 60 days of August 31, 1999. (6) Includes 505,000 shares of common stock held of record by Sandra Leavitt, Dr. Leavitt's former wife, which are voted by Dr. Leavitt as trustee of a voting trust, 10,000 shares of common stock held of record by Amy Elizabeth Leavitt and 170,000 shares of common stock held in trust for Amy Elizabeth Leavitt. (7) Includes 10,000 shares of common stock held of record by Courtaney E. Samco and 10,000 shares of common stock held of record by Mark R. Samco. (8) Includes 500,000 shares of common stock held of record by Elizabeth Moffenbeier. (9) Includes 950,000 shares of common stock held of record by entities associated with Enterprise Partners, for which Mr. Taylor disclaims beneficial ownership, except to the extent of his pecuniary interest therein. Of those shares for which beneficial ownership is disclaimed, Mr. Taylor has the right to acquire beneficial ownership of 55,555 shares at any time. Also includes 57,777 shares subject to an option held of record by Mr. Taylor that is exerciseable within 60 days of August 31, 1999 and an aggregate of 9,000 shares of common stock of which 3,000 shares each are held of record by his children, Luke Rand Williams, Leah Williams Barbieri and Tiffany Marie Taylor. (10) Includes 5,000 shares of common stock held of record by Allie Middleton. (11) Includes 3,333 shares subject to an option held of record by Mr. Fried that is exerciseable within 60 days of August 31, 1999. (12) Consists of 53,333 shares subject to an option held of record by Mr. Burwell that is exerciseable within 60 days of August 31, 1999. Mr. Burwell disclaims beneficial ownership of the shares underlying these options. Mr. Burwell is a Senior Vice President of VHA, Inc, which holds of record 1,587,302 shares of common stock. Mr. Burwell disclaims beneficial ownership in shares of common stock held of record by VHA as he does not have voting or dispositive power over such shares. (13) Mr. Moszkowski is an employee of Soros Fund Management LLC, which is the principal investment advisor to Quantum Industrial Partners LDC. Mr. Moszkowski is also a non-managing member of SFM Domestic Investments LLC. Mr. Moszkowski does not have voting or dispositive power over shares held of record by Quantum Industrial Partners LDC or SFM Domestic Investments LLC. (14) Includes 232,359 shares subject to options that are exercisable within 60 days of August 31, 1999.
74 DESCRIPTION OF CAPITAL STOCK General Upon the completion of this offering, we will be authorized to issue 150,000,000 shares of common stock, no par value, and 50,000,000 shares of undesignated preferred stock, no par value. The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our articles of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Oregon law. Common Stock As of August 31, 1999, there were 46,601,705 shares of our common stock outstanding, which were held of record by approximately 260 shareholders, after giving effect to the conversion of the outstanding series of preferred stock. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. In the event we liquidate, dissolve or wind up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. The holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. The outstanding shares of common stock are, and the shares of common stock offered by this prospectus when issued will be, fully paid and nonassessable. See "Dividend Policy." Preferred Stock The board of directors has the authority, without action by the shareholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of our common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until the board of directors determines the specific rights of the holders of preferred stock. However, the effects might include, among other things: o Restricting dividends on our common stock; o Diluting the voting power of our common stock; o Impairing the liquidation rights of our common stock; and o Delaying or preventing a change in control of our company without further action by the shareholders. 75 Upon the completion of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. Registration Rights After this offering, the holders of 32,655,933 shares of common stock will be entitled to rights with respect to the registration of these shares under the Securities Act. Under the terms of the agreements between us and the holders of these shares, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of registration and are entitled to include their shares of common stock in the registration. These holders of registrable securities are also entitled to specified demand registration rights under which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of our common stock, and we are required to use our best efforts to effect this registration. Further, some of the holders of these demand registration rights may require us to file additional registration statements. All of the registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in the registration and our right not to effect a requested registration within sixty days following the effectiveness of a registration statement registering any of our stock or other securities in connection with the public offering of those securities solely for cash. Transfer Agent and Registrar The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, LLC. Oregon Control Share and Business Combination Statutes Upon completion of this offering, we will become subject to the Oregon Control Share Act. The Oregon Control Share Act generally provides that a person who acquires voting stock of an Oregon corporation in a transaction, other than a transaction in which voting shares are acquired from the issuing public corporation, that results in the acquiror holding more than 20%, 33 1/3% or 50% of the total voting power of the corporation cannot vote the shares it acquires in the acquisition unless voting rights are accorded to the control shares by: o A majority of each voting group entitled to vote; and o The holders of a majority of the outstanding voting shares, excluding the control shares held by the acquiror and shares held by the company's officers and inside directors. The term "acquiror" is broadly defined to include persons acting as a group. The acquiror may, but is not required to, submit to the target company a statement setting forth certain information about the acquiror and its plans with respect to the company. The statement may also request that the company call a special meeting of shareholders to determine whether voting rights will be accorded to the control shares. If the acquiror does not request a 76 special meeting of shareholders, the issue of voting rights of control shares will be considered at the next annual or special meeting of shareholders. If the acquiror's control shares are accorded voting rights and represent a majority or more of all voting power, shareholders who do not vote in favor of voting rights for the control shares will have the right to receive the appraised "fair value" of their shares, which may not be less than the highest price paid per share by the acquiror for the control shares. Upon completion of this offering, we will become subject to certain provisions of the Oregon Business Corporation Act that govern business combinations between corporations and interested shareholders. The Oregon Business Corporation Act generally provides that if a person or entity acquires 15% or more of the outstanding voting stock of an Oregon corporation, the corporation and the acquiring shareholder, or any affiliated entity of the acquiring shareholder, may not engage in certain business combination transactions for three years following the date the person acquired the shares. Business combination transactions for this purpose include: o A merger or plan of share exchange; o Any sale, lease, mortgage or other disposition of 10% or more of the assets of the corporation; and o Certain transactions that result in the issuance or transfer of capital stock of the corporation to the acquiring shareholder. These restrictions do not apply if: o The acquiring shareholder, as a result of the transaction in which such person acquired the shares, owns at least 85% of the outstanding voting stock of the corporation (disregarding shares owned by directors who are also officers and certain employee benefits plans); o The board of directors approves the business combination or the transaction that resulted in the shareholder acquiring the shares before the acquiring shareholder acquires 15% or more of the corporation's voting stock; or o The board of directors and the holders of at least two-thirds of the outstanding voting stock of the corporation (disregarding shares owned by the acquiring shareholder) approve the business combination after the acquiring shareholder acquires 15% or more of the corporation's voting stock. Staggered Board; Removal of Directors only for Cause Our articles and restated bylaws contain provisions that: o Classify the board of directors into three classes as nearly equal in number as possible, each of which will serve for three years with one class being elected each year; and o Provide that directors may be removed by shareholders only for cause and only upon the vote of 75 percent of the votes then entitled to be cast for the election of directors. 77 The classified board provisions may have the effect of lengthening the time required for a third party to acquire control of MedicaLogic through a proxy contest or the election of a majority of the board of directors and may deter any potential unfriendly offers or other efforts to obtain control of the company. These provisions could deprive you of opportunities to realize a premium for your shares and could make removal of incumbent directors more difficult. At the same time, these provisions may have the effect of inducing any third parties seeking control of MedicaLogic to negotiate terms acceptable to the board of directors. In addition, the provisions regarding removal of directors will make the removal of any director more difficult, even if you believe such removal is in your best interests. Since these provisions make the removal of directors more difficult, they increase the likelihood that incumbent directors will retain their position and, since the board has the power to retain and discharge management, could perpetuate incumbent management. 78 SHARES ELIGIBLE FOR FUTURE SALE If our shareholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options, in the public market following this offering, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity related securities in the future and at a time and price that we deem appropriate. Upon completion of this offering, we will have outstanding an aggregate of __________ shares of our common stock, assuming no exercise of outstanding options or warrants. As of August 31, 1999, we had approximately 260 holders of common stock, after giving effect to the conversion of the convertible preferred stock. All of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless these shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. This leaves 46,601,705 shares eligible for sale in the public market as follows: Number of Shares Date - ---------------- ---- 32,958,907 After 180 days from the date of this prospectus (subject, in some cases, to volume limitations). 13,642,798 At various times after 181 days from the date of this prospectus (subject, in some cases, to volume limitations). Lock-up Agreements All of our officers and directors and shareholders holding substantially all of our outstanding shares of common stock have signed lock-up agreements with our underwriters under which they agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 180 days after the date of this prospectus. Transfers or dispositions can be made sooner with the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: o 1% of the number of shares of our common stock then outstanding, which will equal approximately _________ shares immediately after this offering; or o the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. 79 Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about MedicaLogic, Inc. Rule 144(k) Under Rule 144(k) as currently in effect, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the completion of this offering. Rule 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares 90 days after the effective date of this prospectus in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. Registration Rights After this offering, the holders of 32,655,933 shares of our common stock, or their transferees, will be entitled to rights with respect to the registration of those shares under the Securities Act. If these shares are registered, they will become freely tradeable without restriction under the Securities Act. These sales could have a material adverse effect on the trading price of our common stock. Stock Options Shortly after this offering, we intend to file a registration statement on Form S-8 covering the shares of common stock reserved for issuance under our stock option plans. Shares of common stock registered under any registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, unless the shares are subject to vesting restrictions or the lock-up agreements described above. 80 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement, dated _____________, 1999, the underwriters named below, for whom Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and DLJdirect Inc. are acting as representatives, have severally agreed to purchase from MedicaLogic the number of shares of common stock set forth opposite each of their names below. Number Underwriters of Shares ------------ --------- Donaldson, Lufkin & Jenrette Securities Corporation .. BancBoston Robertson Stephens Inc. ................... U.S. Bancorp Piper Jaffray Inc. ...................... DLJdirect Inc. ....................................... --------- Total.......................................... ========= The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of common stock offered by this prospectus are subject to approval by their counsel of certain legal matters and to certain other conditions. The underwriters are obligated to purchase and accept delivery of all the shares of common stock offered by this prospectus (other than those shares covered by the over-allotment option described below) if any are purchased. The underwriters initially propose to offer the shares of common stock in part directly to the public at the initial public offering price set forth on the cover page of this prospectus and in part to certain dealers (including the underwriters) at such price less a concession not in excess of $_____ per share. The underwriters may allow, and such dealers may re-allow, to certain other dealers a concession not in excess of $______ per share. After the initial offering of the common stock, the public offering price and other selling terms may be changed by the representatives at any time without notice. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of ________ additional shares of common stock at the initial public offering price less underwriting discounts and commissions. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, subject to certain conditions, to purchase its pro rata portion of such additional shares based on such underwriter's percentage underwriting commitment as indicated in the preceding table. The following table shows the underwriting fees to be paid to the underwriters by us in this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of our common stock to cover over-allotments. 81 No Full Exercise Exercise -------- -------- Per Share..................................... Total......................................... We will pay the offering expenses, estimated to be $_________________. An electronic prospectus is available on the Internet site maintained by DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation. Other than the prospectus in electronic format, the information on such Internet site relating to our offering is not a part of this prospectus, has not been approved or endorsed by us or any underwriter and should not be relied on by prospective purchasers. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect thereof. Each of MedicaLogic, its executive officers and directors and certain of our shareholders has agreed, subject to certain exceptions, not to (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock or (b) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock (regardless of whether any of the transactions described in clause (a) or (b) are to be settled by the delivery of common stock, or other securities, in cash or otherwise) for a period of 180 days after the date of this prospectus without the prior written consent of Donaldson Lufkin & Jenrette Securities Corporation. In addition, during such period, we have also agreed not to file any registration statement with respect to, and each of our executive officers, directors and certain of our shareholders has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of Donaldson Lufkin & Jenrette Securities Corporation. Prior to this offering, there has been no established trading market for our common stock. The initial public offering price for the shares of common stock offered by this prospectus will be determined by negotiation among us and the representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which we compete, our past and present operations, our historical results of operations, our prospects for future earnings, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of this offering. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "MDLI." 82 Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the shares of common stock offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of common stock offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful. In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may over-allot this offering, creating a syndicate short position. The underwriters may bid for and purchase shares of common stock in the open market to cover such syndicate short position or to stabilize the price of our common stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed common stock in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of our common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. 83 ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 with respect to the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules that are part of the registration statement. For further information on us and our common stock, you should review the registration statement and its exhibits and schedules. Any document we file may be read and copied at the Commission's public reference rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commissioner located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission at 1-800-SEC-0330 for further information about the public reference rooms. Our filings with the Commission are also available to the public from the Commission's Web site at http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act and, accordingly, will file periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the Commission's public reference rooms and the Web site of the Commission referred to above. LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Stoel Rives LLP, Portland, Oregon. Certain legal matters will be passed upon for the underwriters by Perkins Coie LLP, Portland, Oregon. As of the date of this prospectus, partners and employees of Stoel Rives LLP beneficially owned an aggregate of 50,000 shares of our common stock. EXPERTS The financial statements of MedicaLogic, Inc. as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998 have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in auditing and accounting. 84 MEDICALOGIC, INC. AND SUBSIDIARIES Index to Financial Statements Page MedicaLogic, Inc. - Consolidated Financial Statements: Report of KPMG LLP........................................................F-2 Consolidated Balance Sheets...............................................F-3 Consolidated Statements of Operations.....................................F-4 Consolidated Statements of Shareholders' Equity (Deficit).................F-5 Consolidated Statements of Cash Flows.....................................F-6 Notes to Consolidated Financial Statements................................F-7 PrimaCis Health Information Technology, Inc. - Financial Statements: Report of KPMG LLP.......................................................F-26 Balance Sheet............................................................F-27 Statement of Operations..................................................F-28 Statement of Shareholders' Deficit.......................................F-29 Statement of Cash Flows..................................................F-30 Notes to Financial Statements............................................F-31 Pro Forma Financial Information: Summary...................................................................F-41 Unaudited Pro Forma Condensed Combined Balance Sheet......................F-42 Unaudited Pro Forma Condensed Combined Statement of Operations............F-43 Notes to the Unaudited Pro Forma Condensed Combined Financial Information.F-44 F-1 Independent Auditors' Report The Board of Directors MedicaLogic, Inc.: We have audited the accompanying consolidated balance sheets of MedicaLogic, Inc. and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of MedicaLogic, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Portland, Oregon April 23, 1999 F-2
MEDICALOGIC, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands, except per share data) December 31 ------------------------------- Assets 1997 1998 June 30, 1999 ------------- ------------- ----------------------------- (Unaudited) (Unaudited) (Pro forma) Current assets: Cash and cash equivalents $ 4,924 $ 4,718 $ 9,922 Short-term investments 7,116 7,030 31,277 Accounts receivable, net 7,663 10,084 6,219 Prepaid expenses and other current assets 263 545 1,379 ------------- ------------- ------------ Total current assets 19,966 22,377 48,797 Property and equipment, net 1,969 1,804 6,619 Other assets 137 127 3,787 ------------- ------------- ------------ Total assets $ 22,072 $ 24,308 $ 59,203 ============= ============= ============ Liabilities, Redeemable Preferred Stock and Shareholders' Equity (Deficit) Current liabilities: Accounts payable 667 557 5,803 Accrued and other liabilities 2,187 2,286 1,204 Deferred revenue 1,396 2,701 2,338 Current portion of capital leases 846 215 104 Current portion of notes payable -- 527 924 ------------- ------------- ------------ Total current liabilities 5,096 6,286 10,373 Non-current portion of capital leases 278 92 151 Non-current portion of notes payable -- 587 833 ------------- ------------- ------------ Total liabilities 5,374 6,965 11,357 ------------- ------------- ------------ Convertible redeemable preferred stock; 50,000,000 shares authorized; aggregate liquidation preference $50,128 at December 31, 1998 and $85,918 at June 30, 1999 (unaudited); issued and outstanding 19,525,545, 21,524,545, and 29,059,283 at December 31, 1997 and 1998, and June 30, 1999 (unaudited), respectively; pro forma no shares issued and outstanding 42,593 49,387 83,687 $ -- Commitments and contingencies Shareholders' equity (deficit): Common stock, no par value; authorized 100,000,000 shares; issued and outstanding 13,308,561, 14,255,122 and 17,542,422 shares at December 31, 1997 and 1998 and June 30, 1999 (unaudited), respectively; pro forma 46,601,705 shares issued and outstanding 3,202 5,139 14,211 97,898 Common stock notes receivable (988) (2,039) (5,959) (5,959) Deferred compensation -- -- (956) (956) Accumulated deficit (28,109) (35,144) (43,137) (43,137) ------------- ------------- ------------ ------------ Total shareholders' equity (deficit) (25,895) (32,044) (35,841) $ 47,846 ------------- ------------- ------------ ============ Total liabilities, redeemable preferred stock and shareholders' equity (deficit) $ 22,072 $ 24,308 $ 59,203 ============= ============= ============ See accompanying notes to consolidated financial statements.
F-3
MEDICALOGIC, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Dollars in thousands, except per share data) Six Months Ended Years Ended December 31, June 30, ----------------------------------------- -------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (Unaudited) Revenues: Software $ 6,845 $ 7,617 $ 10,410 $ 3,989 $ 5,787 Service and support 2,819 5,190 5,750 2,670 3,188 ----------- ----------- ----------- ----------- ----------- Total revenues 9,664 12,807 16,160 6,659 8,975 Operating expenses: Cost of revenue 6,120 7,756 6,754 3,283 3,418 Marketing and sales 6,498 7,539 7,579 3,630 7,946 Research and development 6,583 7,047 8,016 3,858 5,092 General and administrative 718 865 1,044 451 1,255 ----------- ----------- ----------- ----------- ----------- Total operating expenses 19,919 23,207 23,393 11,222 17,711 ----------- ----------- ----------- ----------- ----------- Operating loss (10,255) (10,400) (7,233) (4,563) (8,736) Other income (expense): Interest expense (251) (240) (187) (106) (93) Interest income 456 617 707 313 494 Other, net (265) (647) (322) (141) 342 ----------- ----------- ----------- ----------- ----------- Total other income (expense) (60) (270) 198 66 743 ----------- ----------- ----------- ----------- ----------- Loss before income taxes (10,315) (10,670) (7,035) (4,497) (7,993) Provision for income taxes -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net loss $ (10,315) $ (10,670) $ (7,035) $ (4,497) $ (7,993) =========== =========== =========== =========== =========== Historical net loss per share: Basic and diluted $ (0.78) $ (0.80) $ (0.51) $ (0.34) $ (0.47) =========== =========== =========== =========== =========== Weighted average shares - basic and diluted 13,152,557 13,269,082 13,766,073 13,357,891 16,840,576 Pro forma net loss per share: Basic and diluted $ (0.20) $ (0.21) Weighted average shares - basic =========== =========== and diluted 34,957,284 38,919,064 See accompanying notes to consolidated financial statements.
F-4
MEDICALOGIC, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (Deficit) (Dollars in thousands) Common Total Common stock stock shareholders' ---------------------- notes Deferred Accumulated equity Shares Amount receivable compensation deficit (deficit) ---------- ---------- ------------ -------------- -------------- ----------- Balance at December 31, 1995 13,056,224 $ 2,812 $ (683) $ -- $ (7,124) $ (4,995) Issuance of common stock in exchange for a promissory note 105,000 210 (210) -- -- -- Issuance of common stock in exchange for services 25,000 50 -- -- -- 50 Issuance of common stock for cash 5,000 10 -- -- -- 10 Options exercised 36,500 26 -- -- -- 26 Interest accrued on common stock notes receivable -- -- (44) -- -- (44) Net loss -- -- -- -- (10,315) (10,315) ---------- ---------- ------------ -------------- -------------- ----------- Balance at December 31, 1996 13,227,724 3,108 (937) -- (17,439) (15,268) Issuance of common stock in exchange for services 28,700 51 -- -- -- 51 Options exercised 52,137 43 -- -- -- 43 Interest accrued on common stock notes receivable -- -- (51) -- -- (51) Net loss -- -- -- -- (10,670) (10,670) ---------- ---------- ------------ -------------- -------------- ----------- Balance at December 31, 1997 13,308,561 3,202 (988) -- (28,109) (25,895) Issuance of common stock for acquisition 27,500 55 -- -- -- 55 Issuance of common stock for cash 350,000 700 -- -- -- 700 Issuance of restricted common stock in exchange for promissory notes 500,000 1,000 (1,000) -- -- -- Non-cash stock compensation -- 110 -- -- -- 110 Options exercised 69,061 72 -- -- -- 72 Interest accrued on common stock notes receivable -- -- (51) -- -- (51) Net loss -- -- -- -- (7,035) (7,035) ---------- ---------- ------------ -------------- -------------- ----------- Balance at December 31, 1998 14,255,122 5,139 (2,039) -- (35,144) (32,044) Issuance of common stock for acquisition (unaudited) 1,500,000 3,300 -- -- -- 3,300 Issuance of restricted common stock in exchange for promissory notes (unaudited) 1,360,000 3,790 (3,790) -- -- -- Issuance of common stock in exchange for services (unaudited) 47,500 105 -- -- -- 105 Warrants exercised (unaudited) 45,000 14 -- -- -- 14 Options exercised (unaudited) 334,800 598 -- -- -- 598 Stock compensation expense (unaudited) -- 309 -- -- -- 309 Interest accrued on common stock notes receivable (unaudited) -- -- (130) -- -- (130) Deferred compensation related to stock options (unaudited) -- 956 -- (956) -- -- Net loss (unaudited) -- -- -- -- (7,993) (7,993) ---------- ---------- ------------ -------------- -------------- ----------- Balance at June 30, 1999 (unaudited) 17,542,422 $ 14,211 $ (5,959) $ (956) (43,137) $ (35,841) ========== ========== ============ ============== ============== =========== See accompanying notes to consolidated financial statements.
F-5
MEDICALOGIC, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) Six Months Ended Years Ended December 31, June 30, -------------------------------------- ------------------------ 1996 1997 1998 1998 1999 ---------- ---------- ---------- ---------- ---------- (Unaudited) Cash flows from operating activities: Net loss $ (10,315) $ (10,670) $ (7,035) $ (4,497) $ (7,993) Adjustments to reconcile net loss to net cash (used by) provided by operating activities: Depreciation and amortization 912 1,464 1,537 762 2,082 Non-cash expenses 50 51 110 110 2,664 Provision for doubtful accounts 304 829 756 40 437 Loss (gain) on disposition of assets -- 14 (2) (4) (2) Other non-cash expenses (44) (51) (51) (25) (130) Changes in assets and liabilities: Accounts receivable (3,027) (3,630) (3,177) 491 3,428 Prepaid expenses and other current assets (25) (133) (239) (423) (858) Other assets 300 (35) -- (70) (13) Accounts payable 1,131 (906) (110) (96) 5,246 Accrued and other liabilities 80 1,314 99 (295) (1,082) Deferred revenue (250) 113 1,305 509 (363) ---------- ---------- ---------- ---------- ---------- Net cash (used by) provided by operating activities (10,884) (11,640) (6,807) (3,498) 3,416 ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchase of fixed assets (263) (525) (1,280) (823) (6,322) Purchase of business -- -- (12) (12) (3,152) Proceeds from sale of fixed assets -- -- 6 29 6 Purchase of short-term investments -- (15,261) (28,248) (15,715) (31,277) Purchase from maturities of short-term investments -- 8,145 28,334 11,048 7,030 ---------- ---------- ---------- ---------- ---------- Net cash used by investing activities (263) (7,641) (1,200) (5,473) (33,715) ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of preferred stock 20,023 6,775 6,794 6,794 34,300 Net proceeds from issuance of common stock 36 43 772 13 612 Proceeds from issuance of notes payable -- -- 1,264 150 792 Principal payments under capital lease (875) (1,264) (879) (503) (52) Principal payments under note obligations -- -- (150) (22) (149) ---------- ---------- ---------- ---------- ---------- Net cash provided by financing activities 19,184 5,554 7,801 6,432 35,503 ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 8,037 (13,727) (206) (2,539) 5,204 Cash and cash equivalents at beginning of period 10,614 18,651 4,924 4,924 4,718 ---------- ---------- ---------- ---------- ---------- Cash and cash equivalents at end of period $ 18,651 $ 4,924 $ 4,718 $ 2,385 $ 9,922 ========== ========== ========== ========== ========== Summary of non-cash investing and financing activities: Issuance of common stock in exchange for note receivable $ 210 $ -- $ 1,000 $ 1,000 $ 3,790 Issuance of common stock for purchase of a business -- -- 55 55 3,300 Assets acquired or exchanged under capital leases 1,451 593 62 -- -- See accompanying notes to consolidated financial statements.
F-6 MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (1) Summary of Significant Accounting Policies (a) Company MedicaLogic, Inc. (the Company) develops, markets and supports electronic medical record software used by physicians at the point of care, throughout the U.S. The accompanying consolidated financial statements include the accounts of the Company and subsidiaries. All significant intercompany balances have been eliminated in consolidation. (b) Unaudited Quarterly Information The financial information included herein for the six-month periods ended June 30, 1998 and 1999 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes included in the consolidated financial statements. The results of operations for the interim period presented are not necessarily indicative of the results to be expected for the full year. (c) Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. (d) Short-Term Investments Short-term investments include various corporate debt instruments and have been classified as available-for-sale securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities at December 31, 1997 and 1998. Short-term investments are carried at amortized cost, which approximates market. At December 31, 1998, contractual maturities of short-term investments ranged from seventy-two to one hundred and thirty-three days. At June 30, 1999 (unaudited), contractual maturities of short-term investments ranged from 104 to 296 days. F-7 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (e) Accounts Receivable Accounts receivable are shown net of allowance for doubtful accounts of $852, $1,360 and $1,514 at December 31, 1997 and 1998 and June 30, 1999 (unaudited), respectively. The following table presents a rollforward of the allowance for doubtful accounts:
1996 1997 1998 ---------- ---------- ---------- Balance - beginning of period $ 30 $ 165 $ 852 Provision 304 829 756 Charge offs (169) (142) (248) ---------- ---------- ---------- Balance - end of period $ 165 $ 852 $ 1,360 ========== ========== ==========
(f) Property and Equipment Property and equipment are stated at cost. Property and equipment under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. The cost of repairs and maintenance is expensed as incurred. Depreciation on furniture, equipment and leasehold improvements is calculated on a straight-line basis over the estimated useful lives of the assets, five years for furniture and two to three years for equipment. Property and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Amortization of leasehold improvements is recognized over the shorter of the life of the improvement or the remaining life of the lease using the straight-line method. In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, management reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount including associated intangible assets of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. F-8 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (g) Goodwill Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and intangible assets acquired in various acquisitions. Goodwill costs are being amortized on a straight-line basis, over periods ranging from two to four years. Amortization expense for the years ended December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1999 (unaudited) was $-0-, $-0-, $34 and $361, respectively. Accumulated amortization at December 31, 1997 and 1998 and at June 30, 1999 (unaudited) was $-0-, $34 and $395, respectively. (h) Software Development Costs Software development costs have been accounted for in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has been short; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs and charged all costs to research and development expense. (i) Revenue Recognition In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition. Subsequently, in March 1998, the Financial Accounting Standards Board ("FASB") approved SOP 98-4, Deferral of the Effective Date of a Provision of 97-2, Software Revenue Recognition. SOP 98-4 defers for one year, the application of several paragraphs and examples in SOP 97-2 that limit the definition of vendor specific objective evidence (VSOE) of the fair value of various elements in a multiple element arrangement. The provisions of SOP's 97-2 and 98-4 have been applied to transactions entered into by the Company beginning January 1, 1998. Prior to 1997, the Company's revenue policy was in accordance with the preceding authoritative guidance provided by SOP No. 91-1, Software Revenue Recognition. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of the relative fair values of each element in the arrangement. The revenue allocated to software products is generally recognized by the Company upon the delivery of the products. The revenue allocated to extended support agreements is recognized ratably over the term of the maintenance agreement and revenue allocated to service elements is recognized as the services are performed. F-9 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. This SOP amends SOP 97-2 to require recognition of revenue using the "residual method" in circumstances outlined in the SOP. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. SOP 98-9 is effective for fiscal years beginning after March 15, 1999. Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to be deferred until the date SOP 98-9 becomes effective. (j) Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that include the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. (k) Stock-Based Employee Compensation The Company has adopted SFAS No. 123, Accounting for Stock-Based Compensation, which defines a fair value based method of accounting for employee stock options and similar equity instruments. As is permitted under SFAS No. 123, the Company has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25 and provide the pro forma disclosures as prescribed by SFAS No. 123. (l) Advertising The Company expenses costs of advertising when the costs are incurred. Advertising expense was approximately $700, $836 and $896 for the years ended December 31, 1996, 1997 and 1998, respectively. F-10 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (m) Net Loss Per Share The Company has adopted SFAS No. 128, Earnings Per Share, which provides that "basic net income (loss) per share" and "diluted net income (loss) per share" for all prior periods presented are to be computed using the weighted average number of common shares outstanding during each period, with diluted net income per share including the effect of potentially dilutive common shares. The reconciliation of shares used to calculate basic and diluted income per share consists of the following as of December 31:
June 30, -------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (Unaudited) Basic weighted average shares of common stock 13,152,557 13,269,082 13,766,073 13,357,891 16,840,576 Effect of dilutive securities: Stock options and warrants -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Diluted weighted average shares of common stock 13,152,557 13,269,082 13,766,073 13,357,891 16,840,576 =========== =========== =========== =========== ===========
Common stock equivalents related to stock options and warrants of 839,853, 1,830,568, 2,259,447, 2,274,118 and 3,059,283 are anti-dilutive in a net loss year and, therefore, are not included during the years ended December 1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999 (unaudited) net loss per share. (n) Use of Estimates Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (o) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of capital leases and notes payable approximate fair value as the stated interest rates reflect current market rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. F-11 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (p) Contingencies and Factors that Could Affect Future Results A substantial portion of the Company's revenues each year are generated from the development and release to market of computer software products. In the extremely competitive industry environment in which the Company operates, such product generating, development and marketing processes are uncertain and complex, requiring accurate prediction of market trends and demand as well as successful management of various development risks inherent in such products. In light of these dependencies, it is possible that failure to successfully manage a significant product introduction could have a severe near term impact on the Company's growth and results of operations. (q) Pro Forma Shareholders Equity (Unaudited) Pro forma net loss per share has been computed as described above and also gives effect to common equivalent shares from preferred stock that will automatically convert upon the closing of the Company's initial public offering (using the as-if-converted method). If the Company's initial public offering is consummated, all of the convertible preferred stock outstanding as of the closing date will automatically be converted into an aggregate of 29,059,283 shares of common stock based on the shares of convertible preferred stock outstanding at June 30, 1999. Unaudited pro forma shareholders' equity at June 30, 1999, as adjusted for the conversion of the convertible preferred stock, is disclosed on the balance sheet. (2) Acquisition On January 5, 1998, the Company paid $12 in cash and issued 27,500 shares of common stock valued at $2.00 per share to acquire certain intangible assets of Health Outcome Technologies, Inc. (HOT). This acquisition was accounted for as a purchase and results of operations for the acquired company are included only from the date of acquisition forward. In connection with this acquisition, the Company recorded goodwill of $67, which is being amortized over two years, the estimated economic life of the goodwill. The separate results of operations of HOT were not material compared to the Company's overall results of operations and as such, pro forma financial information has been omitted. F-12 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (3) Balance Sheet Components (a) Property and Equipment Property and equipment, including equipment under capital leases, consist of the following:
December 31, ------------------------------ June 30, 1997 1998 1999 ------------- ------------- ------------- (Unaudited) Furniture and equipment $ 3,850 $ 4,565 $ 9,343 Leasehold improvements 876 1,267 1,347 ------------- ------------- ------------- 4,726 5,832 10,690 Less accumulated depreciation and amortization (2,757) (4,028) (4,071) ------------- ------------- ------------- $ 1,969 $ 1,804 $ 6,619 ============= ============= =============
(b) Accrued Liabilities Accrued liabilities consist of the following:
December 31, ------------------------- 1997 1998 ----------- ----------- Royalties $ 947 $ 843 Payroll and related liabilities 674 627 Litigation accruals 301 488 Other 265 328 ----------- ----------- $ 2,187 $ 2,286 =========== ===========
(4) Leases The Company leases certain office furniture and equipment under long-term capital leases, which expire over the next two years. At December 31, 1997 and 1998, the net book value of leased furniture and equipment included in property and equipment was $1,122 and $307, respectively. The Company also leases its office facilities under non-cancelable operating lease agreements. F-13 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Future minimum lease payments under non-cancelable operating leases and the capital leases as of December 31, 1998 are as follows:
Capital Operating Leases Leases ----------- ----------- Year ending December 31: 1999 $ 267 $ 821 2000 65 945 2001 40 945 2002 -- 953 2003 -- 1,044 Thereafter -- 4,090 ----------- ----------- Total minimum lease payments 372 $ 8,798 =========== Less amount representing interest (65) ----------- Present value of net minimum capital lease payments 307 Less current portion of capital leases (215) ----------- Non-current portion of capital leases $ 92 ===========
Rent expense for the years ended December 31, 1996, 1997 and 1998 totaled approximately $600, $611 and $1,073, respectively. F-14 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (5) Notes Payable Notes payable consists of the following:
December 31, ------------------------- June 30, 1997 1998 1999 ----------- ----------- ----------- (Unaudited) Notes payable, monthly principal and interest payments of $47; interest at two-year treasury constant maturities plus 5% per annum (10.4% as of December 31, 1998 and 9.53% at June 30, 1999 (unaudited)); maturing between September 2000 and September 2001; secured by equipment purchased thereunder $ -- $ 1,007 $ 774 Note payable, monthly principal and interest payments of $1; interest at 11% per annum; final payment due December 31, 2008; unsecured -- 70 68 Note payable, monthly principal and interest payments of $3; interest at 11% per annum; final payment due December 31, 2000; unsecured -- 37 -- Notes payable, monthly principal and interest payments of $25; interest at two-year treasury constant maturities plus 5% per annum (9.45% at June 30, 1999); maturing between March 2001 and July 2001; secured by equipment purchased thereunder, (unaudited) -- -- 529 Note payable, monthly principal and interest payments of $3; interest at 11% per annum; final payment due December 1999; unsecured; (unaudited) -- -- 17 Note payable, monthly principal and interest payments of $13; interest at 7.96% per annum; final payment due April 2001; secured by equipment purchased thereunder, (unaudited) -- -- 369 ----------- ----------- ----------- -- 1,114 1,757 Less current portion of long-term debt -- 527 924 ----------- ----------- ----------- $ -- $ 587 $ 833 =========== =========== ===========
Future minimum payments as of December 31, 1998 are as follows: Year ending December 31: 1999 $ 527 2000 465 2001 69 2002 7 2003 7 Thereafter 39 --------- Total minimum payments $ 1,114 ========= F-15 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (6) Convertible Redeemable Preferred Stock The Company has authorized several series of convertible redeemable preferred stock. The title, carrying amount, and number of shares issued and outstanding are as follows:
December 31, ---------------------------- June 30, 1997 1998 1999 ------------ ------------ ------------ (Unaudited) Series A, $1.00 liquidation preference; issued and outstanding 5,750,001 at December 31, 1997 and 1998 and June 30, 1999 (unaudited) 5,698 5,698 5,698 Series A-1, $10.00 liquidation preference; no shares issued and outstanding at June 30, 1999 (unaudited) -- -- -- Series C, $2.25 liquidation preference; issued and outstanding 7,012,637 shares at December 31, 1997 and 1998 and June 30, 1999 (unaudited) 15,697 15,697 15,697 Series C-1, $22.50 liquidation preference; no shares issued and outstanding at June 30, 1999 (unaudited) -- -- -- Series E, $3.15 liquidation preference; 4,761,907 shares issued and outstanding at December 31, 1997 and 1998 and June 30, 1999 (unaudited) 14,423 14,423 14,423 Series E-1, $31.50 liquidation preference; no shares issued and outstanding at June 30, 1999 (unaudited) -- -- -- Series F, $3.40 liquidation preference; 2,000,000, 4,000,000, and 4,000,000 shares issued and outstanding at December 31, 1997 and 1998 and June 30, 1999 (unaudited) 6,775 13,569 13,569 Series F-1, $34.00 liquidation preference; no shares issued and outstanding at June 30, 1999 (unaudited) -- -- -- Series I, $3.80 liquidation preference; no shares issued and outstanding at June 30, 1999 (unaudited) -- -- -- Series I-1, $38.00 liquidation preference; no shares issued and outstanding at June 30, 1999 (unaudited) -- -- -- Series J, $4.75 liquidation preference; 7,534,738 shares issued and outstanding at June 30, 1999 (unaudited) -- -- 34,300 Series J-1, $47.50 liquidation preference; no shares issued and outstanding at June 30, 1999 (unaudited) -- -- -- ------------ ------------ ------------ Total convertible redeemable preferred stock 42,593 49,387 83,687 ============ ============ ============ See note 13 for unaudited recent developments.
F-16 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The terms for each series of preferred stock are similar and are summarized below: Dividends --------- Preferred shareholders are entitled to receive dividends when and if declared by the Board of Directors at an annual rate of $.10 and $1 per share for Series A and A-1, $.225 and $2.25 per share for Series C and C-1, $.315, $3.15 for Series E and E-1, $.340 and $3.40 for Series F and F-1, and $.380 and $3.80 for Series I and I-1, respectively. The right to receive dividends on preferred stock is not cumulative and no right to receive dividends accrues to holders of the preferred stock in the event the Board of Directors does not declare dividends. No dividends may be declared or paid on common stock until all declared dividends on preferred stock have been paid. As of December 31, 1998, no dividends had been declared or paid. Liquidation Preferences ----------------------- Upon dissolution, liquidation or winding up of the affairs of the Company, either voluntarily or involuntarily, the preferred shareholders receive preference in liquidation over the common shareholders of the Company. The liquidation value for each outstanding share is $1 and $10 for Series A and A-1, $2.25 and $22.50 for Series C and C-1, $3.15 and $31.50 for Series E and E-1, $3.40 and $34.00 for Series F and F-1 and $3.80 and $38.00 for Series I and I-1, respectively, adjusted for any stock dividends. The holders of Series E and E-1, Series F and F-1 and Series I and I-1, on a parity basis among these Series, are entitled to receive their liquidation value prior to and in preference to any distribution to the holders of Series A and A-1 and Series C and C-1 preferred stock. The holders of Series C and C-1 preferred stock are entitled to receive their liquidation value prior to and in preference to any distribution to the holders of Series A and A-1. Redemption ---------- The preferred stock is subject to certain mandatory redemption features following the affirmative vote of a majority of the outstanding shares of the preferred stock, effective no earlier than December 31, 2001. Upon the majority vote of the outstanding shares, the Company is required to redeem all of the then outstanding preferred stock or an amount determined by the Company for which funds are available for redemption. The per share redemption price for each series of preferred stock is equal to its per share liquidation value for each respective series discussed above. In the event of a redemption of only a portion of the total outstanding preferred stock, the Company is required to redeem Series E and E-1, Series F and F-1 and Series I and I-1 prior to and in preference to the holders of Series A and A-1 and Series C and C-1 preferred stock. In addition, the holders of Series C and C-1 will have preference over the holders of Series A and A-1 preferred stock. F-17 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Voting ------ The holder of each share of each series of preferred stock is entitled to the number of votes such holder would be entitled to if the shares of preferred stock were converted to common stock. Conversion ---------- Each share of preferred stock is voluntarily convertible into common stock at any time after the date of issuance at a rate that equals the original issue price divided by the conversion price at the time in effect, subject to certain adjustments as set forth in the purchase agreements. Automatic conversion to common stock at the then effective conversion rate will occur for Series A, A-1, C, C-1, E and E-1, following the effectiveness of a registration statement under the Securities Act of 1933 in which the aggregate price to the public equals or exceeds $7,500,000 and in which the public offering price per share of common stock equals or exceeds $5. The public offering price of the Company's common stock that will trigger automatic conversion of the Series F and F-1 and the Series I and I-1 preferred stock is $5.40 and $5.79 per share, respectively. (7) Shareholders' Equity (a) Shareholders' Agreement The Company and certain of its shareholders have an agreement that includes restrictions on the purchase and sale of the Company's stock. Except as expressly provided, no shareholder is allowed to transfer ownership of stock without the prior written consent of the other shareholders that are party to the agreement. These restrictions lapse upon the effectiveness of a registration of common stock under the Securities Act of 1933, as amended, and the consummation of the sale of common stock pursuant to that registration statement. The agreement also requires the Company to purchase a shareholder's stock under specific conditions and entitles the Company to purchase a shareholder's stock under certain other conditions. The acquisition price is equal to the fair value of the shares to be purchased. F-18 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (b) Stock Incentive Plan On February 9, 1993, the Company adopted a Stock Incentive Plan which allowed for the issuance of 4,499,384 shares of common stock. Under the 1996 Stock Incentive Plan, adopted December 31, 1996, together with the 1993 Stock Incentive Plan (the Plans), 1,000,000 shares of common stock were reserved for issuance. The 1996 Plan was amended in 1998 to reserve an additional 700,000 shares of common stock for issuance, bringing the total under the Plans to 6,194,384. Pursuant to the terms of the Plans, the Board of Directors is authorized to grant incentive stock options, non-statutory stock options and to sell restricted stock to employees or others providing services or benefits to the Company. The Plans also allow granting of stock bonuses, stock appreciation rights, and other forms of stock based incentives, although none have been granted to date. Option prices for incentive stock options are set at not less than the fair market value of the common stock at the date of grant. Options vest over periods determined by the Board of Directors. Options to employees are contingent upon continued employment with the Company and, unless otherwise specified, expire ten years from the date of grant. As of March 1998, the Company extended the term of all outstanding options from five years to ten years, which constituted a new measurement date. The Company recorded a compensation charge of $110 in connection with this change in option terms. The per share weighted average fair market value, as determined by applying the Black-Scholes option pricing model to stock options granted under the Plans during 1996, 1997 and 1998 was $1.44, $1.45 and $1.72, respectively, on the date of grant, with the following weighted average assumptions:
Years Ended December 31, --------------------------------- 1996 1997 1998 --------- --------- --------- Risk-free interest rate 6.3% 6.5% 6.0% Expected dividend yield 0% 0% 0% Expected life (in years) 4 4 7 Expected volatility 100% 100% 100%
The Company continues to apply APB Opinion No. 25 in accounting for the Plan and, accordingly, compensation cost is generally not recognized for its stock options in the financial statements. The effect on the Company's net loss, had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 is as follows:
Years Ended December 31, --------------------------------- 1996 1997 1998 --------- --------- --------- Net loss $ (10,315) $ (10,670) $ (7,035) Pro forma net loss (10,859) (11,772) (8,145) Net loss per share (0.78) (0.80) (0.51) Pro forma net loss per share (0.83) (0.89) (0.59)
F-19 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) Transactions involving the Plans are summarized as follows:
Weighted Average Number Exercise of shares Price ------------- ------------- Options outstanding, December 31, 1995 591,040 $ 1.20 Granted 496,300 2.00 Exercised (36,500) 0.75 Forfeited (42,700) 1.25 ------------- ------------- Options outstanding, December 31, 1996 1,008,140 1.54 Granted 1,072,950 2.00 Exercised (52,137) 0.82 Forfeited (80,923) 1.95 ------------- ------------- Options outstanding, December 31, 1997 1,948,030 1.84 Granted 960,986 2.02 Exercised (69,061) 1.05 Forfeited (413,153) 1.99 ------------- ------------- Options outstanding, December 31, 1998 2,426,802 1.90 Granted (unaudited) 1,820,500 2.86 Exercised (unaudited) (334,800) 1.79 Forfeited (unaudited) (29,013) 1.96 ------------- ------------- Options outstanding, June 30, 1999 (unaudited) 3,883,489 $ 2.36 ============= =============
At December 31, 1998, the range of exercise prices and weighted average remaining contractual life of outstanding options were $0.20 to $2.00 and eight years, respectively. At December 31, 1998 1,509,146 options were exercisable with a weighted average exercise price of $1.84. At December 31, 1998, 193,024 shares were available for grant. See note 13 for unaudited recent developments. F-20 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (c) Stock Warrants In 1994, the Company entered into a Stock Purchase Warrant Agreement (the Agreement) with Indius, Inc. (II). Pursuant to the Agreement, the Company issued II warrants to purchase up to 45,000 shares of common stock at $.31 per share, conditioned on II meeting certain software development and licensing requirements. At December 31, 1998 all of the warrants were exercisable. These warrants were exercised in March 1998. (d) Restricted Stock Purchase Agreement As of December 1998, the Company had sold 500,000 shares of common stock for $2.00 per share to senior management of the Company under agreements which allow the Company, at its option, to repurchase these shares of common stock at $2.00 per share. In accordance with the Company repurchase agreements associated with 335,000 of these shares, the shares subject to repurchase are reduced in equal increments over 36 months from the original vesting dates which range from February 28, 1996 to February 13, 1997. 165,000 of these shares of common stock are released from the Company's repurchase rights if certain key business performance criteria are met. See note 13 for Unaudited Recent Developments. (8) Income Taxes The Company incurred a loss for both financial reporting and tax return purposes for the years ended December 31, 1996, 1997 and 1998. As such, there was no current or deferred tax provision for those years. The actual income tax expense differs from the expected tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to net income (loss) before income taxes) as follows:
Years Ended December 31, ------------------------------------------ 1996 1997 1998 ------------ ------------ ------------ Computed expected income tax (benefit) expense (34.0)% (34.0)% (34.0)% Increase (reduction) in income tax expense (benefit) resulting from: State income tax (benefit) expense (4.3) (4.3) (4.3) Increase in valuation allowance 39.0 43.8 44.7 Research and development credits (0.7) (3.1) (8.3) Other -- (2.4) 1.9 ------------ ------------ ------------ Income tax expense --% --% --% ============ ============ ============
F-21 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
December 31, ------------------------------- 1997 1998 -------------- -------------- Deferred tax assets: Furniture and equipment due to differences in depreciation $ 165 $ 229 Net operating loss and research and experimentation credit carryforwards 11,221 14,169 Allowance for doubtful accounts 326 234 Other accruals 173 215 -------------- -------------- Gross deferred tax assets 11,885 14,847 Less valuation allowance (11,406) (14,559) -------------- -------------- Net deferred tax assets 479 288 -------------- -------------- Deferred tax liabilities: Change in method of accounting (467) (280) Other (12) (8) -------------- -------------- Net deferred tax liabilities (479) (288) -------------- -------------- Net deferred tax assets and liabilities $ -- $ -- ============== ==============
The valuation allowance for deferred tax assets as of December 31, 1998 was approximately $14,559. The net change in the total valuation allowance for the years ending December 31, 1996, 1997 and 1998 was an increase of approximately $4,067, $4,668 and $3,153, respectively. The Company has available federal and state net operating loss carryforwards for tax purposes of approximately $33,671 and research and experimentation credits of approximately $1,259, which expire through 2018. Approximately $7,100 of the net operating losses are subject to annual utilization limitation due to ownership changes in prior years. (9) Contingencies The Company is involved in various claims and legal actions in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's consolidated financial position, results of operations or liquidity. F-22 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (10) Segment Information MedicaLogic derives its revenue from a single operating segment, electronic medical records, and the service and support related to these products. Geographic Information MedicaLogic operates solely within the United States and to date has derived all of its revenue from within the United States. Major Customers During 1996, the Company had sales to four customers which accounted for approximately 41% of total revenues. During 1997, the Company had sales to two customers which accounted for approximately 32% of total revenues. The Company had accounts receivable from these customers representing approximately 36% of trade accounts receivable at December 31, 1997. During 1998, the Company had sales to one customer which accounted for approximately 21% of total revenues. The Company had accounts receivable from this customer representing approximately 20% of trade accounts receivable at December 31, 1998. (11) 401(k) Plan The Company sponsors a 401(k) deferred savings plan for all employees. Employees become eligible to participate in the plan upon employment. Employees may contribute up to 15% of their pay to the plan, subject to the limitation of $10 by the Internal Revenue Code. All employee contributions vest immediately. The Company has not made any matching contributions but does pay administrative costs for the Plan. These costs were not significant for any period presented. F-23 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (12) Subsequent Event On January 29, 1999, the Company acquired PrimaCis Health Information Technology, Inc. (PrimaCis), a Delaware corporation. The total purchase price, including acquisition costs, was $6,453 and consisted of $3,153 in cash and the issuance of 1,500,000 shares of common stock. In connection with this transaction, the Company entered into a separate agreement under which it will receive a purchase order from a customer for 1,500 licenses. Also related to this separate agreement, the Company has agreed to issue common stock at fair market value up to $12 million, contingent upon sales of additional licenses. The contingent stock agreement expires December 31, 2002. Approximately $2,300 of the total purchase price for PrimaCis related to a prepayment for a commission related to the purchase order from a customer for 1,500 licenses. The purchase accounting allocations resulted in goodwill of approximately $3,200 and other intangible assets of $1,000. Goodwill costs will be amortized on a straight-line basis over a four year period. Other intangible assets will be amortized on a straight-line basis over a two year period. The pro forma results shown below assume the acquisition described above occurred as of the beginning of 1998. Revenues $ 16,408 Net loss (10,126) Diluted net loss per share (0.66) The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the periods presented. In addition, they are not intended to be a projection of future results that may be achieved from the combined operations. (13) Unaudited Recent Developments (a) Issuance of Preferred Stock On May 28, 1999, the Company amended its Articles of Incorporation to authorize 8,421,050 shares of Series J preferred stock and 842,105 shares of Series J-1 preferred stock. The terms of Series J and J-1 preferred stock are substantially identical to Series I and I-1 preferred stock as described in note 6 except that the dividend preference for Series J and J-1 preferred stock is $0.475 and $4.75 per share, respectively; the liquidation preference and redemption price for Series J and J-1 preferred stock are $4.75 and $47.50 per share, respectively; and the public offering price of the Company's common stock that will trigger automatic conversion of the Series J and J-1 preferred stock is $5.40 per share. There are 7,534,738 and -0- shares of Series J and J-1 preferred stock outstanding as of June 30, 1999. F-24 (Continued) MEDICALOGIC, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (b) Lease Transactions On May 12, 1999 the Company entered into a ten year operating lease agreement for office space. The lease requires a letter of credit in lieu of a cash security deposit in the amount of $1,750. In consideration for the lessor's agreement to enter into the lease, the Company irrevocably granted options to purchase up to 50,000 shares of common stock, at a price of $3.25 per share. The lessor is required to exercise the option at any time within three years of the Company's initial public offering. In addition, at the time of the Company's initial public offering the lessor will have the right to purchase the greater of 100,000 shares of common stock or 1% of the number of shares offered at the initial offering price. (c) Stock Incentive Plan On April 30, 1999, the Company's 1996 Stock Incentive Plan was amended to reserve an additional 3,800,000 shares of common stock, bringing the total under the 1993 and 1996 Plans to 9,994,384. The Company adopted, subject to shareholder approval, the MedicaLogic, Inc. 1999 Stock Incentive Plan, which authorizes the issuance of 4,000,000 shares of common stock. (d) Employee Stock Purchase Plan The Company adopted, subject to shareholder approval, the MedicaLogic, Inc. 1999 Employee Stock Purchase Plan. (e) Term Loan Facility and Leasing Arrangement The Company entered into a term loan facility to finance the purchase of new capital equipment in the amount of $3,300. These loans are secured by the equipment purchased thereunder. $1,672 is outstanding under this facility at June 30, 1999. In August 1999, the Company entered into a leasing arrangement for the purpose of leasing computer equipment. These leases are secured by the equipment obtained thereunder. (f) Restricted Stock Purchase Agreement During the first six months of 1999, the Company sold an additional 1,360,000 shares of common stock to senior management at prices between $2.20 per share and $3.25 per share. 1,090,000 of these shares are subject to a repurchase option which lapses in equal increments over 36 months from the purchase date. An additional 270,000 shares are subject to repurchase if certain key business performance criteria are not met. In connection with these stock issuances the Company recorded compensation expense of $309 for the first six months of 1999. F-25 Independent Auditors' Report The Board of Directors PrimaCis Health Information Technology, Inc.: We have audited the accompanying balance sheet of PrimaCis Health Information Technology, Inc. as of December 31, 1998, and the related statements of operations, stockholders' deficit, and cash flows for the year ended December 31, 1998. 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 audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PrimaCis Health Information Technology, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Portland, Oregon July 23, 1999 F-26
PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Balance Sheet (Dollars in thousands, except per share data) December 31, Assets 1998 ----------- Current assets: Cash and cash equivalents $ 50 Accounts receivable 51 Other receivables 10 ----------- Total current assets 111 Property and equipment, net 58 Other assets 11 ----------- Total assets $ 180 =========== Liabilities and Stockholders' Deficit Current liabilities: Accounts payable 19 Accrued liabilities 72 Deferred revenue 225 Current portion of capital leases 10 Notes payable to related party 381 ----------- Total current liabilities 707 Non-current portion of capital leases 10 ----------- Total liabilities 717 ----------- Stockholders' deficit: Common stock, par value $0.001 per share; authorized 15,000,000 shares; issued and outstanding 11,361,425 shares at December 31, 1998 11 Additional paid in capital 3,005 Notes from shareholders (39) Warrants 109 Accumulated deficit (3,623) ----------- Total stockholders' deficit (537) ----------- Total liabilities and stockholders' deficit $ 180 =========== See accompanying notes to financial statements.
F-27
PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Statement of Operations (Dollars in thousands, except per share data) Year Ended December 31, 1998 ----------- Revenues: Software $ 70 Maintenance and service 178 ----------- Total revenues 248 Operating expenses: Cost of revenue 16 Marketing and sales 282 Research and development 559 General and administrative 1,063 ----------- Operating loss (1,672) Other income (expense): Interest expense (116) Interest income 2 Other (7) ----------- Loss before income taxes (1,793) Provision for income taxes -- Net loss $ (1,793) =========== Net loss per share - basic and diluted $ (0.16) =========== Shares used in computing net loss per share - basic and diluted 11,481,704 See accompanying notes to financial statements.
F-28
PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Statement of Stockholders' Deficit Year ended December 31, 1998 (Dollars in thousands) Common stock Additional Total ---------------------- paid in Notes from Accumulated shareholders' Shares Amount capital shareholders Warrants deficit deficit ---------- --------- ---------- ------------ ---------- ----------- ------------- Balances at December 31, 1997 9,458,093 $ 9 $ 1,687 $ -- $ -- $ (1,830) $ (134) Issuance of common stock 3,203,332 3 1,329 (39) -- -- 1,293 Cancellation of common stock (1,300,000) (1) (11) -- -- -- (12) Issuance of stock warrants -- -- -- -- 109 -- 109 Net loss -- -- -- -- -- (1,793) (1,793) ---------- --------- ---------- ------------ ---------- ----------- ------------- Balances at December 31, 1998 11,361,425 $ 11 $ 3,005 $ (39) $ 109 $ (3,623) $ (537) ========== ========= ========== ============ ========== =========== ============= See accompanying notes to financial statements.
F-29
PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Statement of Cash Flows (Dollars in thousands) Year Ended December 31, 1998 ----------- Cash flows from operating activities: Net loss $ (1,793) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 37 Other non-cash expense 91 Changes in assets and liabilities: Accounts receivable (22) Prepaid expenses and other current assets 5 Accounts payable 16 Accrued and other liabilities (128) Deferred revenue 200 ----------- Net cash used by operating activities (1,594) ----------- Cash flows from investing activities: Purchase of fixed assets (37) ----------- Net cash used by investing activities (37) ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 1,293 Proceeds from issuance of notes payable 381 Principal payments under capital lease (7) ----------- Net cash provided by financing activities 1,667 ----------- Net increase in cash and cash equivalents 36 Cash and cash equivalents at beginning of year 14 ----------- Cash and cash equivalents at end of year $ 50 =========== Summary of non-cash investing and financing activities: Issuance of common stock in exchange for note receivable $ 39 Assets acquired or exchanged under capital leases 23 =========== See accompanying notes to financial statements.
F-30 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) (1) Summary of Significant Accounting Policies (a) Company PrimaCis Health Information Technology, Inc. (the Company), located in Houston, Texas, was formed in April 1996. The Company develops, supports and markets its electronic medical record software and its Internet-based oncology content for its Internet site. (b) Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. (c) Property and Equipment Property and equipment are stated at cost. Property and equipment under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. The cost of repairs and maintenance is expensed as incurred. Depreciation on property and equipment is calculated on a double-declining basis over the estimated useful lives of the assets, generally five to seven years. Property and equipment held under capital leases is amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Amortization of leasehold improvements is recognized over the shorter of the life of the improvement or the remaining life of the lease using the straight-line method. (d) Software Development Costs Software development costs have been accounted for in accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has been short; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs and charged all such costs to research and development expense. F-31 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) (e) Revenue Recognition In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 97-2, Software Revenue Recognition. Subsequently, in March 1998, the Financial Accounting Standards Board ("FASB") approved SOP 98-4, Deferral of the Effective Date of a Provision of 97-2, Software Revenue Recognition. SOP 98-4 defers for one year, the application of several paragraphs and examples in SOP 97-2 that limit the definition of vendor specific objective evidence (VSOE) of the fair value of various elements in a multiple element arrangement. The provisions of SOP's 97-2 and 98-4 have been applied to transactions entered into beginning January 1, 1998. Prior to 1997, the Company's revenue policy was in accordance with the preceding authoritative guidance provided by SOP No. 91-1, Software Revenue Recognition. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of the relative fair values of each element in the arrangement. The revenue allocated to software products is generally recognized upon the delivery of the products. The revenue allocated to extended support agreements is recognized ratably over the term of the maintenance agreement and revenue allocated to service elements is recognized as the services are performed. Deferred revenue consists of payments received or owed from customers for support or other services not yet performed. In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. This SOP amends SOP 97-2 to require recognition of revenue using the "residual method" in circumstances outlined in the SOP. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. SOP 98-9 is effective for fiscal years beginning after March 15, 1999. Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to be deferred until the date SOP 98-9 becomes effective. F-32 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) (f) Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that include the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. (g) Stock-Based Employee Compensation The Company has adopted SFAS No. 123, Accounting for Stock-Based Compensation, which defines a fair value based method of accounting for employee stock options and similar equity instruments. As is permitted under SFAS No. 123, the Company has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25 and provide the pro forma disclosures as prescribed by SFAS No. 123. (h) Net Loss Per Share The Company has adopted SFAS No. 128, Earnings Per Share, which provides that "basic net income (loss) per share" and "diluted net income (loss) per share" for all prior periods presented are to be computed using the weighted average number of common shares outstanding during each period, with diluted net income per share including the effect of potentially dilutive common shares. The reconciliation of shares used to calculate basic and diluted income per share consists of the following as of December 31, 1998: Basic weighted average shares of common stock 11,481,704 Effect of dilutive securities: Stock options and warrants 400,000 ------------ Diluted weighted average share of common stock 11,881,704 ============ Common stock equivalents related to stock options and warrants are anti-dilutive in a net loss year and, therefore, are not included in the 1998 net loss per share. F-33 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) (i) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of capital leases and notes payable approximate fair value as the stated interest rates reflect current market rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (j) Use of Estimates Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (k) Other Assets Other assets consist primarily of legal costs related to the organization of the Company. The organizational costs are being amortized on a straight-line basis over a period of five years. Amortization expense for the year ended December 31, 1998 was $5. Accumulated amortization at December 31, 1998 was $14. (l) Contingencies and Factors that Could Affect Future Results A substantial portion of the Company's revenues each year are generated from the development and release to market of computer software products. In the extremely competitive industry environment in which the Company operates, such product generating, development and marketing processes are uncertain and complex, requiring accurate prediction of market trends and demand as well as successful management of various development risks inherent in such products. In light of these dependencies, it is possible that failure to successfully manage a significant product introduction could have a sever near term impact on the Company's growth and results of operations. F-34 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) (2) Property and Equipment Property and equipment, including equipment under capital leases, consist of the following at December 31, 1998: Furniture $ 74 Equipment 27 ---------- 101 Less accumulated depreciation and amortization 43 ---------- $ 58 ========== (3) Leases The Company leases certain office furniture and equipment under a long-term capital lease, which expires on December 2, 2000. At December 31, 1998, the net book value of leased furniture and equipment included in property and equipment was $20. The Company also leases its office facilities under non-cancelable operating lease agreements. F-35 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) Future minimum lease payments under non-cancelable operating leases and the capital leases as of December 31, 1998 are as follows:
Capital Operating Leases Leases ----------- ----------- Year ending December 31: 1999 $ 12 $ 42 2000 12 12 2001 -- -- 2002 -- -- 2003 -- -- Thereafter -- -- ----------- ----------- Total minimum lease payments 24 $ 54 =========== Less amount representing interest 4 ----------- Present value of net minimum capital lease payments 20 Less current portion of capital leases 10 ----------- Non-current portion of capital leases $ 10 ===========
Rent expense for the year ended December 31, 1998, totaled approximately $35. (4) Notes Payable During 1998, the Company received an unsecured loan of $381 from an officer and shareholder of the Company. The loan was evidenced by promissory note payable and other supporting documentation, and was paid in full during 1999. In conjunction with this loan, the Company granted the shareholder the option to purchase 300,000 shares of common stock of the Company at an exercise price of $0.06 per share. The Company recorded the option at fair value, as determined by the Black-Scholes method, as additional interest expense over the life of the loan. (5) Stockholders' Equity (a) Stockholders' Agreement The Company and its stockholders have an agreement that includes restrictions on the purchase and sale of the Company's stock. Except as expressly provided, no stockholder is allowed to transfer ownership of stock without the prior written consent of all stockholders. F-36 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) (b) Stock Incentive Plan In 1997, the Company adopted an Incentive Stock Option Plan (the Plan). Pursuant to the terms of the Plan, the Board of Directors is authorized to grant incentive stock options, non-statutory stock options and restricted stock to employees or non-employees. Option prices for incentive stock options are generally set at not less than the fair market value of the common stock at the date of grant. Options vest over periods determined by the Board of Directors. Options are contingent upon continued employment with the Company and, unless otherwise specified, expire ten years from the date of grant. The Company has reserved 500,000 shares of its common stock for issuance under the Plan. The per share weighted average fair market value, as determined by applying the Black-Scholes method to stock options granted under the Plan during 1998, was $0.37 on the date of grant with the following weighted average assumptions: Year Ended December 31, 1998 ---------------------------------------------------- Risk free interest rate 6.0% Expected dividend yield 0% Expected life (in years) 10.0 Expected volatility 100% The Company continues to apply APB Opinion No. 25 in accounting for its Plan and, accordingly, compensation cost is generally not recognized for its stock options in the financial statements. For the year ended December 31, 1998, the Company recognized $282 in compensation costs with respect to stock based compensation awards as valued under APB No. 25. The effect on the Company's net loss, had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, for the year ended December 31, 1998 is as follows: Net loss $ (1,793) Pro forma net loss (1,801) Net loss per share $ (0.16) Pro forma net loss per share (0.16) F-37 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) Transactions involving the Plan are summarized as follows:
Weighted Average Number Exercise of shares Price ------------ ------------ Options outstanding, December 31, 1997 -- $ -- Granted 270,000 0.48 Exercised -- -- Forfeited (205,000) 0.59 ------------ ------------ Options outstanding, December 31, 1998 65,000 $ 0.14 ============ ============
At December 31, 1998, the range of exercise prices and weighted average remaining contractual life of outstanding options were $.05 to $.09 and ten years, respectively. At December 31, 1998, 65,000 options were exercisable with a weighted average exercise price of $0.14. At December 31, 1998, 435,000 shares were available for grant. (c) Warrants During fiscal 1998, the Company issued warrants to investors. At December 31, 1998 warrants to purchase 300,000 and 35,000 shares of common stock at exercise prices of $0.06 and $0.40, respectively, were outstanding. (6) Income Taxes The Company incurred a loss for both financial reporting and tax return purposes and, as such, there was no current or deferred tax provision for the year ended December 31, 1998. F-38 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) The actual income tax expense differs from the expected tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to net income (loss) before income taxes) as follows (in thousands):
1998 ------------ Computed expected income tax (benefit) expense (34.0)% Increase (reduction) in income tax expense (benefit) resulting from: State income tax (benefit) expense -- Increase in valuation allowance 34.0 Research and development credits -- ------------ Income tax expense --% ============ The tax effects of temporary differences and net operating loss carryforwards which give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1998 are as follows: Deferred tax assets: Net operating loss and research and experimentation credit carryforwards $ 1,362 ------------ Gross deferred tax assets 1,362 Less valuation allowance (1,362) ------------ Net deferred tax assets $ -- ============
The net change in the total valuation allowance for the year ended December 31, 1998 was an increase of $687. The Company has available federal and state net operating loss carryforwards for tax purposes of approximately $3,537 which expire through 2018. Approximately $3,537 of the net operating losses are subject to annual utilization limitation due to the change in ownership in 1999. (7) Significant Customers The Company had two customers that accounted for approximately 98% of the total revenue for the year ended December 31, 1998. F-39 (Continued) PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. Notes to Financial Statements December 31, 1998 (Dollars in thousands, except per share data) (8) Subsequent Events On January 29, 1999, the Company entered into a reorganization and merger agreement with MedicaLogic, Inc. The purchase price consisted of $3,000 in cash and 1,500,000 shares of MedicaLogic common stock at $2.20 per share. F-40 Pro Forma Financial Information The following unaudited pro forma condensed combined financial statements have been prepared to give effect to the acquisition of PrimaCis Health Information Technology, Inc. (PrimaCis). The historical financial information has been derived from the respective historical financial statements of MedicaLogic, Inc. and PrimaCis, and should be read in conjunction with such financial statements and the related notes included herein. The unaudited pro forma condensed combined statements of operations combine MedicaLogic's and PrimaCis' historical statements of operations and give effect to the acquisition, including the amortization of goodwill and other tangible assets resulting from the acquisition, as if it occurred on January 1, 1998. The unaudited pro forma condensed combined statement of operations for the period from December 31, 1998 through June 30, 1999 have not been presented as the results of operations presented for MedicaLogic during this period include PrimaCis' operating results. The unaudited pro forma condensed combined balance sheet as of December 31, 1998 gives effect to the acquisition of PrimaCis as if it had occurred on December 31, 1998. The unaudited pro forma condensed combined information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have actually occurred if the acquisition had been consummated as of the dates indicated, nor is it necessarily indicative of the future operating results or financial position of the combined companies. The pro forma adjustments are based upon available information and certain assumptions that MedicaLogic believes are reasonable under the circumstances. F-41
MEDICALOGIC, INC. Unaudited Pro Forma Condensed Combined Balance Sheet (Dollars in thousands) December 31, 1998 --------------------------------------------------------------- Pro forma Pro forma Assets MedicaLogic PrimaCis adjustments combined ------------ ------------ ------------ ------------ Current assets: Cash and cash equivalents $ 4,718 $ 50 $ (3,153)(1) $ 1,615 Short-term investments 7,030 -- 7,030 Accounts receivable, net 10,084 51 10,135 Other current assets 545 10 2,250 (3) 2,805 ------------ ------------ ------------ Total current assets 22,377 111 21,585 Property and equipment, net 1,804 58 (15)(3) 1,847 Other assets 127 11 4,755 (3) 4,893 ------------ ------------ ------------ Total assets $ 24,308 $ 180 $ 28,325 ============ ============ ============ Liabilities, Redeemable Preferred Stock and Shareholders' Equity (Deficit) Current liabilities: Accounts payable $ 557 $ 19 $ 576 Accrued and other liabilities 2,286 72 2,358 Deferred revenue 2,701 225 2,926 Current portion of capital leases 215 10 225 Current portion of notes payable 527 381 908 ------------ ------------ ------------ Total current liabilities 6,286 707 6,993 Non-current portion of capital leases 92 10 102 Notes payable 587 -- 587 ------------ ------------ ------------ Total liabilities 6,965 717 7,682 ------------ ------------ ------------ Convertible redeemable preferred stock; 50,000,000 shares authorized; aggregate liquidation preference $50,128; issued and outstanding 21,524,545 at December 31, 1998 49,387 -- 49,387 Commitments and contingencies Shareholders' equity (deficit): Common stock, no par value; authorized 10,000,000 shares; issued and outstanding 13,308,561 shares at December 31, 1998 5,139 11 3,289 (1,2) 8,439 Additional paid in capital -- 3,114 (3,114)(2) -- Common stock notes receivable (2,039) (39) 39 (2) (2,039) Accumulated deficit (35,144) (3,623) 3,623 (2) (35,144) ------------ ------------ ------------ Total shareholders' equity (deficit) (32,044) (537) (28,744) ------------ ------------ ------------ Total liabilities, redeemable preferred stock and shareholders' equity (deficit) $ 24,308 $ 180 $ 28,325 ============ ============ ============ See notes to unaudited pro forma condensed combined financial information.
F-42
MEDICALOGIC, INC. Unaudited Pro Forma Condensed Combined Statement of Operations (Dollars in thousands, except per share data) Year Ended December 31, 1998 --------------------------------------------------------------- Pro forma Pro forma MedicaLogic PrimaCis adjustments combined ------------ ------------ ------------ ------------ Revenues: Software $ 10,410 $ 70 $ 10,480 Service and support 5,750 178 5,928 ------------ ------------ ------------ Total revenues 16,160 248 16,408 ------------ ------------ ------------ Operating expenses: Cost of revenue 6,754 16 6,770 Marketing and sales 7,579 282 $ 1,305 (4) 9,166 Research and development 8,016 559 8,575 General and administrative 1,044 1,063 (7)(4) 2,100 ------------ ------------ ------------ Total operating expenses 23,393 1,920 26,611 ------------ ------------ ------------ Operating loss (7,233) (1,672) (10,203) Other income (expense): Interest expense (187) (116) (303) Interest income 707 2 709 Other, net (322) (7) (329) ------------ ------------ ------------ Loss before income taxes (7,035) (1,793) (10,126) Provision for income taxes -- -- -- ------------ ------------ ------------ Net loss $ (7,035) $ (1,793) $ (10,126) ============ ============ ============ Net loss per share: Basic and diluted $ (0.51) $ (0.16) $ (0.66) ============ ============ ============ Shares used in computing net loss per share: Basic and diluted 13,766,073 11,481,704 15,230,789 ============ ============ ============ See notes to unaudited pro forma condensed combined financial information.
F-43 Medicalogic, inc., Notes to the Unaudited Pro Forma Condensed Combined Financial Information (Dollars in thousands, except per share data) The unaudited pro forma condensed financial information reflects the acquisition by MedicaLogic, Inc. of PrimaCis Health Information Technology, Inc. (PrimaCis) and gives effect to certain reclassifications to the historical financial statements to conform the presentation of the historical operations of the merged companies. The adjustments to the unaudited pro forma condensed combined balance sheet have been calculated as if the acquisition occurred on December 31, 1998. The adjustments to the unaudited pro forma condensed combined statement of operations have been calculated as if the acquisition occurred on January 1, 1998. Pursuant to the merger agreement, a total of $3,000 in cash and 1,500,000 shares of common stock, valued at $2.20 per share, was issued in connection with the acquisition of PrimaCis in exchange for all outstanding common shares and vested options of PrimaCis. In addition, MedicaLogic paid $153 in merger related costs which is included in the total purchase price. The pro forma adjustments to record the purchase of PrimaCis are as follows: (1) To record the cash paid and stock issued in exchange for all outstanding shares of PrimaCis capital stock. (2) To reflect the elimination of the historical stockholders' equity accounts of PrimaCis. (3) To record allocation of the purchase price and adjust PrimaCis' balance sheet for purchase accounting entries: Total consideration $ 6,453 Book value of assets acquired $ 537 Write down of property and equipment to fair value 15 Write down of startup costs 11 ---------- Net book value allocated to tangible assets 563 Record prepaid commission (2,250) ---------- Goodwill and other intangibles $ 4,766 ========== F-44 (Continued) Medicalogic, inc., Notes to the Unaudited Pro Forma Condensed Combined Financial Information (Dollars in thousands, except per share data) The adjustments to the net book value of assets acquired relate to allocation of the purchase price to the assets acquired based on their relative fair values and are summarized as follows: o To write down PrimaCis' property and equipment to the fair value of the property and equipment acquired. o To eliminate PrimaCis intangibles consisting of start up costs to their fair value. o To allocate a portion of the purchase price to prepaid commission related to the sale of MedicaLogic software to a PrimaCis customer. o To record the allocation of the excess purchase price over the fair value of net tangible assets acquired, totaling approximately $4,800, which has been recorded as goodwill and other intangible assets which consists primarily of a customer list. Goodwill, totaling $3,800, is amortized on a straight line basis, over a four year period. Other intangible assets, totaling $1,000, are amortized on a straight-line basis, over a two year period. (4) To record amortization of goodwill and other intangible assets recorded as a result of the acquisition and to reduce depreciation expense to reflect new asset fair values. F-45 - -------------------------------------------------------------------------------- 1999 MEDICALOGIC, INC. ________________ Shares --------------- PROSPECTUS --------------- Donaldson, Lufkin & Jenrette BancBoston Robertson Stephens U.S. Bancorp Piper Jaffray DLJdirect Inc. - -------------------------------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters not stated in this prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy the securities in any jurisdiction where that would not be permitted or legal. Neither the delivery of this prospectus nor any sales made hereunder after the date of this prospectus shall create an implication that the information contained herein or the affairs of MedicaLogic, Inc. have not changed since the date hereof. - -------------------------------------------------------------------------------- Until , 1999 (25 days after the date of this prospectus), all dealers that effect transactions in these shares of common stock may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than underwriting discounts, payable by the Registrant in connection with the offer and sale of the Common Stock being registered. All amounts are estimates except the registration fee, the NASD filing fee and the Nasdaq National Market entry fee. Registration fee................................... $ 16,680 NASD filing fee.................................... 6,500 Blue Sky fees and expenses (including legal fees).. 5,000 (1) Nasdaq National Market entry fee................... 95,000 (1) Accounting fees and expenses....................... 250,000 (1) Other legal fees and expenses...................... 200,000 (1) Transfer agent and registrar fee................... 5,000 (1) Printing and engraving............................. 90,000 (1) Miscellaneous...................................... 31,820 (1) ------- Total............. $700,000 (1) ======= - -------------- (1) Estimated expense. Item 14. Indemnification of Directors and Officers Article IV of the Registrant's 1994 Restated Articles of Incorporation requires indemnification of current or former directors of the Company to the fullest extent not prohibited by the Oregon Business Corporation Act. The Oregon Business Corporation Act permits or requires indemnification of directors and officers in certain circumstances. The effects of the indemnification provisions are as follows: (a) The Indemnification Provisions grant a right of indemnification in respect of any proceeding (other than an action by or in the right of the Company), if the person concerned acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company, was not adjudged liable on the basis of receipt of an improper personal benefit and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or plea of nolo contendere, or its equivalent, is not, of itself, determinative that the person did not meet the required standards of conduct. (b) The Indemnification Provisions grant a right of indemnification in respect of any proceeding by or in the right of the Company against the expenses (including attorney fees) actually and reasonably incurred if the person concerned acted in good faith and in a manner the person reasonably II-1 believed to be in or not opposed to the best interests of the Company, except that no right of indemnification will be granted if the person is adjudged to be liable to the Company. (c) Every person who has been wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because of the person's status as a director or officer is entitled to indemnification as a matter of right. (d) Because the limits of permissible indemnification under Oregon law are not clearly defined, the Indemnification Provisions may provide indemnification broader than that described in (a) and (b). (e) The Registrant may advance to a director or officer the expenses incurred in defending any proceeding in advance of its final disposition if the director or officer affirms in writing in good faith that he or she has met the standard of conduct to be entitled to indemnification as described in (a) or (b) above and undertakes to repay any amount advanced if it is determined that the person did not meet the required standard of conduct. The Registrant has obtained insurance for the protection of its directors and officers against any liability asserted against them in their official capacities. The rights of indemnification described above are not exclusive of any other rights of indemnification to which the persons indemnified may be entitled under any bylaw, agreement, vote of shareholders or directors or otherwise. Item 15. Recent Sales of Unregistered Securities Within the last three years, the Registrant has issued and sold the following unregistered securities on the dates and for the consideration indicated: In December 1996, the Registrant issued an aggregate of 4,761,907 shares of Series E Preferred Stock to 24 investors for total consideration of $15,000,007.05. The Series E Preferred Stock was offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In November 1997, the Registrant issued 2,000,000 shares of Series F Preferred Stock to one investor for total consideration of $6,800,000. The shares of Series F Preferred Stock was offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In connection with the same transaction, the Registrant granted to the investor an option to purchase an additional 2,000,000 shares of Series F Preferred for $3.40 a share and an option to purchase 4,129,665 shares of Series G Preferred Stock for $3.65 a share. The Registrant also issued to the investor an option to purchase one share of Series H Preferred Stock, which option was exercisable upon the failure of the Registrant to reach specific revenue targets. On March 31, 1998, the investor exercised its option to purchase 2,000,000 shares of Series F Preferred Stock for a total purchase price of $6,800,000. The investor and the Registrant agreed to extend the exercise period for the Series G option agreement to June 1, 1998. The Series G option has expired and will not be exercised. The Series H option has also expired and will not be exercised. The Series F Preferred Stock was offered and sold, and the Series F option, the Series G option and the Series H option were issued and, in the case of the Series G option, extended by the Registrant, in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In January 1998, the Company issued an aggregate of 27,500 shares of Common Stock at a deemed value of $2.00 a share to Health Outcome Technologies, Inc. ("HOT") in consideration for the acquisition of certain intangible assets of HOT. These shares of Common Stock were offered and sold by II-2 the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated under the Securities Act. In March 1998, the Registrant issued 45,000 shares of Common Stock to an investor for a total purchase price of $13,950, pursuant to the exercise of a warrant issued in 1994. The Common Stock issued pursuant to the warrant was offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act. In August 1998, the Registrant issued an aggregate of 350,000 shares of Common Stock to Enterprise Partners IV Associates, L.P. and Enterprise Partners IV, L.P., for a total purchase price of $700,000. In addition, the Registrant granted an option to purchase 16,000 shares of Common Stock at a price of $2.00 a share to Enterprise Partners IV Associates, L.P. and granted an option to purchase 184,000 shares of Common Stock at a price of $2.00 a share to Enterprise Partners IV, L.P. The options were exercised on April 14, 1999. The shares of Common Stock and the options were offered and sold and issued in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In February 1999, the Registrant issued 1,500,000 shares of Common Stock to the shareholders of PrimaCis Information Technology, Inc., at a deemed value of $2.20 a share, as partial consideration for the acquisition of PrimaCis. The shares of Common Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In May 1999, the Registrant issued shares of its Series J Preferred Stock to four investors. The Registrant offered and sold an aggregate of 7,326,316 shares of Series J Preferred Stock to the investors at a price of $4.75 a share, for a total purchase price of $34,800,000. The shares of Series J Preferred Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In August 1999, the Registrant issued an additional 3,050,527 shares of its Series J Preferred Stock to 11 investors. The Registrant offered and sold the shares of Series J Preferred Stock to the investors at a price of $4.75 a share, for $13,499,998.75 in cash, and services from three of the investors valued at $990,004.50. The shares of Series J Preferred Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. Options, Restricted Stock and Grants under Stock Incentive Plan As set forth in the chart below, between September 1996 and September 1999 the Registrant granted to employees, consultants and directors stock options under the Registrant's Stock Incentive Plans in reliance on the exemption from registration provided by either (i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the Securities Act. II-3
Number of Shares Subject to Exercise Options Price ---------- -------- September 1, 1996 to October 28, 1998.............. 1,901,636 $ 2.00 October 29, 1998 to May 25, 1999................... 743,000 $ 2.20 May 26, 1999 and thereafter........................ 1,719,500 $ 3.25
Of the options granted during the period from September 1, 1996 to October 28, 1998 to purchase 1,901,636 shares of Common Stock, 1,752,189 were outstanding as of September 10, 1999. Of the options granted during the period from October 29, 1998 to May 25, 1999 to purchase 743,000 shares of Common Stock, 742,631 remain outstanding. Of the options granted after May 26, 1999 to purchase 1,719,500 shares of Common Stock, all were outstanding as of September 10, 1999. In the past three years, the Registrant from time to time offered and sold the following shares of Common Stock as incentive compensation to senior management of the Registrant, subject to repurchase or performance requirements, pursuant to Registrant's Stock Incentive Plans. Such restricted Common Stock was issued in reliance on the exemption from registration provided by either (i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the Securities Act.
Number of Shares of Restricted Sale Common Price ---------- ------ September 1, 1996 to October 28, 1998........... 500,000 $ 2.00 October 29, 1998 to May 25, 1999................ 600,000 $ 2.20 May 26, 1999 and thereafter..................... 885,000 $ 3.25
In the past three years, the Registrant from time to time has granted shares of its Common Stock to employees or consultants in exchange for services rendered to the Registrant, pursuant to the Registrant's Stock Incentive Plans, as set forth in the table below in reliance upon the II-4 exemption from registration provided by either (i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the Securities Act.
Deemed Per Number of Shares Share Value at Date of Common Date of Grant ---- ---------------- --------------- September 1, 1996 to October 28, 1998.... 58,700 $ 2.00 October 29, 1998 to May 25, 1999......... 47,500 $ 2.20 May 26, 1999 and thereafter.............. 70,000 $ 3.25
II-5 Item 16. Exhibits and Financial Statement Schedules (a) Exhibits 1.1(2) Form of Underwriting Agreement 3.1 1994 Restated Articles of Incorporation, as amended 3.2 Restated Bylaws 4.1 See Article II of Exhibit 3.1 and Article V of Exhibit 3.2 4.2(2) Specimen Stock Certificate 5.1(2) Opinion of Stoel Rives LLP 10.1 1999 Amended and Restated Investor Rights Agreement 10.2 1993 Stock Incentive Plan 10.3 1996 Stock Incentive Plan, as amended 10.4 1999 Stock Incentive Plan 10.5 Form of Incentive Stock Option Agreement 10.6(2) Form of Restricted Stock Purchase Agreement (Performance) 10.7 Form of Restricted Stock Purchase Agreement 10.8 Equipment Financing Agreement between the Company and GE Capital Financing dated June 5, 1998 10.8.1 Industrial Business Park Lease between the Company and Evergreen Corporate Center LLC dated January 15, 1997, as amended July 15, 1999 10.8.2 Office Lease between 945 Battery LLC, and the Company, dated May 9, 1999 10.9 Agreement to Issue Shares of Common Stock between the Company and Baylor College of Medicine dated as of February 16, 1999 10.10 Software Deposit Agreement with Fidex Americas Corporation dated April 15, 1996 10.11(1) Oracle Alliance Agreement between the Company and Oracle Corporation dated April 1, 1998, as amended 10.12 Employment Agreement between the Company and Mark Leavitt, dated August 1, 1985 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 23.2(2) Consent of Stoel Rives LLP (included in Exhibit 5.1) 24.1 Power of Attorney (included on signature page) 27.1 Financial Data Schedule - -------------- (1) Certain portions of this Exhibit have been omitted based on a request for confidential treatment; such portions have been filed separately with the Commission. (2) To be filed by amendment. (b) Financial Statement Schedules 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. II-6 Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, 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 of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hillsboro, State of Oregon, on September 17, 1999. MEDICALOGIC, INC. By DAVID C. MOFFENBEIER -------------------------------------- David C. Moffenbeier Chief Operating Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed below by the following persons in the capacities and on the dates indicated. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark K. Leavitt and David C. Moffenbeier his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any amendments (whether pre-effective or post-effective) to this registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto each of said attorney-in-fact and agents 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 each of said attorneys-in-fact and agents, or their substitute or substitutes, may do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- MARK K. LEAVITT Chairman of the Board September 17, 1999 ----------------------------- and Chief Executive Mark K. Leavitt, M.D. Officer Principal Executive Officer II-8 Signature Title Date --------- ----- ---- DAVID C. MOFFENBEIER Chief Operating Officer September 17, 1999 ----------------------------- and Director Principal David C. Moffenbeier Financial and Accounting Officer CHARLES D. BURWELL Director September 17, 1999 ----------------------------- Charles D. Burwell BRUCE M. FRIED Director September 17, 1999 ----------------------------- Bruce M. Fried RONALD H. KASE Director September 17, 1999 ----------------------------- Ronald H. Kase Director September 17, 1999 ----------------------------- Neal Moszkowski MARK A. STEVENS Director September 17, 1999 ----------------------------- Mark A. Stevens RONALD R. TAYLOR Director September 17, 1999 ----------------------------- Ronald R. Taylor DAVID W. WROE Director September 17, 1999 ----------------------------- David W. Wroe II-9 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 1.1(2) Form of Underwriting Agreement 3.1 1994 Restated Articles of Incorporation, as amended 3.2 Restated Bylaws 4.1 See Article II of Exhibit 3.1 and Article V of Exhibit 3.2 4.2(2) Specimen Stock Certificate 5.1(2) Opinion of Stoel Rives LLP 10.1 1999 Amended and Restated Investor Rights Agreement 10.2 1993 Stock Incentive Plan 10.3 1996 Stock Incentive Plan, as amended 10.4 1999 Stock Incentive Plan 10.5 Form of Incentive Stock Option Agreement 10.6(2) Form of Restricted Stock Purchase Agreement (Performance) 10.7 Form of Restricted Stock Purchase Agreement 10.8 Equipment Financing Agreement between the Company and GE Capital Financing dated June 5, 1998 10.8.1 Industrial Business Park Lease between the Company and Evergreen Corporate Center LLC dated January 15, 1997, as amended July 15, 1999 10.8.2 Office Lease between 945 Battery LLC, and the Company, dated May 9, 1999 10.9 Agreement to Issue Shares of Common Stock between the Company and Baylor College of Medicine dated as of February 16, 1999 10.10 Software Deposit Agreement with Fidex Americas Corporation dated April 15, 1996 10.11(1) Oracle Alliance Agreement between the Company and Oracle Corporation dated April 1, 1998, as amended 10.12 Employment Agreement between the Company and Mark Leavitt, dated August 1, 1985 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 23.2(2) Consent of Stoel Rives LLP (included in Exhibit 5.1) 24.1 Power of Attorney (included on signature page) 27.1 Financial Data Schedule - -------------- (1) Certain portions of this Exhibit have been omitted based on a request for confidential treatment; such portions have been filed separately with the Commission. (2) To be filed by amendment. EX-3.1 2 1994 RESTATED ARTICLES OF INCORPORATION CERTIFICATE ACCOMPANYING 1994 RESTATED ARTICLES OF INCORPORATION OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. (the "Company"). 2. The 1994 Restated Articles of Incorporation of the Company attached hereto do not contain an amendment to the articles of incorporation requiring shareholder approval. 3. The 1994 Restated Articles of Incorporation were adopted by the board of directors of the Company on July 1, 1994. DATED: July 1, 1994. MEDICALOGIC, INC. By: MARK LEAVITT ----------------------------------- Mark Leavitt, President 1994 RESTATED ARTICLES OF INCORPORATION OF MEDICALOGIC, INC. Pursuant to ORS 60.451, MedicaLogic, Inc. adopts the following 1994 Restated Articles of Incorporation, which shall supersede its heretofore existing Restated Articles of Incorporation and all amendments thereto. ARTICLE I The name of the Corporation is MedicaLogic, Inc. ARTICLE II A. Authorized Capital. The Corporation is authorized to issue shares of two classes of stock: 20,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. B. Common Stock. Holders of Common Stock are entitled to one vote per share. On dissolution of the Corporation, after any preferential amount with respect to the Preferred Stock has been paid or set aside, the holders of Common Stock and the holders of any series of Preferred Stock entitled to participate in the distribution of assets are entitled to receive the net assets of the Corporation. C. Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by the Oregon Business Corporation Act, as amended from time to time (the "Act"), and by the provisions of this Article, to provide for the issuance of shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each series and to determine the designations, relative rights, preferences and limitations of the shares of each series. The authority of the Board of Directors with respect to each series includes determination of the following: 1. The number of shares in and the distinguishing designation of that series; 2. Whether shares of that series shall have full, special, conditional, limited or no voting rights, except to the extent otherwise provided by the Act; 3. Whether shares of that series shall be convertible and the terms and conditions of the conversion, including provision for adjustment of the conversion rate in circumstances determined by the Board of Directors; 4. Whether shares of that series shall be redeemable and the terms and conditions of redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions or at different redemption dates; 5. The dividend rate, if any, on shares of that series, the manner of calculating any dividends and the preferences of any dividends; 6. The rights of shares of that series in the event of voluntary or involuntary dissolution of the Corporation and the rights of priority of that series relative to the Common Stock and any other series of Preferred Stock on the distribution of assets on dissolution; and 7. Any other rights, preferences and limitations of that series that are permitted by law to vary. D. Series A and A-1 Preferred Stock. This Article II.D. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series A Preferred Stock ("Series A Preferred") and the number of shares constituting such series shall be 3,750,000, and the shares of the second of such series shall be designated Series A-1 Preferred Stock ("Series A-1 Preferred") and the number of shares constituting such series shall be 375,000. 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.10 on each share of Series A Preferred and $1.00 on each share of Series A-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series A Preferred and Series A-1 Preferred shall not be cumulative. 2. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of 2 series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series A Preferred and Series A-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share of Series A Preferred (the "Series A Preference") equal to $1.00 plus all declared but unpaid dividends on the Series A Preferred, and an amount per share of Series A-1 Preferred (the "Series A-1 Preference") equal to $10.00 per share plus all declared but unpaid dividends on the Series A-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred and Series A-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred and the Series A-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred and Series A-1 Preferred held by such holders. (c) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (d) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market 3 value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred and Series A-1 Preferred (together on an as-converted basis), provided such request is received after June 30, 1999, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred and Series A-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be a sum per share equal to the Series A Preference for Series A Preferred and the Series A-1 Preference for Series A-1 Preferred. If all of the shares of the Series A Preferred or Series A-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred and Series A-1 Preferred, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (ii) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in 4 subsection 3(b)(iii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (iii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred or Series A-1 Preferred, and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. (a) Except as otherwise required by law, the holders of Series A Preferred and Series A-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series A Preferred and Series A-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series A Preferred and Series A-1 Preferred shall vote together with the Common Stock as a single class. (b) The holders of the Series A Preferred and the Series A-1 Preferred, voting together, shall be entitled to elect two members of the Corporation's Board of Directors, with each share of Series A Preferred and Series A-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). The holders of the Common Stock, voting as a 5 separate class, shall be entitled to elect all members of the Board of Directors not elected by holders of Preferred Stock. (c) The Series A Preferred and the Series A-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger, but instead shall vote together on a plan of merger as provided in Section 6. 5. Conversion Rights. The holders of the Series A Preferred and Series A-1 Preferred shall have conversion rights as follows (the Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series A Preferred and Series A-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series A Preferred is $1.00 per share and the Original Issue Price for the Series A-1 Preferred is $10.00 per share. The initial Conversion Price for the Series A Preferred and the Series A-1 Preferred shall be $1.00 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) In the event of a call for redemption of any shares of Series A Preferred or Series A-1 Preferred pursuant to Section 3 hereof, the Conversion Rights shall terminate as to the shares designated for redemption at the close of business on the Redemption Date, unless default is made in payment of the applicable redemption price. (iii) Each share of Series A Preferred and Series A-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $7,500,000 in the aggregate. 6 (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series A Preferred for Dilutive Issues; Special Conversion of Series A Preferred: (i) Special Definitions. For purposes of this Section 5(c), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series A Issue Date" shall mean the date on which the first share of Series A Preferred was first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. 7 (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series A Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, or (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series A Issue Date (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 328,384 plus (x) the number of shares of Common Stock repurchased at cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series A Issue Date and (y) the number of shares of Common Stock subject to outstanding Options on the Series A Issue Date that subsequently terminate unexercised. (E) "Pro Rata Share" with respect to each holder of Series A Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series A Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding plus the number of shares of Common Stock issuable upon conversion of all Preferred Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series A Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than 8 the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series A Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. (H) "Nonparticipating Investor" shall mean any holder of Series A Preferred that is not a Participating Investor and whose Pro Rata Share is not purchased by a Substitute Investor. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series A Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series A Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. Each holder of Series A Preferred that is not an Accredited Investor may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that another holder of Series A Preferred that is an Accredited Investor (the "Substitute Investor") will purchase such holder's Pro Rata Share for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase (or have purchased by the Substitute Investor) its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by (or by a Substitute Investor on behalf of) each Nonparticipating Investor, that number of outstanding shares of Series A Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided 9 that the Corporation gave the Issuance Notice to such holder of Series A Preferred) into a number of fully-paid and nonassessable shares of Series A-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series A Preferred so converted. Such Series A-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series A-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series A Preferred into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series A Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series A Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series A-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series A Preferred. (D) No adjustment in the Conversion Price of the Series A-1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series A-1 Preferred are issued, effective on the Closing Date, any shares of Series A-1 Preferred that remain unissued after such issuance shall be cancelled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series A-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series A-1 Preferred so cancelled and designated Series A-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series A-1 Preferred, except that the Conversion Price for the Series A-2 Preferred shall initially be the Conversion Price then in effect for the Series A Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series A Preferred upon a Dilutive Issuance will 10 be into shares of Series A-2 Preferred rather than Series A-1 Preferred. The Corporation shall take the same actions with respect to the Series A-2 Preferred and each series of Preferred Stock subsequently authorized under this Section (5)(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series A Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series A Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease 11 insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. 12 (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series A Issue Date without consideration or for consideration per share less than the Conversion Price for the Series A Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series A Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so 13 received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series A Preferred and the Series A-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series A Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series A Preferred and the Series A-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series A Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall 14 be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series A Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series A Preferred and Series A-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series A Preferred and Series A-1 Preferred shall be entitled to a proportionate share of any such 15 distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion 16 of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series A Preferred or Series A-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. Subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as shares of Series A Preferred or Series A-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred and Series A-1 Preferred (together on an as-converted basis): (a) Amend or repeal any provision of these 1994 Restated Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series A Preferred or Series A-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E), authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series A Preferred or Series A-1 Preferred; (c) Increase the authorized number of shares of Series A Preferred or Series A-1 Preferred; 17 (d) Increase the number of directors authorized in the bylaws above five (5); (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of the Series A Preferred or Series A-1 Preferred under Section 305 of the Internal Revenue Code of 1986. ARTICLE III No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director, provided that this Article shall not eliminate the liability of a director for any act or omission for which such elimination of liability is not permitted under the Oregon Business Corporation Act. No amendment to the Oregon Business Corporation Act that further limits the acts or omissions for which elimination of liability is permitted shall affect the liability of a director for any act or omission which occurs prior to the effective date of the amendment. ARTICLE IV The Corporation shall indemnify to the fullest extent not prohibited by law any current or former director of the Corporation who is made, or threatened to be made, a party to an action, suit or proceeding, whether civil, criminal, administrative, investigative or other (including an action, suit or proceeding by or in the right of the Corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation or a fiduciary within the meaning of the Employee Retirement Income Security Act of 1974 with respect to any employee benefit plan of the Corporation, or serves or served at the request of the Corporation as a director, officer, employee or agent, or as a fiduciary of an employee benefit plan, of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall pay for or reimburse the reasonable expenses incurred by any such current or former director in any such proceeding in advance of the final disposition of the proceeding if the person sets forth in writing (i) the person's good faith belief that the person is entitled to indemnification under this Article and (ii) the person's 18 agreement to repay all advances if it is ultimately determined that the person is not entitled to indemnification under this Article. No amendment to this Article that limits the Corporation's obligation to indemnify any person shall have any effect on such obligation for any act or omission that occurs prior to the later of the effective date of the amendment or the date notice of the amendment is given to the person. This Article shall not be deemed exclusive of any other provisions for indemnification or advancement of expenses of directors, officers, employees, agents and fiduciaries that may be included in any statute, bylaw, agreement, general or specific action of the Board of Directors, vote of shareholders or other document or arrangement. MEDICALOGIC, INC. By: MARK LEAVITT ---------------------------------------- Mark Leavitt, President 19 ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. Article II.A. of the 1994 Restated Articles of Incorporation of the corporation is amended (the "Authorization Amendment") to read in its entirety as follows: "A. Authorized Capital. The Corporation is authorized to issue shares of two classes of stock: 100,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock." 3. The first paragraph of Article II.D. of the 1994 Restated Articles of Incorporation of the corporation is amended (the "Designation Amendment") to read in its entirety as follows: "Series A and A-1 Preferred Stock. This Article II.D. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series A Preferred Stock ("Series A Preferred") and the number of shares constituting such series shall be 5,750,001, and the shares of the second of such series shall be designated Series A-1 Preferred Stock ("Series A-1 Preferred") and the number of shares constituting such series shall be 575,000.1." 4. The amendments to Article II.A. and Article II.D. were adopted by the shareholders of the corporation on December 30, 1994. 5. 12,243,519 shares of Common Stock and 3,750,000 shares of Series A Preferred Stock were outstanding on December 19, 1994, the record date for the meeting at which the amendments were approved. The Common Stock and the Series A Preferred Stock (on an as-converted basis), voting together as a single class, were entitled to be voted on the Authorization Amendment and the Designation Amendment. In addition, the Series A Preferred Stock (on an as- converted basis), voting separately as a class, was entitled to be voted on the Designation Amendment. 6. 8,716,644 shares of Common Stock were voted for, and -0- shares of Common Stock were voted against, the Authorization Amendment. 3,440,000 shares of Series A Preferred Stock were voted for, and -0- shares of Series A Preferred Stock were voted against, the Authorization Amendment. 7. 8,716,644 shares of Common Stock were voted for, and -0- shares of Common Stock were voted against, the Designation Amendment. 3,440,000 shares of Series A Preferred Stock were voted for, and -0- shares of Series A Preferred Stock were voted against, the Designation Amendment. DATED: December 30, 1994. MEDICALOGIC, INC. By MARK LEAVITT ------------------------------------- Mark Leavitt, President 2 CERTIFICATE ACCOMPANYING ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. (the "Company"). 2. The Articles of Amendment of the Company attached hereto do not contain an amendment to the articles of incorporation requiring shareholder approval. 3. Articles of Amendment were adopted by the board of directors of the Company as of December 30, 1994. DATED: February 21, 1995. MEDICALOGIC, INC. By: MARK LEAVITT ------------------------------------ Mark Leavitt, President ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. The 1994 Restated Articles of Incorporation of the corporation, as amended, are amended to add a new Article II.E to the end of Article II to read in its entirety as follows: "E. Series B and B-1 Preferred Stock. This Article II.E. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series B Preferred Stock ("Series B Preferred") and the number of shares constituting such series shall be 1,200,000, and the shares of the second of such series shall be designated Series B-1 Preferred Stock ("Series B-1 Preferred") and the number of shares constituting such series shall be 120,000. 1. Dividends. Subject to the rights of the Series A Preferred, the Series A-1 Preferred and series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.20 on each share of Series B Preferred and $2.00 on each share of Series B-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series B Preferred and Series B-1 Preferred shall not be cumulative. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D. hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series B Preferred and Series B-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and on a parity with the holders of Series A Preferred and Series A-1 Preferred, an amount per share of Series B Preferred (the "Series B Preference") equal to $2.00 plus all declared but unpaid dividends on the Series B Preferred, and an amount per share of Series B-1 Preferred (the "Series B-1 Preference") equal to $20.00 per share plus all declared but unpaid dividends on the Series B-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred, the Series A-1 Preferred, the Series B Preferred and the Series B-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred held by such holders. (c) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (d) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D. hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred (together on an as-converted basis), provided such request is received after June 30, 1999, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be a sum per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series B Preference for the Series B Preferred and the Series B-1 Preference for the Series B-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem 2 additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (ii) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(iii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (iii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series B Preferred or Series B-1 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D hereof: 3 (a) Except as otherwise required by law, the holders of Series B Preferred and Series B-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series B Preferred and Series B-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 4 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series B Preferred and Series B-1 Preferred shall vote together with the Common Stock, the Series A Preferred and Series A-1 Preferred as a single class. (b) The holders of the Series B Preferred, the Series B-1 Preferred and the Common Stock, voting together as a single class, shall be entitled to elect all members of the Board of Directors not elected by holders of the Series A Preferred and Series A-1 Preferred. (c) The Series B Preferred and the Series B-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger, but instead shall vote together with the Series A Preferred and Series A-1 Preferred on a plan of merger as provided in Section 6. 5. Conversion Rights. The holders of the Series B Preferred and Series B-1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series B Preferred and Series B-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series B Preferred is $2.00 per share and the Original Issue Price for the Series B-1 Preferred is $20.00 per share. The initial Conversion Price for the Series B Preferred and the Series B-1 Preferred shall be $2.00 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) Each share of Series B Preferred and Series B-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage 4 prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series B Preferred for Dilutive Issues; Special Conversion of Series B Preferred: (i) Special Definitions. For purposes of this Section 5(b), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series B Issue Date" shall mean the date on which the first share of Series B Preferred Stock is first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series A Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, 5 (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, or (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series A Issue Date (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 328,384 plus (x) the number of shares of Common Stock repurchased at cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series A Issue Date, and (y) the number of shares of Common Stock subject to outstanding Options on the Series A Issue Date, that subsequently terminate unexercised. (E) "Pro Rata Share" with respect to each holder of Series B Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series B Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series B Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series B Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. (H) "Nonparticipating Investor" shall mean any holder of Series B Preferred (or holder of the Series B Warrant) that is not a Participating Investor. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series B Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series B Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty 6 (20) day period, or fails to actually purchase its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by each Nonparticipating Investor, that number of outstanding shares of Series B Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series B Preferred) into a number of fully-paid and nonassessable shares of Series B-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series B Preferred so converted. Such Series B-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series B-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series B Preferred, if any, into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series B Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series B Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series B-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series B Preferred. (D) No adjustment in the Conversion Price of the Series B- 1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series B-1 Preferred are issued or become subject to issuance or exercise of the Series B Warrant, effective on the Closing Date, any shares of Series B-1 Preferred that remain unissued after such issuance shall be cancelled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, or that do not become subject to issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series B-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series B-1 Preferred so cancelled and designated Series B-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series B-1 Preferred, except that the Conversion Price for the Series B-2 Preferred shall initially be the Conversion Price then in effect for the Series B Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series B Preferred upon a Dilutive Issuance will be into shares of Series B-2 Preferred rather than Series B-1 7 Preferred. The Corporation shall take the same actions with respect to the Series B-2 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series A Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series B Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received 8 therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series A Issue Date without consideration or for consideration per share less than the Conversion Price for the Series B Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series B Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: 9 (A) Cash and Property: Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series B Preferred and the Series B-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series A Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series B Preferred and the Series B-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. 10 (ii) If the number of shares of Common Stock outstanding at any time after the Series A Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series A Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series B Preferred and Series B-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series B Preferred and Series B-1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, 11 but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series B Preferred or Series B-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock (or holder of the Series B Warrant) shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 12 6. Protective Provisions. Notwithstanding any provision to the contrary in Section 6 of Article II.D. hereof, and subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as shares of Series B Preferred or Series B-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent) of the holders of at least a majority of the then outstanding shares of Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred (together on an as-converted basis): (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series A Preferred, Series A-1 Preferred, Series B Preferred or Series B-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E), authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series A Preferred, Series A-1 Preferred, Series B Preferred, or Series B-1 Preferred; (c) Increase the authorized number of shares of Series A Preferred, Series A-1 Preferred, Series B Preferred or Series B-1 Preferred; (d) Increase the number of directors authorized in the bylaws above five (5); (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of the Series A Preferred, Series A-1 Preferred, Series B Preferred or Series B-1 Preferred under Section 305 of the Internal Revenue Code of 1986; Notwithstanding the foregoing, the Corporation shall be required to obtain the approval (by vote or written consent) of the holders of at least a majority of the then outstanding shares of Series B Preferred and Series B-1 Preferred (together on an as-converted basis) if any such foregoing change results in consequences proportionately less favorable with respect to the Series B Preferred or Series B-1 Preferred than with respect to the Series A Preferred or Series A-1 Preferred." DATED: February 21, 1995. MEDICALOGIC, INC. By MARK LEAVITT ------------------------------------ Mark Leavitt, President 13 FOR OFFICE USE ONLY Submit the original Corporation Division - Business Registry and one true copy Public Service Building $10.00 255 Capitol St., NE Ste. 151 Salem, OR 97310-1327 REGISTRY NUMBER: (503) 986-2200 Facsimile (503) 378-4381 209240-15 ARTICLES OF AMENDMENT Business Corporation 1. Name of the corporation prior to amendment: MedicaLogic, Inc. 2. State the article number(s) and set forth the article(s) as it is amended to read, or attach a separate sheet. See attached. 3. The amendment(s) was adopted on December 28, 1995. (If more than one amendment was adopted, identify the date of adoption of each amendment.) 4. Check the appropriate statement: [X] Shareholder action was required to adopt the amendment(s). The vote was as follows: Class or series of shares Series A Preferred Stock ------------------------ No. of shares outstanding 5,750,001 No. of votes entitled to be cast 5,750,001 No. of votes cast for 5,750,001 No. of votes cast against 0 [ ] Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the board of directors without shareholder action. [ ] The corporation has not issued any shares of stock. Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the incorporators or by the board of directors. MARK LEAVITT Mark Leavitt, M.D. President ----------------------------------------------------------------------------- SIGNATURE PRINTED NAME TITLE Person to contact about this filing: Christopher K. Heuer 503/294-9206 ---------------------------------------- NAME DAYTIME PHONE MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TOTHE ABOVE ADDRESS OR INCUDE YOUR VISA OR MASTERCARD NUMBER AND EXPIRATION DATE [ ] AND FAX. ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. The 1994 Restated Articles of Incorporation of the corporation, as amended, are amended to add a new Article II.F to the end of Article II to read in its entirety as follows: "F. Series C and C-1 Preferred Stock. This Article II.F. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series C Preferred Stock ("Series C Preferred") and the number of shares constituting such series shall be 4,771,267 and the shares of the second of such series shall be designated Series C-1 Preferred Stock ("Series C-1 Preferred") and the number of shares constituting such series shall be 477,126.7. 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.225 on each share of Series C Preferred and $2.25 on each share of Series C-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series C Preferred and Series C-1 Preferred shall not be cumulative. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D. or Section 2 of Article II.E. hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series C Preferred and Series C-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred, an amount per share of Series C Preferred (the "Series C Preference") equal to $2.25 plus all declared but unpaid dividends on the Series C Preferred, and an amount per share of Series C-1 Preferred (the "Series C-1 Preference") equal to $22.50 per share plus all declared but unpaid dividends on the Series C-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series C Preferred and Series C-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series C Preferred and the Series C-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series C Preferred, Series C-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series C Preference and the Series C-1 Preference described in subsection 2(a) above), the Series A Preference, the Series A-1 Preference, the Series B Preference and the Series B-1 Preference, as set forth in subsection 2(a) of Article II.D. and subsection 2(a) of Article II.E. hereof. (c) After the distributions described in subsection 2(a) and subsection 2(b) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred and Series C-1 Preferred held by such holders. (d) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other 2 property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (e) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D. and Section 3 of Article II.E. hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred and Series C-1 Preferred (together on an as-converted basis), provided such request is received after June 30, 1999, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred and Series C-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be a sum per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series B Preference for Series B Preferred, the Series B-1 Preference for Series B-1 Preferred, the Series C Preference for the Series C Preferred and the Series C-1 Preference for the Series C-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred and Series C-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series C Preferred and Series C-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred. (ii) In the event of any redemption of only a part of the then outstanding Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. 3 (iii) After the redemptions described in subsection (b)(i) above have been made, the Corporation shall effect such redemption pro rata among the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred according to the full amount of cash each holder would receive if all such shares were being redeemed. (iv) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(v), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (v) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred or Series C-1 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D or Section 4 of Article II.E hereof: (a) Except as otherwise required by law, the holders of Series C Preferred and Series C-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series C Preferred and Series C-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series C Preferred and Series C-1 Preferred shall vote together with the Common Stock, the Series A Preferred, the Series A-1 Preferred, the Series B Preferred and the Series B-1 Preferred as a single class. (b) The holders of the Series B Preferred, the Series B-1 Preferred, the Series C Preferred, the Series C-1 Preferred and the Common Stock, voting together as a single class, shall be entitled to elect all members of the Board of Directors not elected by holders of the Series A Preferred and Series A-1 Preferred. (c) Except as provided in Section 6, the Series C Preferred and the Series C-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 5. Conversion Rights. The holders of the Series C Preferred and Series C-1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series C Preferred and Series C-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series C Preferred is $2.25 per share and the Original Issue Price for the Series C-1 Preferred is $22.50 per share. The initial Conversion Price for the Series C Preferred and the Series C-1 Preferred shall be $2.25 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) Each share of Series C Preferred and Series C-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the 5 Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series C Preferred for Dilutive Issues; Special Conversion of Series C Preferred: (i) Special Definitions. For purposes of this Section 5(c), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series C Issue Date" shall mean the date on which the first share of Series C Preferred Stock is first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. 6 (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series C Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series C Issue Date (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 1,047,684 plus (x) the number of shares of Common Stock repurchased at cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series C Issue Date, and (y) the number of shares of Common Stock subject to outstanding Options on the Series C Issue Date, that subsequently terminate unexercised, or (5) shares of Series B Preferred Stock (or other series of Preferred Stock subsequently authorized under Section 5(c)(ii)(E) of Article II.E) issued pursuant to that certain stock purchase warrant dated December 30, 1994 issued by the Corporation to Independent Investments, Inc. (E) "Pro Rata Share" with respect to each holder of Series C Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series C Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series C Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. 7 (G) "Participating Investor" shall mean any holder of Series C Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. (H) "Nonparticipating Investor" shall mean any holder of Series C Preferred that is not a Participating Investor and whose Pro Rata Share is not purchased by a Substitute Investor. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series C Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series C Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. Each holder of Series C Preferred that is not an Accredited Investor may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that another holder of Series C Preferred that is an Accredited Investor (the "Substitute Investor") will purchase such holder's Pro Rata Share for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase (or have purchased by the Substitute Investor) its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by (or by a Substitute Investor on behalf of) each Nonparticipating Investor, that number of outstanding shares of Series C Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series C Preferred) into a number of fully-paid and nonassessable shares of Series C-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series C Preferred so converted. Such Series C-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series C-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the 8 right to convert its shares of Series C Preferred into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series C Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series C Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series C-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series C Preferred. (D) No adjustment in the Conversion Price of the Series C-1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series C-1 Preferred are issued, effective on the Closing Date, any shares of Series C-1 Preferred that remain unissued after such issuance shall be cancelled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series C-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series C-1 Preferred so cancelled and designated Series C-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series C-1 Preferred, except that the Conversion Price for the Series C-2 Preferred shall initially be the Conversion Price then in effect for the Series C Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series C Preferred upon a Dilutive Issuance will be into shares of Series C-2 Preferred rather than Series C-1 Preferred. The Corporation shall take the same actions with respect to the Series C-2 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series C Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common 9 Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series C Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the 10 consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series C Issue Date without consideration or for consideration per share less than the Conversion Price for the Series C Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series C Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: 11 (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series C Preferred and the Series C-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series C Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series C Preferred and the Series C-1 Preferred shall be appropriately decreased so that the number of shares of 12 Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series C Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series C Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series C Preferred and Series C-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series C Preferred 13 and Series C-1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to 14 increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series C Preferred or Series C-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. So long as shares of Series C Preferred or Series C-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent) of the holders of at least a majority of the then outstanding shares of Series C Preferred and Series C-1 Preferred (together on an as-converted basis): (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series C Preferred or Series C-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E) of each of Articles II.D, II.E and this II.F, authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series C Preferred, or Series C-1 Preferred; (c) Increase the authorized number of shares of Series C Preferred or Series C-1 Preferred; (d) Increase the number of directors authorized in the bylaws above seven (7); (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or 15 (g) Take any action that would result in the taxation of the holders of Series C Preferred or Series C-1 Preferred under Section 305 of the Internal Revenue Code of 1986." Dated: December 28, 1995 MEDICALOGIC, INC. By: MARK LEAVITT ------------------------------------ Mark Leavitt, M.D., President 16 ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. The first paragraph of Article II.F. of the 1994 Restated Articles of Incorporation, as amended, of the corporation is amended to read in its entirety as follows: "Series C and C-1 Preferred Stock. This Article II.F. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series C Preferred Stock ("Series C Preferred") and the number of shares constituting such series shall be 7,425,298, and the shares of the second of such series shall be designated Series C-1 Preferred Stock ("Series C-1 Preferred") and the number of shares constituting such series shall be 742,529.8." 3. The amendment to Article II.F. was adopted by the shareholders of the corporation on May 10, 1996. 4. 13,081,214 shares of Common Stock, 5,750,001 shares of Series A Preferred Stock and 4,506,667 shares of Series C Preferred Stock were outstanding on April 29, 1996, the record date for the meeting at which the amendment was approved. The Common Stock, the Series A Preferred Stock and the Series C Preferred Stock (on an as-converted basis), voting together as a single class, were entitled to be voted on the amendment. In addition, the Series A Preferred Stock (on an as-converted basis), voting separately as a class, and the Series C Preferred Stock (on an as-converted basis), voting separately as a class, were each entitled to be voted on the amendment. 5. 9,044,079 shares of Common Stock were voted for, and -0- shares of Common Stock were voted against, the amendment. 5,750,001 shares of Series A Preferred Stock were voted for, and -0- shares of Series A Preferred Stock were voted against, the amendment. 4,357,178 shares of Series C Preferred Stock were voted for, and -0- shares of Series C Preferred Stock were voted against, the amendment. DATED: May 20, 1996. MEDICALOGIC, INC. By MARK LEAVITT ------------------------------------- Mark Leavitt, President FOR OFFICE USE ONLY Submit the original Corporation Division - Business Registry and one true copy Public Service Building $10.00 255 Capitol St., NE Ste. 151 Salem, OR 97310-1327 REGISTRY NUMBER: (503) 986-2200 Facsimile (503) 378-4381 209240-15 ARTICLES OF AMENDMENT Business Corporation 1. Name of the corporation prior to amendment: MedicaLogic, Inc. 2. State the article number(s) and set forth the article(s) as it is amended to read, or attach a separate sheet. See attached. 3. The amendment(s) was adopted on May 20 , 1996. 4. Check the appropriate statement: [X] Shareholder action was required to adopt the amendment(s). The vote was as follows: Class or series of shares: Series A Preferred Stock No. of shares outstanding: 5,750,001 No. of votes entitled to be cast: 5,750,001 No. of votes cast for: No. of votes cast against: Class or series of shares: Series C Preferred Stock No. of shares outstanding: 4,506,667 No. of votes entitled to be cast: 4,506,667 No. of votes cast for: No. of votes cast against: [ ] Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the board of directors without shareholder action. [ ] The corporation has not issued any shares of stock. Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the incorporators or by the board of directors. MARK LEAVITT, M.D. ---------------------------------------- Mark Leavitt, M.D., President Person to contact about this filing: Christopher K. Heuer, Stoel Rives LLP (503) 294-9206 MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR INCLUDE YOUR VISA OR MASTERCARD NUMBER AND EXIPIRATION DATE [ ] AND FAX. ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. The 1994 Restated Articles of Incorporation of the corporation, as amended, are amended to add a new Article II.G to the end of Article II to read in its entirety as follows: "G. Series D and D-1 Preferred Stock. This Article II.G. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series D Preferred Stock ("Series D Preferred") and the number of shares constituting such series shall be 1,750,000, and the shares of the second of such series shall be designated Series D-1 Preferred Stock ("Series D-1 Preferred") and the number of shares constituting such series shall be 175,000. 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of the Series D Dividend Amount (as defined below) on each share of Series D Preferred and the Series D-1 Dividend Amount (as defined below) on each share of Series D-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series D Preferred and Series D-1 Preferred shall not be cumulative. For purposes of this Section 1, the Series D Dividend Amount and the Series D-1 Dividend Amount shall be $0.30 and $3.00, respectively; provided, however, that the Series D Dividend Amount and the Series D-1 Dividend Amount shall be $0.25 and $2.50, respectively, upon and after the occurrence of an "Adjustment Event" as defined in that certain Series D Warrant issued by the Corporation to Hewlett- Packard Company, a California corporation, dated February 28, 1996. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D., Section 2 of Article II.E. or Section 2 of Article II.F. hereof, but subject to Section 2(a) of Article II.F. hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) After the distribution described in subsection 2(a) of Article II.F hereof, the holders of Series D Preferred and Series D-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and on a parity with the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred and Series B-1 Preferred, an amount per share of Series D Preferred equal to the Series D Preference plus all declared but unpaid dividends on the Series D Preferred, and an amount per share of Series D-1 Preferred equal to the Series D-1 Preference plus all declared but unpaid dividends on the Series D-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred, the Series A-1 Preferred, Series B Preferred, the Series B-1 Preferred, the Series D Preferred and the Series D-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. For purposes of this Article II.G., the Series D Preference and the Series D-1 Preference shall be $3.00 and $30.00, respectively; provided, however, that the Series D Preference and the Series D-1 Preference shall be $2.50 and $25.00, respectively, upon and after the occurrence of an "Adjustment Event" as defined in the Series D Warrant. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred and Series D-1 Preferred held by such holders. (c) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. 2 (d) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D., Section 3 of Article II.E. and Section 3 of Article II.F. hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred and Series D-1 Preferred (together on an as-converted basis), provided such request is received after June 30, 1999, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred Series C-1 Preferred, Series D Preferred and Series D-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be a sum per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series B Preference for Series B Preferred, the Series B-1 Preference for Series B-1 Preferred, the Series C Preference for the Series C Preferred, the Series C-1 Preference for the Series C-1 Preferred, the Series D Preference for the Series D Preferred and the Series D-1 Preference for the Series D-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred and Series D-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred and Series D-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series C Preferred and Series C-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred. (ii) In the event of any redemption of only a part of the then outstanding Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such 3 redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (iii) After the redemptions described in subsection (b)(i) above have been made, the Corporation shall effect such redemption pro rata among the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred according to the full amount of cash each holder would receive if all such shares were being redeemed. (iv) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(v), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (v) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred or Series D-1 4 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D, Section 4 of Article II.E and Section 4 of Article II.F hereof: (a) Except as otherwise required by law, the holders of Series D Preferred and Series D-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series D Preferred and Series D-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 4 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series D Preferred and Series D-1 Preferred shall vote together with the Common Stock, the Series A Preferred, the Series A-1 Preferred, the Series B Preferred, the Series B-1 Preferred, the Series C Preferred, and the Series C-1 Preferred, as a single class. (b) The holders of the Series B Preferred, the Series B-1 Preferred, the Series C Preferred, the Series C-1 Preferred, the Series D Preferred, the Series D-1 Preferred and the Common Stock, voting together as a single class, shall be entitled to elect all members of the Board of Directors not elected by holders of the Series A Preferred and Series A-1 Preferred. (c) Except as provided in Section 6, the Series D Preferred and the Series D-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 5. Conversion Rights. The holders of the Series D Preferred and Series D- 1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series D Preferred and Series D-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series D Preferred is the Series D Preference and the Original Issue Price for the Series D- 1 Preferred is Series D-1 Preference. The initial Conversion Price for the Series D Preferred and the Series D-1 Preferred shall be the Series D Preference; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. 5 (ii) Each share of Series D Preferred and Series D-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series D Preferred for Dilutive Issues; Special Conversion of Series D Preferred: (i) Special Definitions. For purposes of this Section 5(b), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series C Issue Date" shall mean the date on which the first share of Series C Preferred Stock was first issued. 6 (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series C Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation pursuant to any stock incentive plan of the Corporation, or (5) shares of Series B Preferred Stock (or other series of Preferred Stock subsequently authorized under Section 5(c)(ii)(E) of Article II.E) issued pursuant to that certain stock purchase warrant dated December 30, 1994 issued by the Corporation to Independent Investments, Inc. (E) "Pro Rata Share" with respect to each holder of Series D Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series D Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series D Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series D Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. 7 (H) "Nonparticipating Investor" shall mean any holder of Series D Preferred (or holder of the Series D Warrant) that is not a Participating Investor. (I) "Series D Warrant" shall mean that certain warrant issued by the Corporation to Hewlett-Packard Company, a California corporation, dated February 28, 1996. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series D Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series D Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by each Nonparticipating Investor, that number of outstanding shares of Series D Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series D Preferred) into a number of fully-paid and nonassessable shares of Series D-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series D Preferred so converted. Such Series D-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series D-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series D Preferred, if any, into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series D Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series D Preferred and shall be 8 restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series D-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series D Preferred. (D) No adjustment in the Conversion Price of the Series D-1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series D-1 Preferred are issued, effective on the Closing Date, any shares of Series D-1 Preferred that remain unissued after such issuance shall be cancelled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, or that do not become subject to issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series D-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series D-1 Preferred so cancelled and designated Series D-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series B-1 Preferred, except that the Conversion Price for the Series D-2 Preferred shall initially be the Conversion Price then in effect for the Series D Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series D Preferred upon a Dilutive Issuance will be into shares of Series D-2 Preferred rather than Series D-1 Preferred. The Corporation shall take the same actions with respect to the Series D-2 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series C Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be 9 less than the Conversion Price for the Series D Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; 10 (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series C Issue Date without consideration or for consideration per share less than the Conversion Price for the Series D Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series D Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and 11 (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series D Preferred and the Series D-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series C Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series D Preferred and the Series D-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series C Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. 12 (iii) In case, at any time after the Series C Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series D Preferred and Series D-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series D Preferred and Series D-1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or 13 appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series D Preferred or Series D-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. 14 (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock (or holder of the Series D Warrant) shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. Notwithstanding any provision to the contrary in Section 6 of Article II.D. and Section 6 of Article II.E. hereof, and subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as shares of Series D Preferred or Series D-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent) of the holders of at least a majority of the then outstanding shares of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred (together on an as-converted basis): (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred or Series D-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E), authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred, or Series D-1 Preferred; (c) Increase the authorized number of shares of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred or Series D- 1 Preferred; (d) Increase the number of directors authorized in the bylaws above seven (7); (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of the Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred or Series D-1 Preferred under Section 305 of the Internal Revenue Code of 1986; 15 Notwithstanding the foregoing, the Corporation shall be required to obtain the approval (by vote or written consent) of the holders of at least a majority of the then outstanding shares of Series D Preferred and Series D-1 Preferred (together on an as-converted basis) if any such foregoing change results in consequences proportionately less favorable with respect to the Series D Preferred or Series D-1 Preferred than with respect to the Series A Preferred, Series A-1 Preferred, Series B Preferred or Series B-1 Preferred." 16 FOR OFFICE USE ONLY Submit the original Corporation Division - Business Registry and one true copy Public Service Building $10.00 255 Capitol St., NE Ste. 151 Salem, OR 97310-1327 REGISTRY NUMBER: (503) 986-2200 Facsimile (503) 378-4381 209240-15 ARTICLES OF AMENDMENT Business Corporation 1. Name of the corporation prior to amendment: MedicaLogic, Inc. 2. State the article number(s) and set forth the article(s) as it is amended to read, or attach a separate sheet. Attached 3. The amendment(s) was adopted on _______________, 19___. (If more than one amendment was adopted, identify the date of adoption of each amendment.) 4. Check the appropriate statement: [X] Shareholder action was required to adopt the amendment(s). The vote was as follows: Class or series of shares Series A Preferred No. of shares outstanding 5,750,001 No. of votes entitled to be cast 5,750,001 No. of votes cast for 5,274,668 No. of votes cast against 0 Class or series of shares Series C Preferred No. of shares outstanding 7,012,637 No. of votes entitled to be cast 7,012,637 No. of votes cast for 6,651,114 No. of votes cast against 0 [ ] Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the board of directors without shareholder action. [ ] The corporation has not issued any shares of stock. Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the incorporators or by the board of directors. MARK K. LEAVITT, M.D. Mark K. Leavitt, M.D. President - -------------------------------------------------------------------------------- SIGNATURE PRINTED NAME TITLE Person to contact about this filing: Christopher K. Heuer 503/294-9206 - -------------------------------------------------------------------------------- NAME DAYTIME PHONE MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR INCLUDE YOUR VISA OR MASTERCARD NUMBER AND EXPIRATION DATE [ ] AND FAX. ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. The introductory paragraph of Section 6 of Article II.D of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to read as follows: "6. Protective Provisions. Subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as shares of Series A Preferred or Series A-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series A Preferred and Series A-1 Preferred (together on an as-converted basis):" 3. The introductory paragraph of Article II.F of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to read as follows: "F. Series C and C-1 Preferred Stock. This Article II.F. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series C Preferred Stock ("Series C Preferred") and the number of shares constituting such series shall be 7,012,637 and the shares of the second of such series shall be designated Series C-1 Preferred Stock ("Series C-1 Preferred") and the number of shares constituting such series shall be 701,263.7." 4. Section 5(c)(i)(D)(4) of Article II.F of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to replace "1,047,684" with "2,047,684." 5. The introductory paragraph of Section 6 of Article II.F of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to read as follows: "6. Protective Provisions. So long as shares of Series C Preferred or Series C-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series C Preferred and Series C-1 Preferred (together on an as-converted basis):" 6. Section 3(a) of Article II.D, Section 3(a) of Article II.F, and Section 3(a) of Article II.G of the1994 Restated Articles of Incorporation of the corporation, as amended, are each amended to replace "June 30, 1999" with "December 31, 2001." 7. The introductory paragraph of Section 6 of Article II.G of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to read as follows: "6. Protective Provisions. Notwithstanding any provision to the contrary in Section 6 of Article II.D. and Section 6 of Article II.E. hereof, and subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as shares of Series D Preferred or Series D-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred (together on an as-converted basis):" 8. The 1994 Restated Articles of Incorporation of the corporation, as amended, are amended to add a new Article II.H to the end of Article II to read in its entirety as follows: "H. Series E and E-1 Preferred Stock. This Article II.H. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series E Preferred Stock ("Series E Preferred") and the number of shares constituting such series shall be 4,811,669 and the shares of the second of such series shall be designated Series E-1 Preferred Stock ("Series E-1 Preferred") and the number of shares constituting such series shall be 481,166.9. 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.315 on each share of Series E Preferred and 2 $3.15 on each share ofSeries E-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series E Preferred and Series E-1 Preferred shall not be cumulative. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D., Section 2 of Article II.E., Section 2 of Article II.F., or Section 2 of Article II.G. hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series E Preferred and Series E-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred and Series D-1 Preferred an amount per share of Series E Preferred (the "Series E Preference") equal to $3.15 plus all declared but unpaid dividends on the Series E Preferred, and an amount per share of Series E-1 Preferred (the "Series E-1 Preference") equal to $31.50 per share plus all declared but unpaid dividends on the Series E-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series E Preferred and Series E-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series E Preferred and the Series E-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, Series C Preferred and Series C-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred, Series E-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference and the Series E-1 Preference described in subsection 2(a) above), the Series C Preference and the Series C-1 Preference, as set forth in subsection 2(a) of Article II.F. hereof. (c) After the distribution described in subsections 2(a) and 2(b) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series A Preferred, Series A-1 Preferred, 3 Series B Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, the Series E-1 Preference, the Series C Preference and Series C-1 Preference described in subsections 2(a) and 2(b) above), the Series A Preference, the Series A-1 Preference, the Series B Preference, the Series B-1 Preference, the Series D Preference and the Series D-1 Preference, as set forth in subsection 2(a) of Article II.D., subsection 2(a) of Article II.E., and subsection 2(a) of Article II.G. hereof. (d) After the distributions described in subsection 2(a), subsection 2(b) and subsection 2(c) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred, Series E-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred, Series E-1 Preferred held by such holders. (e) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (f) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D., Section 3 of Article II.E., Section 3 of Article II.F. and Section 3 of Article II.G. hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent 4 (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred and Series E-1 Preferred (together on an as-converted basis), provided such request is received after December 31, 2001, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred and Series E-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be a sum per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series B Preference for Series B Preferred, the Series B-1 Preference for Series B-1 Preferred, the Series C Preference for the Series C Preferred, the Series C-1 Preference for the Series C-1 Preferred, the Series D Preference for the Series D Preferred, the Series D-1 Preference for the Series D-1 Preferred, the Series E Preference for the Series E Preferred and the Series E-1 Preference for the Series E-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred and Series E-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred and Series E-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series E Preferred and Series E-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred and Series D-1 Preferred. (ii) In the event of any redemption of only a part of the then outstanding Series E Preferred and Series E-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (iii) After the redemptions described in subsection (b)(i) above have been made, in the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred and Series D-1 5 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series C Preferred and Series C-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred. (iv) In the event of any redemption of only a part of the then outstanding Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (v) After the redemptions described in subsections (b)(i) and (b)(iii) above have been made, the Corporation shall effect such redemption pro rata among the holders of Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series D Preferred and Series D-1 Preferred according to the full amount of cash each holder would receive if all such shares were being redeemed. (vi) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(vii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (vii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable 6 redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series D Preferred, Series D-1 Preferred, Series E Preferred or Series E-1 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D, Section 4 of Article II.E, Section 4 of Article II.F or Section 4 of Article II.G hereof: (a) Except as otherwise required by law, the holders of Series E Preferred and Series E-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series E Preferred and Series E-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series E Preferred and Series E-1 Preferred shall vote together with the Common Stock, the Series A Preferred, the Series A-1 Preferred, the Series B Preferred, the Series B-1 Preferred, the Series C Preferred, the Series C-1 Preferred, the Series D Preferred and the Series D-1 Preferred as a single class. (b) The holders of the Series E Preferred and the Series E-1 Preferred, voting together, shall be entitled to elect one member of the Corporation's Board of Directors, with each share of Series E Preferred and Series E-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). The holders of the Series B Preferred, the Series B-1 Preferred, the Series C Preferred, the Series C-1 Preferred, the Series D Preferred and the Series D-1 Preferred, and the Common Stock, voting together as a single class, shall be entitled to elect all members of the Board of Directors not elected by holders of the Series A Preferred, the Series A-1 Preferred, the Series E Preferred and the Series E-1 Preferred. (c) Except as provided in Section 6, the Series E Preferred and the Series E-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 7 5. Conversion Rights. The holders of the Series E Preferred and Series E-1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series E Preferred and Series E-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series E Preferred is $3.15 per share and the Original Issue Price for the Series E-1 Preferred is $31.50 per share. The initial Conversion Price for the Series E Preferred and the Series E-1 Preferred shall be $3.15 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) Each share of Series E Preferred and Series E-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the 8 underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series E Preferred for Dilutive Issues; Special Conversion of Series E Preferred: (i) Special Definitions. For purposes of this Section 5(c), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series E Issue Date" shall mean the date on which the first share of Series E Preferred Stock is first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series E Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series E Issue Date (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 1,360,684 plus (x) the number 9 of shares of Common Stock repurchased at cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series E Issue Date, and (y) the number of shares of Common Stock subject to outstanding Options on the Series E Issue Date, that subsequently terminate unexercised, or (5) shares of Series D Preferred Stock (or other series of Preferred Stock subsequently authorized under Section 5(c)(ii)(E) of Article II.G) issued pursuant to that certain stock purchase warrant dated February 28, 1996 issued by the Corporation to Hewlett-Packard Company. (E) "Pro Rata Share" with respect to each holder of Series E Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series E Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series E Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series E Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. (H) "Nonparticipating Investor" shall mean any holder of Series E Preferred that is not a Participating Investor and whose Pro Rata Share is not purchased by a Substitute Investor. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series E Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series E Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. Each holder of Series E Preferred that is 10 not an Accredited Investor may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that another holder of Series E Preferred that is an Accredited Investor (the "Substitute Investor") will purchase such holder's Pro Rata Share for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase (or have purchased by the Substitute Investor) its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by (or by a Substitute Investor on behalf of) each Nonparticipating Investor, that number of outstanding shares of Series E Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series E Preferred) into a number of fully-paid and nonassessable shares of Series E-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series E Preferred so converted. Such Series E-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series E-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series E Preferred into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series E Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series E Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series E-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series E Preferred. (D) No adjustment in the Conversion Price of the Series E- 1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series E-1 Preferred are issued, effective on the Closing Date, any shares of Series E-1 Preferred that remain unissued after such issuance shall be cancelled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In 11 addition, concurrently with such issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series E-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series E-1 Preferred so cancelled and designated Series E-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series E-1 Preferred, except that the Conversion Price for the Series E-2 Preferred shall initially be the Conversion Price then in effect for the Series E Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series E Preferred upon a Dilutive Issuance will be into shares of Series E-2 Preferred rather than Series E-1 Preferred. The Corporation shall take the same actions with respect to the Series E-2 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series E Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series E Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with 12 respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be 13 issued pursuant to Section 5(c)(iii)) after the Series E Issue Date without consideration or for consideration per share less than the Conversion Price for the Series E Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series E Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing 14 (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series E Preferred and the Series E-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series E Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series E Preferred and the Series E-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series E Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series E Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series E Preferred and Series E-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. 15 (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series E Preferred and Series E-1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written 16 request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series E Preferred or Series E-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. So long as shares of Series E Preferred or Series E-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series E Preferred and Series E-1 Preferred (together on an as-converted basis): 17 (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series E Preferred or Series E-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E) of each of Articles II.D, II.E, II.F, II.G and this II.H authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series E Preferred or Series E-1 Preferred; (c) Increase the authorized number of shares of Series E Preferred or Series E-1 Preferred; (d) Increase the number of directors authorized in the bylaws above seven (7); (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of Series E Preferred or Series E-1 Preferred under Section 305 of the Internal Revenue Code of 1986." Dated: December 31, 1996 MEDICALOGIC, INC. By: DAVID C. MOFFENBEIER ------------------------------------- David C. Moffenbeier, Chief Operating Officer and Secretary 18 FOR OFFICE USE ONLY Submit the original Corporation Division - Business Registry and one true copy Public Service Building $10.00 255 Capitol St., NE Ste. 151 Salem, OR 97310-1327 REGISTRY NUMBER: (503) 986-2200 Facsimile (503) 378-4381 209240-15 ARTICLES OF AMENDMENT Business Corporation 1. Name of the corporation prior to amendment: MedicaLogic, Inc. 2. State the article number(s) and set forth the article(s) as it is amended to read, or attach a separate sheet. Attached 3. The amendment(s) was adopted on November 10, 1997. (If more than one amendment was adopted, identify the date of adoption of each amendment.) 4. Check the appropriate statement: [ ] Shareholder action was required to adopt the amendment(s). The vote was as follows: Class or series of shares No. of shares outstanding No. of votes entitled to be cast No. of votes cast for No. of votes cast against [X] Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the board of directors without shareholder action. [ ] The corporation has not issued any shares of stock. Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the incorporators or by the board of directors. GUY E. FIELD Guy E. Field Controller - -------------------------------------------------------------------------------- SIGNATURE PRINTED NAME TITLE Person to contact about this filing: Kurt E. Scheuerman 503/294-9187 - -------------------------------------------------------------------------------- NAME DAYTIME PHONE MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR INCLUDE YOUR VISA OR MASTERCARD NUMBER AND EXPIRATION DATE [ ] AND FAX. ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. Article II.E of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to read as follows: "E. Series B and B-1 Preferred Stock. The two series of Preferred Stock of the Corporation previously designated Series B Preferred Stock ("Series B Preferred") and Series B-1 Preferred Stock ("Series B-1 Preferred") are hereby eliminated. 3. Article II.G of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to read as follows: "G. Series D and D-1 Preferred Stock. The two series of Preferred Stock of the Corporation previously designated Series D Preferred Stock ("Series D Preferred") and Series D-1 Preferred Stock ("Series D-1 Preferred") are hereby eliminated. 4. The 1994 Restated Articles of Incorporation of the corporation, as amended, are amended to add new Articles II.I, II.J and II.K to the end of Article II to read in their entirety as follows: "I. Series F and F-1 Preferred Stock. This Article II.I. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series F Preferred Stock ("Series F Preferred") and the number of shares constituting such series shall be 4,000,000 and the shares of the second of such series shall be designated Series F-1 Preferred Stock ("Series F-1 Preferred") and the number of shares constituting such series shall be 400,000. 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.340 on each share of Series F Preferred and $3.40 on each share of Series F-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series F Preferred and Series F-1 Preferred shall not be cumulative. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D., Section 2 of Article II.F., or Section 2 of Article II.H. hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series F Preferred and Series F-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, and Series C-1 Preferred, and on a parity with the holders of the Series E Preferred and Series E-1 Preferred, an amount per share of Series F Preferred (the "Series F Preference") equal to $3.40 plus all declared but unpaid dividends on the Series F Preferred, and an amount per share of Series F-1 Preferred (the "Series F-1 Preference") equal to $34.00 per share plus all declared but unpaid dividends on the Series F-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred and the Series F-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of the Series C Preferred and Series C-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 Preference, Series F Preference and the Series F-1 Preference described in subsection 2(a) above and subsection 2(a) of Article II.H hereof), the Series C Preference and the Series C-1 Preference, as set forth in subsection 2(a) of Article II.F. hereof. (c) After the distribution described in subsections 2(a) and 2(b) above has been made, subject to the rights of series of Preferred Stock which may from time to 2 time come into existence, the holders of Series A Preferred and Series A-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, the Series E-1 Preference, Series F Preference, the Series F- 1 Preference, the Series C Preference and Series C-1 Preference described in subsections 2(a) and 2(b) above), the Series A Preference, the Series A-1 Preference, as set forth in subsection 2(a) of Article II.D. hereof. (d) After the distributions described in subsection 2(a), subsection 2(b) and subsection 2(c) above have been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred held by such holders. (e) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (f) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D., Section 3 of Article II.F. or Section 3 of Article II.H. hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred (together on an as-converted basis), provided such request is received after December 31, 2001, the Corporation shall redeem one hundred percent (100%) of the 3 number of shares of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be an amount per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series C Preference for the Series C Preferred, the Series C-1 Preference for the Series C-1 Preferred, the Series E Preference for the Series E Preferred, the Series E-1 Preference for the Series E-1 Preferred, the Series F Preference for the Series F Preferred and the Series F-1 Preference for the Series F-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, and Series C-1 Preferred. (ii) In the event of any redemption of only a part of the then outstanding Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (iii) After the redemptions described in subsection (b)(i) above have been made, in the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, and Series C-1 Preferred, requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series C Preferred and Series C-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, and Series A-1 Preferred. (iv) In the event of any redemption of only a part of the then outstanding Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. 4 (v) After the redemptions described in subsections (b)(i) and (b)(iii) above have been made, the Corporation shall effect such redemption pro rata among the holders of Series A Preferred and Series A-1 Preferred according to the full amount of cash each holder would receive if all such shares were being redeemed. (vi) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(vii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (vii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred or Series F-1 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D, Section 4 of Article II.F or Section 4 of Article II.H hereof: 5 (a) Except as otherwise required by law, the holders of Series F Preferred and Series F-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series F Preferred and Series F-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series F Preferred and Series F-1 Preferred shall vote together with the Common Stock, the Series A Preferred, the Series A-1 Preferred, the Series C Preferred, the Series C-1 Preferred, the Series E Preferred and the Series E-1 Preferred as a single class. (b) The holders of the Series F Preferred and the Series F-1 Preferred shall have voting rights with respect to the election of the Corporation's Board of Directors set forth in Section 7 of this Article II.I. (c) Except as provided in Section 6, the Series F Preferred and the Series F-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 5. Conversion Rights. The holders of the Series F Preferred and Series F-1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series F Preferred and Series F-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series F Preferred is $3.40 per share and the Original Issue Price for the Series F-1 Preferred is $34.00 per share. The initial Conversion Price for the Series F Preferred and the Series F-1 Preferred shall be $3.40 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) Each share of Series F Preferred and Series F-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.40 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the 6 certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series F Preferred for Dilutive Issues; Special Conversion of Series F Preferred: (i) Special Definitions. For purposes of this Section 5(c), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series F Issue Date" shall mean the date on which the first share of Series F Preferred Stock is first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series F Issue Date, 7 (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series F Issue Date (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 391,174 plus (x) the number of shares of Common Stock repurchased at cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series F Issue Date, and (y) the number of shares of Common Stock subject to outstanding Options on the Series F Issue Date, that subsequently terminate unexercised, or (5) shares of Series G Preferred Stock (or other series of Preferred Stock subsequently authorized under Section 5(c)(ii)(J) of Article II.J) issued pursuant to that certain Series G Preferred Stock Option Agreement dated November 10, 1997 issued by the Corporation to Continental Casualty Company. (E) "Pro Rata Share" with respect to each holder of Series F Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series F Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series F Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series F Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. (H) "Nonparticipating Investor" shall mean any holder of Series F Preferred that is not a Participating Investor and whose Pro Rata Share is not purchased by a Substitute Investor. 8 (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series F Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series F Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. Each holder of Series F Preferred that is not an Accredited Investor may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that another holder of Series F Preferred that is an Accredited Investor (the "Substitute Investor") will purchase such holder's Pro Rata Share for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase (or have purchased by the Substitute Investor) its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by (or by a Substitute Investor on behalf of) each Nonparticipating Investor, that number of outstanding shares of Series F Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series F Preferred) into a number of fully-paid and nonassessable shares of Series F-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series F Preferred so converted. Such Series F-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series F-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series F Preferred into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series F Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series F Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series F-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series F Preferred. 9 (D) No adjustment in the Conversion Price of the Series F-1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series F-1 Preferred are issued, effective on the Closing Date, any shares of Series F-1 Preferred that remain unissued after such issuance shall be cancelled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series F-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series F-1 Preferred so cancelled and designated Series F-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series F-1 Preferred, except that the Conversion Price for the Series F-2 Preferred shall initially be the Conversion Price then in effect for the Series F Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series F Preferred upon a Dilutive Issuance will be into shares of Series F-2 Preferred rather than Series F-1 Preferred. The Corporation shall take the same actions with respect to the Series F-2 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series F Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series F Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: 10 (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and 11 (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series F Issue Date without consideration or for consideration per share less than the Conversion Price for the Series F Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series F Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. 12 (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series F Preferred and the Series F-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series F Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series F Preferred and the Series F-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series F Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series F Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series F Preferred and Series F-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been 13 entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series F Preferred and Series F-1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in 14 accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series F Preferred or Series F-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. So long as shares of Series F Preferred or Series F-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series F Preferred and Series F-1 Preferred (together on an as-converted basis): 15 (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series F Preferred or Series F-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E) of each of Articles II.D, II.F, II.H, this II.I and II.J, authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series F Preferred or Series F-1 Preferred; (c) Increase the authorized number of shares of Series F Preferred or Series F-1 Preferred; (d) Except in accordance with Section 7(b) of Article II.I of these Articles, increase the number of directors authorized in the bylaws above nine (9); (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of Series F Preferred or Series F-1 Preferred under Section 305 of the Internal Revenue Code of 1986. 7. Special Protective Provisions. Subject to Section 8 of this Article II.I, and so long as all of the shares of Series F Preferred or Series F-1 Preferred initially issued to Continental Casualty Company ("CCC") continue to be held by CCC, the following provisions (the "Special Protective Provisions") shall apply. (a) The holders of the Series F Preferred and the Series F-1 Preferred, voting together, shall be entitled to elect one member of the Corporation's Board of Directors reasonably acceptable to the Corporation's Board of Directors, with each share of Series F Preferred and Series F-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 above). The holders of the Series C Preferred, the Series C-1 Preferred and the Common Stock, voting together as a single class, shall be entitled to elect all members of the Board of Directors not elected by holders of the Series A Preferred, the Series A-1 Preferred, the Series E Preferred, the Series E-1 Preferred, the Series F Preferred and the Series F-1 Preferred. (b) On a quarterly basis, the Corporation shall prepare a cash and cash flow projection for the subsequent four quarters (the "Projection") to be delivered to CCC with the financial statements required to be delivered as provided in Section 2.1 of the 1997 Amended and Restated Investors Rights Agreement. If any such Projection indicates that within 90 days the Corporation will not have a cash balance sufficient to meet its cash needs 16 (not including capital expenditures) for 60 days (the "Working Capital Test"), CCC may deliver a notice to the Corporation ("First Notice") stating that the Corporation is failing to meet the Working Capital Test. If CCC delivers a First Notice to the Corporation, the Corporation will then have 30 days from the date the First Notice was delivered to the Corporation (the "First Cure Period") to take any such action necessary for the Corporation to satisfy the Working Capital Test. If at any time after the First Cure Period CCC determines that the Corporation fails to satisfy the Working Capital Test, CCC may deliver a notice to the Corporation ("Second Notice") that the Corporation has failed to satisfy the Working Capital Test. If CCC delivers a Second Notice to the Corporation, CCC shall, on the first day following delivery of the Second Notice, loan to the Corporation $5 million, secured by a first priority (except with respect to collateral subject to a purchase money security interest covering the purchase obligation or equipment subject to financing leases) lien on all of the asssets of the Corporation (the "Loan"). If at any time after CCC makes the Loan CCC determines that the Corporation fails to satisfy the Working Capital Test, CCC may deliver a notice to the Corporation ("Third Notice") that the Corporation has failed to satisfy the Working Capital Test. If CCC delivers a Third Notice to the Corporation, the Corporation will then have 30 days from the date of such Third Notice (the "Third Cure Period") to take any such action necessary for the Corporation to satisfy the Working Capital Test. If the Corporation fails to satisfy the Working Capital Test by the 30th day of the Third Cure Period, CCC shall have the option, on or after the first day following the Third Cure Period, to invest in one share of Series H Preferred Stock (the "Series H Preferred"). Such investment in Series H Preferred must be sufficient to enable the Corporation to maintain cash and cash equivalents equal to 180 days of cash requirements (not including capital expenditures) as of the end of each fiscal quarter for a period of at least 12 months, according to the most recent Projection; provided, however, that if the Corporation reasonably establishes, either prior to the end of the Third Cure Period or prior to CCC's purchase of Series H Preferred, that it will be able to meet the Working Capital Test within an additional 30 days from the end of the Third Cure Period, the Corporation can extend the Third Cure Period for such additional 30-day period. In the event that CCC exercises its option to purchase the Series H Preferred, the size of the Board of Directors shall be increased by the number of directors (the "Additional Directors") necessary to provide that the Additional Directors, together with any other directors that CCC has the right to elect, constitute a majority of the directors, and CCC shall have the right to nominate and elect, voting as a separate voting group, a majority of the Corporation's Board of Directors. Commencing at the end of the 12-month period following the date of issuance of the Series H Preferred, the Corporation, upon demonstration that it has satisfied the Working Capital Test for a period of 180 days (without giving effect to the capital provided by the Series H Preferred) shall have the right to redeem the Series H Preferred for an amount equal to the original purchase price for the Series H Preferred plus accrued and unpaid dividends thereon through the date of Series H Preference (as defined below). If the Corporation redeems the Series H Preferred, CCC shall automatically relinquish its right under this paragraph to nominate and elect a majority of the Corporation's Board of Directors. 17 (c) These Special Protective Provisions shall terminate upon (i) the consummation of any Transfer (as defined in Section 8 of this Article II.I), (ii) the consummation of a firm commitment underwritten public offering of the Company's common stock resulting in aggregate net proceeds to the Company of not less than $20,000,000, or (iii) the termination of that certain Marketing and Licensing Agreement between the Corporation and CCC (the "Marketing Agreement") (A) as scheduled by its terms, (B) by mutual agreement of the parties, or (C) by the Corporation for material breach by TSO (as defined in the Marketing Agreement), which breach is acknowledged by CCC or determined following application of the dispute resolution mechanisms provided for in Article 24 of the Marketing Agreement. 8. Restrictions on Transfer. The shares of Series F Preferred Stock or Series F-1 Preferred Stock, any beneficial or record interest therein, or the right to vote the same, may not be transferred, sold, assigned or conveyed to any person, other than a corporation at least 80% owned, directly or indirectly, by CNA Financial Corporation (collectively, a "Transfer") except in compliance with the provisions of this Section 8. (a) If a holder of Series F or Series F-1 Preferred Stock desires to make a Transfer of any or all of his shares to any person or to any entity such holder shall submit to the Corporation a written notice (the "Offer Notice") informing the Corporation the holder's intent to sell. The Offer Notice shall specify the number of shares of Series F or Series F-1 Preferred Stock to be sold. (b) Upon receipt of an Offer Notice, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, to create and reserve for issuance a new series of Preferred Stock equal in number to the number of shares of Series F or Series F-1 Preferred to be transferred, with relative rights, preferences and limitations identical to those then applicable to the Series F or F-1 Preferred, as the case may be, except that the rights and preferences of the new series of Preferred Stock shall not include the Special Protective Provisions set forth in Section 7 of this Article II.I, or the restrictions on transfer set forth in this Section 8 of Article II.I. (c) Upon consummation of a Transfer, the shares of Series F or Series F-1 Preferred to be automatically transferred shall be converted into the new series of Preferred Stock designated pursuant to paragraph (b) of this Section 8. J. Series G and G-1 Preferred Stock. This Article II.J. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series G Preferred Stock ("Series G Preferred") and the number of shares constituting such series shall be 4,129,665 and the shares of the second of such series shall be designated Series G-1 Preferred Stock ("Series G-1 Preferred") and the number of shares constituting such series shall be 412,966.5. 18 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.365 on each share of Series G Preferred and $3.65 on each share of Series G-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series G Preferred and Series G-1 Preferred shall not be cumulative. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D., Section 2 of Article II.F., Section 2 of Article II.H., and Section 2 of Article II.I. hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series G Preferred and Series G-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred and Series C-1 Preferred and on a parity with the Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred an amount per share of Series G Preferred (the "Series G Preference") equal to $3.65 plus all declared but unpaid dividends on the Series G Preferred, and an amount per share of Series G-1 Preferred (the "Series G-1 Preference") equal to $36.50 per share plus all declared but unpaid dividends on the Series G-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred and Series G-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred and the Series G-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, Series C Preferred and Series C-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 19 Preference, Series F Preference, Series F-1 Preference, Series G Preference and the Series G-1 Preference described in subsection 2(a) above), the Series C Preference and the Series C-1 Preference, as set forth in subsection 2(a) of Article II.F. hereof. (c) After the distribution described in subsections 2(a) and 2(b) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series A Preferred and Series A-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 Preference, Series F Preference, Series F-1 Preference, Series G Preference, the Series G-1 Preference, the Series C Preference and Series C-1 Preference described in subsections 2(a) and 2(b) above), the Series A Preference and the Series A-1 Preference, as set forth in subsection 2(a) of Article II.D. (d) After the distributions described in subsection 2(a), subsection 2(b) and subsection 2(c) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A- 1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred held by such holders. (e) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (f) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 20 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D., Section 3 of Article II.F., Section 3 of Article II.H. or Section 3 of Article II.I. hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred and Series G-1 Preferred (together on an as-converted basis), provided such request is received after December 31, 2001, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred and Series G-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be an amount per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series C Preference for Series C Preferred, the Series C-1 Preference for Series C-1 Preferred, the Series E Preference for the Series E Preferred, the Series E-1 Preference for the Series E-1 Preferred, the Series F Preference for the Series F Preferred, the Series F-1 Preference for the Series F-1 Preferred, the Series G Preference for the Series G Preferred and the Series G-1 Preference for the Series G-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred and Series G-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred and Series G-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, the Series G Preferred and Series G-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred and Series C-1 Preferred. (ii) In the event of any redemption of only a part of the then outstanding Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, Series G Preferred and Series G-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption 21 pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (iii) After the redemptions described in subsection (b)(i) above have been made, in the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series C Preferred and Series C-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred and Series A-1 Preferred. (iv) In the event of any redemption of only a part of the then outstanding Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (v) After the redemptions described in subsections (b)(i) and (b)(iii) above have been made, the Corporation shall effect such redemption pro rata among the holders of Series A Preferred and Series A-1 Preferred according to the full amount of cash each holder would receive if all such shares were being redeemed. (vi) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(vii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. 22 (vii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred or Series G-1 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D, Section 4 of Article II.F, Section 4 of Article II.H or Section 4 of Article II.I hereof: (a) Except as otherwise required by law, the holders of Series G Preferred and Series G-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series G Preferred and Series G-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series G Preferred and Series G-1 Preferred shall vote together with the Common Stock, the Series A Preferred, the Series A-1 Preferred, the Series C Preferred, the Series C-1 Preferred, the Series E Preferred, the Series E-1 Preferred, the Series F Preferred and the Series F-1 Preferred as a single class. (b) The holders of the Series G Preferred and the Series G-1 Preferred, voting together, shall be entitled to elect one member of the Corporation's Board of Directors reasonably acceptable to the Corporation's Board of Directors, with each share of Series G Preferred and Series G-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). The holders of the Series C Preferred, the Series C-1 Preferred, and the Common Stock, voting together as a single class, shall be entitled to elect all members of the Board of Directors not elected by holders of the Series A Preferred, the Series A-1 Preferred, the Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, the Series G Preferred and the Series G-1 Preferred. (c) Except as provided in Section 6, the Series G Preferred and the Series G-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 23 5. Conversion Rights. The holders of the Series G Preferred and Series G-1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series G Preferred and Series G-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series G Preferred is $3.65 per share and the Original Issue Price for the Series G-1 Preferred is $36.50 per share. The initial Conversion Price for the Series G Preferred and the Series G-1 Preferred shall be $3.65 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) Each share of Series G Preferred and Series G-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.79 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to 24 have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series G Preferred for Dilutive Issues; Special Conversion of Series G Preferred: (i) Special Definitions. For purposes of this Section 5(c), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series G Issue Date" shall mean the date on which the first share of Series G Preferred Stock is first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series G Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, or (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series F Issue Date (as defined in Article II.I hereof) (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 391,174 plus (x) the number of shares of Common Stock repurchased at cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series F Issue Date, and (y) the number of shares of Common Stock subject to 25 outstanding Options on the Series F Issue Date, that subsequently terminate unexercised. (E) "Pro Rata Share" with respect to each holder of Series G Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series G Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series G Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series G Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. (H) "Nonparticipating Investor" shall mean any holder of Series G Preferred that is not a Participating Investor and whose Pro Rata Share is not purchased by a Substitute Investor. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series G Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series G Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. Each holder of Series G Preferred that is not an Accredited Investor may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that another holder of Series G Preferred that is an Accredited Investor (the "Substitute Investor") will purchase such holder's Pro Rata Share for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase (or have purchased by the Substitute Investor) its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. 26 (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by (or by a Substitute Investor on behalf of) each Nonparticipating Investor, that number of outstanding shares of Series G Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series G Preferred) into a number of fully-paid and nonassessable shares of Series G-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series G Preferred so converted. Such Series G-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series G-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series G Preferred into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series G Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series G Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series G-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series G Preferred. (D) No adjustment in the Conversion Price of the Series G-1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series G-1 Preferred are issued, effective on the Closing Date, any shares of Series G-1 Preferred that remain unissued after such issuance shall be canceled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series G-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series G-1 Preferred so cancelled and designated Series G-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series G-1 Preferred, except that the Conversion Price for the Series G-2 Preferred shall initially be the Conversion Price then in effect for the Series G Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series G Preferred upon a Dilutive Issuance will be into shares of Series G-2 Preferred rather than Series G-1 Preferred. The Corporation shall take the same actions with respect to the Series G-2 27 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series G Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series G Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion 28 or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series G Issue Date without consideration or for consideration per share less than the Conversion Price for the Series G Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series G Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. 29 (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series G Preferred and the Series G-1 Preferred shall be subject to adjustment from time to time as follows: 30 (i) If the number of shares of Common Stock outstanding at any time after the Series G Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series G Preferred and the Series G-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series G Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series G Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series G Preferred and Series G-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the 31 Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series G Preferred and Series G-1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take 32 such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series G Preferred or Series G-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. So long as shares of Series G Preferred or Series G-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series G Preferred and Series G-1 Preferred (together on an as-converted basis): (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series G Preferred or Series G-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E) of each of Articles II.D, II.F, II.H, II.I and this II.J authorize or result in the issuance of shares of any class of stock (other than Series H Preferred Stock) having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series G Preferred or Series G-1 Preferred; (c) Increase the authorized number of shares of Series G Preferred or Series G-1 Preferred; (d) Increase the number of directors authorized in the bylaws above ten (10), except as provided in Section 4 of Article II.K hereof; (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or 33 (g) Take any action that would result in the taxation of the holders of Series G Preferred or Series G-1 Preferred under Section 305 of the Internal Revenue Code of 1986. K. Series H Preferred Stock. This Article II.K sets forth the designation, preferences, limitations and relative rights of one series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The share of such series shall be designated Series H Preferred Stock ("Series H Preferred") and the number of shares constituting such series shall be one (1). 1. Dividends. The Series H Preferred shall accrue dividends at an annual rate equal to the original purchase price of the Series H Preferred multiplied by the rate of interest per annum (as of the issue date of the Series H Preferred) for deposits in U.S. dollars in the approximate amount of the purchase price for a period equal to the date of purchase through the date of redemption which appears on the display designated on the Telerate System for London Interbank offered rates. Accrual of dividends on the Series H Preferred and shall be cumulative, and such dividends shall be paid only upon the redemption of the Series H Preferred or the liquidation, dissolution or winding up of the Corporation. Except as provided in this paragraph, so long as the share of Series H Preferred is outstanding, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock or any share Preferred Stock. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D., Section 2 of Article II.F., Section 2 of Article II.H., Section 2 of Article II.I. or Section 2 of Article II.J. hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series H Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred and Series G-1 Preferred an amount per share of Series H Preferred (the "Series H Preference") equal to the purchase price paid to the Corporation for such share plus accrued and unpaid dividends. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come 34 into existence, the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, and Series G-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series H Preferred and Common Stock by reason of their ownership thereof (other than the Series H Preference described in subsection 2(a) above), the Series E Preference, Series E-1 Preference, Series F Preference, Series F-1 Preference, Series G Preference, and Series G-1 Preference. (c) After the distribution described in subsections 2(a) and 2(b) above have been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, Series C Preferred and Series C-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 Preference, Series F Preference, Series F-1 Preference, Series G Preference, Series G-1 Preference and Series H Preference described in subsections 2(a) and 2(b) above), the Series C Preference and the Series C-1 Preference. (d) After the distribution described in subsections 2(a), 2(b) and 2(c) above have been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series A Preferred and Series A-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred Series H Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 Preference, Series F Preference, Series F-1 Preference, Series G Preference, the Series G-1 Preference, the Series H Preference, the Series C Preference and Series C-1 Preference described in subsections 2(a), 2(b) and 2(c) above), the Series A Preference and the Series A-1 Preference. (e) After the distributions described in subsection 2(a), subsection 2(b), subsection 2(c), and 2(d) above have been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred held by such holders. 35 (f) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (g) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D., Section 3 of Article II.F., Section 3 of Article II.H, Section 3 of Article II.I or Section 3 of Article II.J. hereof: (a) Mandatory Redemption. Commencing at the end of the 12-month period following the date of issuance of the Series H, the Corporation, upon demonstration that it has satisfied the Working Capital Test (as defined in Section 8(b) of Article II.I hereof) for a period of 180 days (without giving effect to the capital provided by the Series H Preferred) shall have the right to redeem the Series H Preferred for an amount equal to the Series H Preference, and the Additional Directors (as defined below) will not have the right to participate in, other than to permit a quorum to be present, or otherwise inhibit the Corporation's decision to effect such redemption. If the Corporation redeems the Series H Preferred, the right of the holder of the Series H Preferred to elect the Additional Directors (as defined below) shall automatically terminate. (b) (i) At least 7 but no more than 30 days prior to the date fixed for any redemption of Series H Preferred (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to the holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series H Preferred to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the Redemption Date, the applicable redemption price, the place at which payment may be obtained and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(ii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall 36 be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. (ii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such share as holders of Series H Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such share, and such share shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. (c) Any share redeemed pursuant to this Section 3 shall not be reissued as Series H and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Additional Directors. Notwithstanding any other provision of these Articles or the Corporation's Bylaws, upon the issuance of the Series H Preferred, the size of the Corporation's Board of Directors shall automatically be increased by the number of directors (the "Additional Directors") necessary to provide that the Additional Directors, together with any other directors that Continental Casualty Company, a stock insurance company organized and licensed pursuant to the laws of Illinois ("CCC") has the right to elect, constitute a majority of the directors. Upon the redemption of the Series H Preferred pursuant to Section 3 of this Article II.K, the size of the Corporation's Board of Directors shall automatically be reduced in size by the number of Additional Directors, and the terms of the Additional Directors shall immediately expire. 5. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D, Section 4 of Article II.F, Section 4 of Article II.H or Section 4 of Article II.I or Section 4 of Article II.J hereof: (a) Except as otherwise required by law, the holder of Series H Preferred shall be entitled to notice of shareholder meetings. (b) Upon the issuance of the Series H Preferred, the holder of the Series H Preferred shall be entitled to elect, voting as a single class, the Additional Directors. The holders of the Series C Preferred, the Series C-1 Preferred, and the Common Stock, voting together as a single class, shall be entitled to elect all other members of the Board of Directors not elected by holders of the Series A Preferred, the Series A-1 Preferred, the Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, the Series G Preferred, the Series G-1 Preferred and the Series H Preferred. An Additional Director shall be subject to removal upon shareholders vote only if the Series H Preferred votes in favor of removal. The foregoing limitation on removal of the Additional Directors does not apply to an expiration of the terms of the Additional Directors under Section 4 above. 37 (c) Except as provided in subparagraph (b) above or otherwise required by law, the holder of the Series H Preferred shall not be entitled to vote upon any other matter submitted to shareholders for a vote. (d) Except as provided in Section 6, the Series H Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 5. Conversion Rights. The Series H Preferred is not convertible into Common Stock. 6. Protective Provisions. So long the share of Series H Preferred is outstanding, the Corporation shall not without first obtaining the written consent of the holder of the then outstanding share of Series H Preferred: (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series H Preferred; (b) Authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series H Preferred; (c) Increase the authorized number of shares of Series H; (d) Increase the number of directors authorized in the bylaws; (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of Series H Preferred under Section 305 of the Internal Revenue Code of 1986. 7. Restrictions on Transfer. The shares of Series H Preferred Stock any beneficial or record interest therein, or the right to vote the same, may not be transferred, sold, assigned or conveyed except to a corporation at least 80% owned, directly or indirectly, by CNA Financial Corporation." 38 Dated: November 10, 1997. MEDICALOGIC, INC. By: MARK LEAVITT ----------------------------------------- Printed Name: Mark Leavitt, M.D. Title: President 39 FOR OFFICE USE ONLY Submit the original Corporation Division - Business Registry and one true copy Public Service Building $10.00 255 Capitol St., NE Ste. 151 Salem, OR 97310-1327 REGISTRY NUMBER: (503) 986-2200 Facsimile (503) 378-4381 209240-15 ARTICLES OF AMENDMENT Business Corporation 1. Name of the corporation prior to amendment: MedicaLogic, Inc. 2. State the article number(s) and set forth the article(s) as it is amended to read, or attach a separate sheet. Attached 3. The amendment(s) was adopted on April 17, 1998. (If more than one amendment was adopted, identify the date of adoption of each amendment.) 4. Check the appropriate statement: [X] Shareholder action was required to adopt the amendment(s). The vote was as follows: Class or series of shares Common Stock No. of shares outstanding 13,348,511 No. of votes entitled to be cast 13,348,651 No. of votes cast for 8,994,079 No. of votes cast against -0- Class or series of shares Series A Preferred Stock No. of shares outstanding 5,750,001 No. of votes entitled to be cast 5,750,001 No. of votes cast for 5,734,558 No. of votes cast against -0- Cash or series of shares Series C Preferred Stock No. of shares outstanding 7,012,637 No. of votes entitled to be cast 7,012,637 No. of votes cast for 4,602,224 No. of votes cast against -0- MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR INCLUDE YOUR VISA OR MASTERCARD NUMBER AND EXPIRATION DATE [ ] AND FAX Class or series of shares Series E Preferred Stock No. of shares outstanding 4,761,907 No. of votes entitled to be cast 4,761,907 No. of votes cast for 4,489,113 No. of votes cast against -0- Class or series of shares Series F Preferred Stock No. of shares outstanding 4,000,000 No. of votes entitled to be cast 4,000,000 No. of votes cast for 4,000,000 No. of votes cast against -0- [ ] Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the board of directors without shareholder action. [ ] The corporation has not issued any shares of stock. Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the incorporators or by the board of directors. DAVID C. MOFFENBEIER David C. Moffenbeier COO - -------------------------------------------------------------------------------- SIGNATURE PRINTED NAME TITLE Person to contact about this filing: Kurt E. Scheuerman 503/294-9187 ------------------------------------------- NAME DAYTIME PHONE MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR INCLUDE YOUR VISA OR MASTERCARD NUMBER AND EXPIRATION DATE [ ] AND FAX. 2 ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. Section 5(c)(i)(D)(4) of Article II.F of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to replace "2,047,684" with "2,747,684." 3. Section 5(c)(i)(D)(4) of Article II.H of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to replace "1,360,684" with "2,060,684." 4. Section 5(c)(i)(D)(4) of Article II.I of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to replace "391,174" with "1,091,174." 5. Section 5(c)(i)(D)(4) of Article II.J of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to replace "391,174" with "1,091,174." 6. The first paragraph of Article II.J of the 1994 Restated Articles of Incorporation of the corporation, as amended, is amended to read as follows: "J. Series G and G-1 Preferred Stock. This Article II.J sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C above. The shares of the first of such series shall be designated Series G Preferred Stock ("Series G Preferred") and the number of shares constituting such series shall be 5,000,000 and the shares of the second of such series shall be designated Series G-1 Preferred Stock ("Series G-1 Preferred") and the number of shares constituting such series shall be 500,000." 7. The 1994 Restated Articles of Incorporation of the corporation, as amended, are amended to add new Articles II.L to the end of Article II to read in their entirety as follows: "L. Series I and I-1 Preferred Stock. This Article II.L sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C above. The shares of the first of such series shall be designated Series I Preferred Stock ("Series I Preferred") and the number of shares constituting such series shall be 5,000,000 and the shares of the second of such series shall be designated Series I-1 Preferred Stock ("Series I- 1 Preferred") and the number of shares constituting such series shall be 500,000. No shares of Series I Preferred or Series I-1 Preferred shall be issued if any shares of Series G Preferred or Series G-1 Preferred are outstanding. 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.380 on each share of Series I Preferred and $3.80 on each share of Series I-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series I Preferred and Series I-1 Preferred shall not be cumulative. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D, Section 2 of Article II.F, Section 2 of Article II.H, and Section 2 of Article II.I hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series I Preferred and Series I-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred and Series C-1 Preferred and on a parity with the Series E Preferred, Series E-1 Preferred, Series F Preferred and Series F-1 Preferred an amount per share of Series I Preferred (the "Series I Preference") equal to $3.80 plus all declared but unpaid dividends on the Series I Preferred, and an amount per share of Series I-1 Preferred (the "Series I-1 Preference") equal to $38.00 per share plus all declared but unpaid dividends on the Series I-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred and Series I-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series E Preferred, 2 Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred and the Series I-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, Series C Preferred and Series C-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred, Series I-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 Preference, Series F Preference, Series F-1 Preference, Series I Preference and the Series I-1 Preference described in subsection 2(a) above), the Series C Preference and the Series C-1 Preference, as set forth in subsection 2(a) of Article II.F hereof. (c) After the distribution described in subsections 2(a) and 2(b) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series A Preferred and Series A-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred, Series I-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 Preference, Series F Preference, Series F-1 Preference, Series I Preference, the Series I-1 Preference, the Series C Preference and Series C-1 Preference described in subsections 2(a) and 2(b) above), the Series A Preference and the Series A-1 Preference, as set forth in subsection 2(a) of Article II.D. (d) After the distributions described in subsection 2(a), subsection 2(b) and subsection 2(c) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred, Series I-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred, Series I-1 Preferred held by such holders. (e) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's 3 shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (f) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D, Section 3 of Article II.F, Section 3 of Article II.H or Section 3 of Article II.I hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred and Series I-1 Preferred (together on an as-converted basis), provided such request is received after December 31, 2001, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred and Series I-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be an amount per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series C Preference for Series C Preferred, the Series C-1 Preference for Series C-1 Preferred, the Series E Preference for the Series E Preferred, the Series E-1 Preference for the Series E-1 Preferred, the Series F Preference for the Series F Preferred, the Series F-1 Preference for the Series F-1 Preferred, the Series I Preference for the Series I Preferred and the Series I-1 Preference for the Series I-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred and Series I-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). 4 (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred and Series I-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, the Series I Preferred and Series I-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred and Series C-1 Preferred. (ii) In the event of any redemption of only a part of the then outstanding Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, Series I Preferred and Series I-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (iii) After the redemptions described in subsection (b)(i) above have been made, in the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series C Preferred and Series C-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred and Series A-1 Preferred. (iv) In the event of any redemption of only a part of the then outstanding Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (v) After the redemptions described in subsections (b)(i) and (b)(iii) above have been made, the Corporation shall effect such redemption pro rata among the holders of Series A Preferred and Series A-1 Preferred according to the full amount of cash each holder would receive if all such shares were being redeemed. (vi) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address 5 appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(vii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (vii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series B Preferred, Series B-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series I Preferred or Series I-1 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D, Section 4 of Article II.F, Section 4 of Article II.H or Section 4 of Article II.I hereof: (a) Except as otherwise required by law, the holders of Series I Preferred and Series I-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series I Preferred and Series I-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). Except as otherwise required by law or as otherwise provided herein, the holders of 6 shares of Series I Preferred and Series I-1 Preferred shall vote together with the Common Stock, the Series A Preferred, the Series A-1 Preferred, the Series C Preferred, the Series C-1 Preferred, the Series E Preferred, the Series E-1 Preferred, the Series F Preferred and the Series F-1 Preferred as a single class. (b) The holders of the Series I Preferred and the Series I-1 Preferred, voting together, shall be entitled to elect one member of the Corporation's Board of Directors reasonably acceptable to the Corporation's Board of Directors, with each share of Series I Preferred and Series I-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). The holders of the Series C Preferred, the Series C-1 Preferred, and the Common Stock, voting together as a single class, shall be entitled to elect all members of the Board of Directors not elected by holders of the Series A Preferred, the Series A-1 Preferred, the Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, the Series I Preferred and the Series I-1 Preferred. (c) Except as provided in Section 6, the Series I Preferred and the Series I-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 5. Conversion Rights. The holders of the Series I Preferred and Series I-1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series I Preferred and Series I-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. The Original Issue Price for the Series I Preferred is $3.80 per share and the Original Issue Price for the Series I-1 Preferred is $38.00 per share. The initial Conversion Price for the Series I Preferred and the Series I-1 Preferred shall be $3.80 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) Each share of Series I Preferred and Series I-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately upon the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment 7 underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.79 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series I Preferred for Dilutive Issues; Special Conversion of Series I Preferred: (i) Special Definitions. For purposes of this Section 5(c), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series I Issue Date" shall mean the date on which the first share of Series I Preferred Stock is first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. 8 (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series I Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, or (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series F Issue Date (as defined in Article II.I hereof) (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 1,091,174 plus (x) the number of shares of Common Stock repurchased at cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series F Issue Date, and (y) the number of shares of Common Stock subject to outstanding Options on the Series F Issue Date, that subsequently terminate unexercised. (E) "Pro Rata Share" with respect to each holder of Series I Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series I Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series I Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series I Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. 9 (H) "Nonparticipating Investor" shall mean any holder of Series I Preferred that is not a Participating Investor and whose Pro Rata Share is not purchased by a Substitute Investor. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series I Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series I Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. Each holder of Series I Preferred that is not an Accredited Investor may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that another holder of Series I Preferred that is an Accredited Investor (the "Substitute Investor") will purchase such holder's Pro Rata Share for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase (or have purchased by the Substitute Investor) its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by (or by a Substitute Investor on behalf of) each Nonparticipating Investor, that number of outstanding shares of Series I Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series I Preferred) into a number of fully-paid and nonassessable shares of Series I-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series I Preferred so converted. Such Series I-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series I-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series I Preferred into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. 10 (C) Shares of Series I Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series I Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series I-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series I Preferred. (D) No adjustment in the Conversion Price of the Series I-1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series I-1 Preferred are issued, effective on the Closing Date, any shares of Series I-1 Preferred that remain unissued after such issuance shall be canceled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series I-1 Preferred, (2) to create and reserve for issuance upon any subsequent Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series I-1 Preferred so cancelled and designated Series I-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series I-1 Preferred, except that the Conversion Price for the Series I-2 Preferred shall initially be the Conversion Price then in effect for the Series I Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series I Preferred upon a Dilutive Issuance will be into shares of Series I-2 Preferred rather than Series I-1 Preferred. The Corporation shall take the same actions with respect to the Series I-2 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series I Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock 11 issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series I Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and 12 the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series I Issue Date without consideration or for consideration per share less than the Conversion Price for the Series I Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series I Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. 13 (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property. Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. 14 (d) Adjustment of Conversion Price. The Conversion Price of the Series I Preferred and the Series I-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series I Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series I Preferred and the Series I-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series I Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In case, at any time after the Series I Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series I Preferred and Series I-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and 15 together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series I Preferred and Series I- 1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation 16 shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series I Preferred or Series I-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. So long as shares of Series I Preferred or Series I-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series I Preferred and Series I-1 Preferred (together on an as-converted basis): (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series I Preferred or Series I-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E) of each of Articles II.D, II.F, II.H, II.I and this II.L authorize or result in the issuance of shares of any class of stock (other than Series H Preferred Stock) having any preference or priority as to dividends or assets superior to or on a parity with any preference or priority of the Series I Preferred or Series I-1 Preferred; 17 (c) Increase the authorized number of shares of Series I Preferred or Series I-1 Preferred; (d) Increase the number of directors authorized in the bylaws above ten (10), except as provided in Section 4 of Article II.K hereof; (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of Series I Preferred or Series I-1 Preferred under Section 305 of the Internal Revenue Code of 1986." Dated: March 31, 1998. MEDICALOGIC, INC. By: MARK LEAVITT ----------------------------------------- Printed Name: Mark Leavitt Title: President 18 FOR OFFICE USE ONLY Submit the original Corporation Division - Business Registry and one true copy Public Service Building $10.00 255 Capitol St., NE Ste. 151 Salem, OR 97310-1327 REGISTRY NUMBER: (503) 986-2200 Facsimile (503) 378-4381 209240-15 ARTICLES OF AMENDMENT Business Corporation 1. Name of the corporation prior to amendment: MedicaLogic, Inc. 2. State the article number(s) and set forth the article(s) as it is amended to read, or attach a separate sheet. Attached 3. The amendment(s) was adopted on June 2, 1998. (If more than one amendment was adopted, identify the date of adoption of each amendment.) 4. Check the appropriate statement: [X] Shareholder action was required to adopt the amendment(s). The vote was as follows: Class or series of shares Common Stock No. of shares outstanding 13,348,551 No. of votes entitled to be cast 13,348,551 No. of votes cast for 7,621,556 No. of votes cast against -0- Class or series of shares Series A Preferred Stock No. of shares outstanding 6,750,001 No. of votes entitled to be cast 6,750,001 No. of votes cast for 5,290,001 No. of votes cast against -0- Class or series of shares Series C Preferred Stock No. of shares outstanding 7,012,637 No. of votes entitled to be cast 7,012,637 No. of votes cast for 4,477,081 No. of votes cast against -0- MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR INCLUDE YOUR VISA OR MASTERCARD NUMBER AND EXPIRATION DATE [ ] AND FAX. Class or series of shares Series E Preferred Stock No. of shares outstanding 4,761,907 No. of votes entitled to be cast 4,761,907 No. of votes cast for 2,901,811 No. of votes cast against -0- Class or series of shares Series F Preferred Stock No. of shares outstanding 4,000,000 No. of votes entitled to be cast 4,000,000 No. of votes cast for 4,000,000 No. of votes cast against -0- [ ] Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the board of directors without shareholder action. [ ] The corporation has not issued any shares of stock. Shareholder action was not required to adopt the amendment(s). The amendment(s) was adopted by the incorporators or by the board of directors. DAVID C. MOFFENBEIER David C. Moffenbeier COO - -------------------------------------------------------------------------------- SIGNATURE PRINTED NAME TITLE Person to contact about this filing: Kurt E. Scheuerman 503/294-9187 - -------------------------------------------------------------------------------- NAME DAYTIME PHONE MAKE CHECKS PAYABLE TO THE CORPORATION DIVISION. SUBMIT THE COMPLETED FORM AND FEE TO THE ABOVE ADDRESS OR INCLUDE YOUR VISA OR MASTERCARD NUMBER AND EXPIRATION DATE [ ] AND FAX. 2 ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. Section 5(c)(i)(D)(4) of each of Articles II.F, II.H and II.I of the 1994 Restated Articles of Incorporation of the Corporation (the "Restated Articles") is amended to delete the word "or" from the end of such clause. 3. Section 5(c)(i)(D)(5) of each of Articles II.F, II.H and II.I of the Restated Articles is amended to replace "." with ", or" at the end of such clause. 4. Section 5(c)(i)(D) of each of Articles II.F, II.H and II.I of the Restated Articles is amended to add a new clause (6) reading as follows: "(6) up to 550,000 shares of Common Stock issued to Enterprise Partners, provided such stock is issued by the Corporation for consideration not less than $2.00 per share." 5. Section 5(c)(i)(D)(3) of each of Articles II.J and II.L of the Restated Articles is amended to delete the word "or" from the end of such clause. 6. Section 5(c)(i)(D)(4) of each of Articles II.J and II.L of the Restated Articles is amended to replace "." with ", or" at the end of such clause. 7. Section 5(c)(i)(D) of each of Articles II.J and II.L of the Restated Articles is amended to add a new clause (5) reading as follows: "(6) up to 550,000 shares of Common Stock issued to Enterprise Partners, provided such stock is issued by the Corporation for consideration not less than $2.00 per share." Dated: June 2, 1998 MEDICALOGIC, INC. By: DAVID C. MOFFENBEIER ------------------------------------ Printed Name: David C. Moffenbeier Title: COO ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. Article II.D.5(c)(i)(D) of the 1994 Restated Articles of Incorporation of the corporation, as amended (the "Articles"), is amended to add a new subparagraph which shall read as follows: (5) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market. 3. Article II.F.5(c)(i)(D) of the Articles is amended to add a new subparagraph which shall read as follows: (6) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market. 4. Article II.H.5(c)(i)(D) of the Articles is amended to add a new subparagraph which shall read as follows: (6) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market. 5. Article II.I.5(c)(i)(D) of the Articles is amended to add a new subparagraph which shall read as follows: (6) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market. 6. Article II.J.5(c)(i)(D) of the Articles is amended to add a new subparagraph which shall read as follows: (5) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market. 7. The amendments to the Articles were adopted by the shareholders of the corporation on January 28, 1999. 8. The amendments to the Articles were approved by the Board of Directors of the corporation on December 31, 1998. 9. The amendments to the Articles were approved by holders of the capital stock of the corporation on January 28, 1998 as follows: (i) Class or series of shares: Common Stock No. of shares outstanding: 14,255,112 No. of votes entitled to be cast: 14,255,112 No. of votes cast for: 8,625,079 No. of votes cast against: 0 (ii) Class or series of shares: Series A Preferred Stock No. of shares outstanding: 5,750,001 No. of votes entitled to be cast: 5,750,001 No. of votes cast for: 5,290,001 No. of votes cast against: 0 (iii) Class or series of shares: Series C Preferred Stock No. of shares outstanding: 7,012,637 No. of votes entitled to be cast: 7,012,637 No. of votes cast for: 3,588,191 No. of votes cast against: 0 (ii) Class or series of shares: Series E Preferred Stock No. of shares outstanding: 4,761,907 No. of votes entitled to be cast: 4,761,907 No. of votes cast for: 2,868,621 No. of votes cast against: 0 (ii) Class or series of shares: Series F Preferred Stock No. of shares outstanding: 4,000,000 No. of votes entitled to be cast: 4,000,000 No. of votes cast for: 4,000,000 No. of votes cast against: 0 2 Dated: January 31, 1999 MEDICALOGIC, INC. By: DAVID MOFFENBEIER -------------------------------------- David Moffenbeier Chief Operating Officer and Secretary 3 ARTICLES OF CORRECTION OF THE 1994 RESTATED ARTICLES OF INCORPORATION OF MEDICALOGIC, INC. (1) The name of the corporation is MedicaLogic, Inc. (2) The document to be corrected is the Articles of Amendment of MedicaLogic, Inc. filed in the office of the Secretary of State of the State of Oregon on February 12, 1999; Registry Number 209240-15 (the "Articles of Amendment"). (3) Paragraphs 2, 3, 4, 5 and 6 of the Articles of Amendment are deleted and replaced with the following, and paragraphs 7, 8 and 9 of the Articles of Amendment are renumbered accordingly. 2. Section 5(c)(i)(D)(5) of each of Articles II.F, II.H and II.I of the 1994 Restated Articles of Incorporation of the Corporation (the "Restated Articles") is amended to delete the word "or" from the end of such clause. 3. Section 5(c)(i)(D)(6) of each Article II.F, II.H and II.I of the Restated Articles is amended to replace "." with ", or" at the end of such clause. 4. Section 5(c)(i)(D) of each Articles II.F, II.H and II.I of the Restated Articles is amended to add a new clause (7) reading as follows: "(7) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market." 5. Section 5(c)(i)(D)(4) of each of Articles II.J and II.L of the Restated Articles is amended to delete the word "or" from the end of such clause. 6. Section 5(c)(i)(D)(5) of each of Articles II.J and II.L of the Restated Articles is amended to replace "." with ", or" at the end of such clause. 7. Section 5(c)(i)(D) of each of Articles II.J and II.L of the Restated Articles is amended to add a new clause (6) reading as follows: "(6) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market." (4) The effective date of the correction shall be February 12, 1999. Dated: April 29, 1999 MEDICALOGIC, INC. By: DAVID MOFFENBEIER ------------------------------------- David Moffenbeier Chief Operating Officer and Secretary 2 ARTICLES OF AMENDMENT TO THE 1994 RESTATED ARTICLES OF INCORPORATION OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. The 1994 Restated Articles of Incorporation of the corporation, as amended, are amended to add a new Article II.M to the end of Article II to read in its entirety as follows: "M. Series J and J-1 Preferred Stock. This Article II.M sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series J Preferred Stock ("Series J Preferred") and the number of shares constituting such series shall be 8,421,050 and the shares of the second of such series shall be designated Series J-1 Preferred Stock ("Series J-1 Preferred") and the number of shares constituting such series shall be 842,105. 1. Dividends. Subject to the rights of series of Preferred Stock which may from time to time come into existence, no dividend other than a dividend payable in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this Corporation shall be paid on any share of Common Stock unless dividends have first been paid in the current fiscal year of the Corporation of $0.475 on each share of Series J Preferred and $4.75 on each share of Series J-1 Preferred (adjusted for any combinations, consolidations, stock distributions or stock dividends with respect to such shares). Such dividends on the Series J Preferred and Series J-1 Preferred shall not be cumulative. 2. Liquidation Preference. Notwithstanding any provision to the contrary in Section 2 of Article II.D., Section 2 of Article II.F., Section 2 of Article II.H., Section 2 of Article II.I, Section 2 of Article II.J, Section 2 of Article II.K, or Section 2 of Article II.L hereof, in the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, distributions to the shareholders of the Corporation shall be made in the following manner: (a) The holders of Series J Preferred and Series J-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, and prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, and Series C-1 Preferred, and on a parity with the holders of the Series E Preferred and Series E-1 Preferred, the Series F Preferred and Series F-1 Preferred, the Series G Preferred and G-1 Preferred, the Series H Preferred, the Series I Preferred and Series I-1 Preferred an amount per share of Series J Preferred (the "Series J Preference") equal to $4.75 plus all declared but unpaid dividends on the Series J Preferred, and an amount per share of Series J-1 Preferred (the "Series J-1 Preference") equal to $47.50 per share plus all declared but unpaid dividends on the Series J-1 Preferred. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred and Series J-1 Preferred shall be insufficient to permit the payment to such holders of their full preferences, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred and the Series J-1 Preferred in proportion to the full preferential amount each such holder is otherwise entitled to receive. (b) After the distribution described in subsection 2(a) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of the Series C Preferred and Series C-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series A Preferred, Series A-1 Preferred, Series E Preferred, Series E- 1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred, Series J-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, Series E-1 Preference, Series F Preference, Series F-1 Preference, Series G Preference, Series G-1 Preference, Series H Preference, Series I Preference, Series I-1 Preference, Series J Preference and the Series J-1 Preference described in subsection 2(a) above, subsection 2(a) of Article II.H, subsection 2(a) of Article II.I, subsection 2(a) of Article II.J, subsection 2(a) of Article II.K, subsection 2(a) of Article II.L hereof), the Series C Preference and the Series C-1 Preference, as set forth in subsection 2(a) of Article II.F. hereof. 2 (c) After the distribution described in subsections 2(a) and 2(b) above has been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series A Preferred and Series A-1 Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred, Series J-1 Preferred and Common Stock by reason of their ownership thereof (other than the Series E Preference, the Series E-1 Preference, Series F Preference, Series F-1 Preference, Series G Preference, Series G-1 Preference, Series H Preference, Series I Preference, Series I-1 Preference, Series J Preference, the Series J-1 Preference, the Series C Preference and Series C-1 Preference described in subsections 2(a) and 2(b) above), the Series A Preference, the Series A-1 Preference, as set forth in subsection 2(a) of Article II.D. hereof. (d) After the distributions described in subsection 2(a), subsection 2(b) and subsection 2(c) above have been made, subject to the rights of series of Preferred Stock which may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred, Series J-1 Preferred, and Common Stock pro rata based on the number of shares of Common Stock held or issuable upon conversion of all such Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred, Series J-1 Preferred held by such holders. (e) A merger, consolidation or sale of all or substantially all of the assets of the Corporation which will result in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving, continuing or purchasing entity, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2; provided, however, that any payments made may be made in cash or in securities or other property received from the acquiring entity or in a combination thereof, on the closing of such transaction. (f) Whenever a distribution of assets provided for in this Section 2 shall be payable in property other than cash, the value of such distribution shall be the fair market value of such property as determined in good faith by the Board of Directors of the Corporation. 3 3. Redemption. Notwithstanding any provision to the contrary in Section 3 of Article II.D., Section 3 of Article II.F., Section 3 of Article II.H., Section 3 of Article II.I., Section 3 of Article II.J., Section 3 of Article II.K. or Section 3 of Article II.L. hereof: (a) Subject to the rights of Preferred Stock which may from time to time come into existence, within sixty (60) days after the date (the "Request Date") of the receipt by the Corporation of the written request of the holders of more than fifty percent (50%) of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred and Series J-1 Preferred (together on an as-converted basis), provided such request is received after December 31, 2001, the Corporation shall redeem one hundred percent (100%) of the number of shares of Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred and Series J-1 Preferred outstanding on the Request Date, or such lesser number of shares as the Board of Directors shall determine is the maximum number of shares for which funds are legally available for redemption. The redemption price for these shares shall be paid in cash and shall be an amount per share equal to the Series A Preference for Series A Preferred, the Series A-1 Preference for Series A-1 Preferred, the Series C Preference for the Series C Preferred, the Series C-1 Preference for the Series C-1 Preferred, the Series E Preference for the Series E Preferred, the Series E-1 Preference for the Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, the Series J Preference for the Series J Preferred and the Series J-1 Preference for the Series J-1 Preferred. If all of the shares of the Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred and Series J-1 Preferred are not redeemed because of a determination of insufficient funds, the Corporation shall redeem additional shares only upon receipt of a new request from the holders as provided in this subsection 3(a). (b) (i) In the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series J Preferred and Series J-1 Preferred because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred and Series J-1 Preferred, prior and in preference to any redemption with respect to the holders of Series A Preferred, Series A-1 Preferred, Series C Preferred and Series C-1 Preferred. 4 (ii) In the event of any redemption described in Section 3(b)(i), the Corporation shall effect such redemption pro rata among the holders of the Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series J Preferred and Series J-1 Preferred in proportion to the full preferential amount of cash each holder would be entitled to receive if all such shares were being redeemed. (iii) After the redemptions described in subsections (b)(i) and (b)(ii) above have been made, in the event of any redemption of only a part of the then outstanding Series A Preferred, Series A-1 Preferred, Series C Preferred, and Series C-1 Preferred, because of a determination of insufficient funds, the Corporation shall effect such redemption with respect to the Series C Preferred and Series C-1 Preferred requested to be redeemed, prior and in preference to any redemption with respect to the holders of Series A Preferred, and Series A-1 Preferred. (iv) In the event of any redemption of only a part of the then outstanding Series C Preferred and Series C-1 Preferred requested to be redeemed because of a determination of insufficient funds, the Corporation shall effect such redemption pro rata according to the full amount of cash each holder would receive if all such shares were being redeemed. (v) After the redemptions described in subsections (b)(i), (b)(ii) and (b)(iii) above have been made, the Corporation shall effect such redemption pro rata among the holders of Series A Preferred and Series A-1 Preferred according to the full amount of cash each holder would receive if all such shares were being redeemed. (vi) At least 30 but no more than 60 days prior to the date fixed for any redemption of Preferred Stock (the "Redemption Date"), written notice shall be mailed by the Corporation, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock to be redeemed, at the address last shown on the records of the Corporation for such holder or given by the holder to the Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of the Corporation is located, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the Redemption Date, the applicable redemption price, the place at which payment may be obtained and the date on which such holder's conversion rights as to such shares terminate and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). Except as provided in subsection 3(b)(vii), on or after the Redemption Date each holder of Preferred Stock to be redeemed shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the applicable redemption price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered 5 certificate shall be canceled. In the event less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (vii) From and after the Redemption Date, unless there shall have been a default in payment of the applicable redemption price, all rights of the holders of such shares as holders of Preferred Stock (except the right to receive the applicable redemption price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. The shares of Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. (c) Any shares redeemed pursuant to this Section 3 shall not be reissued as Series A Preferred, Series A-1 Preferred, Series C Preferred, Series C-1 Preferred, Series E Preferred, Series E-1 Preferred, Series F Preferred, Series F-1 Preferred, Series G Preferred, Series G-1 Preferred, Series H Preferred, Series I Preferred, Series I-1 Preferred, Series J Preferred or Series J-1 Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. 4. Voting Rights. Notwithstanding any provision to the contrary in Section 4 of Article II.D, Section 4 of Article II.F, Section 4 of Article II.H, Section 4 of Article II.I, Section 4 of Article II.J, Section 4 of Article II.K or Section 4 of Article II.L hereof: (a) Except as otherwise required by law, the holders of Series J Preferred and Series J-1 Preferred shall be entitled to notice of shareholder meetings and to vote upon any matter submitted to shareholders for a vote, with each share of Series J Preferred and Series J-1 Preferred having that number of votes equal to the number of shares of Common Stock into which it is convertible (as defined in Section 5 below). Except as otherwise required by law or as otherwise provided herein, the holders of shares of Series J Preferred and Series J-1 Preferred shall vote together with the Common Stock, the Series A Preferred, the Series A-1 Preferred, the Series C Preferred, the Series C-1 Preferred, the Series E Preferred, the Series E-1 Preferred, the Series F Preferred, the Series F-1 Preferred, the Series G Preferred, the Series G-1 Preferred, the Series H Preferred, the Series I Preferred and the Series I-1 Preferred as a single class. (b) A majority of the holders of the Series J Preferred and the Series J-1 Preferred, voting together, shall be entitled to elect one member of the Corporation's Board of Directors reasonably acceptable to the Corporation's Board of Directors. (c) Except as provided in Section 6, the Series J Preferred and the Series J-1 Preferred shall not be entitled under Oregon law to vote separately on a plan of merger. 6 5. Conversion Rights. The holders of the Series J Preferred and Series J-1 Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Subject to subsections 5(c) and 5(d), each share of Series J Preferred and Series J-1 Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Issue Price by the Conversion Price at the time in effect. In the event less than all of the then outstanding shares of Series J Preferred or Series J-1 Preferred are redeemed on a Redemption Date, the holder's right to convert such remaining shares shall continue until the close of business on a Redemption Date on which such shares are actually redeemed. The Original Issue Price for the Series J Preferred is $4.75 per share and the Original Issue Price for the Series J-1 Preferred is $47.50 per share. The initial Conversion Price for the Series J Preferred and the Series J-1 Preferred shall be $4.75 per share; provided, however, that the Conversion Prices shall be subject to adjustment as hereinafter provided. (ii) Each share of Series J Preferred and Series J-1 Preferred shall automatically be converted into shares of Common Stock at the applicable Conversion Price in effect immediately prior to the consummation of the Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933, as amended, the public offering price of which is not less than $5.40 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) and $7,500,000 in the aggregate. (b) Mechanics of Conversion. Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the 7 conversion may, at the option of any holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock issuable upon such conversion of Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustments to Conversion Price of Series J Preferred for Dilutive Issues; Special Conversion of Series J Preferred: (i) Special Definitions. For purposes of this Section 5(c), the following definitions shall apply: (A) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (B) "Series J Issue Date" shall mean the date on which the first share of Series J Preferred Stock is first issued. (C) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than the Common Stock) or other securities convertible into or exchangeable for Common Stock. (D) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 5(c)(iii), deemed to be issued) by the Corporation, other than: (1) any shares of Common Stock issuable upon exercise or conversion of Options or Convertible Securities outstanding on the Series J Issue Date, (2) Common Stock issued pursuant to a transaction described in subsection 5(d) hereof, (3) shares issued pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets, or other reorganization, or (4) shares of Common Stock issuable or issued to directors, employees or other service providers to the Corporation at any time when the total number of shares of Common Stock so issuable or issued after the Series J Issue Date (and not repurchased at cost by the Corporation in connection with the termination of service as a director, employee or other service provider) does not exceed 4,891,174 plus (x) the number of shares of Common Stock repurchased at 8 cost by the Corporation from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to the Series J Issue Date, and (y) the number of shares of Common Stock subject to outstanding Options on the Series J Issue Date, that subsequently terminate unexercised, or (5) Up to 5,454,545 shares of Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market. (E) "Pro Rata Share" with respect to each holder of Series J Preferred shall mean that portion of the total dollar amount of the Dilutive Issuance equal to (i) the amount of the Dilutive Issuance (ii) multiplied by a fraction, the numerator of which is the number of shares of Common Stock into which the Series J Preferred then held by such holder is then convertible, and the denominator of which is the total number of shares of Common Stock then outstanding. (F) "Dilutive Issuance" with respect to the Series J Preferred shall mean an issuance of Additional Shares of Common Stock for a consideration per share less than the Conversion Price of such series of Preferred Stock in effect on the date of and immediately prior to such issue. (G) "Participating Investor" shall mean any holder of Series J Preferred that purchases at least its Pro Rata Share of a Dilutive Issuance. (H) "Nonparticipating Investor" shall mean any holder of Series J Preferred that is not a Participating Investor and whose Pro Rata Share is not purchased by a Substitute Investor. (ii) Shadow Preferred. (A) In the event the Corporation proposes to undertake a Dilutive Issuance, it shall give each holder of Series J Preferred a written notice (the "Issuance Notice") of its intention, describing the type of new securities, the price and number of shares and the general terms upon which the Corporation proposes to issue such new securities, at least thirty (30) days prior to the date of such Dilutive Issuance. Each holder of Series J Preferred that is an accredited investor as defined in Rule 501(a) under the Securities Act of 1933 (an "Accredited Investor") may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that such holder agrees to become a Participating Investor for the price and upon the terms specified in the Issuance Notice. Each holder of Series J Preferred that is not an Accredited Investor may, within twenty (20) days from the date of the Issuance Notice, provide written notice to the Corporation that another 9 holder of Series J Preferred that is an Accredited Investor (the "Substitute Investor") will purchase such holder's Pro Rata Share for the price and upon the terms specified in the Issuance Notice. In the event that such holder fails to give such notice within the twenty (20) day period, or fails to actually purchase (or have purchased by the Substitute Investor) its Pro Rata Share of the Dilutive Issuance (other than as a result of the Corporation refusing to allow such holder to so purchase its Pro Rata Share), such holder shall be deemed to be a Nonparticipating Investor. (B) To the extent of the percentage of the Pro Rata Share not purchased (the "Refused Percentage") by (or by a Substitute Investor on behalf of) each Nonparticipating Investor, that number of outstanding shares of Series J Preferred held by such Nonparticipating Investor equal to the product of (x) the number of shares of such series held by the Nonparticipating Investor, times (y) the Refused Percentage, shall be converted automatically on the date (the "Closing Date") of the applicable Dilutive Issuance (provided that the Corporation gave the Issuance Notice to such holder of Series J Preferred) into a number of fully-paid and nonassessable shares of Series J-1 Preferred (or such other series as to which shares are then authorized pursuant to Section 5(c)(ii)(E)) equal to one-tenth of the number of shares of Series J Preferred so converted. Such Series J-1 Preferred may be issued in tenths of a share. The Nonparticipating Investor shall be treated for all purposes as the record holder of such shares of Series J-1 Preferred on the Closing Date. As provided in Section 5(a)(i), prior to the Closing Date each Nonparticipating Investor shall have the right to convert its shares of Series J Preferred into shares of Common Stock at the conversion rate in effect for such series as of the date of such conversion. (C) Shares of Series J Preferred that are converted as provided in Section 5(c)(ii)(B) shall not be reissued as Series J Preferred and shall be restored to the status of authorized but unissued shares of Preferred Stock. No shares of Series J-1 Preferred shall be issued except as set forth in this Section 5(c)(ii) upon conversion of shares of Series J Preferred. (D) No adjustment in the Conversion Price of the Series J-1 Preferred shall be made in respect of the issuance of Additional Shares of Common Stock, regardless of the issuance price of such shares, except for the issuance of such shares as a stock dividend, stock split, or in connection with such other transactions as are provided in Section 5(d) hereof. (E) In the event that any shares of Series J-1 Preferred are issued, effective on the Closing Date, any shares of Series J-1 Preferred that remain unissued after such issuance shall be cancelled, shall not be available for issuance and shall be restored to the status of authorized but unissued shares of Preferred Stock. In addition, concurrently with such issuance, the Corporation shall take all such action as may be required, including amending these Articles of Incorporation, (1) to evidence the cancellation of such unissued shares of Series J-1 Preferred, (2) to create and reserve for issuance upon any subsequent 10 Dilutive Issuance a new series of Preferred Stock equal in number to the number of shares of Series J-1 Preferred so cancelled and designated Series J-2 Preferred, with relative rights, preferences and limitations identical to those then applicable to the Series J-1 Preferred, except that the Conversion Price for the Series J-2 Preferred shall initially be the Conversion Price then in effect for the Series J Preferred, and (3) to amend the provisions of this Section 5 to provide that any subsequent conversion of Series J Preferred upon a Dilutive Issuance will be into shares of Series J-2 Preferred rather than Series J-1 Preferred. The Corporation shall take the same actions with respect to the Series J-2 Preferred and each series of Preferred Stock subsequently authorized under this Section 5(c)(ii)(E) upon the initial issuance of shares of such series. (iii) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Series J Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time and without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall, unless otherwise excluded under Section 5(c)(i)(D), be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 5(c)(v) hereof) of such Additional Shares of Common Stock would be less than the Conversion Price for the Series J Preferred in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; 11 (C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (1) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (2) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (E) in the case of any Options which expire by their terms not more than 90 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 5(c)(iii)) after the Series J Issue Date without consideration or for consideration per share less than the Conversion Price for the Series J Preferred in effect on the date of and immediately prior to such issue, then and in such event, the Conversion Price for the Series J Preferred shall be reduced, concurrently with such issue, to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of 12 Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue (including all shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and all shares of Common Stock reserved for future issuance by the Board of Directors of the Corporation) plus the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 5(c), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (A) Cash and Property: Such consideration shall: (1) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (2) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors irrespective of any accounting treatment; and (3) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors. (B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c)(iii), relating to Options and Convertible Securities, shall be determined by dividing (1) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exercise of such Convertible Securities, or in the case of Options for Convertible 13 Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (2) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustment of Conversion Price. The Conversion Price of the Series J Preferred and the Series J-1 Preferred shall be subject to adjustment from time to time as follows: (i) If the number of shares of Common Stock outstanding at any time after the Series J Issue Date is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, on the date such payment is made or such change is effective, the Conversion Price for the Series J Preferred and the Series J-1 Preferred shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of shares of such Preferred Stock shall be increased in proportion to such increase of outstanding shares. (ii) If the number of shares of Common Stock outstanding at any time after the Series J Issue Date is decreased by a combination or reverse stock split of the outstanding shares of Common Stock, then, on the effective date of such combination, the Conversion Price for such series shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of shares of such series shall be decreased in proportion to such decrease in outstanding shares. (iii) In the case, at any time after the Series J Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or as a result of a stock dividend or subdivision, split-up, reverse stock split, or combination of shares), the shares of Series J Preferred and Series J-1 Preferred shall, after such reorganization or reclassification, be convertible into the kind and number of shares of stock or other securities or property of the Corporation to which the holder would have been entitled if immediately prior to such reorganization or reclassification such holder had converted its shares of Preferred Stock into Common Stock. The provisions of this Section 5(d)(iii) shall similarly apply to successive reorganizations or reclassifications. (e) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value for such Common Stock as determined by the Board of Directors. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the 14 time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (f) Adjustment Threshold. No adjustment in a Conversion Price need be made if such adjustment would result in a change in a Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in a Conversion Price. All calculations under this Section 5 shall be made to the nearest one hundredth of a cent ($0.0001) or to the nearest one hundredth (1/100) of a share, as the case may be. (g) Other Distributions. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets excluding cash dividends or options or rights not referred to in subsection 5(d)(i), then in each such case for the purpose of this subsection 5(g), the holders of Series J Preferred and Series J-1 Preferred shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. (h) No Impairment. The Corporation will not, through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation from amending its Articles of Incorporation in accordance with the Oregon Business Corporation Act; provided that the Corporation shall, if practicable, provide reasonable notice to the holders of the Preferred Stock of any such amendment. (i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect for each series of Preferred Stock, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Preferred Stock held by such holder. 15 (j) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, the Corporation shall mail to each holder of Preferred Stock at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. (k) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (l) Status of Converted Stock. In the event any shares of Series J Preferred or Series J-1 Preferred shall be converted into Common Stock pursuant to Section 5 hereof, the shares so converted shall not be reissued and shall no longer constitute authorized shares of Preferred Stock. The Articles of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. (m) Notices. Any notice required by the provisions of this Section 5 to be given to the holders of shares of Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. 6. Protective Provisions. So long as shares of Series J Preferred or Series J-1 Preferred are outstanding, the Corporation shall not without first obtaining the approval, by vote or written consent (which consent need not be unanimous and may be obtained without a shareholders' meeting), of the holders of at least a majority of the then outstanding shares of Series J Preferred and Series J-1 Preferred (together on an as-converted basis): (a) Amend or repeal any provision of the Corporation's Articles of Incorporation if such action would adversely affect the relative rights, preferences and privileges of the Series J Preferred or Series J-1 Preferred; (b) Except as provided in Section 5(c)(ii)(E) of each of Articles II.D, II.F, II.H, II.I, II.J, II.K, II.L and this II.M, authorize or result in the issuance of shares of any class of stock having any preference or priority as to dividends, redemption or other 16 distribution of assets superior to or on a parity with any preference or priority of the Series J Preferred or Series J-1 Preferred; (c) Increase the authorized number of shares of Series J Preferred or Series J-1 Preferred; (d) Increase the number of directors authorized in the bylaws above nine (9); (e) Pay or declare any dividend on the Common Stock; (f) Authorize a merger, consolidation, sale of all or substantially all of the assets, recapitalization or reorganization of the Corporation; or (g) Take any action that would result in the taxation of the holders of Series J Preferred or Series J-1 Preferred under Section 305 of the Internal Revenue Code of 1986. 3. The amendment to the Articles was approved by the Board of Directors of the corporation on May 26, 1999. Shareholder approval was not required. Dated: May 28th, 1999. MEDICALOGIC, INC. By: MARK LEAVITT ------------------------------------ Printed Name: Mark Leavitt, M.D. Title: President 17 ARTICLES OF AMENDMENT OF MEDICALOGIC, INC. 1. The name of the corporation is MedicaLogic, Inc. 2. The first paragraph of Article II.M. of the 1994 Restated Articles of Incorporation of the corporation is amended to read in its entirety as follows: "Series J and J-1 Preferred Stock. This Article II.M. sets forth the designation, preferences, limitations and relative rights of two series of Preferred Stock of the Corporation as determined by the Board of Directors of the Corporation pursuant to its authority under ORS 60.134 and Article II.C. above. The shares of the first of such series shall be designated Series J Preferred Stock ("Series J Preferred") and the number of shares constituting such series shall be 10,376,843, and the shares of the second of such series shall be designated Series J-1 Preferred Stock ("Series J-1 Preferred") and the number of shares constituting such series shall be 1,037,684.3." 3. The amendment to Article II.M. was approved by the Board of Directors of the corporation effective July 22, 1999. 4. The amendment to Article II.M. was approved by holders of the capital stock of the corporation on August 2, 1999 as follows: (i) Class or series of shares: Common Stock No. of shares outstanding: 17,542,412 No. of votes entitled to be cast: 17,542,412 No. of votes cast for: 9,137,875 No. of votes cast against: 0 (ii) Class or series of shares: Series A Preferred Stock No. of shares outstanding: 5,750,001 No. of votes entitled to be cast: 5,750,001 No. of votes cast for: 5,116,427 No. of votes cast against: 0 (iii) Class or series of shares: Series C Preferred Stock No. of shares outstanding: 7,012,637 No. of votes entitled to be cast: 7,012,637 No. of votes cast for: 6,651,114 No. of votes cast against: 0 (iv) Class or series of shares: Series E Preferred Stock No. of shares outstanding: 4,761,907 No. of votes entitled to be cast: 4,761,907 No. of votes cast for: 2,983,128 No. of votes cast against: 0 (v) Class or series of shares: Series F Preferred Stock No. of shares outstanding: 4,000,000 No. of votes entitled to be cast: 4,000,000 No. of votes cast for: 4,000,000 No. of votes cast against: 0 (vi) Class or series of shares: Series J Preferred Stock No. of shares outstanding: 7,326,316 No. of votes entitled to be cast: 7,326,316 No. of votes cast for: 7,326,316 No. of votes cast against: 0 Dated: August 2, 1999 MEDICALOGIC, INC. By: GUY E. FIELD ------------------------------------ Guy Field, Vice President, Finance 2 EX-3.2 3 RESTATED BYLAWS Bylaws of MedicaLogic, Inc. ARTICLE I SHAREHOLDERS MEETINGS 1.1 Annual Meeting. The annual meeting of the shareholders shall be held on the second Tuesday in May of each year at 10 a.m., unless a different date or time is fixed by the Board of Directors and stated in the notice of the meeting. 1.2 Special Meetings. Special meetings of the shareholders, for any purposes, unless otherwise prescribed by statute, may be called by the Chief Executive Officer or the Board of Directors. 1.3 Place of Meetings. Meetings of the shareholders shall be held at any place in or out of Oregon designated by the Board of Directors. 1.4 Meeting by Telephone Conference. Shareholders may participate in an annual or special meeting by, or conduct the meeting through, use of any means of communications by which all shareholders participating may simultaneously hear each other during the meeting, except that no meeting for which a written notice is sent to shareholders may be conducted by this means unless the notice states that participation in this manner is permitted and describes how any shareholder desiring to participate in this manner may notify the Corporation. 1.5 Notice of Shareholder Business and Nominations. (a) Annual Meetings of Shareholders. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders only (i) pursuant to the Corporation's notice of meeting or any supplement thereto, (ii) by or at the direction of the Board of Directors or (iii) by any shareholder of the Corporation who (A) was a shareholder of record of the Corporation when the notice provided for in this Section 1.5 is delivered to the Secretary of the Corporation, (B) is entitled to vote at the meeting and (C) complies with the notice procedures set forth in subparagraphs (2) and (3) of this paragraph (a) in this Section 1.5. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (iii) of paragraph (a)(1) of this Section 1.5, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for shareholder action as determined by the Board of Directors. To be timely, a notice shall be delivered to the Secretary at the principal executive offices of the Corporation at least 90 days, and no earlier than 120 days, before the first anniversary of the date of the proxy statement for the preceding year's annual meeting (provided, however, that if the date of the annual meeting is more than 30 days before or more than 70 days after the anniversary date, notice by the shareholder must be delivered no earlier than 120 days before the annual meeting and no later than the later of 90 days before the annual meeting or 10 days following the day on which public announcement of the date of the meeting is first made by the Corporation). The public announcement of an adjournment or postponement of an annual meeting of shareholders shall not commence a new time period (or extend any time period) for the giving of a shareholder's notice as described above. The shareholder's notice shall set forth the information required by paragraph (c) of this Section 1.5. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 1.5 to the contrary, if the number of directors to be elected to the Board of Directors of the Corporation at an annual meeting is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 1.5 shall also be considered timely, but only with respect to nominees for any new positions created by the increase, if it is delivered to the Secretary at the principal executive offices of the Corporation not later than 10 days following the day on which the public announcement is first made by the Corporation. (b) Special Meetings of Shareholders. (1) The only business that may be conducted at a special meeting of shareholders is the business described in the Corporation's notice of meeting. If directors are to be elected at a special meeting, nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders only (i) by or at the direction of the Board of Directors or the Chairman of the Board or (ii) by any shareholder of the Corporation who (A) is a shareholder of record at the time the notice provided for in this Section 1.5(b) is delivered to the Secretary of the Corporation, (B) is entitled to vote at the special meeting and (C) complies with the notice procedures set forth in paragraph (b)(2) of this Section 1.5. If a special meeting of shareholders is called to elect one or more directors to the Board of Directors, any shareholder entitled to vote in the election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation's notice of meeting, if the shareholder's notice containing the information and as otherwise required by paragraph (b)(2) of this Section 1.5 is delivered to the Secretary at the principal 2 executive offices of the Corporation not later than 10 days following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at the meeting. The public announcement of an adjournment or postponement of a special meeting shall not commence a new time period (or extend any time period) for the giving of a shareholder's notice as described above. (2) For nominations to be properly brought before a special meeting by a shareholder pursuant to clause (ii) of paragraph (b)(1) of this Section 1.5, the shareholder's notice must contain the information required by paragraph (c) of this Section 1.5. For any other business to be properly brought before a special meeting by a shareholder, the other business must be a proper matter for shareholder action and the shareholder's demand for the special meeting pursuant to the Oregon Business Corporation Act must contain the information required by paragraph (c) of this Section 1.5. (c) Information Required in Shareholder Notice. A shareholder notice given pursuant to paragraph (a) or (b) of this Section 1.5 shall contain the following information: (1) As to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act and Rule 14a-11 thereunder (and be accompanied by such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (2) as to any other business the shareholder proposes to bring before the special meeting, a brief description of the business desired to be brought before the special meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and, if the business includes a proposal to amend the bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting the business at the special meeting and any material interest in the business of such shareholder and any beneficial owner on whose behalf the proposal is made; and (3) as to the shareholder giving the notice and any beneficial owner on whose behalf the nomination or proposal is made, (A) the name and address of the shareholder, as they appear on the Corporation's books, and of the beneficial owner, (B) the class and number of shares of capital stock of the Corporation which are owned beneficially and of record by the shareholder and the beneficial owner, (C) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at the special meeting and intends to appear in person or by proxy at the special meeting to propose such business or nomination, and (D) a representation as to whether the shareholder or the beneficial owner, if any, intends or is part of a group which intends to (1) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation's outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (2) otherwise solicit 3 proxies from shareholders in support of such proposal or nomination. The Corporation may require any proposed nominee to furnish any other information it reasonably requires to determine the eligibility of the proposed nominee to serve as a director of the Corporation. (d) General. (1) Only persons nominated in accordance with the procedures set forth in this Section 1.5 shall be eligible to be elected at an annual or special meeting of shareholders of the Corporation to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 1.5. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty to (i) determine whether a nomination or any business proposed to be brought before an annual or special meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 1.5 and (ii) if any proposed nomination or business is not in compliance with this Section 1.5 (including whether the shareholder or any beneficial owner on whose behalf the nomination or proposal is made solicits (or is part of a group which solicits), or fails to so solicit (as the case may be), proxies in support of such shareholder's nominee or proposal in compliance with such shareholder's representation as required by clause (iii)(D) of Section (a)(2) or clause (iii)(D) of Section (b)(2) of this Section 1.5), to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. (2) For purposes of this Section 1.5, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, PR Newswire or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) A shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 1.5. Nothing in this Section 1.5 shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 1.6 Conduct of Meetings. (a) Meetings of shareholders shall be presided over by the Chief Executive Officer, if that position is filled, or, if there is no Chief Executive Officer, the President or, in any event, by another chairman designated by the Board of Directors. The date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at a meeting shall be determined by the chairman of the meeting and announced at the meeting. 4 (b) The Board of Directors may adopt by resolution any rules and regulations for the conduct of the meeting of shareholders as it deems appropriate. Except to the extent inconsistent with rules and regulations as adopted by the Board of Directors, the chairman of any meeting of shareholders shall have the exclusive right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of the chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to shareholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting determines; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent otherwise determined by the Board of Directors or the chairman of the meeting, meetings of shareholders are not required to be held in accordance with the rules of parliamentary procedure. (c) Any annual or special meeting of shareholders may be adjourned only by the chairman of the meeting from time to time to reconvene at the same or some other time, date and place, and notice need not be given of any such adjourned meeting if the time, date and place are announced at the meeting at which the adjournment occurs. The shareholders present at a meeting shall not have authority to adjourn the meeting. At the adjourned meeting at which a quorum is present, the shareholders may transact any business which might have been transacted at the original meeting. If after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. ARTICLE II BOARD OF DIRECTORS 2.1 Number and Term. (a) Number. The number of directors constituting the entire Board of Directors of the Corporation shall be not less than seven nor more than nine as fixed from time to time by the Board of Directors, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the entire Board of Directors shall be nine until otherwise fixed by the Board of Directors. (b) Election, Qualification and Term of Office of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or 5 resolutions adopted by the Board of Directors. At the first annual meeting of shareholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of shareholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of shareholders following the date hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of shareholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Section 2.1(b), each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 2.2 Regular Meetings. A regular meeting of the Board of Directors shall be held without notice other than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. 2.3 Special Meetings. Special meetings of the Board of Directors may be called by the Chief Executive Officer or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place in or out of Oregon as the place for holding any special meeting of the Board of Directors called by them. 2.4 Notice. Notice of the date, time and place of any special meeting of the Board of Directors shall be given at least 24 hours prior to the meeting by notice communicated in person, by telephone, telegraph, teletype, other form of wire or wireless communication, mail or private carrier. If written, notice shall be effective at the earliest of (a) when received, (b) three days after its deposit in the United States mail, as evidenced by the postmark, if mailed postpaid and correctly addressed, or (c) on the date shown on the return receipt, if sent by registered or certified mail, return receipt requested and the receipt is signed by or on behalf of the addressee. Notice by all other means shall be deemed effective when received by or on behalf of the director. ARTICLE III OFFICERS 3.1 Appointment. The Board of Directors at its first meeting following its election each year shall appoint a Chief Executive Officer and a Secretary. At this meeting, or at any other time, the Board of Directors may appoint one of its members as Chairman of the Board. The Board of Directors may appoint any other officers, assistant officers and agents. Any two or more offices may be held by the same person. 6 3.2 Compensation. The Corporation may pay its officers reasonable compensation for their services as fixed from time to time by the Board of Directors. 3.3 Term. The term of office of all officers commences upon their appointment and continues until their successors are appointed or until their resignation or removal. 3.4 Removal. Any officer or agent appointed by the Board of Directors may be removed by the Board of Directors at any time with or without cause. 3.5 Chairman of the Board. The Chairman of the Board, if that office is filled, shall preside at all meetings of the Board of Directors and shall perform any duties and responsibilities prescribed from time to time by the Board of Directors. 3.6 Chief Executive Officer. Unless otherwise determined by the Board of Directors, the Chief Executive Officer shall be responsible for the day-to-day operation of the Corporation. The Chief Executive Officer shall have any other duties and responsibilities prescribed by the Board of Directors. 3.7 Vice Presidents. Each Vice President shall perform duties and responsibilities prescribed by the Board of Directors or the Chief Executive Officer. The Board of Directors or the Chief Executive may confer a special title upon a Vice President. 3.8 Secretary. The Secretary shall record and keep the minutes of all meetings of the directors and shareholders in one or more books provided for that purpose and perform any duties prescribed by the Board of Directors or the Chief Executive Officer. ARTICLE IV ISSUANCE OF SHARES 4.1 Adequacy of Consideration. The authorization by the Board of Directors of the issuance of shares for stated consideration shall evidence a determination by the Board that such consideration is adequate. 4.2 Certificates for Shares. Certificates representing shares of the Corporation shall be signed, either manually or in facsimile, by two officers of the Corporation, at least one of whom shall be the Chief Executive Officer or a Vice President. 7 ARTICLE V AMENDMENTS These Bylaws may be amended or repealed and new Bylaws may be adopted by the Board of Directors or the shareholders of the Corporation. Adopted: September 2, 1999. 8 EX-10.1 4 1999 AMENDED/RESTATED INVESTOR RIGHTS AGREEMENT 1999 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT THIS 1999 AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT is made as of the 28th day of May 1999, by and among MedicaLogic, Inc., an Oregon corporation (the "Company"), and the investors listed on Schedule A attached hereto (collectively, the "Series A Investors"), the investors listed on Schedule C attached hereto (the "Series C Investors"), the investors listed on Schedule E attached hereto (the "Series E Investors") the investor listed on Schedule F hereto (the "Series F Investor") and the investors listed on Schedule J hereto (the "Series J Investors"). The Series A Investors, the Series C Investors, the Series E Investors, the Series F Investor and the Series J Investors are sometimes collectively referred to herein as the "Investors" and individually as an "Investor." RECITALS WHEREAS, the Company, the Series A Investors, the Series C Investors, the Series E Investors and the Series F Investor are parties to the 1997 Amended and Restated Investor Rights Agreement (the "1997 Agreement") dated as of November 10, 1997, as amended; WHEREAS, Section 3.7 of the 1997 Agreement provides that the 1997 Agreement may be amended only with the written consent of the Company and the holders of more than 50 percent of the Series A Preferred Stock, the holders of more than 50 percent of the Series C Preferred Stock, the holders of more than 50 percent of the Series E Preferred Stock, the holders of more than 50 percent of the Series E Preferred Stock and the holders of more than 50 percent of the Series F Preferred Common Stock (including the Common Stock issued upon conversion thereof) then outstanding; WHEREAS, the undersigned include the Company and the holders of more than 50 percent of the Series A Preferred Stock, more than 50 percent of the Series C Preferred Stock, the holders of more than 50 percent of the Series E Preferred Stock and the holders of more than 50 percent of the Series F Preferred Stock (including the Common Stock issued upon conversion thereof) outstanding and there are no shares of Series G Preferred Stock outstanding. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto agree to amend and restate the 1997 Agreement (a) to waive any rights of first offer arising under section 2.3 of the 1997 Agreement and Section 2.3 of this Agreement in connection with the issuance of shares of the Company's Series J Preferred Stock, to the extent the holders of such rights are not purchasing their pro rata portion of such shares, (b) to consent to providing registration rights to the Series J Investors and (c) to further provide as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The term "Act" means the Securities Act of 1933, as amended. (b) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (c) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.13 hereof. (d) The term "1934 Act" shall mean the Securities Exchange Act of 1934, as amended. (e) The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act and the declaration or ordering of effectiveness of such registration statement or document. (f) The term "Registrable Securities" means (i) the Common Stock issuable or issued upon conversion of the Series A Preferred Stock, Series A-1 Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock, Series F Preferred Stock, Series F-1 Preferred Stock, Series J Preferred Stock, Series J-1 Preferred Stock, or any series of Preferred Stock subsequently authorized and issued under Section 5(c)(ii)(E) of Article II.D., Section 5(c)(ii)(E) of Article II.F., Section 5(c)(ii)(E) of Article II.H., Section 5(c)(ii)(E) of Article II.I. or Section 5(c)(ii)(E) of Article II.M. of the Company's 1994 Restated Articles of Incorporation, as amended; (ii) the Common Stock of the Company purchased pursuant to the Common Stock Purchase Agreement by and among the Company, Mark A. Leavitt, Richard Samco, Sequoia Capital Growth Fund, Sequoia Technology Partners III, New Enterprise Associates VI, Limited Partnership and Stanford University, dated August 3, 1994; and (iii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of the shares referenced in (i) or (ii) above, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights 2 under this Section 1 are not assigned or assignable and any Registrable Securities sold to the public or sold pursuant to Rule 144 promulgated under the Act. (g) The number of shares of "Registrable Securities then outstanding" shall be the aggregate number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities. (h) The term "SEC" shall mean the Securities and Exchange Commission. 1.2 Request for Registration. (a) If the Company shall receive at any time after December 31, 1999, a written request from (i) the Holders of at least fifteen percent (15%) of the Registrable Securities then outstanding, or (ii) the holders of at least thirty percent (30%) of the Company's Series J Preferred Stock then outstanding, that the Company file a registration statement under the Act covering the registration of the Registrable Securities then outstanding, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), use its best efforts to effect as soon as practicable, and in any event within 120 days of the receipt of such request, the registration under the Act of all Registrable Securities that the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company in accordance with paragraph 3.5, provided that the Registrable Securities requested by the Holders to be registered pursuant to such request must either (i) be at least fifteen percent (15%) of all Registrable Securities then outstanding or (ii) have an anticipated aggregate public offering price of not less than $5,000,000. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to subsection 1.2(a) and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders, provided that such underwriter shall be of nationally recognized standing and shall agree to firmly underwrite such offering. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provisions of this Section 1.2, if 3 the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. In a registration pursuant to Section 1.2(a)(ii), if Registrable Securities held by a Series J Investor are excluded from the registration pursuant to the previous sentence as a result of election of Holders other than Series J Investors to participate in the registration, then that registration will not be deemed to be a registration requested by the Series J Investors for the purposes of Section 1.2(d)(ii). (c) Notwithstanding the foregoing: (i) If the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than 90 days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve-month period. (ii) Upon written notice by the Company to Holders requesting a registration statement pursuant to this Section 1.2 stating that in the good faith judgment of the Board of Directors of the Company it would be advantageous to the Company to raise capital in the proposed registration, then the Company may offer shares for its own account in the proposed registration. If any underwriter in connection with the proposed registration advises the Initiating Holders and the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders and the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities owned by each Holder; provided, however, that the number of shares to be offered for the account of the Company in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting; and, provided, further, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities (other than shares to be offered for the account of the Company) are first entirely excluded from the underwriting. In a registration pursuant to 4 Section 1.2(a)(ii), if Registrable Securities held by a Series J Investor are excluded from the registration pursuant to this Section 1.2(c)(ii), then that registration will not be deemed to be a registration requested by the Series J Investors for the purposes of Section 1.2(d)(ii), and if Registrable Securities held by Holders other than Series J Investors are excluded from the registration pursuant to this Section 1.2(c)(ii), then that registration will not be deemed to be a registration requested by the Holders for the purposes of Section 1.2(d)(i). (d) In addition, the Company shall not be obligated to effect, or to take any action to effect, (i) Any registration pursuant to this Section 1.2(a)(i) after the Company has effected one registration pursuant to that subsection and such registration has been declared or ordered effective; (ii) Any registration pursuant to this Section 1.2(a)(ii) after the Company has effected two registration pursuant to that subsections and such registrations have been declared or ordered effective; or (iii) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date sixty (60) days after the effective date of, a registration subject to Section 1.3 hereof, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective. 1.3 Company Registration. If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 3.5, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: 5 (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its diligent efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred eighty (180) days provided, however, that (i) such 180-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 180-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment which (I) includes any prospectus required by Section 10(a)(3) of the Act or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (I) and (II) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the 1934 Act in the registration statement. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Act. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. 6 (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.6 Expenses of Demand Registration. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2 (which right may be assigned as provided in Section 1.13), including (without limitation) all registration, filing, qualification, printers' and accounting fees, fees and disbursements of counsel for the Company (including fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder; if Company counsel does not make itself available for this purpose, the Company will pay the reasonable fees and 7 disbursements of one counsel for the selling Holders) shall be borne by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their demand registration rights pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such material adverse change, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2. 1.7 Expenses of Company Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.13), including (without limitation) all registration, filing, qualification, printers' and accounting fees, fees and disbursements of counsel for the Company (including fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder; if Company counsel does not make itself available for this purpose, the Company will pay the reasonable fees and disbursements of one counsel for the selling Holders) but excluding underwriting discounts and commissions relating to Registrable Securities. 1.8 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between a majority of the Registrable Securities that indicated they would like to be included in the underwriting, the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities entitled to be included therein owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders) but in no event shall (i) the amount of securities of the selling Holders included in the offering be reduced below thirty percent (30%) of the total amount of securities included in such offering, unless such offering is the initial 8 public offering of the Company's securities in which case the selling shareholders may be excluded if the underwriters make the determination described above and no other shareholder's securities are included or (ii) notwithstanding (i) above, any shares being sold by a shareholder exercising a demand registration right granted in Section 1.2 be excluded from such offering. For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling shareholder," and any pro-rata reduction with respect to such "selling shareholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder," as defined in this sentence. 1.9 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements made therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law, or any rule or regulation promulgated under the Act, and the Company will pay to each such Holder, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided; however, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished 9 expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person or any such underwriter or Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, however, that in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10. 10 (d) If the indemnification provided for in this Section 1.10 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying parry, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.11 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and 11 (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act, and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.12 Form S-3 Registration. In case the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.12: (1) if Form S-3 is not available for offering by the Holders; (2) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $1,000,000; (3) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 150 days after receipt of the request of the Holder or Holders under this Section 1.12; provided, however, that the Company shall not utilize this right more than once in any twelve month period, (4) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one registration on Form S-3 for the Holders pursuant to this Section 1.12; or (5) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. 12 (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. The Company shall bear and pay all expenses incurred in connection with a registration requested pursuant to Section 1.12, including (without limitation) all registration, filing, qualification, printer's and accounting fees, fees and disbursements of counsel for the Company (including fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holder or Holders hereunder; if Company counsel does not make itself available for this purpose, the Company will pay the reasonable fees and disbursements of one counsel for the selling Holder or Holders) but excluding underwriting discounts and commissions relating to Registrable Securities; provided, however, that the Company shall not be obligated to pay registration expenses under this paragraph if the Company has already effected two registrations on Form S-3 pursuant to this Section 1.12. Registrations effected pursuant to this Section 1.12 shall not be counted as registrations effected pursuant to Sections 1.2 or 1.3. 1.13 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities, provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee acquires from the Holder more than 100,000 shares; (c) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.15 below; and (d) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 1.14 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a) or within one hundred twenty (120) days of the effective date of any registration effected pursuant to Section 1.2. 1.15 "Market Stand-Off" Agreement. Each Investor hereby agrees that, during the period of duration specified by the Company and an underwriter of common stock or other securities of the Company following the date of the first sale to the public pursuant to 13 a registration statement of the Company filed under the Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except common stock included in such registration; provided, however, that: (a) such agreement shall be applicable only to the first such registration statement of the Company which covers common stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) all officers and directors of the Company, all other persons with registration rights (whether or not pursuant to this Agreement) and all shareholders who hold greater than 1% of the Company's outstanding stock enter into similar agreements; (c) such market stand-off time period shall not exceed 90 days. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of the period. Notwithstanding the foregoing, the obligations described in this Section 1.15 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms which may be promulgated in the future. 1.16 Termination of Registration Rights. (a) No Holder shall be entitled to exercise any right provided for in this Section 1 after ten (10) years following the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the initial firm commitment underwritten offering of its securities to the general public. (b) In addition, the right of any Holder to request registration or inclusion in any registration pursuant to Section 1 shall terminate on such date, after the closing of the first registered public offering of Common Stock of the Company, that all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period; provided, however, that the provisions of this Section 1.16(b) shall not apply to any Holder who owns at least one percent (1%) of the Company's outstanding stock. 14 2. Covenants of the Company. 2.1 Delivery of Financial Statements. (a) The Company shall deliver to each Investor who holds any shares of Preferred Stock or the shares issued or issuable upon conversion thereof: (i) as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of shareholder's equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with Generally Accepted Accounting Principles ("GAAP"), and audited and certified by independent public accountants of nationally recognized standing selected by the Company; (ii) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an unaudited profit or loss statement, statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter; (b) The Company shall deliver to each Investor who holds at least 100,000 shares of Series A Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series J Preferred Stock (or Common Stock issued or issuable upon conversion thereof, as adjusted for stock splits, stock dividends, and the like): (i) as soon as practicable, but in any event thirty (30) days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, including balance sheets and statements of cash flows for such months (the "Annual Financial Plan") and, as soon as prepared, any other budgets or revised budgets prepared by the Company; (ii) within twenty (20) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail, and comparing the results to the Annual Financial Plan and to the prior year comparable period; (iii) with respect to the financial statements called for in subsections (a)(ii) and (b)(ii) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment; and 15 (iv) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as any of such Investors or any assignee of any of such Investors may from time to time request; provided, however, that the Company shall not be obligated under this subsection (b)(iv) or any other subsection of Section 2.1 to provide information which it deems in good faith to be a trade secret or similar confidential information. 2.2 Inspection. The Company shall permit each of the Investors who holds at least 100,000 shares of Series A Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series J Preferred Stock (or the Common Stock issuable upon conversion thereof, as adjusted for stock splits, stock dividends and the like), at such Investors' expense, to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by such Investor; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. 2.3 Right of First Offer. Subject to the terms and conditions specified in this paragraph 2.3, the Company hereby grants to each Investor a right of first offer with respect to future sales by the Company of its Shares (as hereinafter defined). For purposes of this Section 2.3, "Investor" includes any general partners, affiliates, immediate family members (or a trust for the benefit therefor) to whom shares of Preferred Stock or the Common Stock issuable upon conversion thereof, were gifted or transferred and any trust for the benefit of an Investor (collectively, "All Related Parties"). Each of the Investors shall be entitled to apportion the right of first offer hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. Each time the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Shares"), the Company shall first make an offering of such Shares to each Investor (provided that the Company shall not be obligated to offer Shares to any Investor or other party that is not an accredited investor as defined in Rule 501(a) under the Act) in accordance with the following provisions: (a) The Company shall deliver a notice ("Notice") to each Investor stating (i) its bona fide intention to offer such Shares, (ii) the number of such Shares to be offered and (iii) the price and terms, if any, upon which it proposes to offer such Shares. (b) By written notification received by the Company, within 30 calendar days after receiving the Notice, an Investor may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to that portion of such Shares which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon 16 conversion of the Series A Preferred Stock, Series A-1 Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock, Series F Preferred Stock, Series F-1 Preferred Stock, Series J Preferred Stock or Series J-1 Preferred Stock then held, by such Investor bears to the total number of shares of Common Stock outstanding, or issuable upon conversion of outstanding Series A Preferred Stock, Series A-1 Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock, Series F Preferred Stock, Series F-1 Preferred Stock, Series J Preferred Stock or Series J-1 Preferred Stock. (c) If all Shares that the Investors are entitled to obtain pursuant to subsection 2.3(b) are not elected to be obtained as provided in subsection 2.3(b) hereof, the Company may, during the 60-day period following the expiration of the period provided in subsection 2.3(b) hereof, offer the remaining unsubscribed portion of such Shares to any person or persons at a price not less than, and upon terms no more materially favorable to the offeree than those specified in the Notice. If the Company does not enter into an agreement for the sale of the Shares within such period, or if such agreement is not consummated within 30 days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Shares shall not be offered unless first reoffered to the Investors in accordance herewith. (d) The right of first offer in this paragraph 2.3 shall not be applicable to (i) the shares of Common Stock issuable or issued to directors, employees or other service providers to the Company at any time when the total number of shares of Common Stock so issuable or issued after the date of this Agreement (and not repurchased at cost by the Company in connection with the termination of service as a director, employee or other service provider) does not exceed 4,891,174 plus (x) the number of shares of Common Stock repurchased at cost by the Company from directors, employees or other service providers in connection with termination of employment or other service arrangements pursuant to agreements entered into prior to or on the date of this Agreement and (y) the number of shares of Common Stock subject to outstanding options on the date of this Agreement that subsequently terminate unexercised, (ii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities, (iii) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise, (iv) up to 550,000 shares of Common Stock issued to Enterprise Partners, provided such stock is issued by the Corporation for not less than $2.00 per share, or (v) Common Stock issued to Baylor College of Medicine ("BCM") or its assignees in connection with the sale of software licenses by the Company to BCM and other customers in the Houston, Texas market. (e) The right of first offer set forth in this Section 2.3 may not be assigned or transferred. 17 2.4 IRC Section 305. So long as any shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock, Series F Preferred Stock, Series F-1 Preferred Stock, Series J Preferred Stock, or Series J-1 Preferred Stock remain outstanding, the Company will not, without approval of holders of a majority of the Series A Preferred Stock, Series A-1 Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock, Series F Preferred Stock, Series F-1 Preferred Stock, Series J Preferred Stock, or Series J-1 Preferred Stock then outstanding (together on an as-converted basis) do any act or thing which the Company knows would result in taxation of the holders of shares of the Series A Preferred Stock, Series A-1 Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock, Series F Preferred Stock, Series F-1 Preferred Stock, Series J Preferred Stock, or Series J-1 Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). 2.5 Directors' Expenses. The Company shall pay all reasonable expenses of members of the Company's Board of Directors when such members are acting on behalf of the Company, including attending meetings of the Board of Directors. 2.6 Company Right of First Refusal. The Company covenants that, unless otherwise approved by (i) unanimous vote of the Company's Board of Directors or (ii) holders of a majority of the outstanding shares of Series A Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series J Preferred Stock (voting together on an as-converted basis), as to any stock of the Company issued after June 30, 1993 to employees, directors, officers or consultants of the Company ("Affiliates") or issuable pursuant to stock options granted under an employee stock option plan (collectively, "Affiliate Stock"), (a) the Affiliate Stock shall vest over a three-year period with no shares vesting during the first six months and 1/30 of the shares vesting each month thereafter, with the unvested shares subject to repurchase by the Company at cost in the event of termination of such individual's services to the Company for any reason; (b) the Company shall have a right of first refusal to purchase any such Affiliate Stock offered for sale upon the same terms the Affiliate offers to sell such Affiliate Stock to any third party; and (c) should the Company decline to exercise its right of first refusal, the Series A Investors, Series C Investors, Series E Investors, Series F Investors and Series J Investors shall have a right of first refusal to purchase on a pro rata basis (according to the total shares of Common Stock issued or issuable upon conversion of Series A Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series J 18 Preferred Stock) any such Affiliate Stock offered for sale upon the same terms the Affiliate offers to sell such Affiliate Stock to any third party. 2.7 Encumbering Assets. The Company shall not encumber all or substantially all of its assets without the unanimous approval of its Board of Directors. 2.8 Salary Increases. The Company shall not increase the compensation of directors, officers or management employees (including any such increase pursuant to any bonus, pension, profit sharing or other plan or commitment) without the unanimous approval of its Board of Directors. 2.9 Issuance of Stock. Except for shares of the Company's Common Stock issuable on the exercise of options outstanding as of the date of this agreement, the Company shall not issue any shares of the Company's capital stock to Mark Leavitt, Richard Samco or David Moffenbeier without the unanimous consent of its Board of Directors. 2.10 Loans; Insider Transactions. The Company shall not, without the unanimous approval of its Board of Directors, (i) make, or permit any subsidiary to make, any loan or advance to or guarantee, directly or indirectly, any indebtedness of, any person, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business or under the terms of an employee stock or option plan approved by the Board of Directors or (ii) enter into any material transaction with any officer, director or holder of more than five percent (5%) of the outstanding stock of the Company, including any contract or agreement providing for the employment of, furnishing of goods or services by, or the rental of real or personal property from such person. 2.11 Termination of Covenants. The covenants set forth in Sections 2.1 through 2.10 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with a firm commitment underwritten offering of its securities to the general public. 2.12 Board Observation Rights. Each Investor who holds at least 100,000 shares of Series A Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series J Preferred Stock (or Common Stock issued or issuable upon conversion thereof, as adjusted for stock splits, stock dividends, and the like) shall have the right to send a nonvoting observer to attend meetings of the Board of Directors of the Company. Such observers shall have the right to receive notice of all such meetings and to receive all information and materials provided by the Company to the Board of Directors; provided, however, that such observer shall agree to hold in confidence all information so provided and shall not use such information other than for purposes of its investment in the Company; and, provided, further, that the Company reserves the right to withhold any 19 information and to exclude such observer from any meeting or portion thereof if access to such information or attendance at such meeting could reasonably be expected to adversely affect the attorney-client privilege between the Company and its counsel or if such access or attendance would reasonably be expected to result in disclosure of trade secrets to a direct competitor of the Company. 3. Miscellaneous. 3.1 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 3.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid or upon delivery to a recognized courier service and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 3.6 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or 20 in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of more than fifty percent (50%) of the Series A Preferred Stock, the holders of more than fifty percent (50%) of the Series C Preferred Stock, the holders of more than fifty percent (50%) of the Series E Preferred Stock, the holders of more than fifty percent (50%) of the Series F Preferred Common Stock and the holders of more than fifty percent (50%) of the Series J Preferred Stock (including the Common Stock issued upon conversion thereof) then outstanding (together on an as-converted basis). Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities, or shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series C Preferred Stock, Series C-1 Preferred Stock, Series E Preferred Stock, Series E-1 Preferred Stock, Series F Preferred Stock, Series F-1 Preferred Stock, Series J Preferred Stock, Series J-1 Preferred Stock or any series of Preferred Stock subsequently authorized and issued under Section 5(c)(ii)(E) of Article II.D., Section 5(c)(ii)(E) of Article II.F., Section 5(c)(ii)(E) of Article II.H., Section 5(c)(ii)(E) of Article II.I. or Section 5(c)(ii)(E) of Article II.M. of the Company's 1994 Restated Articles of Incorporation, as amended (including the Common Stock issued or issuable upon conversion thereof), as applicable, then outstanding, each further holder of all such Registrable Securities, shares of Series A Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series J Preferred Stock (including the Common Stock issued or issuable upon conversion thereof) as applicable, and the Company. 3.8 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 Aggregation of Stock. All shares of Registrable Securities or Series A Preferred Stock, Series C Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series J Preferred Stock (including the Common Stock issuable upon conversion thereof), as applicable, held or acquired by an Investor and All Related Parties of such Investor shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 Entire Agreement; Amendment; Waiver. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and supersedes the 1997 Agreement. 3.11 Additional Parties. In the event of a subsequent closing with an investor as provided for in Section 1.3 of the Stock Purchase Agreement between the Company and the Series J Investors, such investor shall become a party to this Agreement as an "Investor" upon receipt from such investor of a fully executed signature page hereto. 21 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. MEDICALOGIC, INC. By: MARK LEAVITT ------------------------------------- Printed Name: Mark Leavitt, M.D. Title: President INVESTORS: VHA INC. By: CHARLES BURWELL ------------------------------------- Its: Sr. VP ------------------------------------ Printed name: Charles Burwell --------------------------- APPLEWOOD ASSOCIATES, L.P. By: ------------------------------------- Its: ------------------------------------ Printed name: --------------------------- 21ST CENTURY COMMUNICATIONS PARTNERS, L.P. By: ------------------------------------- Its: ------------------------------------ Printed name: --------------------------- 21ST CENTURY COMMUNICATIONS T-E PARTNERS, L.P. By: ------------------------------------- Its: ------------------------------------ Printed name: --------------------------- 22 21ST CENTURY COMMUNICATIONS FOREIGN PARTNERS, L.P. By: ------------------------------------- Its: ------------------------------------ Printed name: --------------------------- BOSTON SAFE DEPOSIT & TRUST CO., TRUSTEE FOR US WEST PENSION TRUST By: ------------------------------------- Its: ------------------------------------ Printed name: --------------------------- BOSTON SAFE DEPOSIT & TRUST CO., TRUSTEE FOR US WEST BENEFIT ASSURANCE By: ------------------------------------- Its: ------------------------------------ Printed name: --------------------------- PILGRIM, BAXTER HYBRID PARTNERS I, L.P. By: Pilgrim Baxter Hybrid Partners General Partners L.P. By: Pilgrim Baxter & Associates, Ltd., Its General Partner By: SAMUEL H. BAER ------------------------------------- Its: Executive Officer ------------------------------------ Printed name: Samuel H. Baer --------------------------- NEW ENTERPRISE ASSOCIATES VI, LIMITED PARTNERSHIP By: NEA Partners VI, Limited Partnership - its General Partner By: RONALD H. KASE ------------------------------------- Printed name: Ronald H. Kase --------------------------- Title: General Partner ---------------------------------- 23 SEQUOIA CAPITAL VI SEQUOIA TECHNOLOGY PARTNERS VI SEQUOIA 1995 By: MARK STEVENS ------------------------------------- Printed name: Mark Stevens --------------------------- Title: Partner ---------------------------------- SEQUOIA CAPITAL GROWTH FUND SEQUOIA TECHNOLOGY PARTNERS III By: MARK STEVENS ------------------------------------- Printed name: Mark Stevens --------------------------- Title: Partner ---------------------------------- OMEGA VENTURES II, L.P. By: Omega Ventures II Management, L.L.C. Its General Partner By: MICHAEL J. STARK ------------------------------------- Its Managing Member Printed name: Michael J. Stark --------------------------- OMEGA VENTURES II CAYMAN, L.P. By: Omega Ventures II Management, L.L.C. Its Investment General Partner By: MICHAEL J. STARK ------------------------------------- Its Managing Member Printed name: Michael J. Stark --------------------------- 24 CROSSOVER FUND II, L.P. By: Crossover Investment Management, L.L.C. Its General Partner By: MICHAEL J. STARK ------------------------------------- Its Managing Member Printed name: Michael J. Stark --------------------------- CROSSOVER FUND IIA, L.P. By: Crossover Investment Management, L.L.C. Its General Partner By: MICHAEL J. STARK ------------------------------------- Its Managing Member Printed name: Michael J. Stark --------------------------- BAYVIEW INVESTORS, LTD. By: Robertson, Stephens & Company Private Equity Group, L.L.C. Its General Partner By: MICHAEL J. STARK ------------------------------------- Its Managing Member Printed name: Michael J. Stark --------------------------- FRANKLIN CAPITAL ASSOCIATES III L.P. By: Franklin Ventures III L.P. Its General Partner By: ------------------------------------- Its Managing Member Printed name: --------------------------- 25 CONTINENTAL CASUALTY COMPANY By: DAVID WILSON ------------------------------------- Its: Sr. V.P. ------------------------------------ Printed name: David Wilson --------------------------- QUANTUM INDUSTRIAL PARTNERS LDC By: MICHAEL E. NEUS ------------------------------------- Its: Attorney-in-Fact ------------------------------------ Printed name: Michael E. Neus --------------------------- SFM DOMESTIC INVESTMENTS LLC By: MICHAEL E. NEUS ------------------------------------- Its: Attorney-in-Fact ------------------------------------ Printed name: Michael E. Neus --------------------------- SEQUOIA CAPITAL FRANCHISE FUND By: MARK STEVENS ------------------------------------- Its: Partner ------------------------------------ Printed name: Mark Stevens --------------------------- SEQUOIA CAPITAL FRANCHISE PARTNERS By: MARK STEVENS ------------------------------------- Its: Partner ------------------------------------ Printed name: Mark Stevens --------------------------- 26 FRANKLIN CAPITAL ASSOCIATES III L.P. By: FRANKLIN VENTURES III L.P., its General Partner By: W. DAVID SWENSON ------------------------------------- W. David Swenson its General Partner COLEMAN SWENSON HOFFMAN BOOTH IV L.P. By: CSHB VENTURES IV L.P., its General Partner By: W. DAVID SWENSON ------------------------------------- W. David Swenson its General Partner CROSSOVER FUND II, L.P. By: Crossover Investment Management, L.L.C. its General Partner By: MICHAEL STARK ------------------------------------- Michael J. Stark, Managing Member CROSSOVER FUND IIA, L.P. By: Crossover Investment Management, L.L.C. its General Partner By: MICHAEL STARK ------------------------------------- Michael J. Stark, Managing Member 27 OMEGA VENTURES II, L.P. By: Omega Ventures II Management, L.L.C. its General Partner By: MICHAEL STARK ------------------------------------- Michael J. Stark, Managing Member OMEGA VENTURES II CAYMAN, L.P. By: Omega Ventures II Management, L.L.C. its General Partner By: MICHAEL STARK ------------------------------------- Michael J. Stark, Managing Member BAYVIEW INVESTORS, LTD. By: JOHN J. SANDERS ------------------------------------- John J. Sanders, Authorized Signatory DELL USA L.P. By: Dell Gen. P. Corp., Its General Partner By: THOMAS H. WELCH, JR. --------------------------------- Name: Thomas H. Welch, Jr. ------------------------------- Title: Vice President and Assistant Secretary ------------------------------ 28 SUPPLEMENTAL SIGNATURE PAGE (1999 Amended and Restated Investor Rights Agreement) This Supplemental Signature Page to the MedicaLogic, Inc. 1999 Amended and Restated Investor Rights Agreement dated as of May 28, 1999 (the "Investor Rights Agreement") is executed and delivered as of the date set forth below. For and in consideration of the mutual promises contained in the Investor Rights Agreement, the undersigned hereby agrees to be designated as a party to, and agrees to be bound by each and all terms of, the Investor Rights Agreement. Dated as of the 3rd day of August, 1999. GARY J. SHEMANO --------------------------------- Gary J. Shemano MICHAEL JACKS --------------------------------- Michael Jacks MART BAILEY --------------------------------- Mart Bailey 29 SCHEDULE A
SCHEDULE OF SERIES A INVESTORS ------------------------------ Total Purchaser Number of Shares Purchase Price --------- ---------------- -------------- Glynn Ventures III, L.P. 460,000 $ 460,000.00 3000 Sand Hill Road Building 4, Suite 235 Menlo Park, CA 94025 Attn: John Glynn Sequoia Capital Growth Fund 1,479,093 $ 1,479,093.00 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Mark A. Stevens Sequoia Technology Partners III 158,241 $ 158,241.00 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Mark A. Stevens New Enterprise Associates VI, 2,637,334 $ 2,637,334.00 Limited Partnership 2490 Sand Hill Road Menlo Park, CA 94025 Attn: Ronald L. Kase Charles M. Linehan 15,333 $ 15,333.00 New Enterprise Associates 1119 St. Paul Street Baltimore, MD 21202 Total: 5,750,001 $ 5,750,001.00
30 SCHEDULE C
SCHEDULE OF SERIES C INVESTORS ------------------------------ Purchaser Number of Shares Purchase Price --------- ---------------- -------------- Omega Ventures II, L.P. 1,140,391 $ 2,565,879.75 555 California Street San Francisco, CA 94104 Attn: Sy Kaufman Omega Ventures II Cayman, L.P. 281,831 $ 634,119.75 555 California Street San Francisco, CA 94104 Attn: Sy Kaufman Crossover Fund II, L.P. 499,051 $ 1,122,864.75 555 California Street San Francisco, CA 94104 Attn: Sy Kaufman Crossover Fund IIA, L.P. 71,528 $ 160,938.00 555 California Street San Francisco, CA 94104 Attn: Sy Kaufman Bayview Investors, Ltd. 184,978 $ 416,200.50 555 California Street San Francisco, CA 94104 Attn: Sy Kaufman Amerindo Technology 133,333 $ 299,999.25 Growth Fund II 43 Upper Grosvenor Street London, England W1X9PG Franklin Capital Associates III, L.P. 1,222,222 $ 2,749,999.50 237 Second Avenue South Franklin, TN 37064 Attn: Dave Swenson Furman Selz SBIC L.P. 888,890 $ 2,000,002.50 230 Park Avenue New York, NY 10169 Attn: Brian P. Friedman Purchaser Number of Shares Purchase Price --------- ---------------- -------------- New Enterprise Associates VI, 1,181,112 $ 2,657,502.00 Limited Partnership 2490 Sand Hill Road Menlo Park, CA 94025 Attn: Ronald H. Kase Sequoia Capital VI 716,541 $ 1,612,217.25 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Mark A. Stevens Sequoia Technology 39,370 $ 88,582.50 Partners VI 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Mark A. Stevens Sequoia 1995 31,497 $ 70,868.25 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Mark A. Stevens Sequoia Capital Growth Fund 370,082 $ 832,684.50 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Mark A. Stevens Sequoia Technology 23,621 $ 53,147.25 Partners III 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Attn: Mark A. Stevens Glynn Ventures III, L.P. 128,889 $ 290,000.25 3000 Sand Hill Road Building 4, Suite 235 Menlo Park, CA 94025 Attn: John Glynn 2 Purchaser Number of Shares Purchase Price --------- ---------------- -------------- Tom Hodapp 28,889 $ 65,000.25 Robertson, Stephens & Company 555 California Street, Suite 2600 San Francisco, CA 94104 Michael Boxer 11,111 $ 24,999.75 Furman Selz Investments Inc. One Embarcadero Center, Suite 1020 San Francisco, CA 94111-3682 Paul Felton 11,111 $ 24,999.75 Furman Selz Investments Inc. One Embarcadero Center, Suite 1020 San Francisco, CA 94111-3682 Cathy Klema 11,111 $ 24,999.75 Furman Selz Investments Inc. 230 Park Avenue New York, NY 10169 Leopold Swergold 11,111 $ 24,999.75 Furman Selz Investments Inc. 230 Park Avenue New York, NY 10169 Paul Ellwood, M.D 6,667 $ 15,000.75 Jackson Hole Group 6700 Ellencreek Road PO Box 350 Teton Village, WY 93025 William Slattery 4,445 $ 10,001.25 399 Park Avenue, 18th Floor New York, NY 10022 Sarah Gordon-Wild 4,444 $ 9,999.00 399 Park Avenue, 18th Floor New York, NY 10022 Thomas H. Cato 4,444 $ 9,999.00 803 Timber Lane Nashville, TN 37215 3 Purchaser Number of Shares Purchase Price --------- ---------------- -------------- Charles M. Linehan 3,746 $ 8,428.50 New Enterprise Associates 2490 Sand Hill Road Menlo Park, CA 94025 Dr. Hugh Y. Rienhoff, Jr. 2,222 $ 4,999.50 New Enterprise Associates 1119 St. Paul Street Baltimore, MD 21202 Total 7,012,637.00 $15,778,433.25
4
SCHEDULE E SCHEDULE OF SERIES E INVESTORS ------------------------------ Number of Total Investor Shares Purchase Price -------- ----------- -------------- VHA Inc. 1,587,302 $ 5,000,001.30 Applewood Associates, L.P. 317,461 $ 1,000,002.15 21st Century Communications Partners, L.P. 430,480 $ 1,356,012.00 21st Century Communications T-E Partners, L.P. 146,480 $ 461,412.00 21st Century Communications Foreign Partners, L.P. 57,960 $ 182,574.00 Boston Safe Deposit & Trust Co., Trustee for 714,286 $ 2,250,000.90 US West Pension Trust Boston Safe Deposit & Trust Co., Trustee for 238,095 $ 749,999.25 US West Benefit Assurance Pilgrim, Baxter Hybrid Partners I, L.P. 634,921 $ 2,000,001.15 New Enterprise Associates VI, Limited 142,720 $ 449,568.00 Partnership Sequoia Capital VI 85,285 $ 268,647.75 Sequoia Technology Partners VI 4,686 $ 14,760.90 Sequoia 1995 3,749 $ 11,809.35 Sequoia Capital Growth Fund 44,049 $ 138,754.35 Sequoia Technology Partners III 2,811 $ 8,854.65 Omega Ventures II, L.P. 42,582 $ 134,133.30 Omega Ventures II Cayman, L.P. 10,524 $ 33,150.60 Crossover Fund II, L.P. 18,634 $ 58,697.10 Crossover Fund IIA, L.P. 2,670 $ 8,410.50 Bayview Investors, Ltd. 6,907 $ 21,757.05 Franklin Capital Associates III, L.P. 45,638 $ 143,759.70 Furman Selz SBIC, L.P. 33,190 $ 104,548.50 Clayton Associates, L.L.C. 31,747 $ 100,003.05 German American Capital 111,111 $ 349,999.65 DMG Technology Partners 47,619 $ 149,999.85 Paul M. Ellwood, Jr., M.D. 1,000 $ 3,150.00 ----------- -------------- 4,761,907 $15,000,007.05
5
SCHEDULE F SCHEDULE OF SERIES F INVESTORS ------------------------------ Number of Total Investor Shares Purchase Price -------- ----------- -------------- Continental Casualty Company 4,000,000 $13,600,000.00
6
SCHEDULE J SCHEDULE OF SERIES J INVESTORS ------------------------------ Number of Total Investor Shares Purchase Price -------- ----------- -------------- Quantum Industrial Partners LDC 3,136,842 $14,900,000.00 SFM Domestic Investments LLC 3,136,842 $14,900,000.00 Sequoia Capital Franchise Fund 894,737 $ 4,250,000.00 Sequoia Capital Franchise Partner 157,895 $ 750,000.00 INITIAL SERIES J CLOSING 7,326,316 $34,800,000.00 Franklin Capital Associates III L.P. 105,263 $ 500,000.00 Coleman Swenson Hoffman Booth IV L.P. 421,053 $ 2,000,000.00 Crossover Fund II, L.P. 78,535 $ 373,043.00 Crossover Fund IIA, L.P. 11,256 $ 53,467.00 Omega Ventures II, L.P. 67,893 $ 322,492.00 Omega Ventures II Cayman, L.P. 23,732 $ 112,727.00 Bayview Investors, Ltd. 29,110 $ 138,272.00 Dell Computer Corporation 1,052,632 $ 5,000,000.00 SECOND CLOSING TOTAL 1,789,474 $ 8,500,000.00 GRAND TOTAL 9,115,790 $43,300,000.00
7 EX-10.2 5 1993 STOCK INCENTIVE PLAN MEDICALOGIC, INC. STOCK INCENTIVE PLAN 1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to enable MedicaLogic, Inc. (the "Company") to attract and retain experienced and able directors, officers, employees and other key contributors and to provide an additional incentive to these individuals to exert their best efforts for the Company and its shareholders. 2. Administration. The Plan shall be administered by the board of directors of the Company (the "Board of Directors"), which shall determine and designate from time to time the persons to whom grants and awards shall be made and the amounts, terms and conditions of those grants and awards. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt or amend rules and regulations relating to administration of the Plan, and the interpretation and construction of the provisions of the Plan and any stock bonus, stock purchase and option agreements under the Plan by the Board of Directors shall be final and conclusive. Whenever the operation of the Plan requires that the fair market value of the Company's common stock ("Stock") be determined, the fair market value shall be determined by, or in a manner approved by, the Board of Directors. 3. Eligibility. Grants and awards may be made under the Plan to directors, officers, and key employees of the Company or any parent or subsidiary of the Company, and other key individuals such as consultants to the Company who the Board of Directors believes have made or will make an essential contribution to the Company; provided, however, that only employees of the Company shall be eligible to receive Incentive Stock Options under the Plan. 4. Shares Subject to the Plan. Except as provided in Section 9, the total number of shares of Stock that may be issued (i) upon exercise of all options and stock appreciation rights granted under the Plan, (ii) as bonuses under the Plan and (iii) pursuant to sales under the Plan, shall not exceed in the aggregate 4,494,384 shares. If any option under the Plan or stock appreciation right granted without a related option expires or is cancelled or terminated and is unexercised in whole or in part, the shares allocable to the unexercised portion shall again become available for awards under the Plan, except that shares that are issued on exercise of a stock appreciation right that were allocable to an option, or portion thereof, surrendered in connection with exercise of the stock appreciation right shall not again become available for awards under the Plan. If Stock sold or awarded as a bonus under the Plan is forfeited to the Company or repurchased by the Company pursuant to applicable restrictions, the number of shares forfeited or repurchased shall again be available under the Plan. Stock issued under the Plan may be subject to such restrictions on transfer, repurchase rights, or other restrictions as are determined by the Board of Directors. The certificates representing such Stock shall bear such legends as are determined by the Board of Directors. 5. Effective Date and Duration of Plan. 5.1 Effective Date. The Plan shall become effective when adopted by the Board of Directors (the "Effective Date"), but no option shall become exercisable until the Plan is approved by a vote of the shareholders of the Company entitled to vote thereon. Subject to this limitation, options and stock appreciation rights may be granted and Stock 2 may be awarded as bonuses or sold under the Plan at any time after the Effective Date and before termination of the Plan. 5.2 Duration of the Plan. The Plan shall continue until, in the aggregate, options and stock appreciation rights have been granted and exercised and Stock has been awarded as bonuses or sold and the restrictions on any such Stock have lapsed with respect to all shares subject to the Plan under Section 4 (subject to any adjustments under Section 9), provided, however, that unless sooner terminated by the Board of Directors, the Plan shall terminate on, and no option or stock appreciation right or bonus right shall be granted and no Stock shall be awarded as a bonus or sold under the Plan on or after, the tenth anniversary of the Effective Date. The Board of Directors may suspend or terminate the Plan at any time except with respect to options, stock appreciation rights and bonus rights, and Stock subject to restrictions then outstanding under the Plan. Termination shall not affect any right of the Company to repurchase shares or the forfeitability of shares issued under the Plan. 6. Grants, Awards and Sales. 6.1 Type of Security. The Board of Directors may, from time to time, take the following actions, separately or in combination, under the Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) grant options other than Incentive Stock Options (hereinafter "Non-Statutory Stock Options"); (iii) grant stock appreciation rights or bonus rights; (iv) award bonuses of Stock; and (v) sell Stock subject to restrictions. The Board of Directors shall specify the action taken with respect to each 3 person granted, awarded, or sold any option or Stock under the Plan and shall specifically designate each option granted under the Plan as an Incentive Stock Option or a Non-Statutory Stock Option. 6.2 General Rules Relating to Options. 6.2.1 Time of Exercise. Except as provided in Section 8, options granted under the Plan may be exercised over the period stated in each option in amounts and at times prescribed by the Board of Directors and stated in the option, provided that options shall not be exercised for fractional shares. If the optionee does not exercise an option in any period with respect to the full number of shares to which the optionee is entitled in that period, the optionee's rights shall be cumulative and the optionee may purchase those shares in any subsequent period during the term of the option. 6.2.2 Purchase of Shares. Shares may be purchased or acquired pursuant to an option granted under the Plan only on receipt by the Company of notice in writing from the optionee of the optionee's intention to exercise, specifying the number of shares the optionee desires to purchase and the date on which the optionee desires to complete the transaction, which may not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such a representation is not required to comply with the Securities Act of 1933, as amended, containing a representation that the optionee intends to acquire the shares for investment and not with a view to distribution. On or before the date specified for completion of the purchase, the optionee must have paid the Company the full purchase price in cash, including cash that may be the proceeds of a loan from the Company, in shares of Stock 4 previously acquired by the optionee valued at fair market value, or in any combination of cash and shares of Stock. No shares shall be issued until full payment therefor has been made. Each optionee who has exercised an option shall, on notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares for which the option was exercised, pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the optionee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the optionee, including salary, subject to applicable law. 6.3 Incentive Stock Options. Incentive Stock Options shall be subject to the following additional terms and conditions: 6.3.1 Limitation on Amount of Grants. No employee may be granted Incentive Stock Options under the Plan such that the aggregate fair market value, on the date of grant, of the Stock with respect to which Incentive Stock Options are exercisable for the first time by that employee during any calendar year, under the Plan and under any other incentive stock option plan (within the meaning of Section 422 of the Code) of the Company or any parent or subsidiary of the Company, exceeds $100,000. 6.3.2 Exercise Price. The exercise price per share under each option granted under the Plan shall be determined by the Board of Directors, but the exercise price with respect to an Incentive Stock 5 Option shall be not less than 100 percent of the fair market value of the shares covered by the option on the date the option is granted. 6.3.3 Duration of Options. Subject to Sections 6.3.4 and 8, each option granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted. 6.3.4 Limitations on Grants to 10 Percent Shareholders. An Incentive Stock Option may be granted under the Plan to an employee possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or of any parent or subsidiary of the Company, only if the exercise price is at least 110 percent of the fair market value of the Stock subject to the option on the date it is granted, and the option by its terms is not exercisable after the expiration of five years from the date it is granted. 6.4 Non-Statutory Stock Options. Non-Statutory Stock Options shall be subject to the following additional terms and conditions: 6.4.1 Exercise Price. The exercise price per share under each option granted under the Plan shall be determined by the Board of Directors, but the exercise price shall be not less than 85 percent of the fair market value of the shares covered by the option on the date the option is granted. 6.4.2 Duration of Options. Non-Statutory Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors. 6 6.5 Stock Bonuses. Stock awarded as a bonus shall be subject to the terms, conditions, and restrictions determined by the Board of Directors at the time the Stock is awarded as a bonus. The Board of Directors may require the recipient to sign an agreement as a condition of the award, but may not require the recipient to pay any money consideration except as provided in the last sentence of this Section 6.5. The agreement may contain such terms, conditions, representations, and warranties as the Board of Directors may require. The Company may require any recipient of a Stock bonus to pay to the Company amounts necessary to satisfy any applicable federal, state, or local tax withholding requirements prior to delivery of certificates. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 6.6 Restricted Stock. The Board of Directors may issue shares of Stock under the Plan for such consideration (including promissory notes and services) as determined by the Board of Directors in accordance with the law and with such restrictions concerning transferability, repurchase by the Company, or forfeiture as determined by the Board of Directors. All shares of Stock issued pursuant to this Section 6.6 shall be subject to a purchase agreement, which shall be executed by the Company and the prospective recipient of the Stock prior to the delivery of certificates representing such shares to the recipient. The purchase agreement shall contain such terms and conditions and representations and 7 warranties as the Board of Directors shall require. Each employee to whom shares of stock are issued pursuant to this paragraph 6.6 shall, on notification of the amount due, if any, and before or concurrently with delivery of the certificates representing the shares, pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 6.7 Stock Appreciation Rights. 6.7.1 Description. Each stock appreciation right shall entitle the holder, on exercise, to receive from the Company in exchange therefor an amount equal in value to the excess of the fair market value on the date of exercise of one share of Stock over its fair market value on the date of grant (or, in the case of a stock appreciation right granted in connection with an option, the exercise price per share under the option to which the stock appreciation right relates), multiplied by the number of shares covered by the stock appreciation right or the option, or portion thereof, that is surrendered. 6.7.2 Exercise. A stock appreciation right shall be exercisable only at the time or times established by the Board of Directors. If a stock appreciation right is granted in connection with an option, then it shall be exercisable only to the extent and on the same conditions that the related option is exercisable. Upon exercise of a 8 stock appreciation right, any option or portion thereof to which the stock appreciation right relates must be surrendered unexercised. 6.7.3 Payment. Payment by the Company upon exercise of a stock appreciation right may be made in shares of Stock valued at fair market value, or in cash, or partly in Stock and partly in cash, as determined by the Board of Directors. No fractional shares shall be issued upon exercise of a stock appreciation right. In lieu thereof, cash may be paid in an amount equal to the value of the fraction or, in the discretion of the Board of Directors, the number of shares may be rounded to the next whole share. 6.7.4 Withholding. If payment by the Company of the stock appreciation right is in cash, or partly in cash, the Company shall have the right to withhold the amount of cash necessary to satisfy any applicable federal, state or local withholding tax requirements. If payment by the Company of the stock appreciation right is solely in shares of Stock or if the amount of the payment in cash is insufficient to satisfy the withholding requirements, the employee shall, on notification of the amount due, and before or concurrently with delivery of the certificates representing the shares, pay to the Company the amounts necessary to satisfy the withholding requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 9 6.7.5 Adjustment. In the event of any adjustment pursuant to Section 9 in the number of shares of Stock subject to an option granted under the Plan, any stock appreciation right granted hereunder in connection with such option shall be proportionately adjusted. 6.8 Cash Bonus Rights. 6.8.1 Grant. The Board of Directors may grant bonus rights under the Plan in connection with (i) an option or stock appreciation right granted or previously granted, (ii) Stock awarded, or previously awarded, as a bonus, and (iii) Stock sold, or previously sold, under the Plan. Bonus rights will be subject to rules, terms, and conditions as the Board of Directors may prescribe. 6.8.2 Bonus Rights in Connection with Options and Stock Appreciation Rights. A bonus right granted in connection with an option will entitle an optionee to a cash bonus when the related option is exercised (or is surrendered in connection with exercise of a stock appreciation right related to the option) in whole or in part. A bonus right granted in connection with a stock appreciation right will entitle the holder to a cash bonus when the stock appreciation right is exercised. Upon exercise of an option, the amount of the bonus shall be determined by multiplying the excess of the total fair market value of the shares to be acquired upon the exercise over the total exercise price for the shares by the applicable bonus percentage. Upon exercise of a stock appreciation right, the bonus shall be determined by multiplying the total fair market value of the shares or cash received pursuant to the exercise of the stock appreciation right by the applicable bonus percentage. The bonus 10 percentage applicable to a bonus right shall be determined from time to time by the Board of Directors but shall in no event exceed 100 percent. 6.8.3 Bonus Rights in Connection with Stock Bonus. A bonus right granted in connection with Stock awarded as a bonus will entitle the person awarded such Stock to a cash bonus either at the time the Stock is awarded or at such time as restrictions, if any, to which the Stock is subject lapse. If Stock awarded is subject to restrictions and is repurchased by the Company or forfeited by the holder, the bonus right granted in connection with such Stock shall terminate and may not be exercised. The amount of any cash bonus to be awarded and the time such cash bonus is to be paid shall be determined from time to time by the Board of Directors. 6.8.4 Bonus Rights in Connection with Stock Purchase. A bonus right granted in connection with Stock purchased hereunder (excluding Stock purchased pursuant to an option) shall terminate and may not be exercised in the event the Stock is repurchased by the Company or forfeited by the holder pursuant to restrictions applicable to the Stock. The amount of any cash bonus to be awarded and the time such cash bonus is to be paid shall be determined from time to time by the Board of Directors. 6.8.5 Withholding. The Company shall have the right to withhold from the bonus the amount of cash necessary to satisfy any applicable federal, state and local withholding tax requirements. If the amount of the payment in cash is insufficient to satisfy the withholding requirements, the employee shall, on notification of the amount due, and before or concurrently with delivery of any stock certificates, pay to the Company the amounts necessary to satisfy the withholding requirements. If 11 additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7. Nontransferability. Each option, stock appreciation right, or cash bonus right granted under the Plan by its terms shall be nonassignable and nontransferable by the holder except by will or by the laws of descent and distribution of the state or country of the holder's domicile at the time of death, and each option, stock appreciation right, or cash bonus right by its terms shall be exercisable during the holder's lifetime only by the holder. 8. Termination of Employment. 8.1 Retirement or General Termination. If an employee's employment by the Company or any parent or subsidiary of the Company is terminated by retirement or for any reason other than in the circumstances specified in Section 8.2 below, any option, stock appreciation right or cash bonus right held by the employee may be exercised at any time prior to its expiration date or the expiration of three months after the date of the termination, whichever is the shorter period, but only if and to the extent the employee was entitled to exercise the option, stock appreciation right or cash bonus right on the date of termination. Transfer of an employee by the Company or any parent or subsidiary of the Company to the Company or any parent or subsidiary of the Company shall not be considered a termination for purposes of the Plan. 12 8.2 Death or Disability. If an employee's employment by the Company or any parent or subsidiary of the Company is terminated because of death or physical disability (within the meaning of Section 22(e)(3) of the Code), any option, stock appreciation right or cash bonus right held by the employee may be exercised at any time prior to its expiration date or the expiration of one year after the date of termination, whichever is the shorter period, for the greater of (a) the number of remaining shares for which the employee was entitled to exercise the option, stock appreciation right or cash bonus right on the date of termination or (b) the number of remaining shares for which the employee would have been entitled to exercise the option, stock appreciation right or cash bonus right if such option or right had been 50 percent exercisable on the date of termination. If an employee's employment is terminated by death, any option, stock appreciation right or cash bonus right held by the employee shall be exercisable only by the person or persons to whom the employee's rights under the option, stock appreciation right or cash bonus right pass by the employee's will or by the laws of descent and distribution of the state or country of the employee's domicile at the time of death. 8.3 Termination of Unexercised Rights. To the extent an option, stock appreciation right or cash bonus right held by any deceased employee or by any employee whose employment is terminated is not exercised within the limited periods provided above, all further rights to exercise the option, stock appreciation right or cash bonus right shall terminate at the expiration of such periods. 8.4 Termination of Non-Employees. With respect to options, stock appreciation rights and cash bonus rights granted to persons who are 13 not employees of the Company, the Board of Directors may establish provisions relating to the termination of those persons' status with the Company. 9. Changes in Capital Structure. If the outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for the purchase of which options or stock appreciation rights may be granted and for which Stock may be awarded as bonuses or sold subject to restrictions under the Plan. In addition, the Board of Directors shall make appropriate adjustments in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable, and the number and kind of shares covered by outstanding stock appreciation rights. Adjustments in outstanding options shall be made without change in the total price applicable to the unexercised portion of any option and with a corresponding adjustment in the exercise price per share; provided, however, that with respect to Incentive Stock Options, (i) the excess of the aggregate fair market value of the shares subject to the option immediately after the adjustment over the aggregate exercise price of those shares shall not be more than the excess of the aggregate fair market value of the shares subject to the option immediately before the adjustment over the aggregate exercise price of those shares, (ii) the adjusted option 14 shall not give the optionee additional benefits that the optionee did not have before the adjustment, and (iii) on a share-by-share comparison, the ratio of the exercise price to the fair market value of the shares subject to the option immediately after the adjustment shall be no more favorable to the optionee than the ratio of the exercise price to the fair market value of the shares subject to the option immediately before the adjustment. Adjustments in outstanding stock appreciation rights shall be made without change in their total value. Any such adjustment made by the Board of Directors shall be conclusive. In the event of dissolution or liquidation of the Company or a merger, consolidation, or plan of exchange affecting the Company, in lieu of making adjustments as provided for above in this Section 9, the Board of Directors may, in its sole discretion, provide a 30-day period prior to such event during which optionees shall have the right to exercise options or stock appreciation rights. 10. Corporate Mergers, Acquisitions, Etc. The Board of Directors may also grant options and stock appreciation rights having terms and provisions which vary from those specified in this Plan provided that any options and stock appreciation rights granted pursuant to this section are granted in substitution for, or in connection with assumption of, existing options and stock appreciation rights granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a subsidiary is a party. 11. Amendment of Plan. The Board of Directors may at any time and from time to time modify or amend the Plan in such respects as it deems 15 advisable because of changes in the law while the Plan is in effect or for any other reason. After the Plan has been approved by the shareholders and except as provided in Section 9, however, no change in an option or stock appreciation right already granted to any person shall be made without the written consent of such person. Furthermore, unless approved at an annual meeting or a special meeting by the shareholders of the Company entitled to vote thereon, no amendment or change shall be made in the Plan (a) increasing the total number of shares that may be issued under the Plan, or (b) changing the class of persons eligible to receive options under the Plan. 12. Approvals. The Company's obligations under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission in connection with the granting of any option or the issuance or sale of any shares under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver shares of Stock under the Plan if the Company is advised by its legal counsel that such issuance or delivery would violate applicable state or federal laws. 13. Employment Rights. Nothing in the Plan or any grant pursuant to the Plan shall confer on any employee any right to be continued in the employment of the Company or any parent or subsidiary of the Company or shall interfere in any way with the right of the Company or any parent or subsidiary of the Company by whom such employee is employed to terminate such employee's employment at any time, with or without cause. 16 14. Rights as a Shareholder. A holder of an option or a stock appreciation right, a recipient of Stock awarded as a bonus, or a purchaser of Stock shall have no rights as a shareholder with respect to any shares covered by any option, stock appreciation right, bonus award, or stock purchase agreement until the date of issue of a stock certificate to him or her for such shares. Except as otherwise provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. Effective Date: February 9, 1993. Shareholder Approval: February 9, 1993. October 19, 1993. February 1, 1994. June 30, 1994. October 13, 1994. May 22, 1995. January 23, 1996. 17 EX-10.3 6 1996 STOCK INCENTIVE PLAN, AS AMENDED MEDICALOGIC, INC. 1996 STOCK INCENTIVE PLAN 1. Purpose. The purpose of this 1996 Stock Incentive Plan (the "Plan") is to enable MedicaLogic, Inc. (the "Company") to attract and retain experienced and able directors, officers, employees and other key contributors and to provide an additional incentive to these individuals to exert their best efforts for the Company and its shareholders. 2. Administration. The Plan shall be administered by the board of directors of the Company (the "Board of Directors"), which shall determine and designate from time to time the persons to whom grants and awards shall be made and the amounts, terms and conditions of those grants and awards. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt or amend rules and regulations relating to administration of the Plan, and the interpretation and construction of the provisions of the Plan and any stock bonus, stock purchase and option agreements under the Plan by the Board of Directors shall be final and conclusive. Whenever the operation of the Plan requires that the fair market value of the Company's common stock ("Stock") be determined, the fair market value shall be determined by, or in a manner approved by, the Board of Directors. 3. Eligibility. Grants and awards may be made under the Plan to directors, officers, and key employees of the Company or any parent or subsidiary of the Company, and other key individuals such as consultants to the Company who the Board of Directors believes have made or will make an essential contribution to the Company; provided, however, that only employees of the Company shall be eligible to receive Incentive Stock Options under the Plan. 4. Shares Subject to the Plan. Except as provided in Section 9, the total number of shares of Stock that may be issued (i) upon exercise of all options and stock appreciation rights granted under the Plan, (ii) as bonuses under the Plan and (iii) pursuant to sales under the Plan, shall not exceed in the aggregate 1,000,000 shares. If any option under the Plan or stock appreciation right granted without a related option expires or is cancelled or terminated and is unexercised in whole or in part, the shares allocable to the unexercised portion shall again become available for awards under the Plan, except that shares that are issued on exercise of a stock appreciation right that were allocable to an option, or portion thereof, surrendered in connection with exercise of the stock appreciation right shall not again become available for awards under the Plan. If Stock sold or awarded as a bonus under the Plan is forfeited to the Company or repurchased by the Company pursuant to applicable restrictions, the number of shares forfeited or repurchased shall again be available under the Plan. Stock issued under the Plan may be subject to such restrictions on transfer, repurchase rights, or other restrictions as are determined by the Board of Directors. The certificates representing such Stock shall bear such legends as are determined by the Board of Directors. 5. Limitation on Number of Shares. No employee who is a Covered Employee may be granted stock options or stock appreciation rights with respect to greater than 500,000 shares during any calendar year. For purposes of this paragraph, a "Covered Employee" means any employee of the Company if (i) as of the close of the taxable year, such employee is the chief executive officer of the Company, or is a person acting in such capacity, or (ii) the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the four highest compensated officers for the taxable year (other than the chief executive officer). 6. Effective Date and Duration of Plan. 6.1 Effective Date. The Plan shall become effective when adopted by the Board of Directors (the "Effective Date"). The Plan shall not be considered as adopted by the Board of Directors until the Plan is approved by a majority vote of the shareholders of the Company entitled to vote thereon at a duly held shareholders' meeting at which a quorum is present or by any other method that satisfies applicable state law requirements regarding approval of actions requiring shareholder voting. Subject to this limitation, options and stock appreciation rights may be granted and Stock may be awarded as bonuses or sold under the Plan at any time after the Effective Date and before termination of the Plan. 6.2 Duration of the Plan. The Plan shall continue until, in the aggregate, options and stock appreciation rights have been granted and exercised and Stock has been awarded as bonuses or sold and the restrictions on any such Stock have lapsed with respect to all shares subject to the Plan under Section 4 (subject to any adjustments under Section 9), provided, however, that unless sooner terminated by the Board of Directors, the Plan shall terminate on, and no option or stock appreciation right or bonus right shall be granted and no Stock shall be awarded as a bonus or sold under the Plan on or after, the tenth anniversary of the date the plan was adopted by the Board of Directors or approved by the shareholders in accordance with 5.1, whichever occurs earlier. The Board of Directors may suspend or terminate the Plan at any time except with respect to options, stock appreciation rights and bonus rights, and Stock subject to restrictions then outstanding under the Plan. Termination shall not affect any right of the Company to repurchase shares or the forfeitability of shares issued under the Plan. 2 7. Grants, Awards and Sales. 7.1 Type of Security. The Board of Directors may, from time to time, take the following actions, separately or in combination, under the Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) grant options other than Incentive Stock Options (hereinafter "Non-Statutory Stock Options"); (iii) grant stock appreciation rights or bonus rights; (iv) award bonuses of Stock; and (v) sell Stock subject to restrictions. The Board of Directors shall specify the action taken with respect to each person granted, awarded, or sold any option or Stock under the Plan and shall specifically designate each option granted under the Plan as an Incentive Stock Option or a Non-Statutory Stock Option. 7.2 General Rules Relating to Options. 7.2.1 Time of Exercise. Except as provided in Section 8, options granted under the Plan may be exercised over the period stated in each option in amounts and at times prescribed by the Board of Directors and stated in the option, provided that options shall not be exercised for fractional shares. If the optionee does not exercise an option in any period with respect to the full number of shares to which the optionee is entitled in that period, the optionee's rights shall be cumulative and the optionee may purchase those shares in any subsequent period during the term of the option. 7.2.2 Purchase of Shares. Shares may be purchased or acquired pursuant to an option granted under the Plan only on receipt by the Company of notice in writing from the optionee of the optionee's intention to exercise, specifying the number of shares the optionee desires to purchase and the date on which the optionee desires to complete the transaction, which may not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such a representation is not required to comply with the Securities Act of 1933, as amended, containing a representation that the optionee intends to acquire the shares for investment and not with a view to distribution. On or before the date specified for completion of the purchase, the optionee must have paid the Company the full purchase price in cash, including cash that may be the proceeds of a loan from the Company, in shares of Stock previously acquired by the optionee valued at fair market value, or in any combination of cash and shares of Stock. No shares shall be issued until full payment therefor has been made. Each optionee who has exercised an option shall, on notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares for which the option was exercised, pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the optionee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the optionee, including salary, subject to applicable law. 3 7.3 Incentive Stock Options. Incentive Stock Options shall be subject to the following additional terms and conditions: 7.3.1 Limitation on Amount of Grants. No employee may be granted Incentive Stock Options under the Plan such that the aggregate fair market value, on the date of grant, of the Stock with respect to which Incentive Stock Options are exercisable for the first time by that employee during any calendar year, under the Plan and under any other incentive stock option plan (within the meaning of Section 422 of the Code) of the Company or any parent or subsidiary of the Company, exceeds $100,000. 7.3.2 Exercise Price. The exercise price per share under each option granted under the Plan shall be determined by the Board of Directors, but the exercise price with respect to an Incentive Stock Option shall be not less than 100 percent of the fair market value of the shares covered by the option on the date the option is granted. 7.3.3 Duration of Options. Subject to Sections 6.3.4 and 8, each option granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted. 7.3.4 Limitations on Grants to 10 Percent Shareholders. An Incentive Stock Option may be granted under the Plan to an employee who owns (within the meaning of Section 424(d) of the Code) more than 10 percent of the total combined voting power of all classes of stock of the Company, or of any parent or subsidiary of the Company, only if the exercise price is at least 110 percent of the fair market value of the Stock subject to the option on the date it is granted, and the option by its terms is not exercisable after the expiration of five years from the date it is granted. 7.4 Non-Statutory Stock Options. Non-Statutory Stock Options shall be subject to the following additional terms and conditions: 7.4.1 Exercise Price. The exercise price per share under each option granted under the Plan shall be determined by the Board of Directors, but the exercise price shall be not less than 85 percent of the fair market value of the shares covered by the option on the date the option is granted. 7.4.2 Duration of Options. Non-Statutory Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors. 7.5 Stock Bonuses. Stock awarded as a bonus shall be subject to the terms, conditions, and restrictions determined by the Board of Directors at the time the Stock is awarded as a bonus. The Board of Directors may require the recipient to sign an 4 agreement as a condition of the award, but may not require the recipient to pay any money consideration except as provided in this Section 6.5. The agreement may contain such terms, conditions, representations, and warranties as the Board of Directors may require. The Company may require any recipient of a Stock bonus to pay to the Company amounts necessary to satisfy any applicable federal, state, or local tax withholding requirements prior to delivery of certificates. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7.6 Restricted Stock. The Board of Directors may issue shares of Stock under the Plan for such consideration (including promissory notes and services) as determined by the Board of Directors in accordance with the law and with such restrictions concerning transferability, repurchase by the Company, or forfeiture as determined by the Board of Directors. All shares of Stock issued pursuant to this Section 6.6 shall be subject to a purchase agreement, which shall be executed by the Company and the prospective recipient of the Stock prior to the delivery of certificates representing such shares to the recipient. The purchase agreement shall contain such terms and conditions and representations and warranties as the Board of Directors shall require. Each employee to whom shares of stock are issued pursuant to this paragraph 6.6 shall, on notification of the amount due, if any, and before or concurrently with delivery of the certificates representing the shares, pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7.7 Stock Appreciation Rights. 7.7.1 Description. Each stock appreciation right shall entitle the holder, on exercise, to receive from the Company in exchange therefor an amount equal in value to the excess of the fair market value on the date of exercise of one share of Stock over its fair market value on the date of grant (or, in the case of a stock appreciation right granted in connection with an option, the exercise price per share under the option to which the stock appreciation right relates) (the "Spread"), multiplied by the number of shares covered by the stock appreciation right or the option, or portion thereof, that is surrendered. If the stock appreciation right is granted in conjunction with an incentive stock option, the stock appreciation right may be for no more than 100 percent of the Spread multiplied by the number of shares covered by the option or portion thereof that is surrendered. 5 7.7.2 Exercise. A stock appreciation right shall be exercisable only at the time or times established by the Board of Directors. If a stock appreciation right is granted in connection with an option, then it shall be exercisable only to the extent and on the same conditions that the related option is exercisable. Upon exercise of a stock appreciation right, any option or portion thereof to which the stock appreciation right relates must be surrendered unexercised. If the stock appreciation right is issued in conjunction with an incentive stock option, the stock appreciation right may be exercised with respect to the shares of stock covered by the incentive stock option only if the Spread with respect to those shares is a positive number. 7.7.3 Payment. Payment by the Company upon exercise of a stock appreciation right may be made in shares of Stock valued at fair market value, or in cash, or partly in Stock and partly in cash, as determined by the Board of Directors. No fractional shares shall be issued upon exercise of a stock appreciation right. In lieu thereof, cash may be paid in an amount equal to the value of the fraction or, in the discretion of the Board of Directors, the number of shares may be rounded to the next whole share. 7.7.4 Withholding. If payment by the Company of the stock appreciation right is in cash, or partly in cash, the Company shall have the right to withhold the amount of cash necessary to satisfy any applicable federal, state or local withholding tax requirements. If payment by the Company of the stock appreciation right is solely in shares of Stock or if the amount of the payment in cash is insufficient to satisfy the withholding requirements, the employee shall, on notification of the amount due, and before or concurrently with delivery of the certificates representing the shares, pay to the Company the amounts necessary to satisfy the withholding requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7.7.5 Adjustment. In the event of any adjustment pursuant to Section 9 in the number of shares of Stock subject to an option granted under the Plan, any stock appreciation right granted hereunder in connection with such option shall be proportionately adjusted. 7.8 Cash Bonus Rights. 7.8.1 Grant. The Board of Directors may grant bonus rights under the Plan in connection with (i) an option or stock appreciation right granted or previously granted, (ii) Stock awarded, or previously awarded, as a bonus, and (iii) Stock sold, or previously sold, under the Plan. Bonus rights will be subject to rules, terms, and conditions as the Board of Directors may prescribe. 6 7.8.2 Bonus Rights in Connection with Options and Stock Appreciation Rights. A bonus right granted in connection with an option will entitle an optionee to a cash bonus when the related option is exercised (or is surrendered in connection with exercise of a stock appreciation right related to the option) in whole or in part. A bonus right granted in connection with a stock appreciation right will entitle the holder to a cash bonus when the stock appreciation right is exercised. Upon exercise of an option, the amount of the bonus shall be determined by multiplying the excess of the total fair market value of the shares to be acquired upon the exercise over the total exercise price for the shares by the applicable bonus percentage. Upon exercise of a stock appreciation right, the bonus shall be determined by multiplying the total fair market value of the shares or cash received pursuant to the exercise of the stock appreciation right by the applicable bonus percentage. The bonus percentage applicable to a bonus right shall be determined from time to time by the Board of Directors but shall in no event exceed 100 percent. 7.8.3 Bonus Rights in Connection with Stock Bonus. A bonus right granted in connection with Stock awarded as a bonus will entitle the person awarded such Stock to a cash bonus either at the time the Stock is awarded or at such time as restrictions, if any, to which the Stock is subject lapse. If Stock awarded is subject to restrictions and is repurchased by the Company or forfeited by the holder, the bonus right granted in connection with such Stock shall terminate and may not be exercised. The amount of any cash bonus to be awarded and the time such cash bonus is to be paid shall be determined from time to time by the Board of Directors. 7.8.4 Bonus Rights in Connection with Stock Purchase. A bonus right granted in connection with Stock purchased hereunder (excluding Stock purchased pursuant to an option) shall terminate and may not be exercised in the event the Stock is repurchased by the Company or forfeited by the holder pursuant to restrictions applicable to the Stock. The amount of any cash bonus to be awarded and the time such cash bonus is to be paid shall be determined from time to time by the Board of Directors. 7.8.5 Withholding. The Company shall have the right to withhold from the bonus the amount of cash necessary to satisfy any applicable federal, state and local withholding tax requirements. If the amount of the payment in cash is insufficient to satisfy the withholding requirements, the employee shall, on notification of the amount due, and before or concurrently with delivery of any stock certificates, pay to the Company the amounts necessary to satisfy the withholding requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7 8. Nontransferability. Each option, stock appreciation right, or cash bonus right granted under the Plan by its terms shall be nonassignable and nontransferable by the holder except by will or by the laws of descent and distribution of the state or country of the holder's domicile at the time of death, and each option, stock appreciation right, or cash bonus right by its terms shall be exercisable during the holder's lifetime only by the holder. 9. Termination of Employment. 9.1 Retirement or General Termination. If an employee's employment by the Company or any parent or subsidiary of the Company is terminated by retirement or for any reason other than in the circumstances specified in Section 8.2 below, any option, stock appreciation right or cash bonus right held by the employee may be exercised at any time prior to its expiration date or the expiration of three months after the date of the termination, whichever is the shorter period, but only if and to the extent the employee was entitled to exercise the option, stock appreciation right or cash bonus right on the date of termination. Transfer of an employee by the Company or any parent or subsidiary of the Company to the Company or any parent or subsidiary of the Company shall not be considered a termination for purposes of the Plan. 9.2 Death or Disability. If an employee's employment by the Company or any parent or subsidiary of the Company is terminated because of death or physical disability (within the meaning of Section 22(e)(3) of the Code), any option, stock appreciation right or cash bonus right held by the employee may be exercised at any time prior to its expiration date or the expiration of one year after the date of termination, whichever is the shorter period, for the greater of (a) the number of remaining shares for which the employee was entitled to exercise the option, stock appreciation right or cash bonus right on the date of termination or (b) the number of remaining shares for which the employee would have been entitled to exercise the option, stock appreciation right or cash bonus right if such option or right had been 50 percent exercisable on the date of termination. If an employee's employment is terminated by death, any option, stock appreciation right or cash bonus right held by the employee shall be exercisable only by the person or persons to whom the employee's rights under the option, stock appreciation right or cash bonus right pass by the employee's will or by the laws of descent and distribution of the state or country of the employee's domicile at the time of death. 9.3 Termination of Unexercised Rights. To the extent an option, stock appreciation right or cash bonus right held by any deceased employee or by any employee whose employment is terminated is not exercised within the limited periods provided above, all further rights to exercise the option, stock appreciation right or cash bonus right shall terminate at the expiration of such periods. 9.4 Termination of Non-Employees. With respect to options, stock appreciation rights and cash bonus rights granted to persons who are not employees of the 8 Company, the Board of Directors may establish provisions relating to the termination of those persons' status with the Company. 10. Changes in Capital Structure. If the outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for the purchase of which options or stock appreciation rights may be granted and for which Stock may be awarded as bonuses or sold subject to restrictions under the Plan. In addition, the Board of Directors shall make appropriate adjustments in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable, and the number and kind of shares covered by outstanding stock appreciation rights. Adjustments in outstanding options shall be made without change in the total price applicable to the unexercised portion of any option and with a corresponding adjustment in the exercise price per share; provided, however, that with respect to Incentive Stock Options, (i) the excess of the aggregate fair market value of the shares subject to the option immediately after the adjustment over the aggregate exercise price of those shares shall not be more than the excess of the aggregate fair market value of the shares subject to the option immediately before the adjustment over the aggregate exercise price of those shares, (ii) the adjusted option shall not give the optionee additional benefits that the optionee did not have before the adjustment, and (iii) on a share-by-share comparison, the ratio of the exercise price to the fair market value of the shares subject to the option immediately after the adjustment shall be no more favorable to the optionee than the ratio of the exercise price to the fair market value of the shares subject to the option immediately before the adjustment. Adjustments in outstanding stock appreciation rights shall be made without change in their total value. Any such adjustment made by the Board of Directors shall be conclusive. In the event of dissolution or liquidation of the Company or a merger, consolidation, or plan of exchange affecting the Company, in lieu of making adjustments as provided for above in this Section 9, the Board of Directors may, in its sole discretion, provide a 30-day period 9 prior to such event during which optionees shall have the right to exercise options or stock appreciation rights. 11. Corporate Mergers, Acquisitions, Etc. The Board of Directors may also grant options and stock appreciation rights having terms and provisions which vary from those specified in this Plan provided that any options and stock appreciation rights granted pursuant to this section are granted in substitution for, or in connection with assumption of, existing options and stock appreciation rights granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a subsidiary is a party. 12. Amendment of Plan. The Board of Directors may at any time and from time to time modify or amend the Plan in such respects as it deems advisable because of changes in the law while the Plan is in effect or for any other reason. After the Plan has been approved by the shareholders and except as provided in Section 9, however, no change in an option or stock appreciation right already granted to any person shall be made without the written consent of such person. Furthermore, unless approved at an annual meeting or a special meeting by the shareholders of the Company entitled to vote thereon, no amendment or change shall be made in the Plan (a) increasing the total number of shares that may be issued under the Plan, or (b) changing the class of persons eligible to receive options under the Plan. 13. Approvals. The Company's obligations under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission in connection with the granting of any option or the issuance or sale of any shares under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver shares of Stock under the Plan if the Company is advised by its legal counsel that such issuance or delivery would violate applicable state or federal laws. 14. Employment Rights. Nothing in the Plan or any grant pursuant to the Plan shall confer on any employee any right to be continued in the employment of the Company or any parent or subsidiary of the Company or shall interfere in any way with the right of the Company or any parent or subsidiary of the Company by whom such employee is employed to terminate such employee's employment at any time, with or without cause. 15. Rights as a Shareholder. A holder of an option or a stock appreciation right, a recipient of Stock awarded as a bonus, or a purchaser of Stock shall have no rights as a shareholder with respect to any shares covered by any option, stock appreciation right, bonus award, or stock purchase agreement until the date of issue of a stock certificate to him or her for such shares. Except as otherwise provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 10 16. Information. Financial statements of the Company will be provided annually to each optioneee under the Plan. Effective Date: December 27, 1996 Shareholder Approval: December 27, 1996 11 EX-10.4 7 1999 STOCK INCENTIVE PLAN MEDICALOGIC, INC. 1999 STOCK INCENTIVE PLAN 1. Purpose. The purpose of this 1999 Stock Incentive Plan (the "Plan") is to enable MedicaLogic, Inc. (the "Company") to attract and retain experienced and able directors, officers, employees and other key contributors and to provide an additional incentive to these individuals to exert their best efforts for the Company and its shareholders. 2. Administration. The Plan shall be administered by the board of directors of the Company (the "Board of Directors"), which shall determine and designate from time to time the persons to whom grants and awards shall be made and the amounts, terms and conditions of those grants and awards. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt or amend rules and regulations relating to administration of the Plan, and the interpretation and construction of the provisions of the Plan and any stock bonus, stock purchase and option agreements under the Plan by the Board of Directors shall be final and conclusive. Whenever the operation of the Plan requires that the fair market value of the Company's common stock ("Stock") be determined, the fair market value shall be determined by, or in a manner approved by, the Board of Directors. If the Stock is not publicly traded, the Board of Directors may consider any valuation methods it deems appropriate and may, but is not required to, obtain one or more independent appraisals of the Company. If the Stock is publicly traded, the fair market value of Stock shall be the closing price of the Stock as reported in The Wall Street Journal on the last trading day preceding the date an award is granted or exercised, as applicable, or such other reported value of the Stock as shall be specified by the Board of Directors. 3. Eligibility. Grants and awards may be made under the Plan to directors, officers, and employees of the Company or any parent or subsidiary of the Company, and other key individuals such as consultants to the Company who the Board of Directors believes have made or will make an essential contribution to the Company; provided, however, that only employees of the Company shall be eligible to receive Incentive Stock Options under the Plan. 4. Shares Subject to the Plan. Except as provided in Section 9, the total number of shares of Stock that may be issued (i) upon exercise of all options and stock appreciation rights granted under the Plan, (ii) as bonuses under the Plan and (iii) pursuant to sales under the Plan, shall not exceed in the aggregate 4,000,000 shares. If any option under the Plan or stock appreciation right granted without a related option expires or is cancelled or terminated and is unexercised in whole or in part, the shares allocable to the unexercised portion shall again become available for awards under the Plan, except that shares that are issued on exercise of a stock appreciation right that were allocable to an option, or portion thereof, surrendered in connection with exercise of the stock appreciation right shall not again become available for awards under the Plan. If Stock sold or awarded as a bonus under the Plan is forfeited to the Company or repurchased by the Company pursuant to applicable restrictions, the number of shares forfeited or repurchased shall again be available under the Plan. Stock issued under the Plan may be subject to such restrictions on transfer, repurchase rights, or other restrictions as are determined by the Board of Directors. The certificates representing such Stock shall bear such legends as are determined by the Board of Directors. 5. Limitation on Number of Shares. No employee may be granted stock options or stock appreciation rights under the Plan for more than an aggregate of 200,000 shares of Stock in connection with the hiring of the employee or 500,000 shares in any calendar year thereafter. 6. Effective Date and Duration of Plan. 6.1 Effective Date. The Plan shall become effective when adopted by the Board of Directors (the "Effective Date"). The Plan shall not be considered as adopted by the Board of Directors until the Plan is approved by a majority vote of the shareholders of the Company entitled to vote thereon at a duly held shareholders' meeting at which a quorum is present or by any other method that satisfies applicable state law requirements regarding approval of actions requiring shareholder voting. Subject to this limitation, options and stock appreciation rights may be granted and Stock may be awarded as bonuses or sold under the Plan at any time after the Effective Date and before termination of the Plan. 6.2 Duration of the Plan. The Plan shall continue until, in the aggregate, options and stock appreciation rights have been granted and exercised and Stock has been awarded as bonuses or sold and the restrictions on any such Stock have lapsed with respect to all shares subject to the Plan under Section 4 (subject to any adjustments under Section 10), provided, however, that unless sooner terminated by the Board of Directors, the Plan shall terminate on, and no option or stock appreciation right or bonus right shall be granted and no Stock shall be awarded as a bonus or sold under the Plan on or after, the tenth anniversary of the date the plan was adopted by the Board of Directors or approved by the shareholders in accordance with Section 6.1, whichever occurs earlier. The Board of Directors may suspend or terminate the Plan at any time except with respect to options, stock appreciation rights and bonus rights, and Stock subject to restrictions then outstanding under the Plan. Termination shall not affect any right of the Company to repurchase shares or the forfeitability of shares issued under the Plan. 2 7. Grants, Awards and Sales. 7.1 Type of Security. The Board of Directors may, from time to time, take the following actions, separately or in combination, under the Plan: (i) grant Incentive Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) grant options other than Incentive Stock Options (hereinafter "Non-Statutory Stock Options"); (iii) grant stock appreciation rights or bonus rights; (iv) award bonuses of Stock; and (v) sell Stock subject to restrictions. The Board of Directors shall specify the action taken with respect to each person granted, awarded, or sold any option or Stock under the Plan and shall specifically designate each option granted under the Plan as an Incentive Stock Option or a Non-Statutory Stock Option. 7.2 General Rules Relating to Options. 7.2.1 Time of Exercise. Except as provided in Section 8, options granted under the Plan may be exercised over the period stated in each option in amounts and at times prescribed by the Board of Directors and stated in the option, provided that options shall not be exercised for fractional shares and provided further that the right to exercise shall be at least 20% per year over five years from the date the option is granted, subject to the provisions of Section 9. If the optionee does not exercise an option in any period with respect to the full number of shares to which the optionee is entitled in that period, the optionee's rights shall be cumulative and the optionee may purchase those shares in any subsequent period during the term of the option. 7.2.2 Purchase of Shares. Shares may be purchased or acquired pursuant to an option granted under the Plan only on receipt by the Company of notice in writing from the optionee of the optionee's intention to exercise, specifying the number of shares the optionee desires to purchase and the date on which the optionee desires to complete the transaction, which may not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such a representation is not required to comply with the Securities Act of 1933, as amended, containing a representation that the optionee intends to acquire the shares for investment and not with a view to distribution. On or before the date specified for completion of the purchase, the optionee must have paid the Company the full purchase price in cash, including cash that may be the proceeds of a loan from the Company, in shares of Stock previously acquired by the optionee valued at fair market value, or in any combination of cash and shares of Stock. No shares shall be issued until full payment therefor has been made. Each optionee who has exercised an option shall, on notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares for which the option was exercised, pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the optionee shall pay such amount to 3 the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the optionee, including salary, subject to applicable law. 7.3 Incentive Stock Options. Incentive Stock Options shall be subject to the following additional terms and conditions: 7.3.1 Limitation on Amount of Grants. No employee may be granted Incentive Stock Options under the Plan such that the aggregate fair market value, on the date of grant, of the Stock with respect to which Incentive Stock Options are exercisable for the first time by that employee during any calendar year, under the Plan and under any other incentive stock option plan (within the meaning of Section 422 of the Code) of the Company or any parent or subsidiary of the Company, exceeds $100,000. 7.3.2 Exercise Price. The exercise price per share under each option granted under the Plan shall be determined by the Board of Directors, but the exercise price with respect to an Incentive Stock Option shall be not less than 100 percent of the fair market value of the shares covered by the option on the date the option is granted. 7.3.3 Duration of Options. Subject to Sections 7.3.4 and 8, each option granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted. 7.3.4 Limitations on Grants to 10 Percent Shareholders. An Incentive Stock Option may be granted under the Plan to an employee who owns (within the meaning of Section 424(d) of the Code) more than 10 percent of the total combined voting power of all classes of stock of the Company, or of any parent or subsidiary of the Company, only if the exercise price is at least 110 percent of the fair market value of the Stock subject to the option on the date it is granted, and the option by its terms is not exercisable after the expiration of five years from the date it is granted. 7.4 Non-Statutory Stock Options. Non-Statutory Stock Options shall be subject to the following additional terms and conditions: 7.4.1 Exercise Price. The exercise price per share under each option granted under the Plan shall be determined by the Board of Directors, but the exercise price shall be not less than 85 percent of the fair market value of the shares covered by the option on the date the option is granted. 7.4.2 Duration of Options. Non-Statutory Stock Options granted under the Plan shall continue in effect for the period fixed by the Board of Directors, not to exceed 10 years. 4 7.5 Stock Bonuses. Stock awarded as a bonus shall be subject to the terms, conditions, and restrictions determined by the Board of Directors at the time the Stock is awarded as a bonus. The Board of Directors may require the recipient to sign an agreement as a condition of the award, but may not require the recipient to pay any money consideration except as provided in this Section 7.5. The agreement may contain such terms, conditions, representations, and warranties as the Board of Directors may require. The Company may require any recipient of a Stock bonus to pay to the Company amounts necessary to satisfy any applicable federal, state, or local tax withholding requirements prior to delivery of certificates. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7.6 Restricted Stock. The Board of Directors may issue shares of Stock under the Plan for such consideration (including promissory notes and services) as determined by the Board of Directors in accordance with the law and with such restrictions concerning transferability, repurchase by the Company, or forfeiture as determined by the Board of Directors. All shares of Stock issued pursuant to this Section 7.6 shall be subject to a purchase agreement, which shall be executed by the Company and the prospective recipient of the Stock prior to the delivery of certificates representing such shares to the recipient. The purchase agreement shall contain such terms and conditions and representations and warranties as the Board of Directors shall require. Each employee to whom shares of stock are issued pursuant to this paragraph 7.6 shall, on notification of the amount due, if any, and before or concurrently with delivery of the certificates representing the shares, pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7.7 Stock Appreciation Rights. 7.7.1 Description. Each stock appreciation right shall entitle the holder, on exercise, to receive from the Company in exchange therefor an amount equal in value to the excess of the fair market value on the date of exercise of one share of Stock over its fair market value on the date of grant (or, in the case of a stock appreciation right granted in connection with an option, the exercise price per share under the option to which the stock appreciation right relates) (the "Spread"), multiplied by the number of shares covered by the stock appreciation right or the option, or portion thereof, that is surrendered. If the stock appreciation right is granted in conjunction with an incentive stock option, the stock appreciation right may be for no more than 100 percent of the 5 Spread multiplied by the number of shares covered by the option or portion thereof that is surrendered. 7.7.2 Exercise. A stock appreciation right shall be exercisable only at the time or times established by the Board of Directors. If a stock appreciation right is granted in connection with an option, then it shall be exercisable only to the extent and on the same conditions that the related option is exercisable. Upon exercise of a stock appreciation right, any option or portion thereof to which the stock appreciation right relates must be surrendered unexercised. If the stock appreciation right is issued in conjunction with an incentive stock option, the stock appreciation right may be exercised with respect to the shares of stock covered by the incentive stock option only if the Spread with respect to those shares is a positive number. 7.7.3 Payment. Payment by the Company upon exercise of a stock appreciation right may be made in shares of Stock valued at fair market value, or in cash, or partly in Stock and partly in cash, as determined by the Board of Directors. No fractional shares shall be issued upon exercise of a stock appreciation right. In lieu thereof, cash may be paid in an amount equal to the value of the fraction or, in the discretion of the Board of Directors, the number of shares may be rounded to the next whole share. 7.7.4 Withholding. If payment by the Company of the stock appreciation right is in cash, or partly in cash, the Company shall have the right to withhold the amount of cash necessary to satisfy any applicable federal, state or local withholding tax requirements. If payment by the Company of the stock appreciation right is solely in shares of Stock or if the amount of the payment in cash is insufficient to satisfy the withholding requirements, the employee shall, on notification of the amount due, and before or concurrently with delivery of the certificates representing the shares, pay to the Company the amounts necessary to satisfy the withholding requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 7.7.5 Adjustment. In the event of any adjustment pursuant to Section 10 in the number of shares of Stock subject to an option granted under the Plan, any stock appreciation right granted hereunder in connection with such option shall be proportionately adjusted. 6 7.8 Cash Bonus Rights. 7.8.1 Grant. The Board of Directors may grant bonus rights under the Plan in connection with (i) an option or stock appreciation right granted or previously granted, (ii) Stock awarded, or previously awarded, as a bonus, and (iii) Stock sold, or previously sold, under the Plan. Bonus rights will be subject to rules, terms, and conditions as the Board of Directors may prescribe. 7.8.2 Bonus Rights in Connection with Options and Stock Appreciation Rights. A bonus right granted in connection with an option will entitle an optionee to a cash bonus when the related option is exercised (or is surrendered in connection with exercise of a stock appreciation right related to the option) in whole or in part. A bonus right granted in connection with a stock appreciation right will entitle the holder to a cash bonus when the stock appreciation right is exercised. Upon exercise of an option, the amount of the bonus shall be determined by multiplying the excess of the total fair market value of the shares to be acquired upon the exercise over the total exercise price for the shares by the applicable bonus percentage. Upon exercise of a stock appreciation right, the bonus shall be determined by multiplying the total fair market value of the shares or cash received pursuant to the exercise of the stock appreciation right by the applicable bonus percentage. The bonus percentage applicable to a bonus right shall be determined from time to time by the Board of Directors but shall in no event exceed 100 percent. 7.8.3 Bonus Rights in Connection with Stock Bonus. A bonus right granted in connection with Stock awarded as a bonus will entitle the person awarded such Stock to a cash bonus either at the time the Stock is awarded or at such time as restrictions, if any, to which the Stock is subject lapse. If Stock awarded is subject to restrictions and is repurchased by the Company or forfeited by the holder, the bonus right granted in connection with such Stock shall terminate and may not be exercised. The amount of any cash bonus to be awarded and the time such cash bonus is to be paid shall be determined from time to time by the Board of Directors. 7.8.4 Bonus Rights in Connection with Stock Purchase. A bonus right granted in connection with Stock purchased hereunder (excluding Stock purchased pursuant to an option) shall terminate and may not be exercised in the event the Stock is repurchased by the Company or forfeited by the holder pursuant to restrictions applicable to the Stock. The amount of any cash bonus to be awarded and the time such cash bonus is to be paid shall be determined from time to time by the Board of Directors. 7.8.5 Withholding. The Company shall have the right to withhold from the bonus the amount of cash necessary to satisfy any applicable federal, state and local withholding tax requirements. If the amount of the payment in cash is insufficient to satisfy the withholding requirements, the employee shall, on notification of the amount due, 7 and before or concurrently with delivery of any stock certificates, pay to the Company the amounts necessary to satisfy the withholding requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, the employee shall pay such amount to the Company on demand. If the employee fails to pay the amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to the employee, including salary, subject to applicable law. 8. Nontransferability. Each option, stock appreciation right, or cash bonus right granted under the Plan by its terms shall be nonassignable and nontransferable by the holder except by will or by the laws of descent and distribution of the state or country of the holder's domicile at the time of death, and each option, stock appreciation right, or cash bonus right by its terms shall be exercisable during the holder's lifetime only by the holder. 9. Termination of Employment. 9.1 Retirement or General Termination. If an employee's employment by the Company or any parent or subsidiary of the Company is terminated by retirement or for any reason other than in the circumstances specified in Section 9.2 below, any option, stock appreciation right or cash bonus right held by the employee may be exercised at any time prior to its expiration date or the expiration of three months after the date of the termination, whichever is the shorter period, but only if and to the extent the employee was entitled to exercise the option, stock appreciation right or cash bonus right on the date of termination. Transfer of an employee by the Company or any parent or subsidiary of the Company to the Company or any parent or subsidiary of the Company shall not be considered a termination for purposes of the Plan. 9.2 Death or Disability. If an employee's employment by the Company or any parent or subsidiary of the Company is terminated because of death or physical disability (within the meaning of Section 22(e)(3) of the Code), any option, stock appreciation right or cash bonus right held by the employee may be exercised at any time prior to its expiration date or the expiration of one year after the date of termination, whichever is the shorter period, for the greater of (a) the number of remaining shares for which the employee was entitled to exercise the option, stock appreciation right or cash bonus right on the date of termination or (b) the number of remaining shares for which the employee would have been entitled to exercise the option, stock appreciation right or cash bonus right if such option or right had been 50 percent exercisable on the date of termination. If an employee's employment is terminated by death, any option, stock appreciation right or cash bonus right held by the employee shall be exercisable only by the person or persons to whom the employee's rights under the option, stock appreciation right or cash bonus right pass by the employee's will or by the laws of descent and distribution of the state or country of the employee's domicile at the time of death. 8 9.3 Termination of Unexercised Rights. To the extent an option, stock appreciation right or cash bonus right held by any deceased employee or by any employee whose employment is terminated is not exercised within the limited periods provided above, all further rights to exercise the option, stock appreciation right or cash bonus right shall terminate at the expiration of such periods. 9.4 Termination of Non-Employees. With respect to options, stock appreciation rights and cash bonus rights granted to persons who are not employees of the Company, the Board of Directors may establish provisions relating to the termination of those persons' status with the Company. 9.5 Repurchase of Options. The Board of Directors may establish provisions relating to the repurchase of any shares acquired upon the exercise of options, in the event of termination of employment or termination of service of non-employees for any reason other than in circumstances specified in Section 9.2. The repurchase price may be stated in each option as prescribed by the Board of Directors, provided that such repurchase price shall not be an amount less than (i) the fair market value at the time of purchase, or (ii) the original purchase price, whichever is less, and further provided that the right to repurchase lapses with respect to at least 20% of the number of shares per year over five years from the date the option is granted, and the repurchase right is exercised within 90 days after termination of employment or service. 10. Changes in Capital Structure. If the outstanding shares of Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for the purchase of which options or stock appreciation rights may be granted and for which Stock may be awarded as bonuses or sold subject to restrictions under the Plan. In addition, the Board of Directors shall make appropriate adjustments in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable, and the number and kind of shares covered by outstanding stock appreciation rights. Adjustments in outstanding options shall be made without change in the total price applicable to the unexercised portion of any option and with a corresponding adjustment in the exercise price per share; provided, however, that with respect to Incentive Stock Options, (i) the excess of the aggregate fair market value of the shares subject to the option immediately after the adjustment over the aggregate exercise price of those shares shall not be more than the excess of the aggregate fair market value of the shares subject to the option immediately before the adjustment over the aggregate exercise price of those shares, (ii) the adjusted option shall not give the optionee additional benefits that the optionee did not have before the adjustment, and (iii) on a share-by-share comparison, the ratio of the exercise price to the fair market value of the shares subject to the option immediately after the adjustment 9 shall be no more favorable to the optionee than the ratio of the exercise price to the fair market value of the shares subject to the option immediately before the adjustment. Adjustments in outstanding stock appreciation rights shall be made without change in their total value. Any such adjustment made by the Board of Directors shall be conclusive. In the event of dissolution or liquidation of the Company or a merger, consolidation, or plan of exchange affecting the Company, in lieu of making adjustments as provided for above in this Section 10, the Board of Directors may, in its sole discretion, provide a 30-day period prior to such event during which optionees shall have the right to exercise options or stock appreciation rights. 11. Corporate Mergers, Acquisitions, Etc. The Board of Directors may also grant options and stock appreciation rights having terms and provisions which vary from those specified in this Plan provided that any options and stock appreciation rights granted pursuant to this section are granted in substitution for, or in connection with assumption of, existing options and stock appreciation rights granted by another corporation and assumed or otherwise agreed to be provided for by the Company pursuant to or by reason of a transaction involving a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation to which the Company or a subsidiary is a party. 12. Amendment of Plan. The Board of Directors may at any time and from time to time modify or amend the Plan in such respects as it deems advisable because of changes in the law while the Plan is in effect or for any other reason. After the Plan has been approved by the shareholders and except as provided in Section 10, however, no change in an option or stock appreciation right already granted to any person shall be made without the written consent of such person. Furthermore, unless approved at an annual meeting or a special meeting by the shareholders of the Company entitled to vote thereon, no amendment or change shall be made in the Plan (a) increasing the total number of shares that may be issued under the Plan, or (b) changing the class of persons eligible to receive options under the Plan. 13. Approvals. The Company's obligations under the Plan are subject to the approval of state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission in connection with the granting of any option or the issuance or sale of any shares under the Plan. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver shares of Stock under the Plan if the Company is advised by its legal counsel that such issuance or delivery would violate applicable state or federal laws. 14. Employment Rights. Nothing in the Plan or any grant pursuant to the Plan shall confer on any employee any right to be continued in the employment of the Company or any parent or subsidiary of the Company or shall interfere in any way with the right of the Company or any parent or subsidiary of the Company by whom such employee is employed to terminate such employee's employment at any time, with or without cause. 10 15. Rights as a Shareholder. A holder of an option or a stock appreciation right, a recipient of Stock awarded as a bonus, or a purchaser of Stock shall have no rights as a shareholder with respect to any shares covered by any option, stock appreciation right, bonus award, or stock purchase agreement until the date of issue of a stock certificate to him or her for such shares. Except as otherwise provided in the Plan, no adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 16. Information. Financial statements of the Company will be provided annually to each optionee under the Plan. Effective Date: September 2, 1999 11 EX-10.5 8 STOCK OPTION AGREEMENT //Name// -------- MEDICALOGIC, INC. STOCK INCENTIVE PLAN STOCK OPTION AGREEMENT This Stock Option Agreement ("Agreement") is made between MedicaLogic, Inc., an Oregon corporation (the "Company"), and //Name// ("Optionee"), pursuant to the Company's Stock Incentive Plan (the "Plan"). The Company and Optionee agree as follows: 1. Option Grant. The Company hereby grants to Optionee, on the terms and subject to the conditions of this Agreement, the right and the option (the "Option") to purchase all or any part of //Stock// shares of the Company's common stock at a purchase price of $//Price// per share. The Option is intended to be an Incentive Stock Option, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Grant Date. The Grant Date for this Option is //Grant Date//. The Option shall continue in effect until the date ten years after the Grant Date (the "Expiration Date"), unless earlier terminated as provided in Section 5 or Section 8 of this Agreement. 3. Vesting Reference Date. The Vesting Reference Date for this Option is //Vest_Date//. 4. Time of Exercise of Option. Until it expires or is terminated as provided in Section 5 or Section 8, this Option may be exercised from time to time to purchase up to the number of shares that have vested as of the time of exercise. One sixth (1/6) of the shares under the Option shall vest on the six-month anniversary of the Vesting Reference Date and the remaining five sixths (5/6) of the shares under the Option shall vest ratably over a period of 30 months beginning on the seven-month anniversary of the Vesting Reference Date so that 1/36th of the shares under the Option shall vest on each of the seventh through the thirty-sixth monthly anniversaries of the Vesting Reference Date; provided, however, that all Shares shall vest immediately in the event Optionee's employment with the Company is terminated by the Company without cause. For purposes of the preceding sentence, the circumstances in which the Company will have cause to terminate Optionee shall include, without limitation, (i) any misappropriation by Optionee of funds or property of the Company; (ii) the conviction of or plea of guilty or nolo contendere by Optionee of a felony or of any crime involving moral turpitude; (iii) Optionee's engagement in illegal, immoral or similar conduct tending to place Optionee or the Company, by association with Optionee, in disrepute; and (iv) Optionee's nonperformance or gross dereliction of duty. 5. Termination of Employment. 5.1 Termination Not Involving Death or Disability. If Optionee's employment by the Company is terminated due to retirement or for any reason other than death or physical disability, the Option may be exercised at any time prior to the Expiration Date or the expiration of three months after the date of termination of employment, whichever is the shorter period, but only if and to the extent Optionee was entitled under Section 4 of this Agreement to exercise the Option on the date of termination of employment. 5.2 Termination Involving Death or Disability. If Optionee's employment by the Company is terminated because of death or physical disability (within the meaning of Section 22(e) (3) of the Code), the Option may be exercised at any time prior to the Expiration Date or the expiration of one year after the date of termination, whichever is the shorter period, for the greater of (i) the number of remaining shares for which Optionee was entitled under Section 4 to exercise the Option on the date of termination or (ii) the number of remaining shares for which Optionee would have been entitled to exercise the Option if the Option had been 50 percent exercisable on the date of termination. If Optionee's employment is terminated by death, the Option shall be exercisable only by the person or persons to whom Optionee's rights under the Option pass by Optionee's will or by the laws of descent and distribution of the state or country of Optionee's domicile at the time of death. 6. Method of Exercise of Option. 6.1 Notice of Exercise; Payment for Shares. The Option may be exercised only by notice in writing from Optionee to the Company of Optionee's intention to exercise, specifying the number of shares Optionee desires to purchase and the date on which Optionee desires to complete the transaction, which may not be more than 30 days after receipt of the notice, and, unless in the opinion of counsel for the Company such a representation is not required to comply with the Securities Act of 1933, as amended, containing a representation that it is Optionee's intention to acquire the shares for investment and not with a view to resale or distribution. On or before the date specified for completion of the purchase, Optionee must have paid the Company the full purchase price in cash, including cash that may be the proceeds of a loan from the Company, in shares of Company common stock previously acquired by Optionee valued at fair market value, or in any combination of cash and shares of the Company's common stock. No shares shall be issued until full payment therefore has been made. 6.2 Withholding. Upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the shares for which the Option was exercised, Optionee shall pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, Optionee shall pay such amount to the Company on demand. If Optionee fails to pay any amount demanded, the Company shall have the right to withhold that amount from other amounts payable by the Company to Optionee, including salary, subject to applicable law. 7. Non transferabilitv of Option. The Option may not be assigned or transferred by Optionee except by will or by the laws of descent and distribution of the state or country of his or her domicile at the time of death, and during Optionee's lifetime the Option may be exercised only by Optionee. 8. Changes in Capital Structure. 8.1 If during the term of the Option the outstanding shares of common stock of the Company are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, plan of exchange, re capitalization, reclassification, stock split, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors of the Company in the number and kind of shares subject to the Option. Such adjustments shall be made without change in the total price application to the unexercised portion of the Option and with a corresponding adjustment in the exercise price per share. Any such adjustment made by the Board of Directors shall be conclusive. 8.2 In the event of dissolution or liquidation of the Company or a merger, consolidation, or plan of exchange affecting the Company, in lieu of making any adjustments that may be provided for above in this Section 8 or in lieu of having the Option continue unchanged, the Board of Directors may, in its sole discretion, provide a 30-day period prior to such event during which the Option will be exercisable for 100 percent of the shares subject to the Option and after which the Option will terminate. 9. Conditions on Obligations. The Company shall not be obligated to issue shares upon exercise of the Option if the Company is advised by its legal counsel that such issuance would violate applicable state or federal laws, including securities laws. The Company will use its best efforts to take any steps required by state or federal law or applicable regulations in connection with issuance of shares upon exercise of the Option. 10. Transferability of Shares Acquired Upon Exercise of Option. Prior to issuance of any shares pursuant to this Agreement, Optionee shall become a party to the Company's Shareholders Agreement, as then in effect including all amendments and supplements thereto, by delivering a signature page or supplemental signature page thereto, and all shares acquired upon exercise of the Option and all shares issued in respect of such shares in connection with a stock dividend, stock split, reverse stock split, re capitalization or other corporate change shall be held by Optionee subject to the transfer restrictions contained in such Shareholders Agreement. 11. Specific Performance. Optionee acknowledges and agrees that the Company will suffer irreparable hardship if Optionee fails to comply with this Agreement, and that monetary damages will be inadequate to compensate the Company for such failure. Accordingly, Optionee agrees that this Agreement may be enforced by specific performance or other injunctive relief, in addition to any other remedies available at law or in equity. 12. Legend. All certificates representing Exercise Shares shall be endorsed with a legend, substantially in the following form, in addition to any other legends required by law: "Transfer of the shares represented by this certificate is restricted by the terms of an agreement between the corporation and the record holder hereof, a copy of which can be obtained by the record holder from the Secretary of the corporation." 13. Notices. Any required or permitted notice shall be given in writing and shall be deemed given upon personal delivery or upon deposit in the United States mail by registered or certified mail, postage prepaid. Any notice to Optionee shall be addressed to Optionee at Optionee's address shown on the corporate records, and any notice to the Company shall be addressed to the Company at its registered office. 14. No Right to Employment. Nothing in the Plan or this Agreement shall confer upon the Optionee any right to be continued in the employment of the Company or to interfere in any way with the right of the Company to terminate the Optionee's employment at any time for any reason. 15. Entire Agreement; Amendment. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof and may be amended only by written agreement between the Company and Optionee. 16. Successors of Company. This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company. 17. Governing Law, Severability. This Agreement shall be governed by and construed in accordance with the laws of Oregon, without regard to the choice of law rules applied in the courts of such state. If any provision or provisions of this Agreement are found to be unenforceable, the remaining provisions shall nevertheless be enforceable and shall be construed as if the unenforceable provisions were deleted. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above. THE COMPANY: MEDICALOGIC, INC. By: GUY E. FIELD Title: VP of Finance 20500 NW Evergreen Parkway Hillsboro, OR 97124 OPTIONEE: _______________________________________ [Signature] EX-10.7 9 RESTRICTED STOCK PURCHASE AGREEMENT MEDICALOGIC, INC. STOCK INCENTIVE PLAN RESTRICTED STOCK PURCHASE AGREEMENT This Restricted Stock Purchase Agreement ("Agreement") is entered into as of _____, 1999 between MedicaLogic, Inc., an Oregon corporation (the "Company"), and _______ ("Purchaser") and is made pursuant to the Company's Stock Incentive Plan. In consideration of the mutual agreements contained in this Agreement, the parties agree as follows: 1. Purchase. 1.1 Purchase Agreement. The Company hereby agrees to sell to Purchaser, and Purchaser hereby agrees to purchase from the Company, ______ (______) shares of the Company's common stock (the "Shares") at a purchase price of $____ per share, all on the terms and subject to the conditions of this Agreement. 1.2 Payment of Purchase Price. Purchaser shall pay for the Shares by delivering to the Company a duly executed note (the "Purchase Note"), substantially in the form of Exhibit A hereto. 1.3 Delivery of Stock. The Company will issue in Purchaser's name, as promptly after receipt of the Purchase Note as practicable, one or more certificates representing the Shares. To secure its rights under the Repurchase Option described in Section 2, the Company will retain the certificate or certificates representing the Shares. Purchaser will deliver to the Company executed blank stock powers covering the Shares subject to the Repurchase Option, substantially in the form of Exhibit B hereto. 2. Repurchase Option. 2.1 Option on Termination of Employment. If Purchaser ceases to be employed by the Company for any reason, or no reason, with or without cause, including death or disability (a "Termination"), the Company shall have an irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days from the date of Termination to purchase all or any portion of the Shares held by Purchaser on the date of the Termination that have not been released from the Repurchase Option as provided in Section 2.3. The right of the Company under the Repurchase Option to purchase any part of the Shares may be assigned in whole or in part to any person or persons designated by the Board of Directors of the Company. 2.2 Exercise of Option. The Repurchase Option shall be exercised by the Company by delivering to Purchaser (or to Purchaser's executors or administrators, if applicable) a written notice of exercise and a check in the amount of the exercise price set forth in Section 2.4. Notwithstanding the foregoing, the Company may, at its option, elect to reduce the amount payable to Purchaser (or Purchaser's estate, if applicable) upon exercise of a Repurchase Option by an amount not in excess of sum of the unpaid principal, if any, and the accrued but unpaid interest, if any, then due on the Purchase Note. Upon delivery of such notice and payment of the exercise price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased without further action by Purchaser. 2.3 Release from Repurchase Option. The Shares shall be released from the Repurchase Option ratably over a period of 36 months beginning on the date six months from March 31, 1999 (the "Vesting Reference Date"), so that on sixth (1/6) of the Shares will be released from the Repurchase Option on the sixth month anniversary of the Vesting Reference Date and the remaining five sixths (5/6) of the Shares shall be released from the Repurchase Option ratably over a period of 30 months beginning on the seventh month anniversary of the Vesting Reference Date so that 1/36 of the Shares under the Option shall vest on each monthly anniversary of the Vesting Reference Date beginning on the date seventh month after the Vesting Reference Date; provided, however, that all Shares shall be released immediately from the Repurchase Option in the event (a) Optionee's employment with the Company is terminated by the Company without cause including, without limitation, termination resulting from a reduction in the workforce of the Company, or (b) a Change of Control (as defined below) occurs. For purposes of the preceding paragraph, the circumstances in which the Company will have cause to terminate Optionee shall include, without limitation, (i) any misappropriation by Optionee of funds or property of the Company; (ii) the conviction of or plea of guilty or nolo contendere by Optionee of a felony or any crime involving moral turpitude; (iii) Optionee's engagement in illegal, immoral or similar conduct tending to place Optionee or the Company, by association with Optionee, in disrepute; and (iv) Optionee's nonperformance or gross dereliction of duty which continues after notice from the Company and a reasonable opportunity to cure. For purposes of the preceding paragraph, "Change of Control" means the occurrence of any of the following: (i) the sale, conveyance, or other disposition of all or substantially all of the property or business of the Company, (ii) the merger or consolidation of the Company with any other entity (other than a wholly-owned subsidiary corporation), or the completion of any other transaction or series of related transactions not involving a public offering, in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. For purposes of this provision, "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (a) was a member of such Board of Directors on the date of this agreement or (b) was nominated for election or elected or appointed to such Board of Directors by the Board of Directors at a time when a majority of the Board consisted of Continuing Directors. As Shares are released from the Repurchase Option, the Company shall deliver to Purchaser a certificate representing the Shares released; provided, however, that the parties agree that for administrative convenience the Company shall deliver certificates representing the Shares in 2 increments of 29,166 2/3 Shares; and provided, further, that in the event that (i) one or more Shares but fewer than 29,166 2/3 Shares have been released from the Repurchase Option and (ii) it is expected that no more Shares will be released from the Repurchase Option, then the Company shall deliver to Purchaser one or more certificates representing all Shares then released from the Repurchase Option but for which certificates have not been delivered. If, during the time the Company is holding certificates to secure its rights under the Repurchase Option, the outstanding shares of common stock of the Company are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors of the Company in the number and kind of shares the Company shall deliver to Purchaser as Shares are released from the Repurchase Option. 2.4 Exercise Price. The price to be paid by the Company for the Shares upon exercise of the Repurchase Option shall be $_______ per Share. 3. Withholding. Upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the Shares, Purchaser shall pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, Purchaser shall pay such amount to the Company on demand. If Purchaser fails to pay any amount demanded, the Company shall have the right to withhold such amount from other amounts payable by the Company to Purchaser, including salary, subject to applicable law. 4. Limitations on Transfer. 4.1 While Subject to Repurchase Option. Without the written consent of the Company, Purchaser shall not sell, assign, encumber, dispose of or transfer (including transfer by operation of law) any interest in any Shares that have not been released from the Repurchase Option. 4.2 Stock Transfer Agreement. Upon release from the Repurchase Option, the Shares shall be subject to the terms of any shareholders agreement then in effect, including any amendments or supplements thereto, among the Company and any of its shareholders (a "Shareholders Agreement"), including the transfer restrictions contained therein, and Purchaser agrees that the transfer restrictions and purchase options of any such Shareholders Agreement shall apply to the Shares and agrees to be bound from the date of this Agreement onward by all of the terms and conditions of any such Shareholders Agreement. 3 5. Investment Intent; Restricted Securities. Purchaser represents, warrants and covenants to the Company that the Shares are being acquired by Purchaser for investment for Purchaser's own account only and not with a view to, or resale in connection with, any distribution thereof within the meaning of the Securities Act of 1993, as amended (the "Act"). Purchaser understands and acknowledges that the sale of the Shares has not been registered under the Act or applicable state securities laws, that the Shares must be held indefinitely unless subsequently registered under the Act and applicable state securities laws or unless an exemption from such registration requirement is available, that the Company is under no obligation to register the Shares, and that the certificate or certificates representing the Shares will be stamped with legends substantially in the form specified in Section 7 of this Agreement. Purchaser agrees to comply with the transfer restrictions specified in the legends set forth in Section 7 and on the Share Certificates. 6. Acknowledgment of Access to Information. Purchaser acknowledges that he, through his position with the Company, has had access to sufficient information regarding the Company's business and financial condition to enable him to make an investment decision regarding the purchase of the Shares. Purchaser acknowledges that he has been provided an opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of this offering and to obtain additional information concerning the Company and this offering. 7. Legend. All certificates representing the Shares shall be endorsed with legends substantially in the following form, in addition to any other legends required by law: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN A RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. " "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." "TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY A SHAREHOLDERS AGREEMENT AMONG THE CORPORATION AND ITS SHAREHOLDERS, WHICH AGREEMENT BY THIS REFERENCE, IS INCORPORATED HEREBY AND MADE A PART HEREOF AS IF FULLY SET FORTH, AND WHICH AGREEMENT, BY ACCEPTANCE OF DELIVERY OF THIS 4 CERTIFICATE, IS ACCEDED TO BY THE HOLDER HEREOF. A COPY OF THE SHAREHOLDERS AGREEMENT IS ON FILE WITH THE SECRETARY OF THE CORPORATION." 8. Specific Performance. Purchaser acknowledges and agrees that the Company will suffer irreparable harm if Purchaser fails to comply with the terms of this Agreement, and that monetary damages will be inadequate to compensate the Company for such failure. Accordingly, Purchaser agrees that this Agreement may be enforced by specific performance or other injunctive relief, in addition to any other remedies available at law or in equity. 9. Notices. Any required or permitted notice shall be given in writing and shall be deemed given upon personal delivery or upon deposit in the United States mail by registered or certified mail, postage prepaid. Any notice to Purchaser shall be addressed to Purchaser at Purchaser's address shown on the corporate records of the Company, and any notice to the Company shall be addressed to the Company at its registered office. 10. No Right to Employment. Nothing in the Company's Stock Incentive Plan or in this Agreement shall confer upon Purchaser any right to be continued in the employment of the Company or to interfere in any way with the right of the Company to terminate Purchaser's employment at any time for any reason. 11. Entire Agreement; Amendment; Counterparts. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof and may be amended only by written agreement between the Company and Purchaser. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. 12. Successors of Company. This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company and, subject to the restrictions on transfer of this Agreement, shall be binding upon and shall inure to the benefit of Purchaser's heirs, executors, administrators, successors and assigns. 13. Governing Law, Severability. This Agreement shall be governed by and construed in accordance with the laws of Oregon, without regard to the choice of law rules applied in the courts of such state. If any provisions or provision of this Agreement are found to be unenforceable, the remaining provisions shall nevertheless be enforceable and shall be construed as if the unenforceable provisions were deleted. 14. Further Action. The parties agree to execute such further instruments and to take such actions as may reasonably be necessary to carry out the intent of this Agreement. 5 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above. THE COMPANY: MEDICALOGIC, INC. By: ------------------------------------- Title: ---------------------------------- Address: 20500 NW Evergreen Parkway Hillsboro, OR 97124 PURCHASER: ----------------------------------------- Address: -------------------------------- -------------------------------- 6 EX-10.8 10 METLIFE CAPITAL LETTER MetLife Capital Loan and Security Agreement THIS LOAN AND SECURITY AGREEMENT entered into as of the 5th day of June, 1998, by and between MetLife Capital Corporation, a Delaware corporation, whose address is 10900 NE 4th Street, Suite 500, Bellevue, WA 98004 ("Lender") and MedicaLogic, Inc., an Oregon Corporation, whose address is 20500 NW Evergreen Parkway, Hillsboro, OR 97124 ("Borrower"). WHEREAS, Lender has agreed to make a commercial loan or loans to Borrower; and WHEREAS, as a condition to making the loans, and in order to secure the repayment thereof, Lender has required Borrower to execute and deliver to Lender this Loan and Security Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower and Lender agree as follows: 1. Creation of Security Interest. As security for the due and punctual payment of any and all of the present and future obligations of the Borrower to Lender, whether direct or contingent or joint or several, Borrower hereby conveys, assigns and grants to Lender a continuing security interest in all of Borrower's rights, title and interests in and to the equipment described in the Supplemental Security Agreement(s) entered into pursuant to this Loan and Security Agreement from time to time ("Equipment") including all present and future additions, attachments and accessories thereto, all substitutions therefor and replacement thereof and all proceeds thereof, including all proceeds of insurance (such Equipment and property hereinafter called "Collateral"). 2. The Loans. (a) Subject to the terms and conditions of this Loan and Security Agreement, Lender agrees to make a loan or loans to Borrower. The maximum principal amount of any loan or loans to be made by Lender to Borrower shall be within Lender's discretion, subject to the exercise of Lender's reasonable business judgment, and shall be as stated in the loan commitment letter issued by Lender to Borrower, or in the event a commitment letter is not issued by Lender, in Lender's internal credit approval (each such loan or loans shall be referred to as the "Loan Amount"). (b) The Loan Amount shall be repaid by Borrower as a term loan or term loans ("Term Loan"). The Term Loan shall be evidenced by a promissory note or notes in the form attached hereto as Exhibit "A" ("Term Note"). The payment provisions of each Term Note shall be stated therein. (c) If requested by Borrower, and in accordance with the terms and conditions of Section 3 hereof, Lender shall make interim fundings to Borrower of a Term Loan as partial advances of the Loan Amount ("Interim Loans"). The Interim Loans shall either be for the payment of the acquisition cost of any items of Equipment delivered and accepted by Borrower prior to the expiration date of Lender's loan commitment to Borrower ("Commitment Expiration Date") or to fund progress payments to the vendor or manufacturer of the Equipment, if the making of progress payments was agreed to by Lender in its commitment or approval to make the loan or loans to Borrower. The Interim Loans shall be evidenced by promissory notes in the form attached hereto as Exhibit "B" ("Interim Note"). Interest on all Interim Loans shall be payable as provided therein. The principal amount due under the Interim Loans shall be due as provided in the Interim Notes, at which time, provided no Event of Default hereunder has occurred and is continuing or event which with the passing of time or giving of notice or both would become an Event of Default hereunder has occurred and is continuing, Lender shall consolidate all Interim Loans and convert them to a Term Loan evidenced by a Term Note or Notes. Whether or not a Term Loan is evidenced by one or more Term Notes shall be as agreed between Lender and Borrower, or in the absence of such an agreement, as decided by Lender, in the exercise of its reasonable business judgment. (d) In the event that the amount loaned pursuant to the Interim Loans is less than the Loan Amount, subject to Borrower's compliance with the terms and conditions of this Loan and Security Agreement (including the satisfaction of the conditions of borrowing set forth in Section 7 of this Loan and Security Agreement, including but not limited to providing Lender with a description of the items of Equipment), Lender shall disburse to Borrower the balance of the Loan Amount on the same date that the Interim Loans are converted into a term loan. 3. Method For Borrowing On Interim Loan. Borrower shall give Lender at least five (5) business days written notice of a request for the disbursement of an Interim Loan ("Request"), specifying the date on which the Interim Loan is to be disbursed. Such Request shall be in the form attached hereto as Exhibit "C". Such Request shall be accompanied by an original copy of the invoice or invoices to be paid from the Interim Loan. Such Request shall constitute a representation and warranty by the Borrower that (i) as of the date of the Request no Event of Default or event which with the passing of time or the giving of notice or both would constitute an Event of Default hereunder has occurred and is continuing and (ii) in the event items of Equipment have been delivered to the Borrower, Borrower has unconditionally accepted the Equipment from the vendor thereof. Subject to the conditions of this Loan and Security Agreement, Lender shall disburse the Interim Loan to the invoicing party, or if Borrower shall have paid the amount of such invoice, Lender shall reimburse Borrower, upon receipt of proof of payment from Borrower. 4. Cross Collateral/Cross Default. All Collateral shall secure the payment and performance of all of Borrower's liabilities and obligations to Lender hereunder and under any of the loan documents relating hereto including, but not limited to, all Interim Notes and all Term Notes (the Loan and Security Agreement, the Interim Notes, the Term Notes, the Supplemental Security Agreement(s) and all other loan documents may be referred to herein collectively as the "Loan Documents"). Lender's security interest in the Collateral shall not be terminated until and unless all of Borrower's obligations to Lender under any of the Loan Documents are fully paid and performed. The occurrence of an event of default under any other of the Loan Documents shall be deemed to be an Event of Default hereunder and an Event of Default hereunder shall be deemed to be an event of default under any other of the Loan Documents. 5. Representations And Warranties. Borrower hereby represents and warrants as follows: (a) Power and Authorization. Borrower has the full power and (corporate) authority to execute, deliver and perform Borrower's obligations under the Loan Documents. The execution and delivery of the Loan Documents have been authorized by all requisite corporate (or partnership) action on the part of Borrower. The execution, delivery and performance of the Loan Documents have not constituted and will not constitute a breach, default, or violation of or under Borrower's articles of incorporation, bylaws (partnership agreement), or any other agreement, indenture, contract, lease, law, order, decree, judgment, or injunction to which Borrower is a party or may be bound and have not resulted and will not result in the creation of any lien upon the Equipment pursuant to any agreement, indenture, lease, contract or other instrument to which Borrower is a party, except the lien created by this Loan and Security Agreement. (b) Existence. If Borrower is a corporation, Borrower (i) is duly incorporated, validly existing and in good standing under the laws of its state of incorporation, (ii) has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, and (iii) is duly qualified to transact business as a foreign corporation in each jurisdiction where the Equipment will be located and in the jurisdiction where its principal place of business is located. If Borrower is a partnership, Borrower (i) has been duly formed as a (limited or general) partnership under the laws of the state of its organization, (ii) is comprised of the general partner(s) listed on the Schedule of Partners attached to this Loan and Security Agreement, and (iii) is in good standing under the laws of the state of its formation. (c) Binding Effect. This Loan and Security Agreement constitutes the valid and binding agreement of the Borrower; the Interim Notes and the Term Note, when executed and delivered, will constitute the valid and binding obligations of the Borrower; and the Loan Documents are enforceable in accordance with their terms except as (i) the enforceability thereof may be limited by the bankruptcy laws, and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (d) Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against or affecting the Borrower, before any court or arbitrator or any governmental body, agency or official which has not been previously disclosed to the Lender in writing and in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, financial condition or results of operations of the Borrower or which would in any manner draw into question the validity of any of the Loan Documents. (e) Filing of Tax Returns. The Borrower has filed all tax returns required to have been filed and has paid all taxes shown to be due and payable on such returns, including interest and penalties, and all other taxes which are payable by it, to the extent the same have become due and payable. The Borrower knows of no proposed tax assessment against it and all tax liabilities of the Borrower are adequately provided for. (f) Title. The Borrower has or shall have at the time it executes the Term Note good and indefeasible title to the Collateral free and clear of all liens other than the Lender's lien. (g) Compliance with Law. The business and operations of the Borrower have been and are being conducted in accordance with all applicable laws, rules and regulations, other than violations which could not (either individually or collectively) have a material adverse effect on the financial condition or operations of the Borrower. (h) Full Disclosure. All documents, records, instruments, certificates, statements (including, but not by way of limitation, financial statements of Borrower) and information provided to Lender by Borrower in connection with this Loan and Security Agreement are true and accurate in all material respects and do not contain any untrue statement, or fail to contain any statement of a material fact necessary to make the statements contained herein or therein not misleading. There is no fact known to the Borrower that Borrower has not disclosed in writing which could materially and adversely affect the financial condition or operations of Borrower. (i) Security Interest. The security interest granted to Lender hereunder is a valid, first priority security interest in the Collateral and has been or promptly after the execution of the Supplemental Security Agreement describing the Collateral will be, perfected in accordance with the requirements of all states in which any item of the Collateral is located. (j) Personal Property. Under the laws of the state(s) in which the Collateral is to be located, the Collateral is deemed to consist solely of personal property. (k) Pollution and Environmental Control. Borrower has obtained all permits, licenses and other authorizations which are required under, and is in material compliance with, all federal, state, and local laws and regulations relating to pollution, reclamation, or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or wastes into air, water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or hazardous or toxic materials or wastes. Borrower shall maintain all such permits, licenses, and authorizations current. 6. Covenants. Borrower hereby agrees and covenants as follows: (a) Payment. Borrower shall pay the indebtedness secured hereby as provided herein and in the Interim Notes and Term Notes. (b) Location of Collateral. Borrower will keep the Collateral located at the location or locations stated on the Supplemental Security Agreements, provided, however, that Borrower may change the location of the collateral with Lender's prior written consent. (c) No Liens. Except for the security interest granted hereby or under any other agreement under which Lender is the secured party, whether as mortgagee, beneficiary or otherwise, Borrower shall keep the Collateral free and clear of any security interest, lien or encumbrance of any kind and Borrower shall not sell, assign (by operation of law or otherwise) exchange or otherwise dispose of any of the Collateral. (d) Insurance. Borrower shall procure and continuously maintain and pay for (a) all risk physical damage and property insurance covering loss or damage to the equipment for not less than the full replacement value thereof naming Lender as loss payee and (b) bodily injury and property damage combined single limit liability insurance, all in such amounts and against such risks and hazards as are reasonably required by Lender, with insurance companies and pursuant to contracts or policies and with deductibles satisfactory to Lender. All contracts and policies shall include provisions for the protection of Lender notwithstanding any act or neglect of or breach or default by Borrower, shall provide for payment of insurance proceeds to Lender, shall provide that they may not be modified, terminated or cancelled unless Lender is given at least thirty (30) days' advance written notice thereof, and shall provide that the coverage is "primary coverage" for the protection of Borrower or Lender notwithstanding any other coverage carried by Lender protecting against similar risks. Borrower shall promptly notify any appropriate insurer and Lender of each and every occurrence, which may become the basis of a claim or cause of action against the insured and provide Lender with all data pertinent to such occurrence. Borrower shall furnish Lender with certificates of such insurance or copies of policies upon request and shall furnish Lender with renewal certificates not less than thirty (30) days prior to the renewal date. Proceeds of all insurance are payable first to Lender to the extent of its interest. (e) Financing Statements. At the request of Lender, Borrower will join Lender in executing one or more financing statements pursuant to the Uniform Commercial Code and other documents deemed necessary by Lender under applicable law to record or perfect its security interest in the Collateral, including continuation statements, in form satisfactory to Lender and will pay the cost of filing the same in all public offices wherever filing is deemed by Lender to be necessary or desirable. Borrower hereby authorizes Lender, in such jurisdictions where such action is authorized by law, to effect any such recordation or filing of financing statements or other documents without Borrower's signature thereto. (f) Change of Name or Address. Borrower will immediately notify Lender in writing of any change in its place of business or the adoption or change of any tradename or fictitious business name, and will upon request of Lender, execute any additional financing statements or other similar documents necessary to perfect or maintain its security interest. (g) Use of Equipment, Maintenance. Borrower will cause the Equipment to be used in a careful and proper manner, will comply with and conform to all governmental laws, rules and regulations relating thereto, and will cause the Equipment to be operated in accordance with the manufacturer's or supplier's instructions or manuals and only by competent and duly qualified personnel. Borrower will cause the Equipment to be kept and maintained in good repair, condition and working order and will furnish all parts, replacements, mechanisms, devices and servicing required therefor so that the value, condition and operating efficiency thereof will at all times be maintained and preserved, normal wear and tear excepted. All such repairs, parts, mechanisms, devices and replacements shall immediately, without further act, become part of the Equipment and subject to the security interest created by this Loan and Security Agreement. Borrower will not make any improvement, change, addition or alteration to the Equipment if such improvement, change, addition or alteration will impair the originally intended function or use of the Equipment or impair the value of the Equipment as it existed immediately prior to such improvement, change, addition or alteration. Any part added to the Equipment in connection with any improvement, change, addition or alteration shall immediately, without further act, become part of the Equipment and subject to the security interest created by this Loan and Security Agreement. (h) Inspection. Lender may at any reasonable time or times inspect the Equipment and may at any reasonable time or times inspect the books and records of Borrower. (i) Taxes. Borrower shall promptly pay, when due, all charges, fees, assessments and taxes (excluding all taxes measured by Lender's income) which may now or hereafter be imposed upon the ownership, leasing, possession, sale or use of the Collateral. (j) Performance by Lender. If Borrower fails to perform any agreement or obligation contained herein, Lender may itself perform, or cause the performance of such agreement or obligation. Borrower will pay, or reimburse Lender, on demand, for any and all fees, including attorneys' fees, costs and expenses of whatever kind or nature incurred by Lender in connection with (i) the creation, preservation and protection of Lender's security interest in the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, (ii) payments or discharge of any taxes or liens upon or in respect of the Collateral, (iii) premiums for insurance with respect to the Equipment and (iv) this Loan and Security Agreement and with protecting, maintaining or preserving the Collateral and Lender's interests therein, whether through judicial proceedings or otherwise, or in connection with defending or prosecuting any actions, suits or proceedings arising out of or related to the Loan and Security Agreement and the Loan Documents or in connection with any debt restructuring, loan workout negotiations or bankruptcy or insolvency case or proceedings. All such amounts shall constitute obligations of Borrower secured by the Collateral. In the event that Borrower fails to perform any of its agreements contained herein, Borrower will, on demand, reimburse Lender for all such expenditures, together with interest thereon from the date of such expenditure until fully reimbursed at the rate of two percent (2%) per month on the outstanding balance of such expenditures or the highest rate permitted by law, whichever is less. (k) Power of Attorney. Borrower hereby irrevocably appoints Lender Borrower's attorney-in-fact, with full authority in the place and stead of Borrower and in the name of Borrower or otherwise, from time to time in the Lender's discretion, to take any action and to execute any instrument which Lender may deem necessary or advisable to accomplish the purposes of this Loan and Security Agreement, including, without limitation: (i) to obtain compromise and adjust insurance required to be paid to Lender; (ii) to ask, demand, collect, sue for, recover, receive, and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iii) to receive, endorse, and collect any drafts or other instruments, documents, and chattel paper in connection with clause (i) or (ii) above; and (iv) to file any claims or take any action or institute any proceedings which Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Lender with respect to any of the Collateral. (l) No Duties. The powers conferred on Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Lender shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. (m) Financial Data. Borrower will furnish to Lender and will cause any guarantor of Borrower's obligations to furnish to Lender on request (i) annual balance sheet and profit and loss statements prepared in accordance with generally accepted accounting principles and practices consistently applied and, if Lender so requires, accompanied by the annual audit report of an independent certified public accountant reasonably acceptable to Lender, and (ii) all other financial information and reports that Lender may from time to time reasonably request, including, if Lender so requires, income tax returns of Borrower and any guarantor of Borrower's obligations hereunder. 7. Conditions of Borrowing. Lender shall not be obligated to make any loan hereunder unless: (a) The Interim Notes or Term Notes evidencing such loan shall have been duly executed and delivered to Lender; (b) Borrower shall have executed and delivered to Lender the Supplemental Security Agreement describing the Collateral and stating, except with respect to progress payment fundings, the location thereof; (c) Except with respect to progress payment fundings, Lender shall have received evidence (as described in Section 6d hereof) that insurance has been obtained in accordance with the provisions of this Loan and Security Agreement; (d) Lender shall have received any and all third party consents, waivers or releases deemed necessary or desirable by it in connection with the loan and the Collateral being financed, including, without limitation, Uniform Commercial Code lien releases and the consent and waiver, in form and substance satisfactory to Lender, of each and every realty owner, landlord and mortgagee holding an interest in or encumbrance on the real property where any of the Collateral is to be located; (e) All filings, recordings and other actions deemed necessary or desirable by Lender in order to establish, protect, preserve and perfect its security interest in the Collateral being financed by such loan as a valid perfected first priority security interest shall have been duly effected, including, without limitation, the filing of financing statements and the recordation of landlord (owners) and/or mortgagee waivers or disclaimers, all in form and substance satisfactory to Lender, and all fees, taxes and other charges relating to such filings and recordings shall have been paid by Borrower. (f) The representations and warranties contained in this Loan and Security Agreement shall be true and correct in all respects on and as of the date of the making of any loan hereunder with the same effect as the date of the making of any loan hereunder with the same effect as if made on and as of such date; (g) In the sole judgment of Lender, there shall have been no material adverse change in the financial condition, business or operations of Borrower from the earliest date of any financial statement, credit report, business report or similar document submitted to Lender for its review; (h) All Loan Documents shall be satisfactory to Lender's attorneys; and (i) Lender shall have received, in form and substance satisfactory to Lender, such other documents as Lender shall require including, but not limited to a Request, proof of payment, vendor invoices and certificates of authority and incumbency. 8. Default. The occurrence of any of the following events, following the giving of any required notice and/or the expiration of any applicable period of grace, shall constitute an event of default ("Event of Default") hereunder: (a) Borrower's default in payment of any installment of the principal of or interest on any Interim Note or Term Note when and after the same shall become due and payable, whether at the due date thereof or by acceleration or otherwise, which default shall continue unremedied for ten (10) days; or (b) The failure by Borrower to make payment of any other amount payable hereunder or under any Interim Note or Term Note, and the continuance of such failure for more than ten (10) days after written notice thereof by Lender to Borrower; or (c) The failure by Borrower to perform or observe any covenant, condition, obligation or agreement to be performed or observed by it hereunder, which failure shall continue unremedied for thirty (30) days after written notice thereof by Lender to Borrower; or (d) The occurrence of a default described in Section 4 hereof; or (e) Any warranty, representation or statement made or furnished with respect to the Borrower or the Collateral to Lender by or on behalf of Borrower, in connection with this Loan and Security Agreement, or the indebtedness secured hereby, shall prove to have been false in any adverse, material respect when made or furnished; or (f) Borrower shall become insolvent or bankrupt or make an assignment for the benefit of creditors or consent to the appointment of a trustee or receiver; or a trustee or a receiver shall be appointed for Borrower or for a substantial part of its property without its consent and shall not be dismissed for a period of sixty (60) days; or bankruptcy, reorganization, liquidation, insolvency or dissolution proceedings shall be instituted by or against Borrower and, if instituted against Borrower, shall be consented to or be pending and not dismissed for a period of sixty (60) days; or any execution or writ of process shall be issued under any action or proceeding against Borrower in such capacity whereby any of the Collateral may be taken or restrained; Borrower shall cease doing business as a going concern; or, without the prior written consent of Lender, Borrower shall sell, transfer or dispose of all or substantially all of its assets or property; or (g) The liquidation, merger, consolidation, reorganization, conversion to an "S" status or dissolution, if Borrower is a corporation or partnership, of Borrower, if in Lender's reasonable opinion, such act shall materially and adversely affect Borrower's ability to perform under any of the Loan Documents; or (h) Any item of Collateral is seized or levied on under legal or governmental process or for any reason Lender deems itself insecure. Lender shall be entitled to deem itself insecure when some event occurs, fails to occur or is threatened or some objective condition exists or is threatened which significantly impairs the prospects that any of Borrower's obligations to Lender will be paid when due, which significantly impairs the value of the Collateral to Lender or which significantly affects the financial or business condition of Borrower. The occurrence of an Event of Default shall terminate any commitment or obligation by Lender to make any of the loans contemplated by this Loan and Security Agreement. 9. Remedies Upon Default. Upon the occurrence of an Event of Default hereunder, Lender may, at its option, do any one or more of the following: (a) Declare all obligations of Borrower to Lender to be immediately due and payable, whereupon all unpaid principal of and interest on said indebtedness and other amounts declared due and payable shall be and become immediately due and payable; (b) Take possession of all or any of the Collateral and exclude therefrom Borrower and all others claiming under Borrower, and thereafter hold, store, use, operate, manage, maintain and control, make repairs, replacements, alterations, additions and improvements to and exercise all rights and powers of Borrower in respect to the Collateral or any part thereof. In the event Lender demands, or attempts to take possession of the Collateral in the exercise of any rights under this Loan and Security Agreement, Borrower promises and agrees to promptly turn over and deliver complete possession thereof to Lender; (c) Require Borrower to assemble the Collateral, or any portion thereof, at a place designated by Lender and reasonably convenient to both parties, and promptly to deliver such Collateral to Lender, or an agent or representative designated by it; (d) Sell, lease or otherwise dispose of the Collateral at public or private sale, without having the Collateral at the place of sale, and upon terms and in such manner as Lender may determine (and Lender may be a purchaser at any sale); and (e) Exercise any remedies of a secured party under the Uniform Commercial Code as adopted in the state where the Collateral is located or any other applicable law. Except as to portions of the Collateral which are perishable or threaten to decline speedily in value or are of a type customarily sold on a recognized market, Lender shall give Borrower at least ten (10) days' prior written notice of the time and place of any public or private sale of the Collateral or other intended disposition thereof to be made. Such notice may be mailed to Borrower at the address set forth in the first paragraph of this Loan and Security Agreement. Borrower hereby specifically agrees (to the extent that applicable law and public policy allows it to effectively do so) that any public or private sale held in accordance with the terms of this Loan and Security Agreement shall, for the purpose of the Uniform Commercial Code as adopted in the state where the Collateral is located and for all other purposes, be deemed to have been conducted in a commercially reasonable manner and in good faith. The proceeds of any sale under Section 9(d) shall be applied as follows: (i) To the repayment of the costs and expenses of retaking, holding and preparing for the sale and the selling of the Collateral (including legal expenses and attorneys' fees) and the discharge of all assessments, encumbrances, charges or liens, if any, on the Collateral prior to the lien hereof (except any taxes, assessments, encumbrances, charges or liens subject to which such sale shall have been made); (ii) To the payment of the whole amount then due and unpaid of the indebtedness of Borrower to Lender; (iii) To the payment of other amounts then secured hereunder; and (iv) The surplus, if any, shall be paid to the Borrower or to whomsoever may be lawfully entitled to receive the same. Lender shall have the right to enforce one or more remedies hereunder, successively or concurrently, and such action shall not operate to estop or prevent Lender from pursuing any further remedy which it may have, and any repossession or retaking or sale of the Collateral pursuant to the terms hereof shall not operate to release Borrower until full payment of any deficiency has been made in cash. 10. Limitation on Interest: It is the intent of the parties to this Loan and Security Agreement to contract in strict compliance with applicable usury laws from time to time in effect. In furtherance thereof, the parties stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract to pay for the use, forbearance or detention of money at a rate in excess of the maximum interest rate permitted to be charged by applicable law from time to time in effect. 11. Personal Property/Tags. No item of Equipment will be attached or affixed to realty or any building without Lender's prior knowledge and written consent and waiver of the landlord and the mortgagee, if any, of the real property. If so requested by Lender, Borrower will affix tags supplied by Lender, reflecting Lender's security interest in the Equipment. 12. Loss and Damage. Borrower shall bear the risk of damage, loss, theft, or destruction, partial or complete of the Equipment, whether or not such loss or damage is covered by insurance, except that while Borrower is not in default, Lender agrees to apply toward payment of obligations of Borrower insurance proceeds payable to Lender by reason of such damage, loss, theft, or destruction. In the event of any damage, loss, theft, or destruction, partial or complete, of any item of Equipment, Borrower shall promptly notify Lender in writing and at the option of Lender (a) repair or restore the Equipment to good condition and working order, or (b) replace the Equipment with similar equipment in good repair, condition and working order, or (c) pay Lender, in cash, an amount equal to the unamortized equipment cost for the item or if the Equipment was not purchased with the loan proceeds, the pro rata portion of the outstanding principal balance due under the Interim Note or Term Note, as the case may be, and all other amounts relating to that item of Equipment then due and owing hereunder, and upon payment of that amount, Lender's lien shall be terminated with respect to that item of Equipment only, and Lender will release its interest in that item of Equipment. 13. Assignment. Borrower may not assign or transfer any rights under this Loan and Security Agreement or to the Collateral without Lender's prior written consent. 14. Indemnification. Borrower shall indemnify and hold harmless Lender from and against any and all claims, losses, liabilities, causes of action, costs and expenses (including the fees of Lender's attorneys) ("Claims") in any way relating to or arising out of this Loan and Security Agreement, the other Loan Documents or the Collateral, except for any Claims resulting solely and directly from Lender's gross negligence or willful misconduct. 15. Notices. Whenever Borrower or Lender shall desire to give or serve any notice, demand, request or other communication with respect to this Loan and Security Agreement, each such notice, demand, request or communication shall be in writing and shall be effective only if the same is physically delivered or is by certified mail, postage prepaid, return receipt requested, or by overnight courier, postage prepaid, mailed to the parties at the addresses set forth in the first paragraph of this Loan and Security Agreement, with a copy to Lender's Vice President of Credit. Any party hereto may change its address for such notices by delivering or mailing to the other parties hereto, as aforesaid, a notice of such change. 16. No Waiver by Lender. By exercising or failing to exercise any of its rights, options or elections hereunder, Lender shall not be deemed to have waived any breach or default on the part of Borrower or to have released Borrower from any of the obligations secured hereby, unless such waiver or release is in writing and is signed by Lender. In addition, the waiver by Lender of any breach hereof for default in payment of an indebtedness secured hereby shall not be deemed to constitute a waiver of any succeeding breach or default. 17. Further Agreements. From time to time, Borrower will execute such further instruments as Lender may reasonably require, in order to protect, preserve, and maintain the security interest granted hereby. 18. Binding upon Successors. All agreements, covenants, conditions and provisions of this Loan and Security Agreement shall apply to and bind the successors and assigns of all parties hereto. 19. Governing Laws. This Loan and Security Agreement shall be governed by the laws of the State of Washington. 20. Amendment. This Loan and Security Agreement can be modified or rescinded only by a writing expressly referring to this Loan and Security Agreement, signed by both of the parties hereto. 21. Invalidity of Provisions. Every provision of this Loan and Security Agreement is intended to be severable. In the event that any term or provision hereof is declared by a court to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable, then to the extent possible all of the other provisions shall nonetheless remain in full force and effect. IN WITNESS WHEREOF, Borrower and Lender have duly executed this Loan and Security Agreement the day and year first above written. Lender: MetLife Capital Corporation Borrower: MedicaLogic, Inc. ---------------------------- ---------------------------- By: By: -------------------------------- ---------------------------------- (Print Name): Mitchell J. Stevens (Print Name): Guy E. Fields ---------------------- ------------------------ Title: Vice President Title: Vice President of Finance ----------------------------- ------------------------------- Social Security Number: _______________ (If Borrower is an individual) Federal Tax Identification Number: 930890696 ----------------------------- EX-10.8.1 11 INDUSTRIAL/BUSINESS PARK LEASE Standard Form of INDUSTRIAL/BUSINESS PARK LEASE Developed by PORTLAND METROPOLITAN ASSOCIATION OF BUILDING OWNERS AND MANAGERS INDUSTRIAL/BUSINESS PARK LEASE (NNN) 1.1 BASIC LEASE TERMS. a. REFERENCE DATE: January 15, 1997 b. TENANT: MedicaLogic, Inc., an Oregon corporation 20500 NW Evergreen Parkway Address (Leased Premises): Hillsboro, OR 97124 Address (For Notices): MedicaLogic, Inc. 15400 NW Greenbrier Parkway, Suite 400 Beaverton, OR 97006 c. LANDLORD: Evergreen Corporate Center LLC, an Oregon limited liability company Address (For Notices): 111 SW Columbia Street, Suite 1380 Portland, OR 97201 d. TENANT'S USE OF PREMISES: General Office Purposes e. PREMISES AREA: Approximately 75,010 Square Feet in Evergreen Corporate Center RIDER NO. 1 f. RIDER NO. 2 g. h. TERM OF LEASE: Anticipated Commencement Date: December 15, 1997 Expiration: December 14, 2007 RIDER NO. 3 Number of Months: 120 i. BASE MONTHLY RENT: j. Time Period Base Monthly Rent ----------- ----------------- Commencement Date through 12th month $60,000 13th month through 24th month $67,500 25th month through 60th month $78,750 61st month through 120th month $87,000 k. ANNUAL EXPENSES: Note: See Section 4.3 below for the method of computing Expenses. The number set forth above for Annual Expenses is only an estimate. The actual Annual Expenses shall be determined pursuant to Section 4.3c below. l. PREPAID RENT: $60,000 m. TOTAL SECURITY DEPOSIT: $87,000 n. BROKER(S): Melvin Mark Brokerage Company, representing Landlord, and Norris, Beggs & Simpson, representing Tenant 2.1 PREMISES. Landlord leases to Tenant the premises described in Section 1.1 and in Exhibit A (the "Premises"), located in the project described on Exhibit B (the "Project"). Landlord shall modify Tenant's percentage of the Project as set forth in Section 1.1 if the Project size is increased or decreased, as the case may be, through the development of additional Page 1 Please Initial 3/95 MM KN MKL GEF -------- -------- property or the deletion of a portion of the Project. RIDER NO. 2 Landlord shall give Tenant notice when the Premises are ready for occupancy. RIDER NO. 4 Within five (5) days after Tenant receives Landlord's notice that the Premises are ready for occupancy, Landlord and Tenant shall inspect the Premises and prepare a "punchlist" of items to be completed. The existence of "punchlist" items shall not postpone the commencement date of this Lease Agreement. By taking occupancy of the Premises, Tenant acknowledges that it has examined the Premises and accepts the Premise in their then present condition, subject only to any work which Landlord has agreed to perform as set forth on the "punchlist." RIDER NO. 5 (1) Landlord shall deliver the Premises to Tenant clean and free of debris on the commencement date and Landlord warrants to Tenant that the Premises shall be in good operating condition on the commencement date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Landlord, after receipt of written notice from Tenant setting forth with specificity the nature of the violation, to promptly, at Landlord's sole cost, rectify such violation. Tenant's failure to give such written notice to Landlord with sixty (60) days after the commencement date shall be deemed that Landlord has complied with all of Landlord's obligations hereunder. (2) Landlord warrants to Tenant that the Premises, in the state existing on the date that the term commences, but without regard to the use for which Tenant will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable Laws (as hereinafter defined) in effect on RIDER NO. 6. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Landlord, after written notice from Tenant, to promptly, at Landlord's sole cost and expense, rectify any such violation. In the event Tenant does not give to Landlord written notice of the violation of this warranty within 180 days from the date the term commences, the correction of same shall be the obligation of the Tenant at Tenant's sole cost. RIDER NO. 7 3.1 TERM The term of this Lease is for the period set forth in Section 1.1, commencing on the date in Section 1.1. If Landlord, for any reason, cannot deliver possession of the Premises to Tenant upon the scheduled commencement date set forth in Section 1.1, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting from such delay. In that event, however, Landlord shall deliver possession of the Premises as soon as practicable and the commencement date shall be the date of such delivery with the term of the Lease remaining unchanged, and all other terms and conditions of this Lease remaining in full force and effect. However, if Landlord is delayed in delivering possession to Tenant for any reason attributable to Tenant, this Lease (including the obligation to pay all rents) shall commence RIDER NO. 8 4.1 RENT Base Monthly Rent. Tenant shall pay to Landlord base monthly rent in the initial amount in Section 1.1 which shall be payable monthly in advance on the first day of each and every calendar month ("Base Monthly Rent"); provided, however, the Base Monthly Rent for the first month of the term shall be paid upon the Commencement Date. All charges and sums due from Tenant to Landlord hereunder shall be deemed rent. 4.2 RENT ADJUSTMENT If Section 1.1j is applicable, Base Monthly Rent shall be increased periodically to the amounts and at the times set forth in Section 1.1j. 4.3 EXPENSES The purpose of this Section is to ensure that Tenant bears a share of all Expenses reasonably related to the use, maintenance, ownership, repair or replacement, and insurance of the Project. Accordingly, beginning on the commencement date, Tenant shall commence the payment of Expenses. (1) Expenses Defined The term "Expenses" shall mean all costs and expenses reasonably incurred by Landlord with respect to the ownership, operation, maintenance, repair or replacement, and insurance of the Project, including without limitation, the following costs: a. All supplies, materials, labor, equipment, and utilities used in or related to the operation and maintenance of the Project; b. All management, janitorial, legal, accounting, insurance, and service agreement costs related to the Project; RIDER NO. 9 c. All maintenance, replacement and repair costs relating to the areas within or around the Project, including, without limitation, air conditioning systems, sidewalks, landscaping, service areas, driveways, parking areas (including resurfacing and restriping parking areas) walkways, building exteriors (including painting), signs and directories, repairs and replacing roofs, walls and other structural elements of the Premises, the Building and the Project. RIDER NO. 10 d. Amortization (along with reasonable financing charges) of capital improvements over the useful life of such capital improvements made to the Project which may be required by any government authority or which will improve the operating efficiency of the Project e. All Real Property Taxes, which shall mean and include all taxes, assessments (general and special) and other impositions or charges which may be taxed, charged, levied, assessed or imposed upon all or any portion of or in relation to the Project or any portion thereof, any leasehold estate in the Premises or measured by rent from the Premises, including any increase caused by the transfer, sale or encumbrance of the Project or any portion thereof. "Real Property Taxes" shall also include any form of assessment, levy, penalty, charge or tax (other than estate, inheritance, net income or franchise taxes) imposed by any authority having a direct or indirect power to tax or charge, including, without limitation, any city, county, state, federal or any improvement or other district, whether such tax is (1) determined by the area of the Project or the rent or other sums payable under this lease; (2) upon or with respect to any legal or equitable interest of Landlord in the Project or any part thereof; (3) upon this transaction or any document to which Tenant is a party creating a transfer in any interest in the Project; (4) in lieu of or as a direct substitute in whole or in part of or in addition to any real property taxes on the Project; (5) based on any parking spaces or parking facilities provided in the Project; (6) in consideration for services, such as police protection, fire protection, street, sidewalk and roadway maintenance, refuse removal or other services that may be provided by any governmental or quasi-governmental agency from time to time which were formerly provided without charge or with less charge to property owners or occupants. "Real Property Taxes" shall also include all assessments under recorded covenants or master plans and/or by owner's associations. RIDER NO. 11 RIDER NO. 12 (2) Annual Estimate of Expenses On the commencement date or as soon thereafter as practical, Landlord shall estimate Tenant's portion of Expenses for the remainder of the calendar year based on the Tenant's portion of the Project Area set forth in Section 1.1. At the commencement of each calendar year thereafter or as soon thereafter as practical, Landlord shall estimate Tenant's portion of Expenses for the coming year based on the Tenant's portion of the Project Area set forth in Section 1.1. Page 2 Please Initial 3/95 MM KN MKL GEF -------- -------- (3) Monthly Payment of Expenses RIDER NO. 13 As soon as practical following each calendar year, Landlord shall prepare an accounting of actual Expenses incurred during the prior calendar year and such accounting (the "Notice") shall reflect Tenant's share of Expenses. If the additional rent paid by Tenant under this Section during the preceding calendar year was less than the actual amount of Tenant's share of Expenses, Landlord shall so notify Tenant and Tenant shall pay such amount to Landlord within 30 days of receipt of such Notice. Such amount shall be deemed to have accrued during the prior calendar year and shall be due and payable from Tenant even though the term of this Lease has expired or this Lease has been terminated prior to Tenant's receipt of this Notice. Tenant shall have RIDER NO. 13a contest the amount due; failure to so notify Landlord shall represent final determination of Tenant's share of expenses. If Tenant's payments were greater than the actual amount, then such overpayment shall be credited by Landlord to all present rent due under this Section or if this Lease has terminated, said amount shall be paid directly to Tenant. RIDER NO. 14 (4) Rent Without Offset and Late Charge All rent shall be paid by Tenant to Landlord monthly in advance on the first day of every calendar month, at the address shown in Section 1.1, or such other place as Landlord may designate in writing from time to time. All rent shall be paid without prior demand or notice and without any deduction or offset whatsoever. All rent shall be paid in lawful currency of the United States of America. All rent due for any partial month shall be prorated at the rate of 1/30th of the total monthly rent per day. Tenant acknowledges that late payment by Tenant to Landlord of any rent or other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to ascertain. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms of any encumbrance or note secured by the Premises. Therefore, if any rent or other sum due from Tenant is not received RIDER NO. 15 due, Tenant shall pay to Landlord an additional sum equal to 5% of such overdue payment. Landlord and Tenant hereby agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any such late payment and that the late charge is in addition to any and all remedies available to the Landlord and that the assessment and/or collection of the late charge shall not be deemed a waiver of any default. Additionally, all such delinquent rent or other sums, plus this late charge, shall bear interest at the prime rate of Key Bank of Oregon or its successor, plus 2%, on a fully floating basis (herein the "Default Rate"), from the date first due until the date paid in full. Any payments of any kind returned for insufficient funds will be subject to an additional handling charge of $25.00, and thereafter, Landlord may require Tenant to pay all future payments of rent or other sums due by money order or cashier's check. 5.1 PREPAID RENT On the Commencement Date, Tenant shall pay to Landlord the prepaid rent set forth in Section 1.1, and if Tenant is not in default of any provisions of this Lease, such prepaid rent shall be applied toward the Base Monthly Rent due for the first month of the term (or the first month following any Base Monthly Rent abatement period, if applicable). Upon a default by Tenant prior to such application, Landlord shall have the right, without waiver of the default or prejudice to other remedies, to use the prepaid rent or any of it to cure the default or to compensate Landlord for all or any damages resulting from the default. Landlord's obligations with respect to the prepaid rent are those of a debtor and not of a trustee, and landlord can commingle the prepaid rent with Landlord's general funds. Landlord shall not be required to pay Tenant interest on the prepaid rent. Landlord shall be entitled to immediately endorse and cash Tenant's prepaid rent; however, such endorsement and cashing shall not constitute Landlord's acceptance of this Lease. In the event Landlord does not accept this Lease, Landlord shall return said prepaid rent. 6.1 DEPOSIT Upon execution of this Lease, Tenant shall deposit the security deposit set forth in Section 1.1 with Landlord as security for the performance by Tenant of the provisions of this Lease. Upon a default by Tenant, Landlord shall have the right, without waiver of the default or prejudice to other remedies, to use the security deposit or any portion of it to cure the default or to compensate Landlord for any damages resulting from Tenant's default. Upon demand, Tenant shall immediately pay to Landlord a sum equal to the portion of the security deposit expended or applied by Landlord to maintain the security deposit in the amount initially deposited with Landlord. In no event will Tenant have the right to apply any part of the security deposit to any rent or other sums due under this Lease. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the entire security deposit to Tenant, except for the portion designated in Section 1.1, if any, which Landlord shall retain as a non-refundable cleaning fee. Landlord's obligations with respect to the deposit are those of a debtor and not of a trustee, and Landlord can commingle the security deposit with Landlord's general funds. Landlord shall not be required to pay Tenant interest on the deposit. Landlord shall be entitled to immediately endorse and cash Tenant's security deposit; however, such endorsement and cashing shall not constitute Landlord's acceptance of this Lease. In the event Landlord does not accept this Lease, Landlord shall return said security deposit. If Landlord sells its interest in the Premises during the term hereof and deposits with or credits to the purchaser the unapplied portion of the security deposit, thereupon Landlord shall be discharged from any further liability or responsibility with respect to the security deposit. 7.1 USE OF PREMISES AND PROJECT FACILITIES Tenant shall use the Premises solely for the purposes set forth in Section 1.1 and for no other purpose without obtaining the prior written consent of Landlord. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises or with respect to the suitability of the Premises or the Project for the conduct of Tenant's business, nor has Landlord agreed to undertake any modification, alteration or improvement to the Premises or the Project, except as provided in writing in this Lease. RIDER NO. 16 Tenant acknowledges that Landlord may from time to time, at its sole discretion, make such modifications, alterations, deletions or improvements to the Project as Landlord may deem necessary or desirable, without compensation or notice to Tenant. RIDER NO. 17 Tenant shall promptly and at all times comply with all federal, state and local statutes, laws, ordinances, orders and regulations affecting the Premises and the Project (herein "Laws"), as well as all master plans, restrictive covenants, and also any rules and regulations that Landlord may adopt from time to time. RIDER NO. 18 Tenant shall not do or permit anything to be done in or about the Premises or bring or keep anything in the Premises that will in any way increase the premiums paid by Landlord on its insurance related to the Project or which will in any way increase the premiums for fire or casualty insurance carried by other tenants in the Project. Tenant will not perform any act or carry on any practices that may injure the Premises or the Project; that may be a nuisance or menace to other tenants in the Project; or that shall in any way interfere with the quiet enjoyment of such other tenants. Tenant shall not use the Premises for sleeping, washing Page 3 Please Initial 3/95 MM KN MKL GEF -------- -------- clothes, cooking or the preparation, manufacture or mixing of anything that might emit any objectionable odor, noises, vibrations or lights onto such other tenants. If sound insulation is required to muffle noise produced by Tenant on the Premises, Tenant at its own cost shall provide all necessary insulation. Tenant shall not do anything on the Premises which will overload any existing parking or service to the Premises. Pets and/or animals of any type shall not be kept on the Premises. 8.1 SIGNAGE All signage shall comply with rules and regulations set forth by Landlord as may be modified from time to time. Current rules and regulations relating to signs are described on Exhibit F. Tenant shall place no window covering (e.g., shades, blinds, curtains, drapes, screens or tinting materials), stickers, signs, lettering, banners or advertising or display material on or near exterior windows or doors if such materials are visible from the exterior of the Premises, without Landlord's prior written consent. Similarly, Tenant may not install any alarm boxes, foil protection tape or other security equipment on the Premises without Landlord's prior written consent. Any material violating this provision may be destroyed by Landlord without compensation to Tenant. 9.1 PERSONAL PROPERTY TAXES Tenant shall pay before delinquency all taxes, assessments, license fees and public charges levied, assessed or imposed upon its business operations as well as upon all trade fixtures, leasehold improvements, merchandise and other personal property in or about the Premises. 10.1 PARKING Landlord grants to Tenant and Tenant's customers, suppliers, employees and invitees, a nonexclusive license to use the designated parking areas in the Project for the use of motor vehicles during the term of this Lease. RIDER NO. 19 Landlord reserves the right at any time to grant similar nonexclusive use to other tenants, to make rules and regulations relating to the use of such parking areas, including reasonable restrictions on parking by tenants and employees, to designate specific spaces for the use of any tenant and to make changes in the parking layout from time to time. RIDER NO. 20 11.1 UTILITIES Tenant shall pay for all water, gas, heat, light, power, sewer, electricity, telephone, garbage or other service metered, chargeable or provided to the Premises. RIDER NO. 21 12.1 MAINTENANCE RIDER NO. 22 electrical, plumbing and sewerage systems lying outside the Premises ; provided, however, the cost of all such maintenance shall be considered "Expenses" for purposes of Section 4.3. Except as provided above, Tenant shall maintain the Premises in good condition, including, without limitation, maintaining and repairing all walls, floors, ceilings, interior doors, exterior and interior windows and fixtures as well as damage caused by Tenant, its agents, employees or invitees. RIDER NO. 23 Upon expiration or termination of this Lease, Tenant shall surrender the Premises to Landlord in the same condition as existed at the commencement of the term, except for reasonable wear and tear or damage caused by fire or other casualty . Nothing herein shall excuse Tenant from financial responsibility for property damage caused by Tenant or Tenant's agents. RIDER NO. 24 13.1 ALTERATIONS (1) Tenant shall not make any alterations to the Premises without Landlord's prior written consent in each instance. If Landlord gives its consent to such alterations, Landlord may post notices in accordance with the laws of the state in which the Premises are located. Any alterations made shall remain on and be surrendered with the Premises upon expiration or termination of this Lease, except that Landlord may, within 30 days before or 30 days after the expiration or termination of this Lease or the termination of Tenant's right of possession, elect to require Tenant to remove any alterations which Tenant may have made to the Premises. RIDER NO. 25 If Landlord so elects, at its own cost Tenant shall restore the Premises to the condition designated by Landlord in its election, before the last day of the term or within 30 days after notice of its election is given, whichever is later. (2) Any request for Landlord's consent to alterations shall be made at least thirty (30) days before any work may be commenced and shall be accompanied by (i) detailed and costed plans and specifications for all alterations, and (ii) Tenant's written agreement to provide, upon completion of work, a complete set of as-built plans and specifications. Landlord may withhold consent, in its reasonable discretion and may issue such consent subject to conditions. All alterations shall be constructed only after obtaining Landlord's prior written consent and only in conformity with all Laws. The issuance of Landlord's consent shall not be a waiver of Tenant's obligation to comply with all Laws, nor Landlord's opinion that such alterations are in compliance with all Laws. (3) Should Landlord consent in writing to Tenant's alteration of the Premises, Tenant shall contract with a contractor approved by Landlord for the construction of such alterations, shall secure all appropriate governmental approvals and permits, and shall complete such alterations with due diligence in compliance with the plans and specifications approved by Landlord. All such construction shall be performed in a manner which will not interfere with the quiet enjoyment of other tenants of the Project. (4) Tenant shall pay all costs for construction of alterations and shall keep the Premises and the Project free and clear of all liens which may result from work by third parties authorized by Tenant. If any such lien is filed, the same shall be an event of default hereunder if Tenant fails to remove such lien within ten (10) days of the filing thereof. 14.1 RELEASE AND INDEMNITY As material consideration to Landlord, Tenant agrees that Landlord and Landlord's partners, shareholders, officers, directors, employees and agents (collectively, the "Protected Parties") shall not be liable to Tenant for any damage to Tenant or Tenant's property from any Page 4 Please Initial 3/95 MM KN MKL GEF -------- -------- cause, RIDER NO. 26 and Tenant waives all claims against Landlord for damage to persons or property arising for any reason, except for damage resulting directly from Landlord's breach of its express obligations under this Lease which Landlord has not cured within a reasonable time after receipt of written notice of such breach from Tenant. Tenant shall defend, indemnify and hold Landlord and all other Protected Parties harmless from all claims, losses, causes of action, costs and expenses, and damages arising out of (a) any damage to any person or property occurring in, on or about the Premises, (b) use by Tenant or its agents of the Premises and/or the Project or other properties of Landlord, and/or (c) Tenant's breach or violation of any term of this Lease. RIDER NO. 27 15.1 INSURANCE Tenant, at its cost, shall maintain public liability and property damage insurance and products liability insurance with a single combined liability limit of $1,000,000, insuring against all liability of Tenant and its authorized representatives arising out of or in connection with Tenant's use or occupancy of the Premises. Public liability insurance, products liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions of Section 14.1. Landlord shall be named as an additional insured and the policy shall contain cross-liability endorsements. On all its personal property, at its cost, Tenant shall maintain a policy of standard fire and extended coverage insurance with vandalism and malicious mischief endorsements and "all risk" coverage on all Tenant's improvements and alterations in or about the Premises, to the extent of at least 100% of their full replacement value. The proceeds from any such policy shall be used by Tenant for the replacement of personal property and the restoration of Tenant's improvements or alterations. All insurance required to be provided by Tenant under this Lease shall release Landlord and the other Protected Parties from any claims for damage to any person or the Premises and the Project, and to Tenant's fixtures, personal property, improvements and alterations in or on the Premises or the Project, caused by or resulting from risks insured against under any insurance policy carried by Tenant and in force at the time of such damage. All insurance required to be provided by Tenant under this Lease: (a) shall be issued by insurance companies authorized to do business in the state in which the Premises are located; (b) be reasonably acceptable to Landlord; (c) shall be issued as a primary policy; and (d) shall contain an endorsement requiring at least 30 days prior written notice of cancellation to Landlord and Landlord's lender, before cancellation or change in coverage, scope or amount of any policy. Tenant shall deliver a certificate or copy of such policy together with evidence of payment of all current premiums to Landlord within 10 days of execution of this Lease. Tenant's failure to provide evidence of such coverage to Landlord may, in Landlord's sole discretion, constitute a default under this Lease. RIDER NO. 28 16.1 DESTRUCTION If during the term, the Premises or Project is more than 25% destroyed (based upon replacement cost) from any cause, or rendered inaccessible or unusable from any cause, Landlord may, in its sole discretion, terminate this Lease by delivery of notice to Tenant within 30 days of such event without compensation to Tenant. If Landlord does not elect to terminate this Lease, and if, in Landlord's estimation, the Premises cannot be restored within 270 days following such destruction, RIDER NO. 29 then Landlord shall commence to restore the Premises in compliance with then existing laws and shall complete such restoration with due diligence. In such event, this Lease shall remain in full force and effect, but there shall be an abatement of Base Monthly Rent between the date of destruction and the date of completion of restoration, based on the extent to which destruction interferes with Tenant's use of the Premises; provided, there shall be no abatement if such damage is the result of Tenant's negligence or wrongdoing. Tenant shall not be entitled to any damages or compensation for loss of use or any inconvenience occasioned by damage or any repair or restoration. 17.1 CONDEMNATION (1) Definitions. The following definitions shall apply: (1) "Condemnation" means (a) the exercise of any governmental power of eminent domain, whether by legal proceedings or otherwise by condemnor and (b) the voluntary sale or transfer by landlord to any condemnor either under threat of condemnation or while legal proceedings for condemnation are proceeding; (2) "Date of Taking" means the date the condemnor has the right to possession of the property being condemned; (3) "Award" means all compensation, sums or anything of value awarded, paid or received on a total or partial condemnation; and (4) "Condemnor" means any public or quasi-public authority, or private corporation or individual, having a power of condemnation. (2) Obligations to Be Governed by Lease. If during the term of the Lease there is any taking of all or any part of the Premises or the Project, the rights and obligations of the parties shall be determined pursuant to this Lease. (3) Total or Partial Taking. If the Premises are totally taken by condemnation, this Lease shall terminate on the Date of Taking. If any portion of the Premises is taken by Condemnation, this Lease shall terminate as to the part so taken as of the Date of Taking, but shall in all other respects remain in effect, except that Tenant can elect to terminate this Lease if the remaining portion of the Premises is rendered unsuitable for Tenant's continued use of the Premises. If Tenant elects to terminate this Lease, Tenant must exercise its right to terminate by giving notice to Landlord within 30 days after the nature and extent of the Condemnation have been finally determined. If Tenant elects to terminate this Lease, Tenant shall also notify Landlord of the date of termination, which date shall not be earlier than 30 days nor later than 90 days after Tenant has notified Landlord of its election to terminate; except that this Lease shall terminate on the Date of Taking if the Date of Taking falls on a date before the date of termination as designated by Tenant. If any portion of the Premises is taken by condemnation and this Lease remains in full force and effect, on the Date of Taking the Base Monthly Rent shall be reduced by an amount in the same ratio as the total number of square feet in the Premises taken bears to the total number of square feet in the Premises immediately before the Date of Taking. (4) Landlord's Election. Notwithstanding anything herein to the contrary, if the Project or any portion thereof is taken by Condemnation and the portion taken does not, in Landlord's sole judgment, feasiblely permit the continuation of the operation of the Project by Landlord, then landlord shall have the right to terminate this Lease by written notice given within thirty (30) days following the Date of Taking. RIDER NO. 30 (5) Award. Tenant shall have no right or claim to all or any portion of the Award; provided this shall not limit Tenant's right to seek and to receive compensation for relocation expenses or the value of its personal property taken, so long as receipt of such compensation does not decrease the Award otherwise payable to Landlord. Page 5 Please Initial 3/95 MM KN MKL GEF -------- -------- 18.1 ASSIGNMENT OR SUBLEASE Tenant shall not assign or encumber its interest in this Lease or the Premises or sublease all or any part of the Premises or allow any other person or entity (except Tenant's authorized representatives, employees, invitees, or guests) to occupy or use all or any part of the Premises without first obtaining Landlord's consent. RIDER NO. 31 Any assignment, encumbrance or sublease without Landlord's written consent shall be voidable and at Landlord's election, shall constitute a default. If Tenant is a partnership, a withdrawal or change, voluntary, involuntary or by operation of law of any partner, or the dissolution of the partnership, shall be deemed a voluntary assignment. If Tenant consists of more than one person, a purported assignment, voluntary or involuntary or by operation of law from one person to the other or to a third party shall be deemed a voluntary assignment. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or sale or other transfer of a controlling percentage of the capital stock of Tenant, or the sale of at least 25% of the value of the assets of Tenant shall be deemed a voluntary assignment. The phrase "controlling percentage" means ownership of and right to vote stock possessing at least 50% of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for election of directors. RIDER NO. 32 The preceding two sentences shall not apply to corporations the stock of which is traded through an exchange or over the counter. RIDER NO. 33 All rent received by Tenant from its subtenants in excess of the rent payable by Tenant to Landlord under this Lease (allocated on a square footage basis in cases of partial subleasing) shall be paid to Landlord, and any sums to be paid by an assignee to Tenant in consideration of the assignment of this Lease shall be paid to Landlord. If Tenant requests Landlord to consent to a proposed assignment or subletting, Tenant shall pay to Landlord, whether or not consent is ultimately given, $100 or Landlord's reasonable attorneys' fees incurred in connection with such request, whichever is greater. No interest of Tenant in this Lease shall be assignable by involuntary assignment through operation of law (including without limitation the transfer of this Lease by testacy or intestacy). Each of the following acts shall be considered an involuntary assignment: (a) if Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes proceedings 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; or (b) if a writ of attachment or execution is levied on this Lease; or (c) 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. 19.1 DEFAULT The occurrence of any of the following shall constitute a default by Tenant: (a) A failure to pay rent or other charge RIDER NO. 34 20.1 LANDLORD'S REMEDIES (1) Landlord shall have the following remedies if Tenant is in default. These remedies are not exclusive; they are cumulative and in addition to any remedies now or later allowed by law. Landlord may terminate this Lease and/or Tenant's right to possession of the Premises at any time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this lease shall not constitute a termination of this Lease. Upon termination of this Lease or of Tenant's right to possession, Landlord has the right to recover from Tenant: (1) The worth of the unpaid rent that had been earned at the time of such termination; (2) The worth of the amount of the unpaid rent that would have been earned after the date of such termination; and (3) Any other amount, including court, attorney and collection costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The Worth," as used for Item 20.1(1) in this Paragraph is to be computed by allowing interest at the Default Rate. "The Worth" as used for Item 20.1(2) in this Paragraph is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of termination of Tenant's right of possession. RIDER NO. 35 (2) All covenants and assignments to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money owed to any party other than Landlord, for which it is liable hereunder, or if Tenant shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for RIDER NO. 36 Landlord may, without waiving such default or any other right or remedy, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant. All sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the Default Rate from the date of expenditure by Landlord, shall be payable to Landlord on demand. 21.1 ENTRY ON PREMISES Landlord and its authorized representatives shall have the right to enter the Premises at all reasonable times RIDER NO. 37 for any of the following purposes: (a) To determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease; (b) To do any necessary maintenance and to make any restoration to the Premises or the Project that Landlord has the right or obligation to perform; (c) To post "for sale" signs at any time during the term, to post "for rent" or "for lease" signs during the last 90 days of the term, or during any period while Tenant is in default; (d) To show the Premises to prospective brokers, agents, buyers, tenants or persons interested in leasing or purchasing the Premises, at any time during the term; or (e) To repair, maintain or improve the Project and to erect scaffolding and protective barricades around and about the Premises but not so as to prevent entry to the Premises and to do any other act or thing necessary for the safety or preservation of the Premises or the Project. Landlord shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance or other damage arising out of Landlord's entry onto the Premises as provided in this Section. Landlord shall conduct its activities on the Premises as provided herein in a manner that will cause the least inconvenience, annoyance or disturbance to Tenant. For each of these purposes, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Tenant's vaults and safes. Tenant shall not alter any lock or install a new or additional lock or bolt on any door of the Premises without prior written consent of Landlord. If Landlord gives its consent, Tenant shall furnish Landlord with a key for any such lock. Page 6 Please Initial 3/95 MM KN MKL GEF -------- -------- 22.1 SUBORDINATION Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee or any beneficiary of a Deed of Trust with a lien on the Project or any ground lessor with respect to the Project, this Lease shall be subject and subordinate at all time to (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Project, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Project, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or Deed of Trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord, at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord any additional documents evidencing the priority or subordination of this Lease with respect to any such ground lease or underlying leases or the lien of any such mortgage or Deed of Trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, deliver and record any such document in the name and on behalf of Tenant. RIDER NO. 38 Tenant, within ten days from notice from Landlord, shall execute and deliver to Landlord, in recordable form, certificates stating that this Lease is not in default, is unmodified and in full force and effect, or in full force and effect as modified, and stating the modifications. This certificate should also state the amount of current monthly rent, the dates to which rent has been paid in advance, the amount of any security deposit and prepaid rent, and such other matters as Landlord may request. In addition, in connection with any sale or financing involving the Premises, Tenant shall deliver to Landlord, within twenty (20) days of request by Landlord, a current audited financial statement of Tenant and of each guarantor. RIDER NO. 39 23.1 NOTICE Any notice, demand, request, consent, approval or communication desired by either party or required to be given, shall be in writing and either served personally or sent by prepaid certified first class mail, addressed as set forth in Section 1.1. RIDER NO. 40 Either party may change its address by notification to the other party. Notice shall be deemed to be communicated 48 hours from the time of such mailing, or upon the time of service as provided in this Section. 24.1 WAIVER No delay or omission in the exercise of any right or remedy by Landlord shall impair such right or remedy or be construed as a waiver. No act or conduct of Landlord, including without limitation, acceptance of the keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Only written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. 25.1 SURRENDER OF PREMISES; HOLDING OVER Upon expiration of the term or the termination of this Lease or of Tenant's right of possession, Tenant shall surrender to Landlord the Premises and all tenant improvements and alterations (except alterations which Tenant has the right or obligation to remove) in good condition, except for ordinary wear and tear. RIDER NO. 41 Tenant shall remove all personal property including, without imitation, all wallpaper, paneling and other decorative improvements or fixtures and shall perform all restoration made necessary by the removal of any alterations or Tenant's personal property before the expiration of the term, including for example, restoring all wall surfaces to their condition prior to the commencement of this Lease. RIDER NO. 42 Landlord can elect to retain or dispose of in any manner Tenant's personal property not removed from the Premises by Tenant prior to the expiration of the term. Tenant waives all claims against Landlord for any damage to Tenant resulting from Landlord's retention or disposition of Tenant's personal property. Tenant shall be liable to Landlord for Landlord's costs for storage, removal or disposal of Tenant's personal property. If Tenant fails to surrender the Premises upon the expiration of the term, or upon the termination of this Lease or of Tenant's right of possession, Tenant shall defend, indemnify and hold Landlord harmless from all resulting loss or liability, including without limitation, any claim made by any succeeding tenant founded on or resulting from such failure. If Tenant, with Landlord's consent, remains in possession of the Premises after expiration of this Lease, such possession by Tenant shall be deemed to be a month-to-month tenancy terminable on written 30-day notice at any time, by either party. All provisions of this Lease, except those pertaining to term and rent, shall apply to the month-to-month tenancy. Tenant shall pay Base Monthly Rent in an amount equal to 150% of the Base Monthly Rent for the last full calendar month during the regular term plus 100% of said last month's estimate of Tenant's share of Expenses pursuant to Section 4.3(3). 26.1 LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder, Tenant agrees that, regarding any claim against Landlord and/or any other Protected Party, including in the event of any actual or alleged failure, breach or default by Landlord: a. The sole and exclusive remedy of Tenant shall be against the interest of Landlord in the Project, and neither Landlord nor any other Protected Party shall have any other liability whatsoever. b. If Landlord is a partnership, the following provisions of this item b. shall also apply: (i) No partner of Landlord shall be sued or named as a party in any suit or action; (ii) No service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (iii) No partner of Landlord shall be required to answer or otherwise plead to any service or process; (iv) No judgement may be taken against any partner of Landlord; (v) Any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; and (vi) No writ of execution will ever be levied against the assets of any partner of Landlord. c. These covenants and agreements contained in this Section are enforceable both by Landlord and also by any other Protected Party. Page 7 Please Initial 3/95 MM KN MKL GEF -------- -------- d. Tenant agrees that each of the foregoing provisions shall be applicable to any and all liabilities, claims and causes of action whatsoever, including those based on any provision of this Lease, any implied covenant, and/or any statute or common law principle. 27.1 MISCELLANEOUS PROVISIONS (1) Time of Essence. Time is of the essence of each provision of this Lease. (2) Successor. This Lease shall be binding on and inure to the benefit of the parties and their successors, except as provided in Section 18.1 herein. (3) Landlord's Consent. Any consent required by Landlord under this Lease must be granted in writing. No such consent shall be unreasonably withheld, but any consent may be issued subject to reasonable conditions. As a condition to any consent, Landlord may require that any other party or parties with a right of consent issue such consent on terms acceptable to Landlord. (4) Commissions. Each party represents that it has not had dealings with any real estate broker, finder or other person with respect to this Lease in any manner, except for the broker identified in Section 1.1, who shall be compensated by Landlord. (5) Other Charges. If Landlord becomes a party to any litigation concerning this lease, the premises or the project, by reason of any act or omission of Tenant or any agent, guest or invitee of Tenant, Tenant shall be liable to Landlord for all attorneys fees and costs incurred by Landlord in connection with such litigation, including any appeal or review. In the event of litigation RIDER NO. 43 between Tenant and Landlord and/or any other Protected Party, the prevailing party shall be entitled to recover from the losing party all costs and attorneys fees incurred both at and in preparation for trial and any appeal or review. If Landlord employs a collection agency to recover delinquent charges, Tenant agrees to pay all collection agency and attorneys' fees charged to Landlord in addition to rent, late charges, interest and other sums payable under this Lease. Tenant shall pay a charge of $75 to Landlord for preparation of a demand for delinquent rent. (6) Landlord's Successors. In the event of a sale or conveyance by Landlord of the Project or a portion thereof including the Premises, or of Landlord's interest in the foregoing, the same shall operate to release Landlord from any liability under this Lease, and in such event Landlord's success in interest shall be solely responsible for all obligations of Landlord under this Lease. (7) Interpretation. This Lease shall be construed and interpreted in accordance with the laws of the state in which the Premises are located. This Lease constitutes the entire agreement between the parties with respect to the Premises and the Project, except for such guarantees or modifications as may be executed in writing by the parties from time to time. When required by the content of this Lease, the singular shall include the plural, and the masculine shall include the feminine and/or neuter. "Party" shall mean Landlord or Tenant. If more than one person or entity constitutes Tenant, the obligations imposed on Tenant shall be joint and several. The enforceability, invalidity or illegality of any provision shall not render the other provisions unenforceable, invalid or illegal. (8) Third Parties. The Protected Parties shall have the right to enforce the provisions of this Lease which reference them. Except for the foregoing, there are no third parties benefitted hereby, this Lease being intended solely for the benefit of Landlord and Tenant. Notwithstanding the foregoing, the beneficiary under a trust deed, or a mortgagee, holding a security interest in the Project shall be a third party beneficiary of the Tenant's obligations set forth in Sections 30.1 and 31.1 hereof and shall have the right to enforce such provisions. (9) Survival. The release and indemnity covenants of Tenant, the right of Landlord to enforce its remedies hereunder, the attorneys fees provisions hereof, the provisions of Section 26.1 hereof, as well as all provisions of this Lease which contemplate performance after the expiration or termination hereof or the termination of Tenant's right to possession hereunder, shall survive any such expiration or termination. 28.1 EMISSIONS Tenant shall not: a. Discharge, emit or permit to be discharged or emitted, any liquid, solid or gaseous matter, or any combination thereof, into the atmosphere, the ground or any body of water, which matter, as reasonably determined by Lessor or any governmental entity does, or may, pollute or contaminate the same, or is, or may become, radioactive or does, or may, adversely affect the (1) health or safety of persons, wherever located, whether on the Premises or anywhere else, (2) condition, use or enjoyment of the Premises or any other real or personal property, whether on the Premises or anywhere else, or (3) Premises or any of the improvements thereto, or thereon including buildings, foundations, pipes, utility lines, landscaping or parking areas; b. Produce, or permit to be produced, any intense glare, light or heat except within an enclosed or screened area and then only in such manner that the glare, light or heat shall not be discernible from outside the Premises; c. Create, or permit to be created, any sound pressure level which will interfere with the quiet enjoyment of any real property outside the Premises; or which will create a nuisance or violate any Law, rule, regulation or requirement; d. Create, or permit to be created, any ground vibration that is discernible outside the Premises; e. Transmit, receive or permit to be transmitted or received, any electromagnetic, microwave or other radiation which is harmful or hazardous to any person or property in, on or about the Premises, or anywhere else. Page 8 Please Initial 3/95 MM KN MKL GEF -------- -------- 28.2 STORAGE AND USE (1) Storage. Subject to the uses permitted and prohibited to Tenant under this lease, Tenant shall store in appropriate leak proof containers all solid, liquid, or gaseous matter, or any combination thereof, which matter, if discharged or emitted into the atmosphere, the ground or any body of water, does or may (1) pollute or contaminate the same, or (2) adversely affect the (i) health or safety of persons, whether on the Premises or anywhere else, (ii) condition, use or enjoyment of the Premises or any real or personal property, whether on the Premises or anywhere else, or (iii) Premises or any of the improvements thereto or thereon. (2) Use. In addition, without Landlord's prior written consent, Tenant shall not use, store or permit to remain on the Premises any solid, liquid or gaseous matter which is, or may become, radioactive. If Landlord does give its consent, Tenant shall store the materials in such a manner that no radioactivity will be detectable outside a designated storage area and Tenant shall use the materials in such a manner that (1) no real or personal property outside the designated storage area shall become contaminated thereby or (2) there are and shall be no adverse effects on the (i) health or safety of persons, whether on the Premises or anywhere else, (ii) condition, use or enjoyment of the Premises or any real or personal property thereon or therein, or (iii) Premises or any of the improvements thereto or thereon. 28.3 DISPOSAL OF WASTE (1) Refuse Disposal. Tenant shall not keep an trash, garbage, waste or other refuse on the Premises except in sanitary containers and shall regularly and frequently remove same from the Premises. Tenant shall keep all incinerators, containers or other equipment used for the storage or disposal of such materials in a clean and sanitary condition. (2) Sewage Disposal. Tenant shall properly dispose of all sanitary sewage and shall not use the sewage system (1) for the disposal of anything except sanitary sewage or (2) in excess of the lesser of the amount (a) reasonably contemplated by the uses permitted under this Lease or (b) permitted by any governmental entity. Tenant shall keep the sewage disposal system free of all obstructions and in good operating condition. (3) Disposal of Other Waste. Tenant shall properly dispose of all other waste or other matter delivered to, stored upon, located upon or within, used on, or removed from, the premises in such a manner that it does not, and will not, adversely affect the (1) health or safety of persons, wherever located, whether on the Premises or elsewhere, (2) condition, use or enjoyment of the Premises or any other real or personal property, wherever located, whether on the Premises or anywhere else, or (3) Premises or any of the improvements thereto or thereon including buildings, foundations, pipes, utility lines, landscaping or parking areas. 29.1 COMPLIANCE WITH LAW Notwithstanding any other provision in the Lease to the contrary, Tenant shall comply with all Laws in complying with its obligations under this Lease, and in particular, Laws relating to the storage, use and disposal of hazardous or toxic matter. 30.1 INDEMNIFICATION Tenant shall defend, indemnify and hold Landlord, the other Protected Parties, the Project and the beneficiary under a trust deed, or mortgagee, holding a security interest in the Project harmless from any loss, claim, liability or expense, including, without limitation, attorneys fees and costs, at trial and/or on appeal and review, arising out of or in connection with its failure to observe or comply with the provisions of this Section. This indemnity shall survive the expiration or earlier termination of the term of the Lease or the termination of Tenant's right to possession and be fully enforceable thereafter. 31.1 ADDITIONAL PROVISIONS The following covenants and agreements shall in no way diminish or limit the foregoing provisions of this Section. No use may be made of, on or from the Premises relating to the handling, storage, disposal, transportation or discharge of Hazardous Substances (as defined below). All of such use which does occur shall be in strict conformance with all Laws. Tenant shall give prior written notice to Landlord of any use, whether incidental or otherwise, of Hazardous Substances on the Premises, or of any notice of any violation of any Law with respect to such use. Landlord and any ground lessor or master lessor of the Premises and/or the Project shall have the right to request and to receive information with respect to use of Hazardous Substances on the Premises in writing. In addition to the indemnity obligations contained elsewhere herein, Tenant shall indemnify, defend and hold harmless Landlord, the other Protected Parties, the Premises, the Project, and the beneficiary under a trust deed, or a mortgagee, holding a security interest in the Project, from and against all claims, losses, damages, costs, response costs and expenses, liabilities, and other expenses caused by, arising out of, or in connection with, the generation, release, handling, storage, discharge, transportation, deposit or disposal in, on, under or about he Premises by Tenant or any of Tenant's Agents of the following (collectively referred to as "Hazardous Substances"): hazardous materials, hazardous substances, toxic wastes, toxic substances, pollutants, petroleum products, underground tanks, oils, pollution, asbestos, PCB's, materials, or contaminants, as those terms are commonly used or as defined by federal, state and/or local law or regulation related to protection of health or the environment, including but not limited to, the Resource Conservation and Recovery Act (RCRA) (42 U.S.C. ss. 6901 et seq.); the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (42 U.S.C.ss. 9601, et seq.); the Toxic Substances Control Act (15 U.S.C. ss. 2601, et seq.); the Clean Water Act (33 U.S.C. ss. 1251, et seq.); the Clean Air Act (42 U.S.C. ss. 7401, et seq.); and ORS Chapters 453, 465 and 466 as any of the same may be amended from time to time, and/or by any rules and regulations promulgated thereunder. Such damages, costs, liabilities, and expenses shall include such as are claimed by any regulating and/or administering ground lessor or master lessor of the Project, the holder of any Mortgage or Deed of Trust on the Project, and/or any successor of the Landlord named herein. This indemnity shall include (a) claims of third parties, including governmental agencies, for damages, fines, penalties, response costs, monitoring costs, injunctive or other relief; (b) the costs, expenses or losses resulting from any injunctive relief, including preliminary or temporary injunctive relief; (c) the expenses, including fees of attorneys and experts, of reporting the existence of Hazardous Substances to an agency of the State of Oregon or of the United States as required by applicable laws and regulations; (d) any and all expenses or obligations, including attorney's and paralegal fees, incurred Page 9 Please Initial 3/95 MM KN MKL GEF -------- -------- at, before and after any trial or appeal therefrom or review thereof, or an administrative proceeding or appeal therefrom or review thereof, whether or not taxable as costs, including, without limitation, attorney's fees, paralegal fees, witness fees (expert and otherwise), deposition costs, photocopying and telephone charges and other expenses related to the foregoing, all of which shall be paid by Tenant to Landlord when such expenses are accrued. This indemnity shall survive the expiration or earlier termination of the term of the Lease or the termination of Tenant's right to possession and be fully enforceable thereafter. RIDER NO. 44 32.1 INFORMATION Tenant shall provide Landlord with any and all information regarding Hazardous Substances in the Premises, including contemporaneous copies of all filings and reports to governmental entities, and any other information requested by Landlord. In the event of any accident, spill or other incident involving Hazardous Substances, Tenant shall immediately report the same to Landlord and supply Landlord with all information and reports with respect to the same. All information described herein shall be provided to Landlord regardless of any claim by Tenant that it is confidential or privileged. 33.1 RIDER NO. 45 Tenant: MEDICALOGIC, INC., an Oregon corporation MARK LEAVITT GUY E. FIELD -------------------------------------------------- By: Mark K. Leavitt Guy E. Field By: President Controller Landlord: EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company By: Marzer Venture, an Oregon general partnership By: MELVIN MARK --------------------------------------------------- Its: Partner -------------------------------------------------- By: Schnitzer Investment Corp., an Oregon corporation By: KEN NOVACK --------------------------------------------------- Its: -------------------------------------------------- Exhibits - -------- A - Premises A-1 Measurement Standards for each floor B - Project C - Landlord's Work Plans D - Work Agreement E - Rules and Regulations F - Sign Regulations Page 10 Please Initial 3/95 MM KN MKL GEF -------- -------- ADDENDUM TO LEASE DATED: January 15, 1997 BETWEEN: EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company ("Landlord") AND: MEDICALOGIC, INC., an Oregon corporation ("Tenant") The following modifications and insertions, numbered Rider No. 1 to and including Rider No. 45, are hereby incorporated into the Lease and shall be deemed made at the respective places indicated throughout the Lease. Any reference to the Lease in the following provisions of this Addendum shall be deemed to include this Addendum, unless otherwise specified in such reference. The capitalized terms used in this Addendum which are defined in the Lease shall have the meanings given to them in the Lease. Rider No. 1. Insert Section 1.1(e), Page 1: - ------------------------------------------ The Premises will be in a two story building to be constructed by Landlord and are outlined on the attached Exhibit A. Both floors in the Premises shall be measured in accordance with Portland NAIOP measurement standards, a copy of which is attached as Exhibit A-1. Rider No. 2. Insert Section 1.1(f), Page 1: - ------------------------------------------ At the time this Lease is executed, the Project is under construction. The current conceptual plan for the Project is attached as Exhibit B. The location and size of the buildings shown on Exhibit B may change from time to time. Also, the total amount of square footage in the Project shall vary over the Term of the Lease. Tenant's percent of the Project for purposes of determining Tenant's share of Expenses pursuant to Section 4.3 of the Lease shall be determined by multiplying the Expenses by a fraction, the numerator of which shall be the number of square feet in the Premises from time to time (initially 75,010) and the denominator which shall be the total number of square feet of completed and leasable space in the Project from time to time. The remaining development of the Project shall be compatible with that portion of the Project which is constructed as of the date of this Lease and the portion to be constructed as provided in this Lease. That is, the structures, landscaping and parking shall be similar and no special or materially different amenities in the common areas (such as water fountains, for example) are contemplated and, if Landlord constructs such a special or materially different amenity in the common area, the costs thereof shall not be included in Expenses payable by Tenant unless Tenant first consents to the construction of such amenity. 1 Rider No. 3. Insert Section 1.1(h), Page 1: - ------------------------------------------ The term of the Lease (the "Term") shall commence on the earlier of (a) the date on which Tenant first takes occupancy of the Premises; or (b) the date on which Landlord's Work (as defined below) is substantially completed as certified by Landlord's architect, a temporary certificate of occupancy is received, access to the Premises is completed as required by Laws, and parking areas are completed consistent with the provisions of Section 10.1 (the "Commencement Date"). The Term shall expire, unless sooner terminated or extended pursuant to the provisions of the Lease, 120 months after the Commencement Date. If the Lease is fully executed and delivered by January 17, 1997 and all information and approvals as requested by Landlord regarding details, colors, finishes or other issues relating to Landlord's Work (as defined below) are received by Landlord in writing from Tenant on or before March 15, 1997, then the anticipated substantial completion date of Landlord's Work shall be December 15, 1997, subject to delays caused by Tenant, delays caused by Tenant's requested changes to any plans related to Landlord's Work, or to delays caused by forces and events outside of Landlord's control, such as delays caused by abnormally adverse weather, labor dispute, strike, civil commotion, rebellion, hostilities, military or other usurped power, sabotage, governmental regulations or controls, delay in issuance of any permit beyond 30 days after an application therefor (which is, to the best of Landlord's knowledge, a completed application) is submitted, inability, due to reasons beyond Landlord's control, to obtain labor, services or materials, or acts of God (collectively, "Force Majeure"). If substantial completion of Landlord's Work is delayed past March 31, 1998, as extended, day for day, for days of delay caused by Tenant, by Tenant's requested changes to any plans related to Landlord's Work, or by Force Majeure, then for each day of delay in substantial completion of Landlord's Work beyond March 31, 1998 except for days of delay caused by Tenant, by Tenant's requested changes to any plans related to Landlord's Work, or by delays caused by Force Majeure, Tenant shall receive a credit against Base Rent payable under this Lease in an amount equal to $653.47 per day. Tenant hereby accepts the Landlord's Work Plans (defined below) as complete and as comprising the totality of Landlord's Work. Tenant shall be permitted to enter the Premises approximately 45 days prior to the Commencement Date for the purpose of rough-wiring Tenant's telephone, alarm, and data systems to perimeter walls. Such work shall be in compliance with the provisions of Section 2.7, 2.8 and 2.9 of the Work Agreement attached as Exhibit D. Tenant shall provide promptly upon Landlord's request information regarding details, colors, finishes and other issues relating to Landlord's Work so that Landlord may apply for applicable permits by March 15, 1997. Rider No. 4. Insert Section 2.1, Page 1: - --------------------------------------- Landlord shall give Tenant notice when the Premises are ready for occupancy. Rider No. 5. Insert Section 2.1, Page 1: - --------------------------------------- , and subject to latent defects but only to the extent the costs of correction of such latent defects are paid for under any applicable guaranty, warranty or contractual commitment provided by Baugh Construction Oregon, Inc. (the "Contractor"). Landlord agrees to use commercially reasonable efforts to enforce applicable guaranties, warranties and the construction 2 contract with the contractor (the "Construction Contract") related to correction of latent defects at Tenant's cost and expense. The limitation on Landlord's liability in this Lease related to the Building and Landlord's Work shall not limit the Contractor's liability. The Construction Contract shall contain substantially the same warranty as that which is set forth in AIA Form A201-1976 or terms more favorable to landlord. "Punchlist items" shall mean minor items which do not interfere with Tenant's use of the Premises for its intended purpose. Landlord shall complete all punchlist items within 60 days of the date of Tenant's and Landlord's agreement as to the items on the punchlist, subject to additional time needed to complete warranty items and delays due to Force Majeure including additional time needed to obtain materials. Rider No. 6. Insert Section 2.1(2), Page 2: - ------------------------------------------ the date on which the building permits for Landlord's Work are issued. Rider No. 7. Insert Section 2.1(2), Page 2: - ------------------------------------------ However, Landlord agrees to use commercially reasonable efforts to enforce any applicable guaranties, warranties or Construction Contract claims related to the correction of the violation at Tenant's cost and expense. Landlord represents to Tenant that the Premises are zoned MP by the City of Hillsboro, which zoning designation permits office use. Rider No. 8. Insert Section 3.1, Page 2: - --------------------------------------- one day earlier than the date of substantial completion of Landlord's Work for each day of delay caused by any reason attributable to Tenant (each a "Tenant Delay Day"). Tenant acknowledges that Landlord shall not be obligated to engage overtime labor in order to reduce delay due to Force Majeure unless Tenant requests such overtime labor and pays for such overtime labor. Rider No. 9. Insert Section 4.3(1)(b), Page 2: - --------------------------------------------- excluding janitorial costs related to the interior of buildings in the Project; Rider No. 10. Insert Section 4.3(1)(c), Page 2: - ---------------------------------------------- ; provided, however, that Expenses shall not include maintenance, replacement or repair costs relating to individual tenant premises which maintenance, replacement or repair is in excess of the type of maintenance, replacement or repair required to be provided by Landlord to Tenant under this Lease. Rider No. 11. Insert Section 4.3(1)(e), Page 2: - ---------------------------------------------- Real Property Taxes shall not include assessments (such as local improvement districts) for construction of improvements in the initial development of the Project but Real Property Taxes will include ad valorem taxes assessed on such improvements. 3 Rider No. 12. Insert Section 4.3(1), Page 2: - ------------------------------------------- The term "Expenses" shall not include the following: (i) Ground lease rental. (ii) Amortization and interest pay1ments on Landlord's mortgage financing. (iii) Depreciation. (iv) Costs incurred in the initial development and construction of the Project. (v) The costs of correcting defects in construction which are paid by enforcement of applicable guaranties or warranties. (vi) The cost of tenant improvements provided inside buildings. (vii) Leasing commissions or brokerage commissions. (viii) Legal expenses for disputes with other tenants. (ix) Legal, auditing, and consulting fees other than those incurred in connection with operation, maintenance, repair or replacement of the Project. (x) Costs incurred in performing maintenance and repairs or furnishing services for individual tenants which work or services is in excess of the type of maintenance and repair or services required to be provided by Landlord to Tenant under this Lease. (xi) Expenses incurred in leasing transactions or procuring new tenants. (xii) Expenses for repair or replacement paid by proceeds of condemnation awards and costs due to casualty (other than commercially reasonable deductible amounts under insurance policies which shall be included in Expenses). (xiii) Wages, costs and salaries associated with offsite employees of Landlord other than services provided by such employees which would otherwise be provided by outside persons, and wages, costs and salaries attributable to persons above the level of property manager; provided, however, that Tenant acknowledges the right of Landlord to charge (a) a management fee not to exceed four percent of gross rents and revenues of the Project, (b) construction management fees not to exceed ten percent of the costs, fees and expenses in connection with construction, and (c) an additional charge on costs of labor and personnel not to exceed fifteen percent thereof. (xiv) Any costs representing an amount paid to any entity related to Landlord which is in excess of the amount which would have been paid in the absence of such relationship subject to the proviso regarding the fees and charges set forth in paragraph (xiii) above. 4 (xv) Damages payable by Landlord due to a default by Landlord under any lease or fines, penalties or interest charged by a governmental entity arising from Landlord's violation of any governmental laws, rules, regulations, or ordinances applicable to the Project. Rider No. 13. Insert Section 4.3(3), Page 3: - ------------------------------------------- Tenant shall pay its annual share of estimated Expenses in monthly installments of one-twelfth (1/12) each beginning on the Commencement Date and continuing thereafter on the first day of each calendar month, in advance, throughout the Term. Landlord may revise its estimate of Tenant's share of Expenses from time to time. When Landlord revises its estimate of Tenant's share of Expenses, and Landlord gives written notice to Tenant of such revised estimate, Tenant shall make revised payments of Expenses pursuant to such notice commencing on the first day of the calendar month following Landlord's notice of the revised estimate and continuing on the first day of each calendar month until the estimated payments are again revised. Rider No. 13a. Insert Section 4.3(3), Page 3: - -------------------------------------------- until the earlier of (a) 365 days following the date of receipt of the Notice, or (b) the date Landlord issues its accounting for Expenses for the next succeeding calendar year (the "Objection Deadline") to Rider No. 14. Insert Section 4.3(3), Page 3: - ------------------------------------------- No later than on the Objection Deadline, Tenant's employee or Tenant's authorized representative (which must be a certified public accountant paid on an hourly basis and not on a contingent fee basis) may, at Tenant's expense, after reasonable prior notice to Landlord, and at a reasonable time, audit Landlord's books and records for the calendar year pertaining to the Notice for the purpose of verifying Landlord's calculation of the Expenses for the year in question. If such audit reveals any errors, and if Landlord does not dispute the audit, appropriate adjustments shall be made. If Landlord disputes the results of the audit and Landlord and Tenant are unable to agree on the appropriate adjustment to be made, if any, then the dispute shall be resolved by a nationally recognized accounting firm not then employed by Landlord or Tenant selected by Tenant from a list of three names given by Landlord to Tenant (the "Arbitrator"). The decision by the Arbitrator shall be binding on the parties and any adjustment required by the Arbitrator's decision shall promptly be made after receipt of the Arbitrator's decision. The parties shall share equally the cost of the Arbitrator. Tenant shall give Landlord a copy of the audit results. The fact of the audit itself, the results of the audit, and any adjustments made to Expenses shall be kept confidential by Tenant. Rider No. 15. Insert Section 4.3(4), Page 3: - ------------------------------------------- within five days after it is 5 Rider No. 16. Insert Section 7.1, Page 3: - ---------------------------------------- Landlord shall build the base building in which the Premises are located (the "Building") and Landlord shall provide certain tenant improvements in the Premises, all as specifically described in the scope narrative, the plans, and the specifications prepared by Zimmer Gunsul Frasca, the partition plan, and the electrical plan, all attached as Exhibit C (collectively, the "Landlord's Work Plans"). Landlord shall obtain all permits and approvals required for Landlord's Work. Landlord shall perform all of Landlord's Work in a good and workmanlike manner using new materials. The work specified in the Landlord's Work plans is collectively referred to in this lease as "Landlord's Work". All other improvements, alterations, and modifications to the Premises, additional finish items, all changes to Landlord's Work, and all changes to Landlord's Work plans, if any (collectively and individually, the "Additional Work") shall be first approved in writing by Landlord and the costs, fees, and expenses thereof, including without limitation, the costs, fees, and expenses of obtaining all necessary permits and approvals of design, construction, and installation thereof, together with supervision fees by the manager of the Project and any costs, fees, or expenses incurred due to corresponding changes to other items of Landlord's Work required as a result thereof (collectively, the "Additional TI Costs") shall be paid in full by Tenant prior to the Commencement Date of the Lease (except to the extent payable by Tenant as a First TI Loan or a Second TI Loan pursuant to Section 36.1 of the Lease). The Work Agreement attached as Exhibit D is incorporated in this Lease by this reference. Rider No. 17. Insert Section 7.1, Page 3: - ---------------------------------------- ; provided, however, that (unless required by any Laws) no such modifications, alterations, deletions, or improvements shall reduce the parking ratio for the Project below the ratio set forth in Section 10.1 or materially adversely restrict access to the Premises from N.W. Evergreen Parkway. Rider No. 18. Insert Section 7.1, Page 3: - ---------------------------------------- The current rules and regulations pertaining to the Project with which Tenant shall comply are attached to this Lease as Exhibit E. Rider No. 19. Insert Section 10.1, Page 4: - ----------------------------------------- Tenant shall not park nor allow its employees, invitees, and customers collectively to park in excess of four automobiles for every 1,000 square feet leased by tenant in the center at any point in time. Rider No. 20. Insert Section 10.1, Page 4: - ----------------------------------------- ; provided, however, that (unless required by any laws), landlord shall not have the right to reduce the parking available to tenant below the ratio set forth in this Section. 6 Rider No. 21. Insert Section 11.1, Page 4: - ----------------------------------------- Tenant shall pay its share of utilities used in or related to the operation and maintenance of the Project as part of Expenses as described in Section 4.3(1). Rider No. 22. Insert Section 12.1, Page 4: - ----------------------------------------- Landlord shall maintain, in good condition, the structural parts of the building which shall include only the foundation, the structural parts of the bearing and exterior walls (excluding glass), the structural parts of the subflooring and the structural portions of the roof (excluding skylights), and the unexposed portions of the Rider No. 23. Insert Section 12.1, Page 4: - ----------------------------------------- Except as expressly set forth in the first sentence of Section 12.1 and below in this paragraph, from and after the Commencement Date, Tenant shall be fully responsible for the maintenance, repair, replacement, and operation, in good operating order and condition, of the interior and exterior of the Building, and its systems and equipment including without limitation the heating, ventilating and air conditioning systems and equipment ("HVAC"), the roof, and the elevator. Landlord's sole obligations are set forth in the first sentence of Section 12.1. However, so long as (a) Landlord's designated Project property manager ("Landlord's Property Manager") manages the maintenance and repair of the Building and its systems pursuant to a written property management contract between Tenant and Landlord's Property Manager containing a scope of work reasonably satisfactory to Landlord, and (b) such contract is in full force and effect, then Landlord agrees to be responsible to maintain, repair, and replace the roof and any leaking windows. As of the date of this Lease, Melvin Mark Brokerage Company is Landlord's Property Manager. Tenant shall provide its own janitorial services and, in all respects, maintain the Building in good and clean operating condition throughout the Term of the Lease. Tenant shall provide regular service and maintenance of the HVAC, the elevator, the electrical system, and all other Building systems and equipment, and regular pest control services throughout the Term using contractors first approved by Landlord, which approval shall not be unreasonably withheld. Landlord shall also have the right to approve the scope of work to be provided under each such contract so that Landlord is reasonably satisfied that the Building and its systems and equipment will be properly maintained and inspected throughout the Term. Rider No. 24. Insert Section 12.1, Page 4: - ----------------------------------------- Landlord shall use its commercially reasonable efforts to enforce on Tenant's behalf and at Tenant's expense all applicable construction and equipment warranties. Rider No. 25. Insert Section 13.1, Page 4: - ----------------------------------------- either without Landlord's permission or alterations as to which Landlord required removal in connection with Landlord's approval of the alteration. Whenever Tenant requests Landlord's consent to any alteration, Tenant shall also request Landlord's decision at that time whether Landlord will require the alteration in question to be removed at the end of the Term. If 7 Tenant does not request such decision at that time, or if Landlord responds to such request with a requirement that Tenant remove the alteration in question, then Landlord shall be free to require Tenant to remove such alteration at the end of the Term as provided in this Section 13.1. Rider No. 26. Insert Section 14.1, Page 5: - ----------------------------------------- (except as expressly provided below) Rider No. 27. Insert Section 14.1, Page 5: - ----------------------------------------- Landlord shall indemnify, defend, and hold Tenant harmless from all claims, losses, causes of action, costs and expenses, and damages arising out of (a) Landlord's or its agents' negligence or willful misconduct and/or (b) Landlord's default or violation of any term of this Lease which is not corrected within a reasonable time after Tenant's notice to Landlord thereof. However, Landlord shall never be liable for consequential damages such as lost profits. Rider No. 28. Insert Section 15.1, Page 5: - ----------------------------------------- Neither party shall be liable to the other party for any loss or damage caused by any of the risks covered by "all risk" insurance coverage, and there shall be no subrogated claim by one party's insurance carrier against the other party arising out of any such loss. Rider No. 29. Insert Section 16.1, Page 5: - ----------------------------------------- Then Landlord shall give Tenant a notice as to Landlord's estimate of the time period reasonably required to complete the restoration (the "Damage Assessment"). If the Damage Assessment shall state that the reconstruction shall require more than 270 days to complete following receipt of governmental approvals required therefor, then this Lease may be terminated by Landlord or Tenant by its giving to the other party written notice of such termination within 30 days after Tenant's receipt of the Damage Assessment. In the event of the giving of such notice of termination, this Lease shall expire as of the date of such notice given in accordance with the terms of this paragraph, with the same effect as if such date were the Expiration Date. In the event that Landlord fails to substantially complete the repairs by the date specified in the Damage Assessment, Tenant shall have the right to terminate this Lease with written notice given no later than 15 days after the date specified in the Damage Assessment if Landlord's failure to complete such repairs on the date specified in the Damage Assessment is not caused in whole or in part by delays due to Force Majeure or delays caused by Tenant. If the Lease is not terminated pursuant to this Section 16.1, Rider No. 30. Insert Section 17.1(4), Page 5: - -------------------------------------------- ; provided, however, Landlord shall not use this termination provision in bad faith. 8 Rider No. 31. Insert Section 18.1(4), Page 6: - -------------------------------------------- Which consent shall not be unreasonably withheld or delayed. Landlord may condition its consent on reasonable conditions. Should Landlord withhold its consent to a proposed assignment or subletting or any other transfer of Tenant's rights under this Lease (each a "Transfer") for any of the following reasons, the withholding of consent shall be deemed reasonable: (A) conflict or incompatibility of the proposed use with uses appropriate in a professional business park; (b) financial inadequacy of the proposed transferee as reasonably determined by Landlord; (c) any proposed change in use which would diminish the professional nature of the Project or of the other businesses located in the Project; (d) the proposed use would adversely impact the use of the common facilities by other tenants of the Project; (5) Tenant is then in default of the Lease beyond any applicable cure period; and (6) any other reasonable criteria. Landlord shall not be required to consent to a Transfer to any person or entity with whom Landlord or its agents is then negotiating the terms of a lease of any other portion of the Project; provided, however, that with respect to a sublease of no more than 30 percent of the Premises entered into during the initial two years of the Term, (x) Landlord shall not be allowed to withhold its consent to the sublease to a person or entity based solely on the fact that Landlord or its agents is then negotiating the terms of a lease of another portion of the Project with that same person or entity, and (y) Landlord shall not use financial ability of the proposed subtenant as a criterion for withholding its consent to the sublease. Landlord shall not be required to consent to any Transfer at any time to an existing tenant or occupant of the Project. No Transfer shall result in Tenant being released from any obligation under this Lease. As a condition to Landlord's prior written consent as provided in this Section 18.1, the transferee shall agree in writing to comply with and be bound by all of the terms, covenants, conditions, provisions, and agreements of this Lease and Tenant shall deliver to Landlord promptly after execution an executed copy of all agreements of such compliance by each transferee. Rider No. 32. Insert Section 18.1, Page 6: - ----------------------------------------- ; provided, however, if the net worth of Tenant after the transfer at issue would be less than either (x) the net worth of Tenant as of the date of this Lease, or (y) the net worth of Tenant prior to the transfer, then Landlord may refuse its consent to the transfer at issue. Rider No. 33. Insert Section 18.1, Page 6: - ----------------------------------------- or to transfers to shareholders of record on the date of this Lease or to transfers by shareholders of record on the date of this Lease to family members or trusts for the benefit of family members of such shareholders. Tenant shall have the right to assign this Lease or sublease all or part of the Premises to any entity which is controlled by, under the control of, or under common control with Tenant, or any corporation into which Tenant may be merged or consolidated, or which purchases all or substantially all of the assets of Tenant (each an "Affiliate of Tenant"); provided, however, (a) Tenant shall not be released from its obligations under this Lease, (b) Landlord shall be given at least 15 days prior written notice of the assignment or sublease, (c) Landlord shall be given a copy of the document effecting the assignment or sublease at least 15 days prior to the date on which the assignment or sublease 9 shall occur, and (d) from and after the date of the assignment or sublease, Tenant shall be jointly and severally liable with the Affiliate of Tenant with respect to all obligations of Tenant under this Lease. Rider No. 34. Insert Section 19.1, Page 6: - ----------------------------------------- within ten days after written notice that it is due; provided, however, that Landlord shall not be obligated to give a ten day notice and opportunity to cure more than once during any single twelve-month period. If Tenant fails to pay rent or any other charge on the date it is due a second time within any twelve-month period, such failure to pay rent or other charge shall be an automatic event of default at Landlord's option without need for further notice or opportunity to cure; (b) failure to comply with Laws which failure materially affects the operations or quality of the Project or may result in a claim, fine or penalty against Landlord, failure to carry the insurance required of Tenant under this Lease, or the failure of Tenant to deliver a subordination agreement or estoppel certificate within the time required by Section 22.1 of this Lease within five days after written notice by Landlord. No notice and no opportunity to cure shall be required if Landlord has previously given Tenant notice of failure to comply with the same provision of this Lease; (c) failure to comply with the provisions of Section 10.1 of the Lease within five days after written notice by Landlord; provided, however, that Landlord shall not be obligated to give a five day notice and opportunity to cure more than once during any single twelve-month period. If Tenant fails to comply with the provisions of Section 10.1 of the Lease a second time within any twelve-month period, such failure to comply shall be an automatic event of default at Landlord's option without need for further notice or opportunity to cure; (d) failure of Tenant to comply with any other term or condition of this Lease or to fulfill any other obligation of this Lease within 30 days after written notice from Landlord specifying the nature of the failure or, if such failure cannot be cured within such 30 day period, Tenant shall not be in default if, promptly after Landlord's notice to Tenant, Tenant begins its cure of the failure and diligently prosecutes such cure to completion. Landlord shall not be obligated to give written notice for the same type of failure more than once during any single twelve-month period; at Landlord's option, a failure to perform an obligation again after the first notice during any twelve-month period shall be an automatic event of default, without notice or any opportunity to cure. Rider No. 35. Insert Section 20.1, Page 6: - ----------------------------------------- Notwithstanding any provisions in this Section to the contrary, Landlord shall have the duty to exercise its reasonable efforts to mitigate damages in accordance with Oregon law. 10 Rider No. 36. Insert Section 20.1, Page 6: - ----------------------------------------- after notice thereof by Landlord beyond the cure period set forth in Section 19.1, Rider No. 37. Insert Section 21.1, Page 6: - ----------------------------------------- after reasonable oral notice in non-emergency situations Rider No. 38. Insert Section 22.1, Page 7: - ----------------------------------------- Landlord shall deliver to Tenant within 30 days after execution of this Lease or such additional time as may be reasonably required by Landlord to obtain such agreement, a nondisturbance agreement in form and substance reasonably acceptable to Tenant from any existing mortgagee or beneficiary of a deed of trust with a lien on the Project or any existing ground lessor with respect to the Project. The commencement of Tenant's obligation to pay rent shall be contingent upon Landlord's compliance with the terms of this Section 22.1. Tenant's subordination to any future mortgage, trust deed or ground lease shall be contingent upon the delivery of a non-disturbance agreement in form and substance reasonably acceptable to Tenant from any future mortgagee, beneficiary or ground lessor. Rider No. 39. Insert Section 22.1, Page 7: - ----------------------------------------- Tenant's obligation under the last sentence of this section 22.1 shall be to deliver its most recent audited financial statement (which shall be current at least to the most recently ended fiscal year) and its most recent unaudited financial statement which shall be current at least to the most recently ended calendar quarter of tenant's fiscal year. Landlord agrees to keep confidential any such financial statements which are not already public information except that landlord may disclose all financial statements to its advisors, prospective and current lenders, and prospective and current purchasers. Rider No. 40. Insert Section 23.1, Page 7: - ----------------------------------------- In order for any notices given to Landlord to be effective, such notices must be addressed to Landlord and delivered to the following addresses (or to such other addresses as Landlord may designate in writing from time to time in accordance with the notice provisions of Section 23.1 of the Lease): Melvin Mark Companies Attn: Mr. Daniel J. Petrusich Suite 1380 111 SW Columbia Street Portland, OR 97201 11 With a copy to: Schnitzer Investment Corp. Attn: Mr. Kenneth M. Novack 3200 NW Yeon Street Portland, OR 97210 Rider No. 41. Insert Section 25.1, Page 7: - ----------------------------------------- and damage by fire or other casualty Rider No. 42. Insert Section 25.1, Page 7: - ----------------------------------------- to the extent required pursuant to the provisions of Section 13.1 of this Lease. Restoration of wall surfaces shall not include repainting of wall surfaces but shall include patching and preparing such wall surfaces for paint Rider No. 43. Insert Section 25.1(5), Page 8: - -------------------------------------------- concerning this Lease, the Premises or the Project Rider No. 44. Insert Section 31.1, Page 10: - ------------------------------------------ Landlord represents and warrants to Tenant that, to the best of Landlord's actual and present knowledge, without inquiry except for the review of a Phase I Environmental Property Assessment prepared by PBS Environmental dated December 1995, no hazardous substances have been generated, released, handled, stored, discharged, transported, deposited or disposed in, on, or under or about the Premises or the Project. Rider No. 45. Insert Page 10: The following provisions are hereby added to the - ---------------------------- Lease: 33.1 Option to Extend. ---------------- 33.1.1 If the Lease is not then in default and if Tenant has not assigned the Lease or subleased more than 50% of the Premises, Tenant shall have the right to extend the term of the Lease for two successive periods of five years each (the "Options to Extend"). Tenant shall exercise each Option to Extend by delivering written notice of such exercise not less than 365 days prior to the last day of the then expiring Term. The giving of such notice shall be sufficient to make the Lease binding on the parties for the extended term in question without further action of the parties. The extended term shall commence on the day following the date of expiration of the immediately preceding term. The terms and conditions of the Lease for the extended term shall be identical to the immediately preceding term except for Base Monthly Rent. During the extended term, Base Monthly Rent shall be adjusted to equal the greater of (a) the Base Monthly Rent in effect at the end of the immediately preceding term, or (b) the fair market rental value of the premises for the extended term, determined as hereinafter provided. Within 30 days after the exercise of an Option to Extend, Landlord shall notify Tenant of its determination of the fair market rental value. Within 30 days after the effective date of such notice, Tenant shall either 12 (x) notify Landlord of Tenant's acceptance of Landlord's determination of the fair market rental value, in which event Base Monthly Rent for the extended term shall be as so determined by Landlord; or (y) notify Landlord of Tenant's rejection of Landlord's determination of the fair market rental value, in which event the fair market rental value shall be determined in accordance with Section 33.1.2 below. The failure of Tenant to give any notice within the required time period shall be deemed an acceptance by Tenant of Landlord's determination of the fair market rental value. 33.1.2 Within ten days after Tenant's rejection of Landlord's determination of fair market rental value as provided in Section 33.1.1 above, each party shall designate a representative who is either an Oregon licensed MAI appraiser skilled in determining rental rates for office buildings in western suburban areas of Portland, Oregon, or a real estate broker experienced in leasing office space in office buildings located in the western suburbs of Portland, Oregon. If the two representatives cannot agree within 30 days after their selection on the fair market rental value, then the two representatives so chosen shall select an arbitrator having the above qualifications or, if they cannot agree, the presiding judge of the Circuit Court of Multnomah County or Washington County, Oregon, shall, upon application by either party, select an arbitrator having the above qualifications. Within 90 days prior to the commencement of the extended term, each party's representative shall submit to the arbitrator a written report stating such representative's opinion of the fair market rental value of the Premises for the extended term in question, based on a consideration of all factors appropriate to determining fair market rental value for the extended term in question including without limitation rental rates then being charged (under the most recently executed leases) in space comparable to the Premises in buildings comparable to the Building and concessions available to comparable tenants for comparable space. Within 30 days after receipt of such reports, the arbitrator shall accept one or the other of the reports. The determination of the fair market rental value in the report so accepted shall be binding on the parties; provided, however, that Base Monthly Rent during any extended term shall not in any event be less than Base Monthly Rent payable during the immediately preceding term. The cost of the determination of the fair market rental value pursuant to this Section 33.1.2 shall be shared equally by Landlord and Tenant. If the arbitrator does not decide the fair market rental value prior to the commencement date of the renewal term in question, Base Monthly Rent shall continue to be payable in the amount previously in effect, and retroactive adjustment shall be made when the arbitrator reaches a decision. 34.1 Satellite Dish -------------- 34.1.1 Grant of License. Landlord hereby grants Tenant a nonexclusive license to install on the roof of the building a satellite dish of no more than three feet in diameter and the nonexclusive right to run connecting lines to such satellite dish from the Premises (such satellite dish and such connecting lines and equipment are herein referred to as the "Equipment"). Tenant shall not penetrate the roof in connection with any installation or reinstallation of the Equipment if such penetration may void or adversely affect any applicable guaranty or warranty. The plans and specifications for all the Equipment shall be approved by Landlord in writing prior to any installation. Tenant shall be responsible for any damage to the roof or conduit systems as a result of Tenant's installation, maintenance and/or removal of the Equipment. 13 34.1.2 Location. The location of the satellite dish and the rest of the Equipment shall be subject to Landlord's prior written approval. Tenant shall not change the location of, or alter or install additional Equipment or paint the satellite dish or the other Equipment without Landlord's prior written consent. 34.1.3 Compliance with Law. Tenant, at Tenant's sole expense, shall comply with all Laws regarding the installation, construction, operation, maintenance and removal of the Equipment and shall be solely responsible for obtaining and maintaining in force all permits, licenses and approvals necessary for such operations. 34.1.4 Taxes. Tenant shall be responsible for and promptly shall pay when due all taxes, assessments, charges, fees and other governmental impositions levied or assessed on the Equipment or based on the operation thereof. 34.1.5 Relocation. Landlord may require Tenant to relocate the Equipment during the term of the Lease to a location approved by Tenant, which approval shall not be unreasonably withheld or delayed. Landlord shall reimburse Tenant for any direct third party expenses reasonably incurred by Tenant in so relocating the Equipment upon receipt of invoices evidencing Tenant's incurring of such expenses. 34.1.6 Interference. Operation of the Equipment shall not interfere in any manner with equipment systems or utility systems of other tenants, including without limitation, telephones, dictation equipment, lighting, heat and air conditioning, computers, electrical systems, and elevators. If operation of the Equipment causes such interference, Tenant immediately shall suspend operation of the Equipment until such interference is eliminated. 34.1.7 Maintenance and Repair. Tenant shall maintain the Equipment in good condition and repair, at Tenant's cost and expense. Landlord may from time to time require that Tenant repaint the satellite dish at Tenant's expense to keep the same in an attractive condition. 34.1.8 Indemnity and Insurance. Tenant shall indemnify, defend, protect and hold harmless Landlord pursuant to the Lease from and against any and all claims related to the Equipment or operation of the same as if the Equipment were located wholly within the Premises. Tenant shall provide evidence satisfactory to Landlord that Tenant's property and liability insurance policies required under the Lease include coverage for the Equipment and any claim, loss, damage, or liability relating to the Equipment. 34.1.9 No Landlord Responsibility. Landlord shall have no responsibility or liability whatsoever relating to (i) maintenance or repair of the Equipment; (ii) damage to the Equipment; (iii) damage to persons or property relating to the Equipment or the operation thereof; or (iv) interference with use of the Equipment arising out of utility the interruption or any other cause. Upon installation of the Equipment, Tenant shall accept the area where the Equipment is located in its "as is" condition. Tenant acknowledges that the roof location of the Equipment is suitable for Tenant's needs, and acknowledges that Landlord shall have no 14 obligation whatsoever to improve, maintain or repair the area in which the Equipment will be installed. 34.1.10 Use. Tenant shall use the Equipment solely for operations within the Premises and shall not use or allow use of the Equipment, for consideration or otherwise, for the benefit of other tenants in the project or any other person or entity. 34.1.11 Removal. Tenant shall, at Tenant's sole expense, remove the satellite dish and such other portions of the Equipment as Landlord may designate, and restore the affected areas to their condition prior to installation of the Equipment (i) immediately upon request of Landlord, if Tenant fails to perform any of its obligations under this Section 34.1, (ii) immediately if such removal is required by any governmental agency having jurisdiction over the Equipment, and (iii) in any event, no later than 30 days after expiration or earlier termination of the Lease. If Tenant fails to remove the Equipment when and as required under this Section 34.1, Landlord reserves the right to do so, and the expense of the same shall be immediately due and payable from Tenant to Landlord as additional rent, together with interest and late charges as provided in the Lease. 34.1.12 Survival. The covenants, obligations and indemnities of Tenant under this Section 34.1 shall survive expiration or earlier termination of the Lease for any reason. 35.1 Communication Regarding Available Expansion. ------------------------------------------- In the event Tenant informs Landlord that Tenant desires to lease additional space in the Project, Landlord shall inform Tenant of the available space, if any, which is not subject to prior rights held by other tenants or prospective tenants of the Project and of the terms under which Landlord would be willing to lease such available space to Tenant. 36.1 Tenant Improvement Loans. ------------------------ 36.1.1 First Tenant Improvement Loan. As provided in Section 7.1, Rider 16, and the Work Agreement, Tenant is required to pay the Additional TI Costs in full prior to the Commencement Date of this Lease. If Tenant desires to borrow funds from Landlord for such excess amount, Landlord agrees to loan funds to Tenant in an amount not to exceed $75,010.00 solely for costs, fees, and expenses to design and construct improvements in the Premises (the "First TI Loan"). The First TI Loan shall accrue interest at the rate of 11 percent per annum. Tenant shall repay the First TI Loan with monthly payments sufficient to amortize the First TI Loan over the ten year term of the Lease beginning on the Commencement Date and ending on the expiration date of the initial term of the Lease, taking into account interest at the rate of 11 percent per annum. Payments on the First TI Loan will begin on the Commencement Date and shall continue on the first day of each month throughout the remainder of the initial term of the Lease and shall be paid in full on or before the expiration date of the initial term of the Lease or any earlier termination date. Landlord shall inform Tenant of the monthly amount to be paid under the First TI Loan as soon as practicable after substantial completion of the Tenant improvements. If the amount is not determined prior to the Commencement Date, then Tenant's first payment under the First TI Loan shall be sufficient to pay the monthly payments 15 due from the Commencement Date to the date on which Tenant is informed of the monthly payment amount. At Landlord's option, Landlord may prepare a promissory note which Tenant shall execute and deliver to Landlord, setting forth the terms of Tenant's obligation to repay the First TI Loan. 36.1.2 Second Tenant Improvement Loan. Landlord further agrees to loan additional funds to be applied toward the Additional TI Costs in an amount not to exceed $75,010.00 solely for costs, fees, and expenses to design and construct improvements in the Premises (the "Second TI Loan"). The Second TI Loan shall accrue interest at the rate of 11 percent per annum. Tenant shall repay the Second TI Loan with monthly payments sufficient to amortize the Second TI Loan over the initial two years of the Term beginning on the Commencement Date and ending on the last day of the 24th month of the Term, taking into account interest at the rate of 11 percent per annum. Payments on the Second TI Loan will begin on the Commencement Date and shall continue on the first day of each month thereafter and shall be paid in full on or before the end of the 24th month of the Term or any earlier lease termination date. Landlord shall inform Tenant of the monthly amount to be paid under the Second TI Loan as soon as practicable after substantial completion of the Tenant improvements. If the amount is not determined prior to the Commencement Date, then Tenant's first payment under the Second TI Loan shall be sufficient to pay the monthly payments due from the Commencement Date to the date on which Tenant is informed of the monthly payment amount. At Landlord's option, Landlord may prepare a promissory note which Tenant shall execute and deliver to Landlord, setting forth the terms of Tenant's obligation to repay the Second TI Loan. 37.1 Force Majeure. ------------- Whenever a period of time is prescribed in this Lease for action to be taken by Landlord or for performance of any obligation of Landlord under this Lease, Landlord shall not be responsible for, and there shall be excluded from the computation of such period of time, any delays due to Force Majeure. Whenever a period of time is prescribed in this Lease for action to be taken by Tenant (except for the obligation to pay rent and other expenses or charges) or for performance of any obligation of Tenant under this Lease (except for the obligation to pay rent and other expenses or charges), Tenant shall not be responsible for, and there shall be excluded from the computation of such period of time, any delays due to Force Majeure. 38.1 Publicity. --------- Neither Landlord nor Tenant will issue a press release regarding this Lease without the prior written consent of the other party. 39.1 Authority. --------- The person signing this Lease by Tenant represents that he has been duly authorized by Tenant's board of directors to execute and deliver this Lease which shall be binding on Tenant. 16 Effect of Addendum. The Lease is modified only in the specific respects set forth in this Addendum. Except as expressly modified, the Lease remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this Addendum as part of the Lease as of the date first set forth above. LANDLORD: EVERGREEN CORPORATE CENTER LLC By: Marzer Venture, an Oregon general partnership By: Mark Group Partnership No. 4 By: MELVIN MARK --------------------------- Title: Partner ------------------------ By: Schnitzer Investment Corp., an Oregon corporation By: KEN NOVACK --------------------------- Title: President ------------------------ TENANT: MEDICALOGIC, INC., an Oregon corporation By: MARK K. LEAVITT GUY E. FIELD ------------------------------------- Title: President Controller ---------------------------------- 17 Maps and exhibits omitted. AMENDMENT TO LEASE DATED: July 15, 1999 BETWEEN: EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company ("Landlord") AND: MEDICALOGIC, INC., an Oregon corporation ("Tenant") A. Landlord and Tenant are parties to an Industrial Business Park Lease dated January 15, 1997 (the "Lease Agreement"), as amended by an Addendum to Lease dated January 15, 1997 (the "Addendum"). The Lease Agreement and the Addendum are collectively referred to in this Amendment to Lease (the "Amendment") as the "Lease." The capitalized terms used in this Amendment which are defined in the Lease shall have the meanings given to them in the Lease. B. After the Lease was executed, the Project was reconfigured. Attached, as Exhibit A, is a current site plan of the Project. Landlord and Tenant desire to expand the Premises by adding to them approximately 27,652 square feet in Building 3 (20540 N.W. Aloclek), as described in this Amendment. NOW, THEREFORE, in consideration of the mutual promises of the parties set forth in this Amendment, Landlord and Tenant agree as follows: 1. Expansion. Commencing on September 1, 1999, approximately 27,652 square feet of space in Building 3 in the area which is crosshatched on the attached Exhibit B (the "Expansion Space") shall be added to the Premises for the Term. Commencing on September 1, 1999, and continuing throughout the Term, the Expansion Space shall be a part of the Premises and subject to all terms and conditions of the Lease except as otherwise provided in this Amendment. The Expansion Space was measured in accordance with Portland NAIOP measurement standards, a copy of which is attached as Exhibit A-I to the Lease Agreement. 2. Rent. Commencing on September 1, 1999, and continuing throughout the Term, Base Monthly Rent shall increase by the following amounts in accordance with the following schedule: Time Period Monthly Base Rent Increase ----------- -------------------------- September 1, 1999 through February 28, 2000 $0 March 1, 2000 through April 30, 2000 $21,569.00 May 1, 2000 through April 30, 2003 $28,482.00 1 Time Period Monthly Base Rent Increase ----------- -------------------------- May 1, 2003 through April 30, 2006 $31,045.00 May 1, 2006 through December 14, 2007 $33,839.00 3. Additional Rent. Commencing on May 1, 2000, and continuing throughout the Term, Tenant's percent of the Project for purposes of determining Tenant's share of Expenses pursuant to Section 4.3 of the Lease Agreement shall be increased. In addition to the Expenses Tenant pays for the Premises, Tenant shall also pay Tenant's share of Expenses for the Expansion Space which shall be a fraction of the Expenses, the numerator of which shall be 27,652, and the denominator of which shall be the total number of square feet of completed and leasable space in the Project from time to time. 4. Improvements to Expansion Space. The provisions of Rider No. I through Rider No. 6 of the Addendum, Rider No. 8 of the Addendum, Rider No. 16 of the Addendum, Rider No. 36.1 of the Addendum, Exhibit C to the Lease and Exhibit D to the Lease shall not apply to the Expansion Space. The provisions of this Section 4 shall control the condition of the Expansion Space and Landlord's work in the Expansion Space. The Expansion Space shall be leased in its AS IS condition except for the work to be performed pursuant to the Work Agreement attached as Exhibit C to this Amendment (the "Expansion Space Work Agreement"). 5. Security Deposit. Contemporaneously with the execution of this Amendment, Tenant shall pay Landlord $33,839.00 as an increased security deposit which shall be held and disbursed in accordance with the provisions of Section 6.1 of the Lease Agreement. 6. First Opportunity to Lease. Throughout the Term, so long as Tenant is not in default of the Lease, Tenant shall have the right of first offer to lease the remainder of space in Building 3 (the "First Offer Space'), in accordance with the terms of this Section 6. In the event that Landlord desires to make a written offer (the "Offer) to a third party to lease all or any portion of the First Offer Space, Landlord shall first present the Offer to Tenant and give Tenant three business days within which to determine whether Tenant will accept the Offer. If Tenant gives Landlord written notice within such three business day period that Tenant elects to accept the Offer, then Tenant shall be bound to enter into a written lease agreement in accordance with the terms of the Offer. If Tenant does not give Landlord such written notice within the three business day period, then Landlord shall be free to lease the First Offer Space to any party on the terms of the Offer or on substantially similar terms. If Landlord does not so lease the First Offer Space, Tenant's right of first offer with respect to the First Offer Space shall revive and continue throughout the Term. 7. Brokerage Commissions. Landlord agrees to pay Tenant's broker, Norris Beggs & Simpson Northwest Limited Partnership ("NBS") a fee in the amount described in a letter addressed to NBS from Melvin Mark Brokerage Company dated June 18, 1999. One half of the commission shall be payable upon full execution of this Amendment by Landlord and Tenant, and the remainder shall be paid when Tenant begins paying rent for the Expansion Space at the rate of $1.03 per square foot. 2 8. Effect of Amendment. The Lease is modified only in the specific respects set forth in this Amendment. Except as expressly modified, the Lease remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as part of the Lease as of the date first set forth above. LANDLORD: EVERGREEN CORPORATE CENTER LLC By: Marzer Venture, an Oregon general partnership By: Mark Group Partnership No. 4 By: MELVIN MARK ---------------------------------------- Title: Partner ------------------------------------- By: Schnitzer Investment Corp., an Oregon corporation By: KENNETH NOVACK ---------------------------------------- Title: President ------------------------------------- TENANT: MEDICALOGIC, INC., an Oregon corporation By: GUY E. FIELD ------------------------------------------------------- Its: VP Finance -------------------------------------------------- 3 EXHIBIT A (Current Site Plan) [GRAPHIC OMITTED-Evergreen Corporate Center Site Plan] EXHIBIT B (Expansion Space) [GRAPHIC OMITTED-Evergreen Corporate Center Building Three] EXHIBIT C EXPANSION SPACE WORK AGREEMENT ------------------------------ SECTION 1 GENERAL 1.1 Landlord agrees to provide certain improvements in the Expansion Space in accordance with this Expansion Space Work Agreement. Landlord shall pay up to $774,256.00 ($28.00 per square foot in the Expansion Space) (the "TI Allowance") towards the cost of designing and constructing the improvements in the Expansion Space subject to and in accordance with the terms and conditions of this Expansion Space Work Agreement. At least $553,040.00 ($20.00 per square foot in the Expansion Space) of the TI Allowance must be used for improvements made to the Expansion Space on or before May 31, 2000 (the "Initial Improvements") or else the TI Allowance shall be reduced as follows. If $553,040.00 is not spent for improvements made to the Expansion Space on or before May 31, 2000, the TI Allowance shall be reduced by the difference between $774,256.00, and the amount spent for improvements made to the Expansion Space on or before May 31, 2000. Tenant acknowledges that the availability of the TI Allowance is conditioned on Tenant accepting Landlord's work in the Expansion Space on or before May 31, 2000, as described in the certificate attached as Exhibit D (the "Teachers Certificate") to be executed and delivered by Tenant on or before May 31, 2000. If such conditions are fulfilled then, on or before May 31, 2000, Tenant shall execute the Teachers Certificate and send the original and a copy thereof to Landlord. If at least $553,040.00 of the TI Allowance is spent for improvements made to the Expansion Space on or before May 31, 2000, then any remaining amount of the TI Allowance may be spent at any time during the Term. 1.2 All costs, fees, and expenses in connection with the design and construction of the improvements in the Expansion Space in excess of the TI Allowance paid in accordance with Section 1. 1 shall be paid for by Tenant within twenty (20) days after billing therefor. If Tenant desires to borrow funds from Landlord for such excess amount, Landlord agrees to loan funds to Tenant in an amount not to exceed $138,260.00 ($5.00 per square foot in the Expansion Space) solely for costs, fees, and expenses to design and construct improvements in the Expansion Space (the "Expansion TI Loan"). The Expansion TI Loan shall accrue interest at the rate of 11 percent per annum, commencing on the date of the first advance on the Expansion TI Loan (the "First Advance Date') and continuing until such time as the entire Expansion TI Loan and all accrued interest are paid in full. Tenant shall repay the Expansion TI Loan with monthly payments sufficient to amortize the Expansion TI Loan over the period of time beginning on the first Advance Date and ending on December 14, 2007, taking into account interest at the rate of 11 percent per annum. Payments on the Expansion TI Loan will begin on the first day of the first calendar month following the First Advance Date and shall continue on the first day of each month through December 1, 2007 and shall be paid in full on or before December 1, 2007 or any earlier termination date of the Lease. Landlord shall inform Tenant of the monthly amount to be paid under the Expansion TI Loan as soon as practicable after substantial completion of the tenant improvements for which the Expansion TI Loan is used. If the amount is not determined 1 prior to May 1, 2000, then Tenant's first payment under the Expansion TI Loan shall be sufficient to pay the monthly payments due from May 1, 2000 to the date on which Tenant is informed of the monthly payment amount. Upon Landlord's request, Tenant shall execute and deliver to Landlord a promissory note, setting forth the terms of Tenant's obligation to repay the Expansion TI Loan, in the form attached as Exhibit E. 1.3 Throughout the process of design and construction of the Tenant improvements, Patty Sullivan ("Tenant's Construction Representative") shall be available for onsite and telephone consultations and decisions as necessary. Tenant's Construction Representative's address is 20500 N.W. Evergreen Parkway, Hillsboro, Oregon 97124 and her telephone number is 531-7000. Tenant's Construction Representative shall have the authority to bind Tenant as to all matters relating to the tenant improvements. SECTION 2 DESIGN OF TENANT IMPROVEMENTS 2.1 Landlord shall retain the services of a space planner or architect (the "Planner") to prepare the necessary drawings, including without limitation Basic Plans and Working Plans as described below for construction of the tenant improvements (the "Pl1ans"). Promptly after the Planner's requests, Tenant's Construction Representative will meet with the Planner to provide information to the Planner as needed to prepare the Plans and to modify the Plans, as provided in this Expansion Space Work Agreement. 2.2 Within ten business days after Landlord delivers to Tenant a copy of the Basic Plans, Tenant shall either approve the Basic Plans or shall set out the revisions requested by Tenant to the Basic Plans. Also, Tenant shall, within such ten business day period, clearly identify and locate on the Basic Plans (i) any equipment requiring special plumbing or mechanical systems, areas subject to above normal loads, special openings in the floor, ceiling, or walls, and other major or special features; and (ii) locations of telephone and electrical receptacles, outlets, and other items requiring electrical power (for special conditions and equipment, power requirements, and manufacturer's model numbers must be included) 2.3 Landlord shall review any revisions made to the Basic Plans and shall, in writing within five business days after receipt, either approve the revised Basic Plans or reject them, in which case Landlord shall specify in reasonable detail the deficiencies in the Basic Plans as submitted. If the Basic Plans are rejected, Tenant shall resubmit required changes to the Basic Plans as soon as practicable until Landlord's approval has been obtained. Following Landlord's approval of the Basic Plans, the Planner shall produce full working drawings for construction sufficient to obtain all necessary permits and with sufficient detail to construct the improvements, including specifications for every item included thereon (the "Working Plans"). Landlord shall have the right to stop the design process at any point and terminate the Lease if it appears to Landlord that the cost, timing, or some other issue related to the tenant improvements will not be resolved between the parties. 2.4 Tenant must approve the Working Plans for the Initial Improvements to the Premises no later than on December 31, 1999. Tenant shall be responsible for delays and additional costs in completion of the design and construction of Tenant's improvements caused 2 by delays in approving the Working Plans, by changes made to the Working Plans after Landlord delivers them to Tenant or by delays in delivery of special materials requiring long lead times. For any construction of improvements other than the Initial Improvements in the Premises, the Working Plans for such improvements must be completed and approved by Landlord and Tenant at least five months prior to the anticipated substantial completion date of such improvements. SECTION 3 CONSTRUCTION OF TENANT IMPROVEMENTS 3.1 Upon completion of the Working Plans and at the request of Tenant, Landlord and its contractor shall provide to Tenant in writing an estimate of the cost of improvements to be provided at Tenant's expense pursuant to Section 1 of this Expansion Space Work Agreement. Within five days after Tenant's receipt of such estimated cost, Tenant shall delete any items which Tenant elects not to have constructed. Landlord and Tenant shall work together to establish a construction budget reasonably acceptable to both parties. Tenant shall authorize in writing the agreed upon construction budget. In the absence of such written authorization, Landlord shall not be obligated to commence work on the Expansion Space and Tenant shall be responsible for any costs due to any resulting delay in completion of the Expansion Space. 3.2 If Tenant desires any change to its improvements, Tenant shall submit a written request for such change to Landlord, together with all plans and specifications necessary to show and explain changes from the approved Working Plans. Any such change shall be subject to Landlord's approval. Landlord or Landlord's contractor shall notify Tenant in writing of the amount, if any, which will be charged or credited to Tenant to reflect the cost of such change. 3.3 Tenant's entry into the Expansion Space for any purpose, prior to September 1, 1999, shall be subject to all the terms and conditions of the Lease, including without limitation the provisions of the Lease relating to the maintenance of insurance, but excluding the provisions of the Lease relating to the payment of rent. Tenant's entry shall mean entry by Tenant, its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors (the "Tenant Parties"). Tenant shall indemnify and hold harmless Landlord from and against any and all claims, losses, liabilities, and expenses (including without limitation attorneys' fees) arising out of or in any way related to the activities of Tenant or the Tenant Parties in the Expansion Space or the Project. 3 EXHIBIT D STATEMENT OF TENANT IN RE: LEASE -------------------------------- Date: May 31, 2000 Teachers Insurance and Annuity Association of America 730 Third Avenue New York, New York 100 17 Attn: ______________________ RE: TIAA Appl. #OR- 108 TIAA Mtge. #000447000 Name of Project: Evergreen Corporate Center Address: 20540 NW Aloclek Hillsboro, Oregon 97124 Ladies and Gentlemen: It is our understanding that you have a mortgage upon the subject premises and as a condition precedent thereof have required this certification of the undersigned. The undersigned, as tenant, under that certain lease dated January 15, 1997, as amended by an Amendment to Lease dated July 15, 1999, made with Evergreen Corporate Center LLC, as landlord, hereby ratifies said lease and certifies that: 1. the "Commencement Date" of said lease is December 15, 1997; and 2. the undersigned is presently solvent and free from reorganization and/or bankruptcy; and 3. the operation and use of the premises do not involve the generation, treatment, storage, disposal or release of a hazardous substance or a solid waste into the environment other than to the extent necessary to conduct its ordinary course of business in the premises and in accordance with all applicable environmental laws, and that the premises are being operated in accordance with all applicable environmental laws, zoning ordinances and building codes; and 4. the current base rental payable pursuant to the terms of said lease is $107,232 per month; and further, additional rental pursuant to said lease is payable as provided in the Lease; and 5. said lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (except as set forth above) and the undersigned is not in default thereunder; and 1 6. the lease described above represents the entire agreement between the parties as to the leasing of the premises; and 7. the term of said lease expires on December 14, 2007; and 8. Landlord has spent at least $553,040 of the TI Allowance, as defined in the Amendment to Lease, and the work performed by landlord to date in the Expansion Space is acceptable to the undersigned. 9. no rental has been paid in advance and no security (except the security deposit in the amount of $120,839) has been deposited with landlord; and 10. tenant's floor area is 102,662 rentable square feet; and 11. the most recent payment of current basic rental was for the payment due on May 1, 2000, and all basic rental and additional rental payable pursuant to the terms of the lease have been paid up to said date; and 12. the undersigned acknowledges notice that landlord's interest under the lease and the rent and all other sums due thereunder will be assigned to you as part of the security for a mortgage loan by you to landlord. In the event that Teachers Insurance and Annuity Association of America, as lender, notifies the undersigned of a default under the mortgage and demands that the undersigned pay its rent and all other sums due under the lease to lender, tenant agrees that it shall pay its rent and all such other sums to lender. Very truly yours, MEDICALOGIC, INC. By: ------------------------------------- Its: ------------------------------------ 2 EXHIBIT E PROMISSORY NOTE --------------- $__________ __________, 1999 Portland, Oregon FOR VALUE RECEIVED, the undersigned, MEDICALOGIC, Inc., an Oregon corporation ("Borrower"), promises to pay to the order of EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company, at 111 SW Columbia Street, Suite 1380, Portland, Oregon 97201, or such other place as may be designated from time to time in writing by the holder of this Note ("Holder"), the principal sum of ________________________________ Dollars ($____________) in lawful money of the United States of America, plus interest and other charges as provided herein. 1 . Interest Rate. Interest shall accrue on the unpaid principal balance of this Note, from ________________ until paid in full, at a fixed rate of eleven percent (11%) per annum. 2. Payment Schedule. Commencing on _____________________ and continuing on the first day of each calendar month thereafter until and through December 1, 2007 (the "Maturity Date"), Borrower shall make constant equal monthly payments of principal and interest sufficient to amortize fully the principal balance of this Note over a period of time from the date of this Note to December 14, 2007, taking into account interest at the rate of 11 percent per annum. Such payments shall equal $_______ per month. The entire principal balance of and all unpaid accrued interest on this Note shall be due and payable on the Maturity Date. 3. Prepayment. The indebtedness evidenced by this Note may be prepaid in whole or in part at any time without penalty. 4. Time of Essence. Time is of the essence of the performance of Borrower's obligations under this Note. If Borrower fails to make any payment required hereunder within five days after written notice that such payment is due, or if Borrower is in default of its lease between Holder and Borrower dated January 15, 1997, as amended (the "Lease"), such event shall constitute an event of default (an "Event of Default"). Upon the occurrence of an Event of Default, the entire unpaid principal balance of and all unpaid accrued interest on this Note shall become immediately due and payable at Holder's option. Holder's failure to exercise or delay in exercising such option, or any other remedy provided herein, shall not constitute a waiver of the right to do so upon the occurrence of any subsequent Event of Default. 5. Late Fee. If any payment required under this Note is not received by Holder within ten (10) days after the date such payment was due, Borrower shall pay to Holder on demand a late charge in an amount equal to five percent (5%) of the overdue payment. Borrower and Holder agree that the late charge is intended to be a reasonable approximation of actual damages incurred by such overdue payment, which damages are difficult to estimate. The 1 imposition or collection of a late charge is in addition to and not in lieu of any other rights or remedies Holder may have as a result of late payment. 6. Application of Payments. All payments on this Note shall be applied first to the payment of attorneys' fees, costs, and other charges to the extent, if any, provided herein; then to interest accruing hereon; and then to principal. The unpaid principal balance of this Note shall continue to bear interest until and including the date of collection. 7. Attorneys' Fees. If either Holder or Borrower shall institute legal or other proceedings to interpret or enforce this Note, the prevailing party shall recover from the nonprevailing party all costs, attorneys' fees, and expenses incurred by it in connection with such proceedings, whether at trial, on appeal, or on review, in addition to all other amounts allowed by law. 8. Default Interest. All late payments shall bear interest at the Default Rate (as defined in the Lease) from the due date of such payment until paid in full. 9. Miscellaneous. In any provision of this Note is held invalid by a court of competent jurisdiction, the remainder of this Note shall not be affected thereby and shall remain in full force and effect. Borrower hereby waives presentment, demand for payment, notice of dishonor, protest, and notice of protest. BORROWER: MEDICALOGIC, INC., an Oregon corporation By: ------------------------------------ Its: ----------------------------------- 2 EX-10.8.2 12 INDUSTRIAL BUSINESS PARK LEASE - -------------------------------------------------------------------------------- OFFICE LEASE BETWEEN 945 BATTERY LLC, a California limited liability company AND MEDICALOGIC, INC., an Oregon corporation 945 Battery Street San Francisco, California - -------------------------------------------------------------------------------- TABLE OF CONTENTS ----------------- Page ---- 1. Definitions............................................................. 1 2. Term.................................................................... 1 3. Rental.................................................................. 2 4. Letter of Credit as Security............................................ 2 5. Use..................................................................... 3 6. Services................................................................ 4 7. Impositions Payable by Lessee........................................... 5 8. Work to be Performed by Lessor Prior to Commencement of Term; Tenant Improvements; Allowance.................. 5 9. Alterations............................................................. 6 10. Liens................................................................... 7 11. Repairs................................................................. 8 12. Destruction or Damage................................................... 8 13. Insurance............................................................... 9 14. Waiver of Subrogation...................................................10 15. Indemnification.........................................................10 16. Compliance with Legal Requirements......................................10 17. Assignment and Subletting...............................................11 18. Entry by Lessor.........................................................14 19. Events of Default.......................................................14 20. Termination Upon Default................................................15 21. Continuation After Default..............................................16 22. Other Relief............................................................16 23. Lessor's Right to Cure Defaults.........................................16 24. Attorneys' Fees.........................................................16 25. Eminent Domain..........................................................17 26. Subordination...........................................................17 27. No Merger...............................................................17 28. Sale....................................................................18 29. Estoppel Certificate....................................................18 30. No Light, Air or View Easement..........................................18 31. Holding Over............................................................18 32. Abandonment.............................................................18 33. Security Deposit........................................................18 34. Waiver..................................................................19 35. Notices.................................................................19 36. Complete Agreement......................................................19 37. Corporate Authority.....................................................19 38. Miscellaneous...........................................................19 39. Limitation of Liability.................................................20 40. Option to Extend Lease..................................................20 41. Brokerage Commissions...................................................21 42. Lessee's Grant to Lessor of Option to Purchase Stock of Lessee .........21 -i- OFFICE LEASE THIS LEASE, dated May 9, 1999, for purposes of reference only, is made and entered into by and between 945 BATTERY LLC., a California limited liability company ("Lessor") and MEDICALOGIC, INC., an Oregon corporation ("Lessee"). WITNESSETH: Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the premises described in paragraph 1(b) below for the term and subject to the terms, covenants, agreements and conditions hereinafter set forth, to each and all of which Lessor and Lessee hereby mutually agree. 1. Definitions. Unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified. (a) The term "Building" shall mean the building located at 945 Battery Street, San Francisco, California. (b) The term "Premises" shall mean the second floor, third floor, mezzanine, and penthouse of the Building. (c) The term "Lessee's percentage share" shall mean Fifty-Seven and 34/100 percent (57.34%). Lessor and Lessee acknowledge that Lessee's percentage share has been obtained by dividing the rentable area of the Premises by the total rentable area of the Building, and multiplying such quotient by 100. In the event Lessee's percentage share is changed during a calendar year by reason of a change in the rentable area of the Premises and/or a change in the total rentable area of the Building, Lessee's percentage share shall thereafter mean the result obtained by dividing the then rentable area of the Premises by the then total rentable area of the Building, and multiplying such quotient by 100, and for the purposes of paragraph 3, Lessee's percentage share shall be determined on the basis of the number of days during such calendar year at each such percentage share. The parties hereto agree that the total rentable area of the Building for purposes of this paragraph (c) is currently 65,540 square feet. (d) The term "lease year" shall mean the first 12 full calendar months during the term hereof together with any partial month at the commencement of the term, and each successive 12-month period thereafter, provided that the last lease year of the term may be a partial lease year. 2. Term. The term of this Lease shall commence on the earlier of the date Lessor delivers possession of the Premises to Lessee, provided temporary or permanent certificate of occupancy is issued for the Premises, and Lessor's work is substantially completed unless sooner terminated as hereinafter provided, shall continue thereafter for a period of ten (10) years. Notwithstanding the foregoing, in the event that Lessee selects a general contractor other than Birmingham Builders, Inc. to perform tenant improvements at the Premises as provided herein, the term of this Lease shall commence on September 1, 1999 regardless of the date of completion of drawings for tenant improvements to the Premises, the completion of construction -1- of tenant improvements to the Premises, or the date Lessee commences occupancy of the Premises. 3. Rental. (a) Lessee shall pay to Lessor throughout the term of this Lease as rental for the Premises the following sums as the Base Rent: Years 1-5 $133,096.00 per month Years 6-10 $155,017.50 per month (b) Rental shall be paid to Lessor on or before the first day of the term hereof and on or before the first day of each and every successive calendar month thereafter during the term hereof. In the event the term of this Lease commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, then the monthly rental for the first and last fractional months of the term hereof shall be appropriately prorated. (c) Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder after the expiration of any applicable grace period will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sums due from Lessee shall not be received by Lessor when due or, if a grace or cure period is applicable, shall not be received by Lessor prior to the expiration of the applicable grace or cure period, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount nor prevent Lessor from exercising any of the other rights and remedies available to Lessor hereunder or at law. (d) Rental and all other payments to be made by Lessee hereunder shall be paid to Lessor without deduction or offset, in lawful money of the United States of America at Lessor's address for notices hereunder or to such other person or at such other place as Lessor may from time to time designate in writing. All amounts of money payable by Lessee to Lessor hereunder, if not paid within ten days of the date when due, shall bear interest from the due date until paid at the highest rate legally permitted. (e) All sums of money or charges required to be paid by Lessee hereunder shall be deemed rental for the Premises and may be designated as such in any statutory notice to pay rent or quit the Premises. 4. Letter of Credit as Security. In lieu of making a cash security deposit to Lessor, Lessee shall, within ten (10) days after execution of this lease, deliver to Lessor and cause to be in effect during the term hereof an unconditional, irrevocable letter of credit ("LC") in a form reasonably acceptable to Lessor. The initial amount of the LC shall be $1,750,000.00. Provided that Lessee -2- is not then in default under this lease, the LC shall remain in place until such time as Lessee can demonstrate a minimum of $75,000,000 in cash on its month-end balance sheet, at which point the LC shall be reduced to zero, provided, however, that if at any time during the term of the Lease, the cash amount on Lessee's month-end balance sheet falls below $75,000,000, Lessor shall have the right to require reinstatement of the LC in the full amount of $1,750,000.00. In the event that the LC is ever reduced to zero pursuant to the preceding sentence, Lessee shall thereafter provide Lessor with copies of Lessee's month-end balance sheets on a monthly basis by no later than the fifteenth (15th) day of each month, or as soon thereafter as such balance sheets have been prepared for Lessee's internal use. The LC shall be issued by a bank that accepts deposits, maintains accounts, has a San Francisco Bay area office that will negotiate a letter of credit, and the deposits of which are insured by the Federal Deposit Insurance Corporation. Lessee shall pay all expenses, points, or fees incurred by Lessee in obtaining the LC. Lessor shall hold the LC as security for the performance of Lessee's obligations under this lease. If, after notice and failure to cure within any applicable cure period, Lessee defaults under any provision of this lease, Lessor may, upon delivery to the issuing bank a statement that Lessee is in default hereunder beyond the expiration of applicable cure period, without prejudice to any other remedy it has, draw on that portion of the LC necessary to pay any rent or other sum in default or to compensate Lessor for any expense, loss, or damage (including reasonable attorneys' fees) that Lessor may suffer as a result of Lessee's default. If Lessor draws on any portion of the LC, Lessee shall, within five (5) business days after written demand by Lessor, either (a) deposit cash with Lessor in an amount that, when added to the amount remaining under the LC, shall equal the amount of the LC then required under this paragraph, or (b) deliver written documentation executed by the bank issuing the LC confirming that the LC has been reinstated to the amount then required under this paragraph. 5. Use. The Premises shall be used for general office purposes and for no other purpose whatsoever. Any kitchenette facilities installed in the Premises shall be ancillary to the office use and shall consist of no more than a sink, dishwasher, refrigerator, microwave, and other UL-rated countertop cooking equipment such as, for example, only, and not by way of limitation, a toaster oven or coffeemaker. Lessee shall not do or permit to be done in or about the Premises, nor bring or keep or permit to be brought or kept therein, anything which is prohibited by or will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, or which is prohibited by the standard form of fire insurance policy, or will in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause a cancellation of any insurance policy covering the Building or any part thereof or any of its contents. Lessee shall not use, store, or dispose of in the Premises any hazardous at toxic substances, with the sole exception of such substances as are ordinarily used in the course of normal office operations (such as copier fluids), provided that such substances are kept in only such quantities as are reasonably required for normal office operations and are used, handled, stored, and disposed of in accordance with all applicable laws. Losses shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants of the Building, or injure or annoy them, or use or allow the Premises to be used for any unlawful purpose, nor shall Lessee cause, maintain or permit any nuisance in, on, or about the Premises or commit or suffer to be committed any waste in, on, or about the Premises. Notwithstanding anything to the contrary in this paragraph, Lessor understands and agrees that Lessee intends to locate computers, servers, and other equipment in a secure climate-controlled portion of the Premises in a -3- manner similar to other web hosting services. Lessee also requires sufficient electrical capacity to the Premises for the operation of normal office equipment as well as the computer equipment and air conditioning equipment for the climate-controlled room in the Premises. Lessor hereby consents to Lessee's use of the Premises and installation of the equipment as described in this paragraph and agrees that Lessee shall not be liable for any additional costs, other than electricity which shall be separately metered to the Premises. 6. Services. (a) Lessor shall, during the term of this Lease and at its sole cost and expense, be responsible for conforming the Building and all Building systems outside the Premises (including, without limitation, elevators and fire, safety, and security systems) to applicable governmental requirements, including those of environmental laws and regulations and the Americans With Disabilities Act. (b) Lessor shall maintain the public and common areas of the Buildings including the lobbies, stairs, elevators, corridors and restrooms, the exterior windows of the Building, the heating, ventilating and air-conditioning systems, the mechanical, plumbing and electrical equipment serving the Building, and the structure itself in a manner and condition suitable for comparable office buildings in downtown San Francisco, except for damage caused by the willful or grossly negligent act of Lessee, which damage shall be repaired by Lessor at Lessee's expense. (c) The Premises shall be separately metered for all utilities, including water and electricity, provided to the Premises. Lessee shall be responsible for providing and paying for all utilities and services to the Premises, including, without limitation, electricity, gas, and water. Lessee shall during the term of this Lease contract directly for, and pay for, garbage disposal, janitorial, and window cleaning services. Notwithstanding the foregoing, it is agreed that there are certain utility costs related to the central air conditioning system and the common areas of the building (including elevators and lighting for the common area lobby) that are impossible or impractical to meter separately, and Lessee agrees to pay Lessee's percentage share of such costs within ten (10) days after receipt of a billing therefor from Lessor. (d) Lessor shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the rental herein reserved be abated by reason of, (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any condition beyond the reasonable control of Lessor or by the reasonable making of repairs or improvements to the Premises or to the Building, or (iii) the limitation, curtailment, rationing or restrictions on use of water, electricity, gas or any other form of energy serving the Premises or the Building. None of the foregoing events shall be construed as a constructive or other eviction of Lessee. Lessor shall use reasonable efforts diligently to remedy any interruption in the furnishing of such services. (e) Lessee shall not install or use heat-generating machines, lighting other than building standard or other equipment which may affect the temperature otherwise maintained by the heating, air conditioning and ventilation system, office machines using more than 220 volts, or equipment causing the connected electrical load in the Premises to exceed 15 watts per square -4- foot, without the prior consent of Lessor, not to be unreasonably withheld or delayed. Lessor makes no representation with respect to the adequacy or fitness of the electrical, heating, air conditioning or ventilation equipment in the Building to accommodate or maintain temperatures which may be required for any equipment other than ordinary office equipment, or for any equipment exceeding the maximum voltage or wattage referred to above, and Lessor shall have no liability for loss or damage suffered by Lessee or others in connection therewith, except as provided in Paragraph 5 above. If Lessee installs lighting requiring power in excess of that required for normal office use in the Building or if Lessee installs equipment requiring power in excess of that required for normal office equipment or normal copying equipment, Lessee shall pay for the cost of such excess power as additional rent, together with the cost of installing any additional risers or other facilities that may be necessary to furnish such excess power to the Premises; which cost shall include, without limitation. 7. Impositions Payable by Lessee. In addition to the monthly rental and other charges to be paid by Lessee hereunder, Lessee shall pay before delinquency or reimburse Lessor for any and all of the following, whether or not now customary or in the contemplation of the parties hereto (collectively, the "Impositions"): taxes (other than local, state and federal personal or corporate income taxes measured by the net income of Lessor from all sources), assessments (including, without limitation, all assessments for public improvements, services or benefits, irrespective of when commenced or completed), excises, levies, business taxes, license permit, inspection and other authorization fees, transit development fees assessments or charges for housing funds, service payments in lieu of taxes and any other fees or charges of any kind, which are levied, assessed, confirmed or imposed by any public authority, but only to the extent the Impositions are: (a) upon, measured by or reasonably attributable to the cost or value of Lessee's equipment, furniture, fixtures and other personal property located in the Premises or by the cost or any leasehold improvements made in or to the Premises by or for Lessee, regardless of whether title to such improvements shall be in Lessee or Lessor, (b) upon or measured by the monthly rental or other charges payable hereunder including, without limitation, any gross income tax or excise tax levied by the City and County of San Francisco, the State of California the Federal Government or any other governmental body with respect to the receipt of such rental; (c) upon with respect to or by reason of the development, possession, leasing operation, management, maintenance, alteration, repair, use or occupancy by Lessee of the Premises or any portion thereof; (d) upon this, transaction or any document to which Lessee is a party creating or transferring an interest or an estate in the Premises. In the event that it shall not be lawful for Lessee to reimburse Lessor for all or any part of such Impositions, the monthly rental payable to Lessor under this Lease shall be revised to net Lessor the same net rental after imposition of any such Impositions by Lessor as would have been payable to Lessor prior to the payment of any such Imposition. 8. Work to be Performed by Lessor Prior to Commencement of Term; Tenant Improvements; Allowance. (a) Prior to the commencement of the term of this Lease, Lessor shall, at Lessor's sole cost and expense, have performed the base building work described in Exhibit "A" hereto. -5- (b) In the event that Lessee selects Birmingham Builders, Inc. to perform tenant improvements at the Premises as provided herein, Lessee shall, at its sole cost and expense, cause to be prepared and submit to Lessor by no later than May 31, 1999 fully scaled, dimensioned, and integrated architectural and engineering drawings for tenant improvements to the Premises which have been approved by Lessee and which are of sufficient detail and quality as to be ready for immediate submission to the City and County of San Francisco Building Inspection Department. Failure by Lessee to deliver such plans to Lessor by May 31, 1999 shall result in a penalty of one day's rent for each day that the plans are delayed. This penalty, if incurred, shall be paid in a lump sum at the commencement date of the lease. (c) In the event that a contractor other than Birmingham Builders is selected by Lessee as contractor for the tenant improvements, rent shall commence September 1, 1999 regardless of the date of completion of drawings for the tenant improvements, the completion of construction of the tenant improvements, or the date Lessee takes occupancy of the space. (d) Lessor agrees, upon written request by Lessee made no later than one hundred eighty (180) days following the commencement date of this lease, to reimburse Lessee an amount not to exceed $1,503,200.00 for the exclusive purpose of Lessee's payment of costs of architectural, engineering, and permit fees, cabling the Premises, Lessee's move into the Premises, and tenant improvements to the Premises in addition to the base building work to be performed by Lessor. Lessee shall support its request for such reimbursement by providing Lessor with documentation evidencing Lessee's obligation to pay such costs, and if Lessee fails to provide Lessor with such documentation Lessor shall be under no obligation to provide Lessee with such reimbursement. Lessee shall use such reimbursement for no purpose other than paying such costs. 9. Alterations. (a) All of Lessee's trade fixtures, furniture, furnishings, equipment and other movable personal property not permanently affixed to the Premises shall, subject to the provisions hereof, remain the property of Lessee. (b) Lessee shall not make or offer to be made any alterations, additions or improvements (collectively "alterations") to or of the Premises or any part thereof, or attach any fixtures or equipment thereto, or cause a building permit to be issued for any alterations without Lessor's prior consent, which consent shall not be unreasonably withhold or delayed; provided that, with prior notice to Lessor but without the necessity of Lessor's consent, Lessee shall have the right to make non-structural alterations not affecting Building systems and for which a general construction building permit is not required. Any alterations to the Premises shall be made by Lessee at Lessee's sole cost and expense. The contractor selected by Lessee to make any alterations to the Premises must be reasonably approved in writing by Lessor prior to commencement of any work and such contractor shall at all times be subject to Lessor's reasonable control while in the Building. Lessee shall be responsible for any additional alterations required by law to be made by Lessor to or in the Building as a result of any alterations to the Premises made by or for Lessee. All alterations and fixtures, including, but not limited to, carpeting, other affixed floor coverings, paneling, and cabling for built-in security systems made in or upon the Premises either by or for Lessee and affixed to or forming a part of -6- the Premises, shall immediately upon installation or construction become Lessor's property free and clear of all liens and encumbrances. (c) Lessee shall have the right to place and maintain a neat and appropriate sign of the name of Lessee's business on the Green Street facade of the building, provided Lessor consents in writing to the shape, size, color and location thereof. Lessor shall not unreasonably withhold or delay such consent. Lessee upon request of Lessor shall immediately remove any sign or decoration which Lessee has placed or permitted to be placed upon the exterior of the premises or upon the windows facing any street upon which the premises abut without the consent of Lessor and which, in the opinion of Lessor, is inappropriate or objectionable and, if Lessee fails so to do, Lessor, in addition to any rights it may have hereunder, may enter upon the premises and remove such sign without liability whatsoever. Lessee agrees that its signage will comply with all applicable governmental requirements. Lessor expressly reserves the exclusive right to the use of the exterior side walls, rear walls, and roof of the demised premises and Lessee shall not be permitted to place any sign or advertisement thereon or any other matter or property without the written consent of Lessor. (d) Upon the expiration or any sooner termination of this Lease, Lessee shall remove or cause to be removed at its expense (i) all of Lessee's personal property described in paragraph 8(a) above, (ii) all telephone, data processing, audio and video, security, and electrical (other than Building standard) improvements installed by or for Lessee, and (iii) any alterations, additions, fixtures, or improvements installed in the Premises by or for Lessee; provided that, in the case of an item described in clause (ii) or (iii) above, Lessor shall have notified Lessee at the time Lessor consented to its installation that Lessor would require removal of the item. Lessee shall repair at its expense all damage to the Premises and the Building caused by the removal of any of the items described in this paragraph, reasonable wear and tear and damage by fire or other casualty (other than damage caused by the willful or grossly negligent act of Lessee) excepted. Lessee shall not remove any fixtures from the Premises without Lessor's prior written consent if such removal would impair any structural elements of the Building or would damage any improvements within the Premises. Any personal property described in this paragraph not removed from the Premises by Lessee upon the expiration or sooner termination of this Lease, shall, at Lessor's option, become the property of Lessor, or Lessor may remove or cause to be removed such property for Lessee's account, and Lessee shall reimburse Lessor for the cost of removal (including the reasonable cost of repairing any damage to the Premises or the Building caused by removal) and storage and a reasonable charge for Lessor's overhead, within ten (10) days after receipt of a statement therefor. Lessee's obligations under this paragraph shall survive the termination of this Lease. 10. Liens. Lessee shall keep the Premises and the Building free from any liens arising out of any work performed, materials furnished or obligations incurred by Lessee. In the event that Lessee shall not, within 10 business days following notice to Lessee of the imposition of any such lien, cause the same to be released of record (whether by means of posting a bond or otherwise), Lessor shall have, in addition to all other remedies provided herein and by law, the right but not the obligations to cause the same to be released by means of posting a bond or causing the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Lessor for such purposes, and all expenses incurred by it in connection therewith, shall be payable to Lessor by Lessee immediately upon -7- demand. Lessor shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Lessor may deem to be proper for the protection of Lessor, the Premises and the Building from such liens, and Lessee shall give Lessor at least five (5) days' prior notice of the date of commencement of any construction on the Premises in order to permit the posting of such notices. 11. Repairs. By entry hereunder Lessee accepts the Premises as being in the condition in which Lessor is obligated to deliver the Premises, subject only to latent or seasonal defects of which Lessee notifies Lessor within 12 months following the date Lessee takes occupancy of the Premises. Lessee shall, at all times during the term hereof and at Lessee's sole cost and expense, keep the Premises and every part thereof in good condition and repair, ordinary wear and tear and damage thereto by fire, earthquake, act of God or the elements excepted, Lessee hereby waiving all rights to make repairs at the expense of Lessor or in lieu thereof to vacate the Premises as provided by California Civil Code Section 1942 or any other similar law, statute or ordinance now or hereafter in affect. All repairs and replacements made by or on behalf of Lessee hereunder shall be made and performed at Lessee's cost and expense and at such time and in such manner as Lessor may reasonably designate by contractors or mechanics reasonably approved by Landlord and so that the same shall be at least equal in quality, value, character and utility to the original work or installation being repaired or replaced. Lessee shall at the end of the term hereof surrender to Lessor the Premises and all alterations, additions and improvements thereto in the same condition as when received, ordinary wear and tear and damage by fire, earthquake, act of God or the elements excepted. Lessor has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, except as specifically herein set forth. No representations respecting the condition of the Premises or the Building have been made by Lessor to Lessee. 12. Destruction or Damage. (a) In the event the Premises or the portion of the Building necessary for Lessee's occupancy are damaged by first earthquake, act of God, the elements or other casualty, Lessor shall forthwith repair the same, subject to the provisions of this paragraph 10 hereinafter set forth, if such repairs can, in Lessor's reasonable opinion, be made within 90 days and if insurance proceeds are available to pay the full replacement cost thereof. This Lease shall remain in full force and effect except that, if and to the extent that such damage is not the result of the gross negligence or willful misconduct of Lessee or Lessee's employees or invitees, an abatement of rental shall be allowed Lessee for such part of the Premises as shall be rendered unusable by Lessee in the conduct of its business during the time such part is so unusable. (b) If such repairs cannot, in Lessor's reasonable opinion, be made within 90 days, or if sufficient insurance proceeds are not available to pay the full replacement cost thereof, Lessor may elect upon notice to Lessee within 30 days after the date of such fire or other casualty, to repair or restore such damage, in which event this Lease shall continue in full force and effect, but the rent shall be abated as provided above in this paragraph. If in the reasonable opinion of Lessor's contractor, which opinion shall be rendered within 45 days of the date of damage or destruction, the damage or destruction cannot be repaired so as to allow Lessee to reoccupy the Premises within 120 days after such damage or destruction occurs (without regard to the issuance of a building permit or any governmental delays), either Lessor or Lessee may terminate this -8- Lease by notice to the other given within 30 days after receiving notice of such determination. If Lessor does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. (c) A total destruction of the Building shall automatically terminate this Lease. Lessee waives California Civil Code Sections 1932(2) and 1933(4) providing for termination of hiring upon destruction of the thing hired. (d) If the Premises are to be repaired under this paragraph, Lessor shall repair at its cost any injury or damage to the structural portions of the Building, Building systems, and all leasehold improvements, in the Premises other then alterations, additions or improvements made by or for Lessee. Lessee shall pay the cost of repairing any alterations, additions or improvements made by or for Lessee and the cost of repairing or replacing Lessee's fixtures and personal property in the Premises. 13. Insurance. (a) Lessee shall obtain and maintain during the term of this Lease commercial general liability insurance with a combined single limit for bodily injury and property damage in an amount not less than $2,000,000, and employer's liability and workers' compensation insurance as required by law. If Lessee's insurance contains a split limit of liability the liability limit shall be not less than $2,000,000 for bodily injury and $1,000,000 for property damage. Such insurance policy shall also cover Lessee's indemnity obligations set forth below. Lessee's commercial general liability insurance policy shall be an occurrence basis and shall be endorsed to provide that (i) it may not be cancelled or altered in such a manner as adversely to affect the coverage afforded thereby without 30 days' prior written notice to Lessor, (ii) Lessor is named as additional insured, (iii) such insurance is primary with respect to Lessor and that any other insurance maintained by Lessor is excess and noncontributing with such insurance, (iv) it shall contain cross-liability endorsements and (v) it shall contain a waiver of subrogation as provided below. Lessee shall insure all personal property and fixtures of Lessee and all improvements made by or for Lessee to the Premises. If, in the reasonable opinion of Lessor's insurance advisor, based on a substantial increase in recovered liability claims generally, the specified amounts of coverage are no longer adequate, such coverage shall be appropriately increased to an amount comparable to that required by prudent owners of comparable, similarly situated buildings in the San Francisco area. Prior to the commencement of the term, a duplicate of such policy or a duplicate certificate thereof shall be delivered to Lessor for retention by it. If Lessee fails to obtain such insurance or to furnish Lessor any such duplicate policy or certificate as herein required, Lessor may, at its election, with not less than 10 days' prior notice to Lessee but without any obligation so to do, procure and maintain such coverage and Lessee shall reimburse Lessor on demand as additional rent for any premium so paid by Lessor. The insurance required under this paragraph and all renewals thereof shall be issued by such good and responsible insurance companies qualified to do and doing business in the State of California as may be approved by Lessor, which approval shall not be unreasonably withheld. Lessee shall have the right to provide all insurance required herein pursuant to blanket policies so long as the coverage applicable to the Premises or afforded Lessor will not be reduced or diminished by reason of the use of such blanket, policies and so long as all other requirements of this paragraph are satisfied. -9- (b) Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage insurance plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Building in amounts customary for properties comparable to the Building in downtown San Francisco. The policy required herein shall contain such deductibles as Lessor or the aforesaid lender may determine. 14. Waiver of Subrogation. Notwithstanding anything to the contrary contained herein, to the extent of insurance proceeds received with respect to the loss, Lessee and Lessor each hereby waive any right of recovery against the other party for any loss or damage maintained by such other party with respect to the Building, the Premises, the contents of same or any operation therein, whether or not such loss is caused by the fault or negligence of such other party. Lessor and Lessee shall each obtain from their respective insurers under all policies of fire, theft, public liability, and other insurance maintained by either of them (excluding worker's compensation) at any time during the term hereof insuring or covering the Building, the Premises or any portion thereof or operations therein, a waiver of all rights of subrogation which the insurer of one party might have against the other party, and Lessor and Lessee shall each indemnify the other against any loss or expense, including reasonable attorneys' fees, resulting from the failure to obtain such waiver. 15. Indemnification. Lessee hereby waives all claims against Lessor for damage to any property or injury or death of any person in, upon or about the Premises arising at any time and from any cause other than by reason of the gross negligence or willful act of Lessor, its contractors, employees or agents, and Lessee shall indemnify and hold Lessor harmless from any damage to any property or injury to or death of any person arising from the use of the Premises or the Building by Lessee, its agents, employees, contractors and invitees, except to the extent caused by the gross negligence or willful act of Lessor, its contractors, employees or agents. Lessor hereby waives all claims against Lessee for damage to or destruction of any property or injury to or death of any person in, on, or about the areas of the Building other than the Premises arising at any time and from any cause other than by reason of the gross negligence or willful act of Lessee or any of its employees, agents, or contractors, and Lessor shall indemnify and hold Lessee harmless against all liability for death or injury to person and damage to property caused by the gross negligence or willful act of Lessor or any of its employees, agents, or contractors. The foregoing indemnity obligations shall include reasonable attorneys' fees, investigation costs and all other reasonable costs and expenses incurred by the indemnified party from the first notice that any claim or demand is to be made or may be made. The provisions of this paragraph shall survive the termination of this Lease with respect to any damage, injury or death occurring prior to such termination. 16. Compliance with Legal Requirements. Lessee shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules regulations or requirements which may hereafter be in force, with the requirements of any governmental body now or hereafter constituted prescribing fire protection standards, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises, insofar as any thereof relate to or affect the condition, use or occupancy of the Premises by Lessee, excluding alterations or improvements to -10- the Building as a whole or the premises of tenants generally that are not by law the responsibility of tenants to comply with and are not required as a result of Lessee's particular use of the Premises (as opposed to general office use). Lessee shall indemnify and hold Lessor harmless from any and all demands, claims, losses or damages suffered by Lessor as a result of Lessee's failure to perform the foregoing covenant. 17. Assignment and Subletting. (a) Lessee shall not, without the prior written consent of Lessor (which consent shall not be unreasonably withheld or delayed), assign this Lease or any interest herein, sublet the Premises or any part thereof, permit the use or occupancy of the Premises by any person other than Lessee, or hypothecate this Lease or any interest herein. Any of the foregoing acts without such consent shall be void and shall, at the option of Lessor, constitute a default that shall entitle Lessor to terminate this Lease. Notwithstanding the foregoing, Lessee shall be permitted to assign all or a portion of its interest in this Lease or sublet all or a portion of the Premises to an affiliate of Lessee (as defined below), with notice to Lessor but without the necessity of Lessor's consent, provided (i) Lessee is not then in default under the terms of this Lease beyond the expiration of the applicable grace or cure period, if any, and (ii) in the event of an assignment, only, any such affiliate agrees to assume all of Lessee's obligations under this Lease. For purposes of the immediately preceding sentence, an affiliate of Lessee shall mean (1) a corporation which controls Lessee, is controlled by Lessee or its principals, or is under common control with Lessee or its principals or (2) any entity merged into or merging with Lessee or into which Lessee is merged or which acquires all of Lessee's assets as a going concern of the business that is being conducted on the Premises. Any such consent by Lessor shall not release Lessee from any of Lessee's obligations hereunder or be deemed to be a consent to any subsequent hypothecation, assignment, subletting, occupation or use by another person. This Lease shall not, nor shall any interest herein, be assignable as to the interest of Lessee involuntarily or by operation of law without the prior written consent of Lessor. Lessee agrees that the instrument by which any assignment or subletting consented to by Lessor is accomplished shall be in a form reasonably satisfactory to Lessor and shall expressly provide that the assignee or subtenant will perform and observe all the agreements, covenants, conditions and provisions arising from and after such assignment or sublease to be performed and observed by Lessee under this Lease as and when performance and observance in due, that no assignee or subtenant shall have the further right to assign or sublet with Lessor's prior consent, not to be unreasonably withheld, and that Lessor shall have the right to enforce such agreements, covenants, conditions and provisions directly against such assignee or subtenant. Lessee shall in all cases remain responsible for the performance by any subtenant or assignee as indicated thereon of all such agreements, covenants, conditions and provisions. Any assignment or subletting without an instrument containing the foregoing provision shall be void and shall, at the option of Lessor, constitute a default that entitles Lessor to terminate this Lease. (b) Notwithstanding the foregoing, before entering into any assignment of this Lease or into a sublease of all or part of the Premises, Lessee shall give written notice to Lessor identifying the intended assignee or subtenant by name and address, the terms of the intended assignment or sublease, and the nature of the business of the proposed assignee or sublessee, together with current audited or reviewed financial statements for the proposed assignee or sublessee to the extent available, and, thereafter, any other information which Lessor shall -11- reasonably request that is readily available to the proposed subtenant or assignee in the ordinary course of business. For a period of 15 days after such notice is given, Lessor shall have the right by written notice to Lessee (but not in the case of an assignment or subletting to an affiliate pursuant to subparagraph (a) above for which Lessor's consent is not required) to (i) in the case of a proposed sublease of one floor or more of the Premises, either (A) sublet from Lessee any portion of the Premises proposed to be sublet for the term for which such portion is proposed to be sublet but at the same rent as Lessee is required to pay to Lessor under this Lease for the same spaces computed on a pro rata square footage basis, or (B) if the proposed subletting is for substantially the remaining period of the term of this Lease, terminate this Lease, or terminate this Lease as it pertains to the portion of the Premises so proposed by Lessee to be sublet, or (ii) in the case of a proposed assignment, terminate this Lease. If Lessor so terminates this Lease, such termination shall be as of the date specified in such notice. If Lessor so terminates this Lease, Lessor may, if it elects, enter into a new lease covering the Premises or a portion thereof with the intended assignee or subtenant on such terms as Lessor and such person may agree, or enter into a new lease covering the Premises or a portion thereof with any other person; in such event, Lessee shall not be entitled to any portion of the profit, if any, which lessor may realize on account of such termination and reletting. Lessor's exercise of its aforesaid option shall not be construed to impose any liability upon Lessor with respect to any real estate brokerage commission(s) or any other costs or expenses incurred by Lessee in connection with its proposed subletting or assignment. (c) If Lessee complies with the foregoing provisions of this paragraph, and Lessor does not exercise an option provided to Lessor under subparagraph (b) of this paragraph, Lessor's consent to a proposed assignment or sublet shall not be unreasonably withheld and shall be given, or the specific reasons for denial thereof shall be stated, within 15 days following Lessee's request therefor. Without limiting the other instances in which it may be reasonable for Lessor to withhold its consent to an assignment or subletting, Lessor and Lessee acknowledge that it shall be reasonable for Lessor to withhold its consent in the following instances: (1) the proposed assignee or sublessee is a governmental agency; (2) in Lessor's reasonable judgment, the use of the Premises by the proposed assignee or sublessee would involve occupancy by other than primarily general office personnel or otherwise be in violation of this Lease, would entail any alterations which would lessen materially the value of the leasehold improvements in the Premises, or would require materially increased services by Lessor; (3) in Lessor's reasonable judgment, the financial worth of the proposed assignee or sublessee does not meet the credit standards applied by Lessor for other tenants under leases with comparable terms; (4) in Lessor's reasonable judgment, the proposed assignee or sublessee does not have a good reputation as a tenant of property; -12- (5) Lessor has experienced previous repeated, material defaults by or is in litigation with the proposed assignee or subtenant; (6) in Lessor's reasonable judgment, the Premises, or the relevant part thereof, will be used in a manner that will violate any pre-existing negative covenant as to use contained in any other lease of space in the Building; (7) the use of the Premises by the proposed assignee or subtenant will violate any applicable law, ordinance or regulation; (8) the proposed assignment or sublease will create a vacancy elsewhere in the Building with respect to comparable space in the Building; (9) the proposed assignee or subtenant is a person with whom Lessor is negotiating to lease space in the Building; (10) the proposed assignment or sublease fails to include all of the terms and provisions required to be included therein pursuant to this paragraph 16; (11) Lessee is in default of any obligation of Lessee under this Lease beyond the expiration of the applicable grace or cure period, if any, or Lessee has defaulted under this Lease beyond the expiration of the applicable grace or cure period, if any, an two or more occasions during the IS months preceding the date that Lessee shall request consent; or (12) in the case of a subletting of less then the entire Premises if the subletting would result in the division of any floor of the Premises into two or more subparcels or would require access to be provided through space leased or held for lease to another tenant or improvements to be made outside of the Premises. (d) In the case of an assignment, one-half of any sums or other economic consideration received by Lessee as a result of such assignment shall be paid to Lessor after first deducting the unamortized cost of leasehold improvements paid for by Lessee (including demising costs), and the cost of any attorneys' fees, advertising expenses, and real estate commissions incurred in connection with such assignment. In the case of a subletting, one-half of any, sum or economic consideration received by Lessee as a result of such subletting shall be paid to Lessor after first deducting (1) the rental due hereunder, prorated to reflect only rental allocable to the sublet portion of the Premises, (2) the cost of leasehold improvements (including demising costs) made to the sublet portion of the Premises at Lessee's cost, amortized over the term of this Lease, except for leasehold improvements made for the specific benefit of the sublessee, which shall be amortized over the term of the sublease, and (3) the cost of any attorneys' fees, advertising expenses, and real estate commissions incurred in connection with such subletting, amortized over the term of the sublease. -13- (e) If Lessee shall assign or sublet the Premises, or request the consent of Lessor to any assignment or subletting, or if Lessee shall request the consent of Lessor for any act that Lessee proposes to do, then Lessee shall pay Lessor's reasonable attorneys' fees incurred in connection therewith. 18. Entry by Lessor. Lessor may enter the Premises at reasonable hours and, except in case of emergency or the provision of routine janitorial services, upon reasonable prior notice (which, notwithstanding anything to the contrary contained herein, may be oral), in order to (a) inspect the same, (b) exhibit the same to prospective purchasers, lenders or, during the last 12 months of the term hereof, tenants, (c) determine whether Lessee is complying with all its obligations hereunder, (d) supply janitorial service and any other service to be provided by Lessor to Lessee hereunder, (e) post notices of nonresponsibility, (f) post "to Lease" signs of reasonable size upon the Premises during the final 90 days of the term hereof, and (g) make repairs required of Lessor under the terms hereof or repairs to any adjoining space or utility services or to make repairs, alterations or improvements to any other portion of the Building; provided, however, that all such work shall be done as promptly as is reasonably possible and so as to cause as little interference to Lessee as is reasonably possible, and provided further that Lessor shall not store materials within the Premises for more than 2 business days in any 12-month period. Lessee hereby waives any claims for damages for any injury or inconvenience to or interference with Lessee's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by such reasonable entry. Lessor shall at all times have and retain a key with which to unlock all of the doors in, on or about the Premises (excluding Lessee's vaults, safes and similar areas designated by Lessee); and Lessor shall have the right to use any and all means which Lessor may deem proper to open said doors in an emergency only in order to obtain entry to the Premises, and any emergency entry to the Premises obtained by Lessor by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Lessee from the Premises, or any portion thereof. 19. Events of Default. The occurrence of any one or more of the following events ("Events of Default") shall constitute a breach of this Lease by Lessee: (a) if Lessee shall fail to pay rental or any other sum due hereunder when and as the same becomes due and payable and such failure shall continue for more than five (5) days after notice by Lessor, provided that if Lessee shall have failed twice or more in any calendar year to pay rent when due and notice of such default shall have been given by Lessor in two or more such instances, no notice by Lessor shall thereafter be required hereunder for the remainder of such calendar year; or (b) if Lessee shall fail to perform or observe any other term hereof to be performed or observed by Lessee, and such failure shall continue for more than 30 days after notice thereof by Lessor, or, if the failure is not susceptible of cure within 30 days, 90 days provided that Lessee commences to cure within 30 days following Lessor's notice and prosecutes with due diligence and dispatch the curing of such default; or (c) if Lessee shall make a general assignment for the benefit of creditors, shall become insolvent or shall admit in writing its inability to pay its debts as they become due or shall file a petition in bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a petition in any proceeding seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute law or regulation, or shall file an answer admitting or fail timely to contest the material allegations of a petition filed against it in any such proceeding, or shall seek or consent to or -14- acquiesce in the appointment of any trustee, receiver or liquidation of Lessee or any material part of its properties; or (d) if within 90 days after the commencement of any proceeding against Lessee seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed, or if, within 90 days after the appointment without the consent or acquiescence of Lessee, of any trustee, receiver or liquidator of Lessee or of any material part of its properties, such appointment shall not have been vacated; or (e) if this Lease or any estate of Lessee hereunder shall be levied upon under any attachment or execution and such attachment or execution is not vacated within 10 days after notice thereof to Lessee; or (f) Lessee shall vacate or abandon the Premises without payment of rent. 20. Termination Upon Default. (a) If an Event of Default shall occur, Lessor at any time thereafter may give a written termination notice to Lessee, and on the date specified in such notice Lessee's right to possession shall terminate and this Lease shall terminate, unless on or before such date all arrears of rental and all other sums payable by Lessee under this Lease and all costs and expenses incurred by or on behalf of Lessor hereunder shall have been paid by Lessee and all other breaches of this Lease by Lessee at the time existing shall have been fully remedied to the satisfaction of Lessor. Upon such termination, Lessor may recover from Lessee: (a) the worth at the time of award of the unpaid rental which had been earned at the time of termination; (b) the worth at the time of award of the amount by which the unpaid rental which would have been earned after termination until the time of award exceeds the amount of such rental loss that Lessee proves could have been reasonably avoided; (c) the worth at the time of award of the amount by which the unpaid rental for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Lessee proves could be reasonably avoided; and (d) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in clauses (a) and (b) above is computed by allowing interest at the rate of 10% per annum or, if a higher rate is legally permissible, at the highest rate legally permitted. The "worth at the time of award" of the amount referred to in clause (c) above is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%. For purposes of this paragraph, all rental sums shall be computed an the basis of the average monthly amount thereof accruing during the 24-month period immediately preceding the occurrence of an event of default unless a 24-month period of this Lease has not elapsed, in which case the average monthly amount shall be based upon the entire period of Lessee's occupancy of the Premises. As used herein, the "time of the award" shall be deemed to be the time of entry of judgment on Lessor's claim or the similar point of determination if the matter is determined by a tribunal other than a court. The amount recoverable by Lessor pursuant to subsection (d) above shall include, but shall not be limited to, any reasonable costs or expenses incurred by Lessor in maintaining or preserving the Premises after such default, preparing the Premises for reletting to a new tenant, accomplishing any repairs or alterations to the Premises for the purpose of such reletting, rectifying any damage thereto occasioned by the act or omission of Lessee and any other cost reasonably necessary or appropriate to relet the Premises. -15- (b) Lessee hereby waives all rights under California Code of Civil Procedure Section 1179 and California Civil Code Section 3275 providing for relief from forfeiture, and any other right now or hereafter existing to redeem the Premises or reinstate this Lease after termination pursuant to this paragraph or by order or judgment of any court or by any legal process. (c) IT IS MUTUALLY AGREED BY AND BETWEEN LESSOR AND LESSEE THAT THE RESPECTIVE PARTIES HERETO SHALL AND THEY HEREBY DO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HEREBY AGAINST THE OTHER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LESSOR AND LESSEE, LESSEE'S USE OR OCCUPANCY OF THE PREMISES, AND ANY STATUTORY OR ANY OTHER STATUTORY REMEDY. 21. Continuation After Default. Even though Lessee has breached this Lease and abandoned the Premises without payment of rent, this Lease shall continue in effect for so long as Lessor does not terminate Lessee's right to possession, and Lessor may enforce all its rights and remedies under this Lease, including the right to recover the rental as it becomes due under this Lease. Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Lessor to protect Lessor's interest under this Lease shall not constitute a termination of Lessee's right to possession. 22. Other Relief. The remedies provided to Lessor in this Lease shall be cumulative and are in addition to any other remedies available to Lessor at law or in equity by statute or otherwise. 23. Lessor's Right to Cure Defaults. All agreements and provisions to be performed by Lessee under any of the terms of this Lease shall be at its sole cost and expense and without any abatement of rental. If Lessee shall fail to pay any sum of money, other than rental, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder and such failure shall continue for 30 days after notice thereof by Lessor, Lessor may, but shall not be obligated so to do, and without waiving or releasing Lessee from any obligations of Lessee, make any such payment or perform any such other act on Lessee's part to be made or performed as in this Lease provided. All reasonable sums so paid by Lessor and all necessary incidental costs shall be deemed additional rent hereunder and shall be payable to Lessor on demand, and Lessor shall have (in addition to any other right or remedy of Lessor) the same rights and remedies in the event of the nonpayment thereof by Lessee as in the case of default by Lessee in the payment of rental. 24. Attorneys' Fees. If either party commences an action or proceeding against the other party arising out of or in connection with this Lease, or institutes any proceeding in a bankruptcy or similar court which has jurisdiction over the other party or any or all of its property or assets, the prevailing party in such action or proceeding and in any appeal in connection therewith shall be entitled to have and recover from the unsuccessful party reasonable attorneys' fees, court costs, expenses and other costs of investigation and preparation. If such prevailing party recovers a judgment in any such action, proceeding, or appeal, such attorneys' fees, court costs and expenses shall be included in and as a part of such judgment. -16- 25. Eminent Domain. If all or any part of the Premises shall be taken as a result of the exercise of the power of eminent domain, this Lease shall terminate as to the part so taken as of the date of taking. In the case of a partial taking, either Lessor or Lessee shall have the right to terminate this Lease as to the balance of the Premises by delivering a written notice to the other within 30 days after the date of taking, provided, however, that a condition to the exercise by Lessee of such right to terminate shall be that the portion of the Premises taken shall be of such extent and nature as to render the remaining portion thereof untenantable and unusable by Lessee. The Lease shall terminate as of the date thirty (30) days after delivery by either party of a termination notice. In the event of any taking, Lessor shall be entitled to any and compensation, damages, income, rent, awards, or any interest therein whatsoever which may be paid or made in connection therewith, and Lessee shall have no claim against Lessor for the value of any unexpired term of this Lease or otherwise. In the event of a partial taking of the Premises which does not result in a termination of this Lease, the monthly rental thereafter to be paid shall be abated in proportion to the percentage of the Premises taken or substantially impaired by such taking. 26. Subordination. This Lease shall be subject and subordinated at all times to (1) all ground or underlying leases which may hereafter be executed affecting the Building, and (2) the lien of all mortgages and deeds of trust in any amount or amounts whatsoever now or hereafter placed on or against the Building or on or against Lessor's interest or estate therein or on or against all such ground or underlying leases, all without the necessity of having further instruments executed on the part of Lessee to effectuate such subordination. Notwithstanding the foregoing, (i) in the event of termination for any reason whatsoever of any such ground or underlying lease, this Lease shall not be barred, terminated, cut off or foreclosed nor shall the rights and possession of Lessee hereunder be disturbed if Lessee shall not then be in default in the payment of rental or other sums beyond the expiration of the applicable grace or cure period or be otherwise in default beyond the expiration of the applicable grace or cure period under the terms of this Lease, and Lessee shall attorn to the lessor of any such ground or underlying lease, or, if requested, enter into a new lease for the balance of the original or extended term hereof then remaining upon the same terms and provisions as are in this Lease contained; (ii) in the event of a foreclosure of any such mortgage or deed of trust or of any other action or proceeding for the enforcement thereof, or of any sale thereunder, this Lease will not be barred, terminated, cut off or foreclosed nor will the rights and possession of Lessee thereunder be disturbed if Lessee shall not then be in default in the payment of rental or other sums beyond the expiration of the applicable grace or cure period or be otherwise in default beyond the expiration of the applicable grace or cure period under the terms of this Lease, and Lessee shall attorn to the purchaser at such foreclosure, sale or other action or proceeding; and (iii) Lessee agrees to execute and deliver upon demand such further instruments evidencing such subordination of this Lease to said deed, to such ground or underlying leases, and to the lien of any such mortgages or deeds of trust as may reasonably be required by Lessor. Lessee's covenant to subordinate this Lease to ground or underlying leases and/or mortgages or deeds of trust hereafter executed is conditioned upon each such senior instrument containing the commitments specified in the preceding clauses (i) and (ii) and the receipt by Lessee of an agreement from the holder of each such senior instrument confirming such commitments in a form acceptable to such holder. 27. No Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Lessor terminate all or -17- any existing subleases or subtenancies, or may, at the option of Lessor, operate as an assignment to it of any or all such subleases or subtenancies. 28. Sale. In the event the original Lessor hereunder, or any successor owner of the Building, shall sell or convey the Building, all liabilities and obligations on the part of the original Lessor, or such successor owner, under this Lease accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Lessee agrees to attorn to such new owner. 29. Estoppel Certificate. At any time and from time to time but on not less than 10 days' prior written request by either party, the other party will execute, acknowledge and deliver to the requesting party, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification), (b) the date, if any, to which rental and other sums payable hereunder have been paid, (c) that no notice has been received by the certifying party of any default which has not been cured, except as to defaults specified in said certificate, and (d) such other matters as may be reasonably requested by the requesting party. Any such certificates may be relied upon by an prospective purchaser, mortgagee or beneficiary under any deed of trust on the Building or any part thereof. 30. No Light, Air or View Easement. Any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building shall in no way affect this Lease or impose any liability on Lessor. 31. Holding Over. If, without the express consent of Lessor, Lessee holds possession of the Premises after expiration of the term of this Lease, Lessee shall become a tenant from month to month upon the terms herein specified but at a monthly rental equivalent to 150% of the then prevailing monthly rental paid by Lessee at the expiration of the term of this Lease, payable in advance on or before the first day of each month. Each party shall give the other notice at least one month prior to the date of termination of such monthly tenancy of its intention to terminate such tenancy. 32. Abandonment. Lessee shall not at any time during the term hereof vacate or abandon the Premises without payment of rent, and if Lessee shall abandon or surrender the Premises, or be dispossessed by process of law or otherwise, any personal property belonging to Lessee and left on the Premises shall be deemed to be abandoned, at the option of Lessor, except such property as may be mortgaged to Lessor. 33. Security Deposit. Upon execution of this Lease, Lessee shall deposit with Lessor a security deposit (the "Deposit") in the amount of $82,300.00. The Deposit shall be held by Lessor as security for the faithful performance by Lessee of all the provisions of this Lease to be performed or observed by Lessee. If Lessee fails to pay rent or other sums due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of the Deposit for the payment of any rent or other sum in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of the Deposit, then within 10 days after demand therefor -18- Lessee shall deposit cash with Lessor in an amount sufficient to restore the Deposit to the full amount thereof, and Lessee's failure to do so shall be a material breach of this Lease. Lessor shall not be required to keep the Deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, the Deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned without payment of interest for its use, to Lessee (or, at Lessor's option, to the last approved assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to the Deposit. 34. Waiver. The waiver by either party of any agreement, condition or provision herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other agreement, condition or provision herein contained, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be construed to waive or to lessen the right of either party to insist upon performance in strict accordance with said terms. The subsequent acceptance of rental hereunder by Lessor shall not be deemed to be a waiver of any preceding breach by Lessee of any agreement, condition or provision of this Lease other than the failure of Lessee to pay the particular rental so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rental. 35. Notices. All notices, consents, and demands given by either party to the other hereunder shall be in writing and shall be deemed to have been fully given when personally delivered (which shall be deemed to include, without limitation delivery by means of overnight courier service) or deposited in the United States mail, certified or registered, postage prepaid, and addressed as follows: to Lessee at the Premises, or to such other place as Lessee may from time to time designate in a written notice to Lessor; to Lessor at Birmingham Builders, Inc., 1475 Folsom Street, Suite 400, San Francisco, CA 94103, or to such other place as Lessor may from time to time designate in a written notice to Lessee. 36. Complete Agreement. There are no oral agreements between Lessor and Lessee affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between Lessor and Lessee or displayed by Lessor to Lessee with respect to the subject matter of this Lease or the Building. There are no representations between Lessor and Lessee other than those contained in this Lease and all reliance with respect to any representations is solely upon such representations. 37. Corporate Authority. The persons executing this Lease on behalf of Lessee do hereby covenant and warrant that Lessee is a duly authorized and existing corporation, has and is qualified to do business in California, that such corporation has full right and authority to enter into this Lease, and that each and both of the persons signing on behalf of such corporation were authorized to do so. 38. Miscellaneous. The words "Lessor" and "Lessee" as used herein shall include the plural as well as the singular. If there be more than one Lessee, the obligations hereunder imposed upon Lessee shall be joint and several. Time is of the essence of this Lease and each and all of its provisions. Submission of this instrument for examination of signature by Lessee does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Lessor and Lessee. The agreements, conditions and provisions -19- herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, executors, administrators, successors and assigns of the parties hereto. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. This Lease shall be governed by and construed pursuant to the laws of the State of California. No amendments or modifications of this Lease or any agreements in connection therewith shall be valid unless in writing and duly executed by the party to be charged therewith. 39. Limitation of Liability. The liability of Lessor under this Lease shall be and is hereby limited to Lessor's interest in the Building, and no other assets of Lessor shall be affected by reason of any liability which Lessor may have to Lessee or to any other person by reason of this Lease. 40. Option to Extend Lease. Provided that Lessee has not been in default under any of the provisions of this Lease beyond any cure period specified herein and is not in default hereunder at the time it exercises this option, Lessee shall have one (1) option to extend the term of this Lease for an additional term of five (5) years (the "extended term") following the expiration of this Lease, upon all of the same terms and conditions as this Lease, provided that such option shall be exercised by written notice to Lessor not more than twelve (12) months nor less than nine (9) months prior to expiration of the original term of this Lease. The rent for the extended term shall be 100% of the fair market rental for the Premises, taking into account any concessions to tenants of comparable size and credit in buildings of similar age and quality in the immediate submarket. Within thirty (30) days following the date Lessee exercises its option, Lessor and Lessee shall use their reasonable best efforts to agree on the rent for the extended term. If Lessor and Lessee are unable to agree on the rent for the extended term within said thirty (30) day period, then within ten (10) days after said period, Lessor and Lessee shall each submit to the other in writing their good faith estimate of the rent for the extended term. If the higher of said estimates is not more than one hundred ten percent (110%) of the lower of such estimates, the rent for the extended term shall be the average thereof. If otherwise, then within five (5) days after submission of said estimates, either party may submit the question to appraisal in accordance with the following procedure. Within twenty (20) days after either party requests appraisal, the parties shall select a mutually acceptable commercial real estate broker with experience in the leasing of comparable space in the vicinity of the premises, who shall determine the rent for the extended term. If the parties cannot agree on such a commercial real estate broker within said twenty (20) day period, then within five (5) days thereafter, each party shall select an independent commercial real estate broker meeting the criteria set forth above. If one party shall fail to make such appointment within said five (5) day period, then the broker chosen by the other party shall determine the rent for the extended term. Within twenty (20) days thereafter, each such broker shall independently determine his or her opinion of the rent for the extended term, and shall provide a report to Lessor and Lessee stating the basis for such opinion. If Lessor and Lessee cannot agree upon the rent for the extended term within twenty (20) days thereafter, the two brokers shall within such twenty (20) day period select a third commercial real estate broker meeting the above criteria and the third broker shall select the rent for the extended term determined by one of the two brokers. If the two brokers selected by Lessor and Lessee cannot agree on the third broker, the third broker shall be selected by Lessor and Lessee within five (5) days after the expiration of said twenty (20) day period. If Lessor and Lessee cannot agree on the third broker, the third broker shall be selected by the then presiding judge of the -20- Superior Court of California in and for the City and County of San Francisco. If the foregoing process does not result in the selection of a third broker, the parties shall equally share the costs associated with the selection process. The amount selected in accordance with this paragraph shall be deemed to be the rent for the extended term and such determination shall be final and binding on both Lessor and Lessee. The cost of the appraisal shall be borne by the nonprevailing party, as determined by the third broker. In no event shall the rent for the extended term be less than the rent in effect during the last month of the original term of this Lease. 41. Brokerage Commissions. Lessee and Lessor each represents and warrants to the other that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction other than Colliers International, and Lessee and Lessor each agrees to indemnify and hold the other harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with the indemnifying party with regard to this leasing transaction. The provisions of this paragraph shall survive the termination of this Lease. Any broker's fee or commission payable to Colliers International in connection with this Lease shall be paid by Lessor pursuant to a separate agreement. 42. Lessee's Grant to Lessor of Option to Purchase Stock of Lessee. In consideration of Lessor's agreement to enter into this Lease, Lessee hereby irrevocably grants to Lessor the option to purchase any number of shares of the common stock of Lessee, in a quantity not to exceed fifty thousand (50,000) shares, at the price of $3.25 per share. Lessor shall exercise this option by giving Lessee written notice of such exercise at any time within three years of Lessee's initial public offering ("IPO"). Upon receipt of such notice and tender of the purchase price for the shares to be acquired by Lessor, Lessee shall take all actions necessary to effect the prompt transfer of such shares to Lessor. Within thirty (30) days after execution of this Lease by Lessor and Lessee, the parties shall enter into a written agreement (in a form substantially similar to that previously used by Lessee for grants to third parties (including Lessee's employees) of options to purchase Lessee's stock) setting forth additional terms and conditions relating to the option hereby granted. Such agreements shall contain commercially reasonable anti-dilution provisions. The parties agree to use their best, good-faith efforts to agree upon the terms and conditions of such agreement. In the event that the parties are unable to agree upon the terms and conditions of such agreement, the matter shall be resolved by way of binding arbitration conducted under the auspices of Judicial Arbitration and Mediation Services of San Francisco, California, with the award of the arbitrator in such arbitration to be rendered by no later than ninety (90) days after execution of this Lease by Lessor and Lessee. In the event either party fails to comply with the award of the arbitrator, such award shall be confirmed in the Superior Court of the State of California for the City and County of San Francisco. In addition to the foregoing, at the time of the IPO Lessor shall have the right to purchase the greater of one hundred thousand (100,000) shares or one percent (1.0%) of the number of shares offered, at the initial offering price. -21- IN WITNESS WHEREOF, the parties have executed this Lease on the respective dates indicated below: LESSOR: LESSEE: 945 BATTERY LLC, a California MEDICALOGIC, INC., an Oregon limited liability company corporation By: PAUL F. PELOSI By: DAVID C. MOFFENBEIER ------------------------------ ------------------------------ Paul F. Pelosi, Member Name: David C. Moffenbeier ------------------------ Title: COO By: THOMAS G. STUBBS ----------------------- ------------------------------ Thomas G. Stubbs, Member By: MARK K. LEAVITT ------------------------------ Name: Mark K. Leavitt ------------------------ Date of Execution by Lessor: 8/1/99 Title: CEO & President ----------------------- Date of Execution by Lessee: _____ -22- 945 Battery Street Base Building Work Notes: Building shall be provided in its existing condition (unless otherwise referenced in this exhibit) which is ready for Tenant Improvements and available for inspection by Lessee or Lessee's consultants. Any reference in this Exhibit to "at Lessee's expense" means that it shall be paid for in cash by Lessee or included in the Tenant Improvement allowance referenced in the letter of intent. Lessee will be permitted to engage an outside contractor subject to Lessor's reasonable approval right. Lessee will also be permitted to engage its own architect and all fees associated therewith shall be paid by Lessee or included in Lessee's allowance. 1) Lessor to provide a complete weathertight exterior, including new roof and windows repainted, repaired and reglazed where necessary. Lessor will provide legal handrail around perimeter of roof. Lessee will be responsible for any decking on the roof plus any handrails, lighting or landscaping associated therewith. 2) Lessor to provide washrooms on third and penthouse floor but not mezzanine. Washrooms are ADA accessible and are finished and available for Lessee's inspection. Lessor also to provide one drinking fountain per floor, except mezzanine, per code. 3) Lessor to provide complete elevator system (two elevators) serving all levels of the building which are ADA accessible and will be furnished with stone tile floor and wood paneled walls or other material of equal quality. 4) Lessor to provide an electrical meter dedicated to Lessee's space as well as primary electrical transformer and panel connected to a sub-panel. All electrical distribution from the sub panel shall be at Lessee's expense. 5) Lessee to provide mechanical systems to the floors, including plumbing, heating ventilation and air conditioning. Chillers, boilers,, condensers, risers have been installed and stubbed to each floor. HVAC is distributed to a point of connection on each floor and HVAC distribution within Lessee's space to be at Lessee's expense. Fire sprinklers per code have been installed by Lessor including pumps, risers, panels and tamper switches, main and branch distribution and drops for light hazard occupancy. Any modification to this system required for the Tenant Improvement is at Lessee's expense. 6) Lessor will provide one phone closet with phone board in the premises and all other phone work will be at Lessee's expense. 7) Walls, ceilings and columns have been sandblasted and will be delivered to Lessee in their existing condition. Any sheetrock in the space will be delivered sanded and ready for painting by Lessee. 8) Lessor has provided a new seismic upgrade system in compliance with building code which is available for inspection by Lessee or its consultants. 9) The building is in full compliance with ADA in all the public spaces in the building. Exhibit A 10) Lessor has installed a skylight on the roof of the penthouse. Any modifications to this skylight will be at Lessee's expense. 11) Lessor has installed two legal firestairs connecting all floors. Walls of stairways will be painted, eggshell finish. Any additional stairways connecting the floors shall be at Lessee's expense. 12) Lessor will provide code complaint steel pipe handrail along mezzanine floor and around the opening in the Penthouse floor below the skylight (both currently open) and any upgrades to these handrails will be at Lessee's expense. 13) Lessor will improve the Green Street lobby in a manner consistent with other first class renovations in the North Waterfront Area. Any upgrades from Lessor's design will be paid by Lessee. 14) Lessor will provide a security card reader at the Green Street entry lobby. Any other upgrades to the security system, including but not limited to card readers in the elevator cabs or on individual floors, will be at Lessee's expense. 15) Penthouse and mezzanine ceilings will be delivered "as is" and any new ceiling will be installed at Lessee's expense. 16) All floor surfaces shall be delivered in their existing condition. Any surface preparation or leveling shall be at Lessee's expense. Exhibit A EX-10.9 13 AGREEMENT TO ISSUE SHARES OF COMMON STOCK AGREEMENT TO ISSUE SHARES OF COMMON STOCK DATED AS OF: February 16, 1999 BETWEEN: Baylor College of Medicine "BCM" One Baylor Plaza Houston, Texas 77030 AND: MedicaLogic, Inc. "MLI" 20500 NW Evergreen Parkway Hillsboro, OR 97124 RECITALS A. BCM is a shareholder of PrimaCis Health Information Technology, Inc., a Delaware corporation ("PrimaCis"). B. Pursuant to the terms of an Agreement of Reorganization and Merger dated as of December 31, 1998 (the "Merger Agreement") between MLI, PC Merger Corp., a Texas corporation which is a wholly-owned subsidiary of MLI ("Merger Corp.") and PrimaCis, PrimaCis was merged with and into Merger Corp. (the "Merger"). AGREEMENT In consideration of the mutual covenants contained herein, and as a condition to the performance by PrimaCis of its obligations under the Merger Agreement, the parties agree as follows: 1.0 Purchase Order. BCM agrees to place an order with MLI (the "Purchase Order") for 1,500 licenses of MLI's Logician software (the "Software"), at a price of $3,000 a license. 2.0 License of Software. MLI agrees to offer licenses of the Software through December 31, 2002, to BCM or any of its affiliated institutions or affiliated health care providers in the Houston, Texas metropolitan statistical area (the "Houston MSA"), at a price of $3,000 a license. 3.0 Issuance of Shares of MLI Common Stock. For each license sold by MLI to BCM from the date of this Agreement through December 31, 2002 other than pursuant to the Purchase Order, MLI will issue to BCM shares of MLI Common Stock ("Shares") as follows: 3.1 MLI will issue to BCM Shares according to the following formula: N = R divided by P where: N = the number of Shares to be issued by MLI to BCM R = 50 percent of the license fees received by MLI from the sale of licenses for the Software to BCM from the date of this Agreement through December 31, 2002 other than pursuant to the Purchase Order P = the fair market value of MLI's Common Stock For the purposes of this Section 3.1, the "fair market value" of MLI's Common Stock (which is currently $2.20 per share) shall mean: (i) prior to an initial public offering, the fair market value of MLI's Common Stock as of the last day of a particular quarter for which a calculation pursuant to this Section 3.1 is being made, as determined in good faith by MLI's Board of Directors and in accordance with generally accepted accounting principles; and (ii) after an initial public offering, the average of the closing sale prices of MLI Common Stock reported on the securities exchange or other principal securities market on which the MLI Common Stock may be listed or traded for the last 20 business days of a particular quarter for which a calculation pursuant to this Section 3.1 is being made. 3.2 For the purposes of this Section 3, any sales of licenses for the Software in the Houston MSA subsequent to the date of this Agreement other than pursuant to the Purchase Order shall be credited as if such licenses were sold to BCM. 3.3 MLI shall calculate the number of Shares to be issued to BCM quarterly. Within 45 days after the end of each quarter, with the final quarter ending on December 31, 2002, MLI shall transmit to BCM certificates representing the Shares, if any, earned in that quarter. MLI shall include in each such transmittal a written statement in reasonable detail showing MLI's calculation of the number of shares that BCM is entitled to receive for that quarter pursuant to this Section 3. 3.4 Notwithstanding anything to the contrary in this Agreement, MLI shall have no obligation to issue any additional Shares pursuant to this Agreement when the license fees received by MLI from the sale of licenses of the Software for the purpose of applying the formula set forth in Section 3.1 exceeds $24,000,000. 4.0 Term. This Agreement shall expire on December 31, 2002. 5.0 Press Releases. The parties shall use their respective best efforts to draft and release, promptly after the execution of this Agreement, a jointly drafted and previously agreed upon press release disclosing the terms of this Agreement and the Purchase Order, the importance of BCM's decision to standardize on the Software as a single ambulatory electronic medical records system and the expected use of the Software in Texas Children's Hospital Cancer Center once oncology content is available. 6.0 Investment Representations. BCM represents that it will be acquiring the Shares pursuant to this Agreement for investment for its own account, and not with a view to, or for resale in connection with, any distribution of the Shares. The Shares are being offered and sold pursuant to this Agreement without registration under the Securities Act of 1933 (the "1933 Act") or any state securities law based on exemptions provided under such laws, and that the Shares are "restricted securities" under federal securities laws and as such may not be sold or disposed of unless they are registered under the 1933 Act and all applicable state securities laws or unless, in the opinion of counsel acceptable to MLI, exemptions from the registration requirements of the 1933 Act and all applicable state securities laws are available. BCM is an "accredited investor" as defined in Rule 501 of the Securities and Exchange Commission. 7.0 Stock Certificate Legends. BCM understands that there will be placed on the certificates for the Shares, or any substitution therefor, the following legends: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE INVESTOR SHOULD BE AWARE THAT IT MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT, UNLESS THE SECURITIES ARE RESOLD IN COMPLIANCE WITH RULE 144, AND ANY APPLICABLE STATE SECURITIES LAWS." "A FULL STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SHARES OF EACH CLASS OF STOCK OF THE ISSUER, THE VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF PREFERRED STOCK SO FAR AS FIXED AND DETERMINED, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE RECORD HOLDER OF THIS CERTIFICATE TO THE SECRETARY OF THE ISSUER AT ITS PRINCIPAL OFFICE." "TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE TERMS OF AN AGREEMENT BETWEEN THE CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH CAN BE OBTAINED BY THE RECORD HOLDER OF THIS CERTIFICATE FROM THE SECRETARY OF THE CORPORATION." 8.0 Supplemental Signature Page - (Shareholders Agreement); Restrictive Agreement (VHA). Concurrently with the execution and delivery of this Agreement, BCM shall execute and deliver to MLI a supplemental signature page to the MedicaLogic, Inc. Shareholders Agreement dated as of February 1, 1994, as amended, and a supplemental signature page to the Restrictive Agreement (VHA) by and between the Company and VHA. 9.0 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof. 10.0 Assignment. This agreement shall not be assignable by either party without the prior written consent of the other. 11.0 Binding Effect; No Third Party Benefit. This agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns, subject to the restrictions on assignment contained in Section 10. Nothing express or implied in this agreement is intended or shall be construed to confer upon or give to a person, firm or corporation other than the parties hereto any rights or remedies under or by reason of this Agreement or any transaction contemplated hereby. 12.0 Amendment and Modification. Subject to applicable law, this agreement may be amended or modified only by a writing signed by the party against whom enforcement is sought. 13.0 Counterparts. For the convenience of the parties hereto, this agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 14.0 Captions. The article, section and paragraph captions herein are for convenience of reference only, do not constitute a part of this agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 15.0 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or mailed, certified or registered mail with postage prepaid, or sent by telex, telegram or facsimile (in each case with evidence of confirmed transmission) as set forth in the Merger Agreement. 16.0 Choice of Law. This agreement shall be governed by and construed in accordance with the laws of the State of Texas, exclusive of choice of law rules. IN WITNESS WHEREOF, the parties have executed this agreement as of the date first written above. BAYLOR COLLEGE OF MEDICINE By J. ROBERT BECK -------------------------------------- Name: J. Robert Beck, M.D. Title: Vice President for Information Technology MEDICALOGIC, INC. By GUY E. FIELD -------------------------------------- Name: Guy E. Field Title: VP Finance EX-10.10 14 SOFTWARE DEPOSIT AGREEMENT FIDEX AMERICAS CORPORATION ONE-TO-MANY SOFTWARE DEPOSIT AGREEMENT 1. FIDEX AMERICAS CORPORATION ("FIDEX"), an Idaho corporation, agrees to allow MedicaLogic, Inc. ("DEVELOPER") to DEPOSIT for potential delivery to certain third parties ("LICENSEES"), the Software, Documentation and/or Other Material deposited herewith, subject to DEVELOPER meeting and continuing to meet all the terms in this Agreement. "LICENSEE" shall be used throughout this Agreement to refer to each LICENSEE who becomes a third party beneficiary of this agreement by meeting the terms and conditions for becoming one. FIDEX and DEVELOPER, IN EXCHANGE FOR THE MUTUAL CONSIDERATION CONTAINED HEREIN, AGREE AS FOLLOWS: 2. LIMITED SCOPE OF AGREEMENT. This Agreement only defines the responsibility of FIDEX relative to the Software deposited and the disposition thereof, and does not define any other terms between LICENSEE and DEVELOPER, and does not waive any rights, legal or otherwise, LICENSEE and DEVELOPER may have against one another. 3. THIRD PARTY BENEFICIARIES. It is contemplated that there will be one or more third party beneficiaries to this Agreement, referred to herein as LICENSEE. Possession by a third party of a copy of this agreement bearing the notarized signatures of both DEVELOPER and FIDEX shall be sufficient proof that said third party participates in this agreement as LICENSEE. 4. "SOFTWARE" AND "DOCUMENTATION". The Software is the source code and related computer files (such as executable program files, compiler, linker, third-party libraries, etc.) used by DEVELOPER to create the software deposited herewith and further identified in Exhibit A, and the Documentation is all documentation agreed to between the parties as necessary to utilize and understand the Software, and as described in Exhibit A. The Software is the proprietary and confidential information of DEVELOPER and DEVELOPER desires to protect such ownership and confidentiality. 5. INSPECTION. FIDEX will allow the inspection of the Software, Documentation and other Materials (other than withdrawal of the Software, Documentation, and other Materials in accordance with the terms hereof) only upon written authorization from DEVELOPER, including the authorization set forth in paragraph 11 of this Agreement, or as otherwise directed by the final order of a court of competent jurisdiction. 6. VERIFICATION. DEVELOPER will be entitled, at reasonable times during normal business hours and upon reasonable notice to FIDEX during the term of this agreement, to inspect the records of FIDEX with respect to the physical status and condition of the Software, Documentation and other Materials. 7. RECEIPT BY FIDEX. DEVELOPER will furnish to FIDEX, at the time of deposit of any Software, a packing list describing all Software, Documentation, or other Materials deposited hereunder. FIDEX will issue a receipt for all Software, Documentation, or other Materials deposited and forward copies of such receipts and packing lists to DEVELOPER. 8. INITIATION OF DELIVERY OF THE SOFTWARE/DOCUMENTATION. In order for the Software and/or Documentation to be delivered by FIDEX to LICENSEE in executable or source code form, each of the following must occur: (1) Receipt by FIDEX of written notification that an event causing delivery has occurred, explaining in detail the basis for the assertion that such an event has occurred; (2) FIDEX confirming that an event causing delivery has occurred; and (3) Prepayment of Fidex's release processing fees. No delivery will occur until FIDEX can confirm to its satisfaction that an event has occurred. 9. RELEASE PROCESSING FEES. The release processing fee is currently $750 when the release is made at LICENSEE's request, and $100 when release is made at DEVELOPER's request. If release is made at Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 1 LICENSEE's request the fee also includes referral to programmers competent with regards to both the programming language and type of application. The release fee is not subject to change during the first three years of the escrow account. 10. RIGHTS LICENSEE RECEIVES WITH SOFTWARE DELIVERED. DEVELOPER and LICENSEE agree that when and if FIDEX delivers the Software to LICENSEE, LICENSEE only obtains the following rights in the Software, and nothing more: (1) if the Software is delivered in executable form, DEVELOPER grants and LICENSEE receives a complete copy of the Software in executable form, and receives the same license and right to use or otherwise deal with the Software as it had with the original Software it received from DEVELOPER, (2) if the Software is delivered as source code, DEVELOPER hereby grants and LICENSEE receives the license and right to utilize the source code only to maintain and update the Software licensed under the original license/agreement between LICENSEE and DEVELOPER. 11. EVENTS CAUSING DELIVERY OF SOFTWARE Upon occurrence of one or more of the following events ("Release Events"), FIDEX agrees and is hereby specifically authorized and instructed to provide the Software, Documentation, or other Materials to LICENSEE upon written instruction by DEVELOPER or request by LICENSEE. Prior to such request, however (i) LICENSEE must have given written notice to FIDEX of the occurrence of the Release Event (the "Notice of Release Event"); (ii) FIDEX or LICENSEE must have transmitted a copy of the Notice of Release Event to DEVELOPER; and (iii) fifteen (15) days must have elapsed after receipt of Notice of Release Event by DEVELOPER. The following are release events: 11.1 DEVELOPER agrees in writing to the delivery. 11.2 DEVELOPER cannot be located by LICENSEE or by FIDEX as described in paragraph 12 of this Agreement. 11.3 DEVELOPER is unwilling or unable to support the SOFTWARE pursuant to the terms of a valid and existing license agreement with LICENSEE. 11.4 DEVELOPER files for protection under Chapter 7 of the U.S. Bankruptcy Code and such proceeding has not been dismissed within sixty (60) days after it has begun. Notwithstanding the foregoing, the acquisition, merger or reorganization of DEVELOPER shall not be deemed a Release Event provided the successor to DEVELOPER assumes the obligations of DEVELOPER under the License Agreement and this Agreement. 12. DEVELOPER'S DUTY AS TO WHEREABOUTS. It is DEVELOPER'S burden to keep FIDEX fully and timely apprised of its current telephone, telefacsimile and mailing address. Failure to do so may result in a proper transfer of the Software under paragraph 11.2, above, if DEVELOPER cannot be located by FIDEX. Should LICENSEE request delivery of the Software, FIDEX shall immediately attempt to contact DEVELOPER by telephone, telefacsimile, overnight express, and certified mail, return receipt requested. Should FIDEX be unable to contact DEVELOPER within 30 days of notice by certified mail, DEVELOPER will be considered to have ceased to do business for the purposes of this agreement. 13. DISPUTES BETWEEN DEVELOPER AND LICENSEE. If at any time during the life of this escrow any dispute shall arise between DEVELOPER and LICENSEE, FIDEX or any other entity, as to the delivery by FIDEX of the Software, Documentation and other Materials deposited hereunder or as to the ownership or right of possession thereto, FIDEX shall not release the Software, Documentation, and other Materials until: (a) both parties agree to such a release; or (b) a court of competent jurisdiction orders FIDEX to release the Software, Documentation, and other Materials. FIDEX may hold and retain in its possession without liability, any or all of the Software, Documentation and other Materials referred to in this Agreement, until such dispute shall have been settled, or it may at its option, deposit the Software, Documentation and other Materials with the Clerk of the District Court Bonner County Idaho, under the appropriate statutory provisions for interpleader, and thereupon, Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 2 FIDEX shall be relieved of all liability with respect thereto. FIDEX shall be entitled to all reasonable costs and attorneys' fees incurred therein from LICENSEE and/or DEVELOPER. 14. LICENSE TO FIDEX. DEVELOPER hereby grants to FIDEX the following rights and license to the Software Documentation and other Materials: For any and all purposes consistent with this Agreement, including, without limitation, to copy, use and display the Software and the Documentation: to copy the source code; to use the Software to produce executable copies of the Software; to provide verification services; to deliver copies of the Software (source code and/or executable copies) and/or Documentation and other Materials, to the LICENSEE, consistent with the terms of this Agreement. 14.1 CERTAINTY. If FIDEX is uncertain of its duties or rights hereunder, it will refrain from taking any action other than to retain the Software, Documentation, and other Materials safely until it is directed otherwise in writing by DEVELOPER and LICENSEE jointly or by final order of a court of competent jurisdiction. Except as expressly provided in this agreement, FIDEX agrees that it will not divulge or disclose or otherwise make available to third parties whatsoever, or make any use whatsoever, of the Software or of any information deposited with it by DEVELOPER in connection with this Agreement, without the express prior written consent of DEVELOPER. 14.2 RESTRICTION ON ACCESS. Except as required to carry out its duties hereunder, FIDEX shall not permit any FIDEX employee, LICENSEE or any other person access to the Software, Documentation, and other Materials unless consented to in writing by DEVELOPER. FIDEX shall use its best efforts to avoid unauthorized access to the Software by its employees or any other person. 15. LICENSEE BEARS RISK OF DEFICIENT DEPOSIT. LICENSEE agrees that FIDEX makes no representations or warranties as to what it receives and performs no testing or verification to determine what it has received, whether what it received is what DEVELOPER says it is, or anything other than it has received something from DEVELOPER. Between LICENSEE and FIDEX, LICENSEE bears the entire risk that the escrowed Software is what LICENSEE expects it to be. 16. LICENSEE'S RESPONSIBILITY TO LICENSE THIRD-PARTY FILES. FIDEX, DEVELOPER, and LICENSEE agree that if the escrowed Software includes copyrighted computer files which are not the property of DEVELOPER, such as compiler, linker, and third-party programming libraries, FIDEX shall not release said copyrighted computer files to LICENSEE until one of the following occurs: (1) LICENSEE demonstrates to FIDEX'S satisfaction that LICENSEE or LICENSEE'S agent is licensed to use said copyrighted computer files, or (2) LICENSEE demonstrates to FIDEX'S satisfaction that LICENSEE is unable to obtain said license because the owner of said copyrighted computer files cannot be located. 17. DEVELOPER REPRESENTATIONS/WARRANTIES. DEVELOPER represents and warrants: (a) It is depositing with FIDEX the exact Software, Documentation and other Materials stated in Exhibit A; and (b) To DEVELOPER'S knowledge, there is nothing in the deposited Software which will in any way disable, hinder or interfere with its use by LICENSEE should it later have to be delivered to LICENSEE. 18. PAYMENT/COMPLIANCE. DEVELOPER or LICENSEE agree to pay FIDEX all fees and charges at the rates in effect at the time of the service or charge, including applicable sales tax. DEVELOPER and LICENSEE understand and agree that the applicable fees and charges may be changed by FIDEX from time to time. FIDEX'S costs, expenses, charges and attorney's fees in connection with this Agreement are hereby made a first and paramount lien upon: the Software, Documentation and other Materials deposited. All of FIDEX'S obligations are all strictly conditioned upon FIDEX being paid its fees. 19. FIDEX NOT PART OF ANY TRANSACTION. DEVELOPER and LICENSEE agree that FIDEX HAS NO INVOLVEMENT OR LIABILITY RELATING TO ANY UNDERLYING SOFTWARE LICENSING AGREEMENTS, SERVICE CONTRACTS OR ANY OTHER AGREEMENT BETWEEN DEVELOPER AND LICENSEE, OR ANY OTHER ENTITY. DEVELOPER and LICENSEE further agree that this Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 3 Agreement creates no obligation on the part of FIDEX, other than to receive, hold, and release the Software, Documentation and other Materials as agreed herein. 20. DISCLAIMER AND LIMITATION OF FIDEX LIABILITY. DEVELOPER and LICENSEE agree that FIDEX shall not be liable: (a) For its acts or omissions in good faith not resulting from gross negligence; (b) For any indirect, special or consequential damages, including, without limitation, lost business or profits; (c) For any direct damages in excess of the amount paid by DEVELOPER or LICENSEE, to FIDEX for the deposit or maintenance fees for the Software in question. Without limiting the foregoing, FIDEX shall not be liable for any of the following: Any obligations between LICENSEE and DEVELOPER; The correctness, completeness or sufficiency of Software, Documentation or other Materials held pursuant to this Agreement; For failure to notify any party of non-payment or declaration of default in any of the terms set forth herein; For the deposit, procurement or renewal of insurance policies or any riders or additional clauses; For payment of insurance premiums or taxes of any kind; or For the performance of any act not expressly set forth in this Agreement even though contained in the documents or materials deposited. 21. TERMINATION. FIDEX may terminate this Agreement at any time for any reason, with 30 days written notice, and without further obligation or liability, by sending DEVELOPER and LICENSEE notice of termination and a pro-rated refund of annual fees. No other fees will be refunded. DEVELOPER may terminate this agreement upon termination of DEVELOPER'S mainenance obligations. Even if terminated, DEVELOPER remains liable to FIDEX for all fees, charges and services provided up to the time of termination. In the event of termination of this Agreement, FIDEX agrees to redeliver to DEVELOPER all Software, Documentation and other Materials deposited hereunder and this agreement will thereupon terminate. 22. DISCHARGE OF FIDEX. FIDEX may be discharged by DEVELOPER at any time for any reason, with thirty (30) days written notice specifying a date when such discharge will take effect. Prior to the effective date of such termination of this Agreement, DEVELOPER will arrange for the services of a new escrow agent reasonably acceptable to LICENSEE. DEVELOPER and LICENSEE agree to execute and deliver another escrow agreement with such new escrow agent having substantially the same terms as this agreement. Upon DEVELOPER'S notifying FIDEX of the name and address of the new escrow agent, FIDEX, agrees to forward the Software, Documentation and other Materials to such new escrow agent. 23. COSTS, ATTORNEYS' FEES. That if any party has to enforce any terms of this Agreement, the prevailing party shall be entitled to all costs and disbursements incurred by that party, including reasonable attorneys' fees. 24. INDEMNIFICATION. DEVELOPER and LICENSEE jointly and severally agree to fully indemnify, defend and hold FIDEX harmless if FIDEX incurs any damage or loss of any kind, as a result of DEVELOPER'S or LICENSEE's conduct, and in the event FIDEX must in any way become involved in a dispute between them. This indemnification includes all FIDEX' damages and losses of any kind, including all costs and attorneys' fees. 25. ARBITRATION/APPLICABLE LAW/JURISDICTION/VENUE. If a dispute arises which involves FIDEX, it is agreed that the exclusive method to resolve the dispute shall be by arbitration in accordance with the State of Idaho's Arbitration Act, unless later agreed in writing by FIDEX. The laws of the State of Idaho shall govern the construction and interpretation of this Agreement and all disputes between the parties, and each party agrees that the trial/arbitration of all disputes involving FIDEX shall be in the State of Idaho, County of Bonner and each agrees to the jurisdiction of the Idaho courts. Each may conduct discovery pursuant to Idaho civil rules. Any action against FIDEX must be brought within one year from the event or action disputed, or it is forever barred. Notwithstanding the foregoing, any party to this agreement may seek injunctive, including preliminary, relief in the U.S. District Court for Eastern Washington, in Spokane, Washington, or in the First District Court of the State of Idaho in Sandpoint, Idaho. Anything other than injunctive relief is subject to the limitations of this section regarding arbitration, applicable law, jurisdiction, and venue if FIDEX is a party to the dispute. 26. MODIFICATION, COMPLETE AGREEMENT. This Agreement contains the entire and final agreement Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 4 involving FIDEX (not necessarily between LICENSEE and DEVELOPER) and supersedes all prior discussions, negotiations, correspondence and discussion of any kind, and can only be modified in a writing signed by the party against whom enforcement is sought. However, the FIDEX Current Prices and Charges are subject to subsequent unilateral modification by FIDEX with thirty (30) days prior written notice. 27. HEADINGS/TITLES NOT GOVERNING. The headings and titles used herein are for descriptive purposes only and should not be used to construe or interpret the meaning of any paragraphs, sentences or statements made herein. 28. SIGNATURE IN PARTS. This agreement may be executed in several parts and its validity if so executed shall be the same as if all signatures were to appear on one sheet. 29. DEVELOPER AND LICENSEE HAVE FULLY READ AND UNDERSTAND THE TERMS OF THIS AGREEMENT AND AGREE TO BE BOUND BY ALL OF THEM. DATED this 15th day of April, 1996. SOFTWARE DEVELOPER: FIDEX AMERICAS CORPORATION: MedicaLogic, Inc. STEVEN OLSON GUY E. FIELD ---------------------------------- - ---------------------------------- Authorized Signature Authorized Signature Name (Printed): Steven Olson Name (Printed): Guy E. Field ------------------- ------------------ Position: President Position: Controller ------------------------- ------------------------ Notice Address: STATE OF IDAHO ) ------------------ COUNTY OF BONNER ) ss. Telephone: ( ) ---------------------- On this 23 day of April , 19 96 , Telefacsimile: ( ) before me, a Notary Public in and ------------------- for said state, personally appeared Steven Olson, who, being by me STATE OF OR ) first duly sworn, declared that he -------------- is the President of Fidex Americas COUNTY OF WASH ) ss. Corporation, that he signed the ------------- foregoing document as President of the corporation, and that the On this 15 day of April, 1996, statements contained therein are before me, a Notary Public in and true. for said state, personally appeared Guy E. Field , who, being by me JENNIFER FAUBEOTHER, Notary Public first duly sworn, declared that he ------------------- is the of , that he signed the Residing at 11121 Cedar, ID foregoing document as Controller of --------------- the corporation, and that the My commission expires 11/15/00 statements contained therein are -------- true. MARY EVERS ZOUCHA, Notary Public - ----------------- Residing at Beaverton, OR ------------- My commission expires 3/27/99. ------- OFFICIAL SEAL [SEAL] MARY EVERS ZOUCHA NOTARY PUBLIC - OREGON COMMISSION NO. 042533 MY COMMISSION EXPIRES MARCH 27, 1999 Exhibits: Exhibit A: Description of Software and Documentation Submitted for Escrow Exhibit B: LICENSEE registration and signature page. Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 5 EXHIBIT A DESCRIPTION OF SOFTWARE AND DOCUMENTATION SUBMITTED FOR ESCROW Software Program Name: Logician version 4.6.1_7 E&M Advisor Merge/Delete Patient Encounter Form Editor version 1.6.3 Software Developer MedicaLogic, Inc. 20500 NW Evergreen Parkway Hillsboro, OR 97124 Brief Description of Program: Package of Electronic Medical Record (EMR) products, including scheduling (ScheduLogic), data exchange (LinkLogic), and EMR (Logician) Programming Language and Tools: Compiler, Linker, Import Library Manager, Resource Compiler, Make, Debugger: Microsoft C++ version 4.2b Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Database: Multi User Server: Oracle version 7.3 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 Single User Server: Watcom version 4.0 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Client Network Interface: SQLNet SPX/IPX for Windows SQLNET TCP/IP for Windows version 2.3 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 Client: Windows Libraries version 7.1 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 DB Admin Tools: SQLPLUS version 3.1 Revised 3/4/99 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 Single User Admin Tools: ISQL version 3.2 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Schema Tools: S-Designer version 4.1 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Installation: Installation Software: InstallShield version 3 InstallShield Corporation P.O. Box 74904 Chicago, IL 60675-4904 Third-Party Libraries: Database Driver: Watcom ODBC Driver version 3.2 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Database Driver: ODBC Driver Manager version 2.0 Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Report Software: Crystal Reports Print Engine version 4.0 Crystal A. Seagate Software Company 1095 West Pender St., 4th Floor Vancouver, B.C., V6E 2M6 Canada Spell Checker: Visual Spell Checker version 1.01 VisualTools, Inc. 15721 College Blvd. Lenexa, KS 66219 Memory Management: Smartheap version 3.0 MicroQuill Software Publishing Inc. 10500 Valley View Rd. Bothell, WA 98011 Charting/Graphics: ChartFX version 3.0 SoftwareFX, Inc. 7100 West Camino Real, Ste 117 Boca Raton, FL 33433 Imaging: Image Gear Accusoft Corp. Revised 3/4/99 2 Westborough Business Park Suite 3013 Westborough, MA 01581 Third-Party Data: HealthLogic Patient Educational Handouts version: updated annually Clinical Reference Systems 7100 E. Belleview Ave, Suite 208 Greenwood Village, CO 80111 ICD9, CPT4 Coding Superhelp version: updated annually Context Software Systems, Inc. 241 Sourth Frontage Road, Suite 38-39 Burr Ridge, IL 60521 Pharmacologic Medications, Interactions, Drug Handouts version: update quarterly Medi-Span 8425 Woodfield Crossing Blvd. P.O. Box 40930 Indianapolis, IN 46240-0930 SNOMED Coding Superhelp version: updated semi-annually College of American Pathologists 325 Waukegan Road Northfield, IL 60093-2750 Source Code Revision Control: MKS RCS version 2.0 Mortice Kern Systems, Inc. 35 King Street North Waterloo, ONT, N2J 2W9 Canada Documentation: Using Logician Manual Managing Logician Manual Learning Logician Manual LinkLogic Interface Developer's Manual QA Tools: QA Partner version 4.0 Seque Software, Inc. 1320 Center St. Newton Centre, MA 02159 Winrunner version 4.01 Mercury Interactive Corp. 470 Potrero Ave. Sunnyvale, CA 94086 Revised 3/4/99 EX-10.11 15 ORACLE ALLIANCE AGREEMENT ORACLE ALLIANCE AGREEMENT Oracle Alliance Agreement (the "Agreement") is between Oracle Corporation ("Oracle") and the Alliance Member identified below. The terms of this Agreement shall apply to each Program license granted and to all services provided by Oracle under this Agreement, which will be identified on one or more Order Forms. 1. DEFINITIONS 1.1 "Commencement Date" means the date on which the Programs are delivered by Oracle, or if no delivery is necessary, the Effective Date set forth on the relevant Order Form. 1.2 "Designated System" shall mean the computer hardware and operating system designated on the relevant Order Form or Sublicense report for use in conjunction with a Sublicensed Program, Development License, or Marketing Support License. 1.3 "Documentation" means the user guides and manuals for installation and use of the Program software. Documentation is provided in CD-ROM or bound form, whichever is generally available. 1.4 "Order Form" shall mean the document in hard copy or electronic form by which the Alliance Member orders Program licenses, Sublicenses, and services, and which is agreed to by the parties. The Order Form shall reference the Effective Date of this Agreement. 1.5 "Program" shall mean the software in object code form distributed by Oracle for which the Alliance Member is granted a license or grants a Sublicense pursuant to this Agreement; and the media, Documentation, and Updates therefor. 1.6 "Sublicense Addenda" shall mean the addenda to this Agreement specifying additional Sublicense terms and Sublicense rates and fees for the various types of Sublicenses which may be granted by the Alliance Member. 1.7 "Sublicense" shall mean a nonexclusive, nontransferable right granted by or through the Alliance Member to an end user to use an object code copy of the Programs with the Value-Added Package under authority of a Sublicense Addendum. "Sublicensee" shall mean a third party who is granted a Sublicense of the Programs with the Value-Added Package for such party's own internal data processing purposes and not for purposes of any further distribution. 1.8 "Technical Support" means Program support provided under Oracle's policies in effect on the date Technical Support is ordered. 1.9 "Update" shall mean a subsequent release of a Program which Oracle makes generally available for Program Licenses at no additional license fee other than media and handling charges, provided the Alliance Member has ordered Technical Support for such licenses for the relevant time period. Updates shall not include any release, option or future product which Oracle licenses separately. 2. RIGHTS GRANTED 2.1 Development Licenses and Trial Licenses A. Oracle grants to the Alliance Member a nonexclusive license to use the Development Licenses the Alliance Member obtains under this Agreement and applicable Sublicense Addenda, as follows: 1. to develop or prototype the Value-Added Package on the Designated System or on a backup system if the Designated System is inoperative, up to any applicable maximum number of designated Users or other such limitation as may be applicable; 2. to demonstrate the Programs to potential Sublicensees solely in conjunction with the Value-Added Package; 3. to provide training and technical support to employees and to customers solely in conjunction with the Value-Added Package; 4. to use the Documentation provided with the Programs in support of the Alliance Member's authorized use of the Programs; and 5. to copy the Programs for archival or backup purposes; no other copies shall be made without Oracle's prior written consent. All titles, trademarks, and copyright and restricted rights notices shall be reproduced in such copies. All archival and backup copies of the Programs are subject to the terms of this Agreement. B. The Alliance Member may order temporary trial licenses ("Trial Licenses") for its evaluation purposes only, and not for development or prototype purposes, for use during a period specified in the Order Form. Each Order Form for Trial Licenses shall clearly state the trial period and shall identify that the order is for a Trial License. 2.2 Marketing Support Licenses Oracle grants to the Alliance Member a nonexclusive license to use the Marketing Support Licenses the Alliance Member obtains under this Agreement and applicable Sublicense Addenda, as follows: A. to demonstrate the Programs to potential Sublicensees solely in conjunction with the Value-Added Package, up to any applicable maximum number of designated Users or other such limitation as may be applicable; B. to develop customized prototypes of the Value-Added Package for prospective Sublicensees on the Designated System if the Alliance Member does not receive any fees related to the development of such customized prototypes; C. to use the Documentation provided with the Programs in support of the Alliance Member's authorized use of the Programs; and D. to copy the Programs for archival or backup purposes; no other copies shall be made without Oracle's prior written consent. All titles, trademarks, and copyright and restricted rights notices shall be reproduced in such copies. All archival and backup copies of the Programs are subject to the terms of this Agreement. 2.3 Sublicensing A. License to Sublicense Programs [*] Confidential Treatment Requested. As further set forth in the applicable Sublicense Addenda, Oracle hereby grants the Alliance Member a nonexclusive, nontransferable license to market and grant Sublicenses as set forth in such Sublicense Addenda and at the rates and fees set forth in such Sublicense Addenda. The Alliance Member shall only have the right to Sublicense Programs pursuant to an effective Sublicense Addendum between the parties hereto. The Alliance Member shall Sublicense the Programs solely through a written Sublicense agreement as provided under Section 2.3.B. Upon Oracle's request, the Alliance Member shall provide Oracle with a copy of the Alliance Member's standard Sublicense agreement. B. Sublicense Agreement Every Sublicense agreement shall include, at a minimum, contractual provisions which: 1. Restrict use of the Programs to object code, subject to the restrictions provided under the applicable Sublicense Addenda and consistent with the Sublicense fees payable to Oracle; 2. prohibit (a) transfer of the Programs except for temporary transfer in the event of computer malfunction; (b) assignment, timesharing and rental of the Programs; and (c) title to the Programs from passing to the Sublicensee or any other party; 3. Prohibit the reverse engineering, disassembly or decompilation of the Programs and prohibit duplication of the Programs except for a single backup or archival copy; 4. Disclaim, to the extent permitted by applicable law, Oracle's liability for any damages, whether direct, indirect, incidental or consequential, arising from the use of the Programs; 5. 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Not make any representations, warranties, or guarantees to Sublicensees concerning the Programs that are inconsistent with or in addition to those made in this Agreement or by Oracle; and 3. Comply with all applicable federal, state, and local laws and regulations in performing its duties with respect to the Programs. 2.4 Limitations on Use The Alliance Member shall not use or duplicate the Programs (including the Documentation) for any purpose other than as specified in this Agreement or make the Programs available to unauthorized third parties. The Alliance Member shall not (a) use the Programs for its internal data processing or for processing customer data; (b) rent, electronically distribute, or timeshare the Programs or market the Programs by interactive cable or remote processing services or otherwise distribute the Programs other than as specified in this Agreement; or (c) cause or permit the reverse engineering, disassembly, or decompilation of the Programs, except to the extent required to obtain interoperability with other independently created software or as specified by law. 2.5 Title Oracle shall retain all title, copyright, and other proprietary rights in the Programs and any modifications or translations thereof. The Alliance Member and its Sublicensees do not acquire any rights in the Programs other than those specified in this Agreement. 2.6 Transfer of Programs The Alliance Member may transfer a Development License or Marketing Support License within its organization upon notice to Oracle; transfers are subject to the terms and fees specified in Oracle's transfer policy in effect at the time of the transfer. 2.7 Use of Programs by Third Parties The Alliance Member and each Sublicensee (as the case may be) shall have the right to allow third parties to use each such party's licensed Programs for the licensee's operations so long as the applicable licensee ensures that use of the Programs is in accordance with the terms of this Agreement or the applicable Sublicense agreement. 3. TECHNICAL SERVICES 3.1 Technical Support Services Technical Support services ordered by the Alliance Member will be provided under Oracle's Technical Support policies in effect on the date Technical Support is ordered. 3.2 Training Services Oracle will provide training services agreed to by the parties under the terms of this Agreement. For any on-site services requested by the Alliance Member, the Alliance Member shall reimburse Oracle for actual, reasonable travel and out-of-pocket expenses incurred. 4. FEES AND PAYMENTS 4.1 License Fees and Sublicense Fees The Alliance Member may order Development Licenses or Marketing Support Licenses at the standard Program license fees set forth in the Price List or at the fees otherwise provided in a Sublicense Addendum. For each Sublicense granted by the Alliance Member, the Alliance Member agrees to pay Oracle a Sublicense fee as set forth in the applicable Sublicense Addenda. The Alliance Member shall not be relieved of its obligation to pay Sublicense fees owed to Oracle by the nonpayment of such fees by the Sublicensee. The Alliance Member is free to determine unilaterally its own license fees to its Sublicensees. If the Alliance Member or a Sublicensee upgrades the Programs to a larger computer, transfers the Programs outside the United States and/or to another operating system, or increases the licensed number of Users, the Alliance Member will pay additional Sublicense fees to Oracle as provided under Oracle's transfer policies and rates in effect at the time the Program is upgraded or transferred. 4.2 Technical Support Fees [*] Confidential Treatment Requested. 2 Technical Support services ordered by the Alliance Member for Development Licenses and Marketing Support Licenses will be provided under Oracle's Technical Support policies and rates in effect on the date Technical Support is ordered. 4.3 General Payment Terms Except as otherwise provided in a Sublicense Addendum, all fees shall be due and payable 30 days from the invoice date. Fees due by the Alliance Member shall not be subject to set off for any claims against Oracle. All payments made shall be in United States currency and shall be made without deductions based on any taxes or withholdings, except where such deduction is based on Oracle's gross income. Any amounts payable by the Alliance Member hereunder which remain unpaid after the due date shall be subject to a late charge equal to 1.5% per month from the due date until such amount is paid. The Alliance Member agrees to pay applicable media and shipping charges. The Alliance Member shall issue a purchase order, or alternative document acceptable to Oracle, on or before the Effective Date of the applicable Order Form. 4.4 Taxes The fees listed in this Agreement do not include taxes; if Oracle is required to pay sales, use, property, value-added, or other taxes based on the licenses, Sublicenses or services granted under this Agreement or on the Alliance Member's or a Sublicensee's use of Programs or services, then such taxes shall be billed to and paid by the Alliance Member. This shall not apply to taxes based on Oracle's income. 5. RECORDS 5.1 Records Inspection The Alliance Member shall maintain adequate books and records in connection with activity under this Agreement. Such records shall include, without limitation, executed Sublicense agreements, the information required in or related to the Sublicense reports required under a Sublicense Addendum, the number of copies of Programs used or Sublicensed by the Alliance Member, the computers on which the Programs are installed, and the number of Users using the Programs. Oracle may audit the relevant books and records of the Alliance Member and Alliance Member's use of the programs. Any such audit shall be conducted during regular business hours at the Alliance Member's offices and shall not interfere unreasonably with the Alliance Member's business activities. If an audit reveals that the Alliance Member has underpaid fees to Oracle, the Alliance Member shall be invoiced for such underpaid fees. Audits shall be made no more than once annually. 5.2 Notice of Claim The Alliance Member will notify the Oracle legal department promptly in writing of: (a) any claim or proceeding involving the Programs that comes to its attention; and (b) any material change in the management or control of the Alliance Member. 6. TERM AND TERMINATION 6.1 Term This Agreement shall become effective on the Effective Date and shall be valid until the expiration or termination of all Sublicense Addenda hereunder, unless terminated earlier as set forth herein. If not otherwise specified on the Order Form, each Program license granted under this Agreement shall remain in effect perpetually under the terms of this Agreement unless the licenses or this Agreement is terminated as provided in this Article 6. The term of each Sublicense Addendum hereunder shall be as set forth in each such Addendum. 6.2 Termination by the Alliance Member The Alliance Member may terminate any Program license or any Sublicense Addenda at any time; however, termination shall not relieve the Alliance Member's obligations specified in Section 6.5. 6.3 Termination by Oracle Oracle may terminate any Program license, any Sublicense Addenda, or this Agreement upon written notice if the Alliance Member materially breaches this Agreement and fails to correct the breach within 30 days following written notice specifying the breach. 6.4 Force Majeure Neither party shall be liable to the other for failure or delay in the performance of a required obligation if such failure or delay is caused by strike, riot, fire, flood, natural disaster, or other similar cause beyond such party's control, provided that such party gives prompt written notice of such condition and resumes its performance as soon as possible, and provided further that the other party may terminate this Agreement if such condition continues for a period of one hundred eighty (180) days. 6.5 Effect of Termination Upon expiration or termination of a Sublicense Addendum or this Agreement, all of the Alliance Member's rights to market and Sublicense the Programs as set forth in such Sublicense Addendum or this Agreement shall cease. The termination of this Agreement, a Sublicense Addendum, or any license shall not limit either party from pursuing any other remedies available to it, including injunctive relief, nor shall such termination relieve the Alliance Member's obligation to pay all fees that have accrued or that are owed by the Alliance Member under a Sublicense Addendum or any Order Form, or that appear in a Sublicense report. The parties' rights and obligations under Sections 2.4, 2.5, 2.6 and Articles 4, 5, 6, 7, and 8 shall survive termination of this Agreement. Upon termination, the Alliance Member shall cease using, and shall return or destroy, all copies of the applicable Programs. 7. INDEMNITY, WARRANTIES, REMEDIES 7.1 Infringement Indemnity Oracle will defend and indemnify the Alliance Member against a claim that Programs infringe a copyright or patent or other intellectual property right, provided that: (a) the Alliance Member notifies Oracle in writing within 30 days of the claim; (b) Oracle has sole control of the defense and all related settlement negotiations; and (c) the Alliance Member provides Oracle with the assistance, information and authority necessary to perform Oracle's obligations under this Section. Reasonable out-of-pocket expenses incurred by the Alliance Member in providing such assistance will be reimbursed by Oracle. Oracle shall have no liability for any claim of infringement based on use of a superseded or altered release of Programs if the infringement would have been avoided by the use of a [*] Confidential Treatment Requested. 3 current unaltered release of the Programs which Oracle provides to the Alliance Member. In the event the Programs are held or are believed by Oracle to infringe, Oracle shall have the option, at its expense, to (a) modify the Programs to be noninfringing; or (b) obtain for the Alliance Member a license to continue using the Programs. If it is not commercially reasonable to perform either of the above options, then Oracle may terminate the license for the infringing Programs and refund the license fees paid for those Programs. This Section 7.1 states Oracle's entire liability and the Alliance Member's exclusive remedy for infringement. 7.2 Warranties and Disclaimers A. Program Warranty Oracle warrants for a period of one year from the Commencement Date that each unmodified Program will perform the functions described in the Documentation. B. Media Warranty Oracle warrants the tapes, diskettes or other media to be free of defects in materials and workmanship under normal use for 90 days from the Commencement Date. C. Services Warranty Oracle warrants that its Technical Support and training services will be performed consistent with generally accepted industry standards. This warranty shall be valid for 90 days from performance of service. D. Disclaimers THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Oracle does not warrant that the Programs will operate in combinations other than as specified in the Documentation or that the operation of the Programs will be uninterrupted or error free. Pre-Production releases of Programs and computer-based training products are distributed "As Is." The Alliance Member shall not make any warranty on Oracle's behalf. 7.3 Exclusive Remedies For any breach of the warranties contained in Section 7.2 above, the Alliance Member's exclusive remedy, and Oracle's entire liability, shall be: A. For Programs The correction of Program errors that cause breach of the warranty, or if Oracle is unable to make the Program operate as warranted, the Alliance Member shall be entitled to recover the fees paid to Oracle for the Program license. B. For Media The replacement of defective media returned within 90 days of the Commencement Date. C. For Services The reperformance of the services, or if Oracle is unable to perform the services as warranted, the Alliance Member shall be entitled to recover the fees paid to Oracle for the unsatisfactory services. 7.4 Indemnification of Oracle The Alliance Member agrees to enforce the terms of its Sublicense agreements required by this Agreement so as to effect a timely cure of any Sublicense breach, and to notify Oracle of any known breach of such terms. The Alliance Member will defend and indemnify Oracle against: A. All claims and damages to Oracle arising from any use by the Alliance Member or its Sublicensees of any product not provided by Oracle but used in combination with the Programs if such claims would have been avoided by the exclusive use of the Programs; and B. All claims and damages to Oracle caused by the Alliance Member's failure to include the required contractual terms set forth in Section 2.3.B hereof in each Sublicense agreement. 7.5 Equitable Relief The Alliance Member acknowledges that any breach of its obligations with respect to proprietary rights of Oracle will cause Oracle irreparable injury for which there are inadequate remedies at law and that Oracle shall be entitled to equitable relief in addition to all other remedies available to it. 8. GENERAL TERMS AND CONDITIONS 8.1 Nondisclosure By virtue of this Agreement, the parties may have access to information that is confidential to one another ("Confidential Information"). Confidential information shall be limited to the Programs, the terms and pricing under this Agreement, and all information clearly identified as confidential. A party's Confidential Information shall not include information that: (a) is or becomes a part of the public domain through no act or omission of the other party; (b) was in the other party's lawful possession prior to the disclosure and had not been obtained by the other party either directly or indirectly from the disclosing party; (c) is lawfully disclosed to the other party by a third party without restriction or disclosure; or (d) is independently developed by the other party. The Alliance Member shall not disclose the results of any benchmark tests of the Programs to any third party without Oracle's prior written approval. The parties agree to hold each other's Confidential Information in confidence during the term of this Agreement and for a period of two years after termination of this Agreement. The parties agree, unless required by law, not to make each other's Confidential Information available in any form to any third party for any purpose other than the implementation of this Agreement. Each party agrees to take all reasonable steps to ensure that Confidential Information is not disclosed or distributed by its employees or agents in violation of the terms of this Agreement. 8.2 Copyrights The Programs are copyrighted by Oracle. The Alliance Member shall retain all Oracle copyright notices on the Programs used by the Alliance Member under its Development Licenses or Marketing Support Licenses. The Alliance Member shall include the following on all copies of the Programs in software Value-Added Packages incorporating the Programs distributed by the Alliance Member: A. A reproduction of Oracle's copyright notice; or B. A copyright notice indicating that the copyright is vested in the Alliance Member containing the following 1. A "c" in a circle and the word "copyright"; 2. The Alliance Member's name; [*] Confidential Treatment Requested. 4 3. The date of copyright; and 4. The words "All Rights Reserved." Such notices shall be placed on the Documentation, the sign-on screen for any software Value-Added Package incorporating the Programs, and the diskette or tape labels. Notwithstanding any copyright notice by the Alliance Member to the contrary, the copyright to the Program included in any such application package shall remain in Oracle. Other than as specified above, on any reproduction or translation of any Programs, Documentation, or promotional material, the Alliance Member agrees to reproduce Oracle's copyright notices intact. 8.3 Trademarks "Oracle" and any other trademarks and service marks adopted by Oracle to identify the Programs and other Oracle products and services belong to Oracle; the Alliance Member will have no rights in such marks except as expressly set forth herein and as specified in writing from time to time. The Alliance Member's use of Oracle's trademarks shall be under Oracle's trademark policies and procedures in effect from time-to-time. The Alliance Member agrees not to use the trademark "ORACLE," or any mark beginning with the letters "Ora," or any other mark likely to cause confusion with the trademark "ORACLE" as any portion of the Alliance Member's tradename, trademark for the Alliance Member's Value-Added Package, or trademark for any other products of the Alliance Member. The Alliance Member shall have the right to use the trademark "ORACLE" and other Oracle trademarks solely to refer to Oracle's Programs, products and services. The Alliance Member agrees with respect to each registered trademark of Oracle, to include in each advertisement, brochure, or other such use of the trademark, the trademark symbol "circle R" and the following statement: _______________ is a registered trademark of Oracle Corporation, Redwood City, California. Unless otherwise notified in writing by Oracle, the Alliance Member agrees, with respect to every other trademark of Oracle, to include in each advertisement, brochure, or other such use of the trademark, the symbol "TM" and the following statement: ____________ is a trademark of Oracle Corporation, Redwood City, California. The Alliance Member shall not market the Oracle Programs in any way which implies that the Oracle Programs are the proprietary product of the Alliance Member or of any party other than Oracle. Oracle shall not have any liability to the Alliance Member for any claims made by third parties relating to the Alliance Member's use of Oracle's trademarks. 8.4 Relationships Between Parties In all matters relating to this Agreement, the Alliance Member will act as an independent contractor. The relationship between Oracle and the Alliance Member is that of licensor/licensee. Neither party will represent that it has any authority to assume or create any obligation, express or implied, on behalf of the other party, nor to represent the other party as agent, employee, franchisee, or in any other capacity. Nothing in this Agreement shall be construed to limit either party's right to independently develop or distribute software which is functionally similar to the other party's product, so long as proprietary information of the other party is not included in such software. 8.5 Assignment The Alliance Member may not assign or otherwise transfer any rights under this Agreement without Oracle's prior written consent. 8.6 Notice All notices, including notices of address change, required to be sent hereunder shall be in writing and shall be deemed to have been given when mailed by first class mail to the first address listed in the relevant Order Form (if to the Alliance Member) or to the Oracle address on the Order Form (if to Oracle). To expedite order processing, the Alliance Member agrees that Oracle may treat documents faxed by the Alliance Member to Oracle as original documents; nevertheless, either party may require the other to exchange original signed documents. 8.7 Governing Law/Jurisdiction This Agreement, and all matters arising out of or relating to this Agreement, shall be governed by the substantive and procedural laws of the State of California and shall be deemed to be executed in any state or federal court in San Francisco or San Mateo County, California. Oracle and the Alliance Member agree to submit to the jurisdiction of, and agree that venue is proper in, these courts in any such legal action or proceeding. 8.8 Severability In the event any provision of this Agreement is held to be invalid or unenforceable, the remaining provisions of this Agreement will remain in full force and effect. 8.9 Export The Alliance Member agrees to comply fully with all relevant export laws and regulations of the United States ("Export Law") to assure that neither the Programs, nor any direct product thereof, are (a) exported, directly or indirectly, in violation of Export Laws; or (b) are intended to be used for any purposes prohibited by the Export Laws, including, without limitation, nuclear, chemical, or biological weapons proliferation. 8.10 Limitation of Liability In no event shall either party be liable for any indirect, incidental, special or consequential damages, or damages for loss of profits, revenue, data or use, incurred by either party or any third party, whether in an action in contract or tort, even if the other party or any other person has been advised of the possibility of such damages. Oracle's liability for damages hereunder shall in no event exceed the amount of fees paid by the Alliance Member under this Agreement, and if such damages result from the Alliance Member's or Sublicensee's use of the Program or services, such liability shall be limited to fees paid for the relevant Program or services giving rise to the liability. The provisions of this Agreement allocate the risks between Oracle and the Alliance Member. Oracle's pricing [*] Confidential Treatment Requested. 5 reflects this allocation of risk and the limitation of liability specified herein. 8.11 Federal Government Sublicenses If the Alliance Member grants a Sublicense to the United States government, the Programs shall be provided with "Restricted Rights" and the Alliance Member will place a legend, in addition to the applicable copyright notices, on the documentation, and on the tape or diskette label, substantially similar to the following: RESTRICTED RIGHTS LEGEND "Programs delivered subject to the DOD FAR Supplement are "commercial computer software" and use, duplication and disclosure of the Programs shall be subject to the licensing restrictions set forth in the applicable license agreement. Otherwise, Programs delivered subject to the Federal Acquisition Regulations are "restricted computer software" and use, duplication and disclosure of the Programs shall be subject to the restrictions in FAR 52.227-14, Rights in Data--General, including Alternate III (June 1987)." 8.12 Waiver The waiver by either party of any default or breach of this Agreement shall not constitute a waiver of any other or subsequent default or breach. Except for actions for nonpayment or breach of Oracle's proprietary rights in the Programs, no action, regardless of form, arising out of this Agreement may be brought by either party more than two years after the cause of action has accrued. 8.13 Entire Agreement This Agreement constitutes the complete agreement between the parties and supersedes all prior or contemporaneous agreements or representations, written or oral, concerning the subject matter of this Agreement. This Agreement may not be modified or amended except in a writing signed by a duly authorized representative of each party; no other act, document, usage or custom shall be deemed to amend or modify this Agreement. It is expressly agreed that the terms of this Agreement and any Order Form shall supersede the terms in any Alliance Member purchase order or other ordering document. This Agreement shall also supersede the terms of any unsigned or "shrinkwrap" license included in any package, media, or electronic version of Oracle-furnished software and any such software shall be licensed under the terms of this Agreement, provided that the use limitations contained in an unsigned ordering document shall be effective for the specified licenses. The Effective Date of this Agreement shall be April 1, 1998. Executed by the Alliance Member: MedicaLogic Executed by Oracle Corporation: - ---------------------------------- Authorized Signature: RACHEL ROLLINS Authorized Signature: GUY E. FIELD -------------- ------------ Name: Rachel E. Rollins Name: Guy E. Field ------------------------------ ---------------------------- Title: Contract Specialist Title: Controller ----------------------------- --------------------------- Oracle Corporation 500 Oracle Parkway Redwood Shores, CA 94065 (415) 506-7000 Oracle is a registered trademark of Oracle Corporation. 7-97 [*] Confidential Treatment Requested. 6 AMENDMENT ONE to the ORACLE ALLIANCE AGREEMENT between MEDICALOGIC INC. and ORACLE CORPORATION This document ("Amendment One") shall serve to amend the Oracle Alliance Agreement and any amendments and addenda thereto between Medicalogic Inc. (the "Alliance Member") and Oracle Corporation ("Oracle") dated April 1, 1998 (the "Agreement") and any amendments or addenda thereto. The Agreement is amended as follows: 1. Add the following to the end of Section 2.3 B 2(a) of the Agreement: "However, the Alliance Member may permit a Sublicensee to transfer its rights under a Sublicense Agreement to: (i) any company controlling, controlled by, or under, control with Sublicensee; (ii) wholly owned subsidiary of such Sublicensee; (iii) the surviving entity of a merger involving Sublicensee or the purchaser of all or substantially all of the assets of sublicensee or the purchaser of the portion of the business in which the Software is used; or (iv) a management services company that provides management for a Sublicensee's day-to-day operations, provided that Sublicensee notifies Oracle in writing and the transferee remains subject to all limitations of the Sublicense." 2. Notwithstanding the restrictions in the Agreement and the Runtime Sublicense Addendum to the Agreement (the "Addendum") with respect to restrictions on Sublicensee use, including in particular Section 2.3 B of the Agreement, and Section [.] of the Addendum, the Alliance Member may grant Sublicenses, pursuant to the Agreement and the Addendum, to management service companies or others who provide electronic medical record services to third parties, as long as Alliance Member charges such Sublicensees a Sublicense fee based on the number of Concurrent Users and pays to Oracle the applicable Sublicense fees as set forth in the Addendum. 3. Notwithstanding the restrictions in the Agreement with respect to the rental of the Programs, including in particular Section 2.3(B)(2)(b) and Section 2.4(b), the Alliance Member may rent its Value Added package, which includes the Programs for use only as Runtime Programs as described in Section 1.2 of the Runtime Sublicense Addendum, to up to five (5) customers of the Alliance [*] Confidential Treatment Requested. Member, provided the Alliance Member charges such customers a Sublicense fee based on the number of Concurrent Users and pays to Oracle a one-time fee in advance for such Program Sublicenses in the rented Value Added Package. Such Value Added Packages may only be rented once to one customer and may not be rented again to a different customer. Any additional rental arrangements shall require additional fees and approval by Oracle. Other than the modifications set forth above, the terms and conditions of the Agreement remain unchanged and in full force and effect. The Effective Date of this Amendment One is April 1, 1998. MEDICALOGIC INC. ORACLE CORPORATION By: GUY E. FIELD By: NICK MARQUIS ------------------------------ ----------------------------------- Name: Guy E. Field Name: Nick Marquis ---------------------------- --------------------------------- Title: Controller Title: Manager, Alliances Sales Support --------------------------- -------------------------------- [*] Confidential Treatment Requested. RUNTIME SUBLICENSE ADDENDUM This document (the "Addendum") is between Oracle Corporation ("Oracle") and Medicalogic Inc. (the "Alliance Member") and shall be governed by the terms of the Oracle Alliance Agreement between the Alliance Member and Oracle effective April 1, 1998 (the "Agreement") and the terms set forth below. 1. SUBLICENSES 1.1 Sublicense Programs and Terms The Alliance Member may only Sublicense Runtime Programs for which the Alliance member has previously acquired a Supported Development License for the applicable Designated System. Notwithstanding any other provision of this Agreement, the Alliance member shall have no right to Sublicense Programs designated as Oracle Applications Programs, Oracle Express Programs, Limited Production Programs, or other Programs specified by Oracle from time-to-time without the prior written consent of Oracle. The Alliance Member shall have the right to market and grant Sublicenses of Runtime Programs under the conditions set forth in the Agreement and under the following restrictions: A. Sublicense Runtime Programs with the Application Program in the Application Package for use on Designated Systems to Sublicensees. Each copy of the Runtime Programs distributed shall be for the Sublicensee's own internal use in the Territory only on a single Designated System limited to a maximum number of Users; and B. Make and deliver to the Sublicensee a single copy of the Runtime Programs in the Application Package for each Sublicense granted. The Alliance member shall use all practical means available, both contractual and technical, to control the restricted use of each Runtime Program Sublicense. If a Sublicensee uses the Runtime Program beyond the limited functionality described in Section 1.2 hereof, the Alliance member or Distributor shall immediately notify the Sublicensee of such unauthorized use and if the Sublicensee fails to discontinue such unauthorized use following notification either terminate the Sublicense or forward to Oracle one hundred percent (100%) of the applicable Full Use standard Program license fees in effect at the time the payment is made to Oracle together with a written request by the Sublicensee for a Full Use Program license from Oracle. Oracle must approve, in writing, the Sublicensee's request before continued use of the Programs by the Sublicensee shall be deemed authorized. 1.2 Runtime Programs For the purposes of this Addendum, "Runtime Program(s)" shall mean Programs which shall be limited to use solely for the purpose of executing an unmodified standard version of the Alliance Member's Application Program. Runtime Programs may not be use to build or modify reports or applications. "Full Use Programs" shall mean unaltered versions of the Programs with all functions intact. 1.3 Value-Added Package For the purposes of this Addendum, "Application Program(s)" shall mean the Alliance Member's value-added application software, described in the attached Application Package Attachment with which the Runtime Programs are to be coupled. "Application Package(s)" shall mean the Runtime Programs coupled with the Application Programs. For purposes of the Agreement, the Application Program shall be regraded as the Alliance member's Value-Added Package. 1.4 Trial Sublicenses The Alliance Member and its Distributors shall be entitled to grant, at no charge, up to a maximum combined total of ten (10) temporary Trial Sublicenses of the Application Package at any one time. Such Sublicenses shall be for evaluation purposes only and shall be for a period not to exceed thirty (30) days. The Alliance Member shall pay Oracle Sublicense fees for any Trial Sublicenses in excess of thirty (30) days. Each such Trial Sublicense shall be Sublicensed under a Sublicense agreement which provides for such trial use. 1.5 Distributors Oracle grants the Alliance Member the right to appoint third parties ("Distributors") to market and Sublicense the Runtime Programs in the Territory, under the terms of the Agreement and this Addendum. However, Distributors shall have no right to make copies of the Programs for Sublicensing and shall obtain all such Programs from the Alliance Member. Each Distributor shall execute a written agreement with the Alliance Member binding the Distributor to provisions substantially similar to those contained in Sections 2.3, 2.4, 2.5, 5.1, 5.2, 6.1, 6.3, 6.4, 6.5, 7.2.D, 7.5, 8.1, 8.2, 8.3, 8.5, 8.7, 8.9, 8.10, and 8.11 of the Agreement and to those contained in Sections 1 (except 1.5), 3, 4, 5, and 6 of this Addendum. Each obligation of the Alliance Member under such provisions shall also be applicable to each Distributor. Each Distributor agreement shall also contain any other provisions necessary for the Alliance Member to satisfy its commitments under the Agreement. The Alliance Member shall notify Oracle promptly in writing of the appointment of each such Distributor. In addition, the Alliance Member shall keep executed Distributor agreements and records of the Distributor information required under the Alliance Member's Sublicense reports, and shall allow Oracle to inspect such information as specified under the Agreement. The Alliance Member will defend and indemnify Oracle against all damages to Oracle caused by the Distributors' failure to include the [*] Confidential Treatment Requested. required contractual terms set forth in Section 2.3.B of the Agreement in each Sublicense agreement. The Alliance Member agrees to enforce the terms of its Distributor agreements required under this Section so as to effect a timely cure of any Distributor breach, and to notify Oracle of any known breach of such terms. 1.6 Documentation The Alliance Member shall be responsible for providing documentation for Sublicensees. The Alliance Member shall have the right to incorporate portions of the Documentation into the Alliance Member's documentation, subject to the provisions of Section 8.2 of the Agreement. 2. SUBLICENSE FEES 2.1 Sublicense Fees and Rate For each copy of the Programs Sublicensed by the Alliance Member or its Distributor in the Application package, the Alliance Member agrees to pay Oracle a Sublicense fee equal to [*] percent ([*]%) of the applicable license fee for each such Program, as specified in the applicable Price List and Alliance Member Price List supplement to such Price List in effect at the time the applicable Programs are Sublicensed. As further specified in Section 6 of this Addendum, Sublicense fees shall be due and payable within twenty (20) days of the last day of each month. The Alliance Member shall not be relieved of its obligation to pay Sublicense fees owed to Oracle by the nonpayment of such fees by the Sublicensee. On or after each anniversary during the Term of this Addendum, Oracle may amend the Sublicense fee percentage rate set forth above based on Oracle's then-current standard Sublicense fee percentage rate schedule and the actual amount of Sublicense fees received by Oracle hereunder. 2.2 Price List for Sublicenses Notwithstanding any other provision of the Agreement, the applicable Price List for determining Sublicense fees shall be the standard Price List in effect at the time the Application Package is Sublicensed. Notwithstanding any other provision of this Agreement, if the Alliance Member issues a written Sublicense quote and such quote is accepted by the applicable Sublicensee, for a period of ninety (90) days after the date of submission of the quote to the Sublicensee, the Sublicense fee applicable to the Programs identified in the quote shall be based on the Price List in effect on such date. 2.3 Users The Sublicense fees for a Program shall be based and priced on the applicable User Level for the maximum number of Users for such Program, as specified in the Price List. The Alliance Member shall have the right to Sublicense Programs on any User basis specified in the Price List in effect at the time the applicable Program is Sublicensed. TERM This Addendum shall become effective on the Effective Date of this Addendum and shall be valid for three (3) years (the "Term") from the Effective Date, unless terminated as provided in the Agreement. Any renewal of this Addendum shall be subject to renegotiation of terms and fees. Unless the expiration or termination is for default by the Alliance Member, the Alliance Member may continue using the release of the Programs then in the Alliance Member's possession on the Designated Systems for which Development Licenses were granted, solely for the purpose of continuing technical support for Sublicenses granted prior to termination. Such continued use of the Programs shall be subject to all the provisions of this Agreement, including, without limitation, payment of the Technical Support Fees specified herein. 4. TERRITORY The Alliance Member shall have the right to market and grant Sublicenses of Programs in the United States only (the "Territory"). 5. TECHNICAL SUPPORT 5.1 Technical Support for Sublicensees A. Installation The Alliance Member or its Distributors will be responsible for any assistance needed to install the Application Package at Sublicensee sites. B. Sublicensing Support The Alliance Member is responsible for providing all technical support, training and consultations to its Sublicensees and Distributors. In consideration of the payments specified in Section 5.2, the Alliance Member shall have the right to use the Oracle Technical Support services acquired for its Supported Development Licenses to provide technical support services to its Sublicensees as further set forth in the Agreement. The Alliance Member shall continuously maintain Oracle Technical Support services for the Development Licenses during the period during which the Alliance Member provides technical support services to any Sublicensees. Any questions from the Alliance Member's Alliance Member's Sublicensees or Distributors will be referred by Oracle to the Alliance Member. 5.2 Technical Support Fees For Technical Support services for Sublicensees, each year the Alliance Member agrees to pay Oracle annual Technical Support Fees for each Runtime Program Sublicensed under this Addendum, a previous Alliance Member Addendum, or previous distribution agreement between the parties hereto where the Sublicensee received technical support services for such Runtime Program during the applicable support period from the Alliance Member. Annual Technical Support Fees for a Program shall be equal to the applicable Technical Support Percentage Rate specified below, corresponding to the highest Technical Support Services level specified below for any Development License used under this Addendum, of the cumulative Sublicense fees accrued to Oracle for a Sublicensed Program supported by the Alliance Member. Technical Support Technical Support Services Level Percentage Rate -------------- --------------- Bronze [*]% [*] Confidential Treatment Requested. 2 Silver [*]% Gold [*]% Upon December 31 of each year, the Alliance Member shall provide Oracle a report setting forth all of the Alliance Members' Sublicenses and those Sublicensed Programs which were supported by the Alliance Member during the calendar year. The report shall also include the applicable Technical Support Fees due and payable to Oracle for such calendar year. The Alliance Member shall provide Oracle with payment of all Technical Support Fees for such calendar year required under the applicable December 31 report with such report in the form of a check made out in the amount of such fees. All Technical Support Fees paid to Oracle are noncancelable and nonrefundable. On or after each anniversary during the Term of this Addendum, Oracle may amend the Technical Support Percentage Rates set forth above based on Oracle's then-current standard Technical Support percentage rate schedule. 6. SUBLICENSE REPORTS Within twenty (20) days of the last day of each and every month, the Alliance Member shall send Oracle a report detailing for that month: A. For each Sublicensed Application Package shipped during the prior month, Sublicensee name, address, make/model and operating system of the Designated System, date of shipment, Runtime Programs shipped, maximum number of licensed Users, whether the Sublicense is a Trial Sublicense, and total Sublicense fees and Technical Support Fees due to Oracle; B. For each Application Program licensed to end-users to be used with previously installed software licensed by Oracle in conjunction with the Application Program, Sublicensee name, address, make/model and operating system of the computer, and date of installation; and C. The Distributor agreements executed during the prior month, including names and addresses of the Distributors. The Alliance Member shall require its Distributors to report this information to the Alliance Member on a monthly basis and will include it in the report for the month in which the Alliance Member received the information. The Alliance Member shall provide Oracle with payment of all fees required under the monthly report with such report in the form of a check made out in the amount of such fees. 7. ADDITIONAL LICENSES During the Term, the Alliance Member may order production release versions of Oracle off-the-shelf Programs available as production release as of the Effective Date of this Addendum and listed on the Price List in effect as of such date. The license fee for Development Licenses shall be equal to Oracle's standard list license fees in effect when an order is placed. The Alliance Member shall have the right to order Programs for use as Marketing Support Licenses at no further charge to the Alliance Member. The Alliance Member may obtain Technical Support services from Oracle for such Programs under Oracle's applicable Technical Support fees and policies in effect when such services are ordered. The Effective Date of this Addendum shall be April 1, 1998. Executed by the Alliance Member: Executed by Oracle Corporation: Medicalogic, Inc. Authorized Signature: GUY E. FIELD Authorized Signature: RACHEL ROLLINS ------------ -------------- Name: Guy E. Field Name: Rachel E. Rollins ---------------------------- ------------------------------ Title: Controller Title: Contract Specialist --------------------------- ----------------------------- ORACLE Oracle Corporation 500 Oracle Parkway Redwood Shores, CA 94065 (415) 506-7000 Oracle is a registered trademark of Oracle Corporation. 7-97 [*] Confidential Treatment Requested. 3 APPLICATION PACKAGE ATTACHMENT Name of Application Program and Application Package which the Alliance Member will be Sublicensing under the Agreement (may not contain the trademarks "Oracle" or "Ora" or any portion thereof): Logician Description of Application Package: Logician is an Electronic Medical Records program which runs under Microsoft Windows. It supports the entry and retrieval of patient medical information within a single medical clinic or across separate clinics within a healthcare organization. Modules: Registration -- supports the entry of patient demographic information. Chart -- supports the entry and retrieval of patient medical records. Desktop -- supports the workflow tasks of a clinic's staff. Scheduling -- supports the scheduling of patient appointments. Inquiry/Reports -- supports general queries and reports across a set of patient records. LinkLogic -- used for the import and export of data through Electronic ** see Modules continued below Functions and Objectives Functions and Objectives: Logician supports all the clinical data and workflow needs of a medical clinic. ** Modules continued: Data Interfaces (EDI). ClinicLink -- permits Logician databases at separate clinics to be accessed as a single logical, organization-wide database of patient and configuration information. Setup -- used to configure Logician's features. Various knowledgebases -- datasets and associated rules to aid in the delivery of healthcare. For example, ConsultLogic is a knowledgebase module which aids in determining what medical tests need to be performed in a given situation. [*] Confidential Treatment Requested. AMENDMENT ONE to the RUNTIME SUBLICENSE ADDENDUM to the ORACLE ALLIANCE AGREEMENT between MEDICALOGIC INC and ORACLE CORPORATION This document ("Amendment One") shall serve to amend the Runtime Sublicense Addendum dated April 1, 1998 (the "Addendum") to the Oracle Alliance Agreement between Medicalogic Inc. (the "Alliance Member") and Oracle Corporation ("Oracle") dated April 1, 1998 (the "Agreement"). The parties agree to amend the Addendum as follows: 1. In the first sentence of Section 1.4, delete the words "ten (10)" and replace them with the words "one hundred (100)." 2. Notwithstanding any provision to the contrary in Section 2.1 of the Addendum, for each copy of the Oracle Server Program Sublicensed by the Alliance or its Distributor as part of the Logician Application Package, the Alliance Member agrees to pay Oracle the applicable Sublicense fee, stated in the table below, of the applicable license fee for each such Program, as specified in the applicable Price List in effect at the time the applicable Programs are Sublicensed. Program Rate ------- ---- Oracle Server [*]% Oracle Server-Enterprise Edition, NT platform [*]% Oracle Server-Enterprise Edition, Unix platform [*]% 3. In addition to the Sublicense rights granted under the Addendum and notwithstanding any other provision of the Agreement and the Addendum, the parties agree to grant the below Sublicensees the one time right to transfer the Sublicensed Programs to another Designated System on which such Sublicensed Programs are available in production release as of the Effective Date of the Amendment. Such transfer shall be at no additional charge provided: (i) the Sublicensee has maintained Oracle Technical Support services for the Sublicensed Programs from the Effective Date of the Order Form; and (ii) the Sublicensee maintains the same user level on the new Designated System. All transfers of the Sublicensed Programs shall take place prior to [*] Confidential Treatment Requested. December 31, 1999 and all subsequent transfer after such date shall be subject to Oracle's transfer fees and policies in effect at the time of transfer. Sublicensees Alligns - Minneapolis, MN North Memorial - Minneapolis, MN Providence Health Systems - Portland, OR Riverside Physicians Services - Norfolk, VA New York University - NY, NY Sentara - Richmond, VA Arizona Medical Clinic - Phoenix, AZ Wakeforest University - Wakeforest, NC Merrit Care - Fargo, ND Memorial - Houston, TX 4. In Section 2.1, delete the word "month" and insert the word "Quarter" and delete the word "monthly" and insert the word "Quarterly" in each instance in which such words occur. 5. Delete the first sentence of Section 3 and insert the following: "This Addendum shall become effective on the Effective Date of this Addendum and shall be valid till December 31, 1999, unless terminated as provided in the Agreement." 6. In Section 5, delete the word "month" and insert the word "Quarter" and delete the word "monthly" and insert the word "Quarterly" in each instance in which such words occur. 7. Delete the first sentence of Section 6 and insert the following: "Within thirty (30) days of the last day of each quarterly period ending in the months of January, April, July and October (each such period, a "Quarter"), the Alliance Member shall send to Oracle a report detailing for that Quarter." 8. In Section 6, delete the word "month" and insert the word "Quarter" and delete the word "monthly" and insert the word "Quarterly" in each instance in which such words occur. 9. During the Term of the Addendum, if Oracle changes the CPU requirements for Sublicensing of Oracle Server as listed in the applicable Alliance Price List, the Alliance Member shall have the right to Sublicense the Oracle Server Program at its current rate of [*] percent ([*]%) of Net license fees, as stated in Section 2.1 of the Addendum. [*] Confidential Treatment Requested. 1 Other than the modifications set forth above, the terms and conditions of the Agreement shall remain unchanged and in full force and effect. The Effective Date of this Amendment One is April 1, 1998. MEDICALOGIC INC. ORACLE CORPORATION By: GUY E. FIELD By: NICK MARQUIS ------------------------------ ----------------------------------- Name: Guy E. Field Name: Nick Marquis ---------------------------- --------------------------------- Title: Controller Title: Manager, Alliances Sales Support --------------------------- -------------------------------- [*] Confidential Treatment Requested. 1 MedicaLogic(R) and Logician(R) are registered trademarks and LinkLogic(TM) is a trademark of MedicaLogic, Inc. Copyright (C) 1999 MedicaLogic, Inc. All Rights Reserved. This Manual has been created by MedicaLogic, Inc. ("MedicaLogic") for use with the Software and/or Databases ("Software") described in this Manual. The Software and Databases are subject to the terms of the Customer License Agreement accompanying the Software and may be used or copied only in accordance with the Customer License Agreement. Federal law prohibits the copying of the Software or the Manual except as specifically allowed in the Customer License Agreement. No part of the Software or this Manual may be reproduced or transmitted in any form or by any means, electronic or mechanical, except as provided in the Customer License Agreement or with the express written permission of MedicaLogic, Inc. Oracle(R) is a registered trademark and Oracle7(TM) is a trademark of the Oracle Corporation. Copyright (C) 1994 Oracle Corporation. All Rights Reserved. ORACLE RESTRICTED RIGHTS LEGEND: Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Department of Defense Regulations Supplement ("DFARS") 252.227-7013. Rights in Technical Data and Computer Software (October 1988) and Federal Acquisition Regulation ("FAR") 52.227-14, Rights in Data-General, including Alternate III (June 1987), as applicable. Oracle Corporation, 500 Oracle Parkway, Redwood City, CA 94065. Microsoft, Windows, and Windows NT are registered trademarks of Microsoft Corporation. Copyright (C) 1994 Microsoft Corporation. All Rights Reserved. Portions of this software were designed and developed for MedicaLogic by Indius, Inc. C++ framework libraries (C) 1993-1995 Indius, Inc. All Rights Reserved. Norton pcANYWHERE(TM) is a trademark and Symantec(R) is a registered trademark of Symantec Corporation. Copyright (C) 1994 Symantec Corporation. All Rights Reserved. Women's Health Advisor(TM), Adult Health Advisor(TM), Arthritis Health Advisor(TM), Pediatric Advisor(TM), Spanish/English Pediatric Advisor(TM), Behavioral Health Advisor(TM), and Senior Health Advisor(TM) are trademarks of Clinical Reference Systems, Ltd. Copyright (C) 1995 Clinical Reference Systems, Ltd. All Rights Reserved. CPT-4 and ICD-9 Databases included with this software are licensed from Context Software Systems, Inc. Copyright (C) 1994 Context Software Systems, Inc. All Rights Reserved. This software incorporates SNOMED International--The Systematized Nomenclature of Human and Veterinary Medicine, used by permission of the College of American Pathologists. Copyright (C) 1995 College of American Pathologists. All Rights Reserved. The Medication Reference databases included with this software are licensed from MediSpan, Inc. Copyright (C) 1995 Medi-Span, Inc. All Rights Reserved. Portions of this software are copyright (C) 1994 by VISUALTOOLS, INC. All Rights Reserved. These are supplied for run-time use only, and are subject to the terms of the VISUALTOOLS, INC. License Agreement. Portions of this software are copyright (C) 1991-1994 by Arthur D. Applegate. Portions of this software are owned by Software Fx, Inc. and are protected by United States copyright laws and international treaty provisions. They are supplied for run-time use only and may not be used for development purposes. Portions of the imaging technology of this product are copyright (C) AccuSoft Corporation. Referral Guidelines text included with Logician is licensed from Dr. Paul Ladenson. Copyright (C) 1995-1997 Dr. Paul Ladenson. All Rights Reserved. Printed in the United States of America [*] Confidential Treatment Requested. EX-10.12 16 EMPLOYMENT AGREEMENT - MARK LEAVITT MEDICALOGIC, INC. EMPLOYMENT AGREEMENT PARTIES The parties to this Agreement are MEDICALOGIC, INC. An Oregon corporation (Corporation) and MARK LEAVITT (Employee). DECLARATIONS Corporation was organized for the purpose of developing computer products for the medical industry and any other lawful activity for which corporations may be organized under the Oregon Business Corporations Act. TERMS The parties agree: 1. Employment. (a) Corporation shall hire Employee, and Employee shall work for Corporation as employee. (b) The employment period shall continue until it is ended. The employment period may be ended only by dissolution of the corporation, the death or retirement of Employee, or by one party with or without cause mailing to the other party a written notice causing termination which states the employment ending date, except that in the cause of such written notice the ending date cannot be earlier than sixty (60) days after the date the notice was mailed. (c) Employee shall work exclusively for Corporation, except that Employee may engage in any non-related work outside of its employ with Corporation. The exception stated in the 1 preceeding sentence shall not apply to the extent any non-related work conflicts or interferes with the services required of employee by Corporation; and the exception stated in the preceeding sentence shall not apply if the time required by such non-related work exceeds in any calendar quarter the time required of Employee by Corporation in such calendar quarter. If Employee exceeds either of the limitations stated in the preceeding sentence, Corporation may, notwithstanding Section (b), end the employment period of Employee immediately. 2. Compensation. Corporation shall pay to Employees such amounts as are agreed upon by Employees and the board of directors of Corporation. 3. Supervision Corporation shall direct and supervise the work of Employee; Employee shall at all times conform to the working rules and standards imposed by Corporation. 4. Schedule Employee shall conform to the working schedule required by the demands of Corporation's business, except that at no time shall Employee by compelled to more than 12 hours per day or more than 72 hours per week, or more than 265 hours per month - unless, in such case Employee consents to the additional service time and is paid additional compensation accordingly. 2 5. Competition Except as provided in subsection 1(c), Employee shall at no time during the employment period engage in any endeavor whether for profit or not, which competes with the business of the Corporation. 6. Benefits Corporation shall provide Employee with insurance and medical fringe benefits that are in accord with benefits available to other employees in Oregon. 7. Miscellaneous (a) This written agreement is the entire contract between the parties and may be modified only by a write signed by all parties. (b) This Agreement shall be binding on the parties according to its terms and shall likewise be binding on their guardians, conservators, heirs, successors and assigns. (c) If legal fees or costs are incurred by any party in enforcing this Agreement, then the non-prevailing party shall be liable for and shall pay the same in full. DATED this 1st day of August, 1985. MARK LEAVITT ----------------------------------------- MARK LEAVITT Employee MEDICALOGIC, INC. MARK LEAVITT ----------------------------------------- MARK LEAVITT President Secretary/Treasurer/Director 3 EX-21.1 17 SUBSIDIARIES Exhibit 21.1 MEDICALOGIC, INC. SUBSIDIARIES Jurisdiction of Name Incorporation - ---- --------------- MedicaLogic of Texas, Inc. Delaware MedicaLogic SA Switzerland EX-23.1 18 CONSENT OF INDEDENDENT ACCOUNTANTS Consent of Independent Accountants The Board of Directors MedicaLogic Corporation: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the Prospectus. KPMG LLP Portland, Oregon September 14, 1999 EX-27.1 19 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR 6-MOS DEC-31-1997 DEC-31-1998 DEC-31-1999 JAN-01-1997 JAN-01-1998 JAN-01-1999 DEC-31-1997 DEC-31-1998 JUN-30-1999 4,924 4,718 9,922 7,116 7,030 31,277 8,515 11,444 7,733 (852) (1,360) (1,514) 0 0 0 19,966 22,377 48,797 4,726 5,832 10,690 (2,757) (4,028) (4,071) 22,072 24,308 59,203 5,096 6,286 10,373 0 0 0 42,593 49,387 83,687 0 0 0 3,202 5,139 14,211 (29,097) (37,183) (50,052) 22,072 24,308 59,203 7,617 10,410 5,787 12,807 16,160 8,975 7,756 6,754 3,418 7,756 6,754 3,418 15,451 16,639 14,293 829 756 437 240 187 93 (10,670) (7,035) (7,993) 0 0 0 (10,670) (7,035) (7,993) 0 0 0 0 0 0 0 0 0 (10,670) (7,035) (7,993) (0.80) (0.51) (.47) (0.80) (0.51) (.47)
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