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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(b) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended DECEMBER 31, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(b) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-28170
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OACIS HEALTHCARE HOLDINGS CORP.
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(Name of small business issuer in its charter)
DELAWARE 04-3229774
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification Number)
100 DRAKE'S LANDING ROAD, SUITE 100, GREENBRAE, CA 94904
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Address of principal executive offices) (Zip Code)
Issuer's Telephone Number (415) 925-0121
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to
Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE
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Check whether the issuer (1) filed all reports required to be filled
by Section 13 or 15(b) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such report(s),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ]
The Registrant's revenues for its fiscal year ended December 31, 1996
were $20.4 million.
The aggregate value of voting stock held by non-affiliates of the
Registrant was approximately $24,000,000 as of March 21, 1997, based upon
the closing sale price of the Registrant's Common Stock reported for such date
on the Nasdaq National Market. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 21, 1997, the Registrant had outstanding 10,066,796 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by
reference to the Proxy Statement for the Registrant's 1996 annual meeting of
stockholders to be filed with the Securities and exchange Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes ; No X
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OACIS HEALTHCARE HOLDINGS CORP.
TABLE OF CONTENTS
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PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . 12
Item 6. Management's Discussion and Analysis or Plan of Operations . . . . . . . . . . . . . . . . . 13
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 11. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . 43
Item 12. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . . . . . 43
Item 13. Exhibits and Reports on Form 8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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This report on Form 10-KSB including the discussions in Part I Item 1
"DESCRIPTION OF BUSINESS", and Part II Item 6 "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATIONS" contains certain forward-looking statements
which involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The Company's actual results
could differ materially from the results anticipated in these forward-looking
statements as a result of a variety of factors, including those set forth in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Oacis Healthcare Holdings Corp., through its wholly owned subsidiary, Oacis
Healthcare Systems, Inc. (together, the "Company") develops, markets, licenses,
installs and supports flexible, open architecture clinical information systems
("Oacis" or the "System"). Oacis is an "electronic medical record" that
collects and transmits clinical, financial and demographic data from multiple
information systems within a large hospital or integrated healthcare delivery
system ("IDS"), integrates data from these systems into a patient-centered
clinical data repository and provides applications with graphical user
interfaces which enable physicians, nurses and other clinicians to view,
manipulate and act on the information in real time at the point of care.
Oacis is:
o Designed on a flexible, open architecture that is designed to work with
existing departmental and legacy systems enabling institutional providers
of care to preserve their investments in information systems rather than
purchase entirely new systems.
o Based on a client server model and is designed to be scaleable from a few
users to several thousand users in multiple provider locations.
o Designed to provide information to clinicians in a more efficient manner
than paper based records.
o Designed to integrate efficiently with clinician practice routines by
providing care management information in user-defined formats to improve
clinical efficiency and medical outcomes.
The Company's products are in use by major medical centers, large hospitals and
IDS's in the United States, Canada, Europe and Australia.
Oacis Healthcare Systems, Inc. was founded as a California Corporation in 1984
under the name Simborg Systems, Inc. In 1990, Bell Atlantic Systems Group,
Inc. purchased all of the outstanding stock of Simborg Systems and renamed the
company Bell Atlantic Healthcare Systems, Inc. In April 1994, Oacis Healthcare
Holdings Corp. was formed as a Delaware corporation and in May 1994 Oacis
Healthcare Holdings Corp. purchased all of the outstanding stock of Bell
Atlantic Healthcare Systems, Inc. (the "Acquisition") and renamed the company
Oacis Healthcare Systems, Inc.
The Company's executive offices are located at 100 Drakes Landing Road, Suite
100, Greenbrae, California, 94904. Its telephone number is (415) 925-0121.
PRODUCTS
Existing Products
Oacis. The Oacis clinical information system incorporates both
software and hardware systems that collect clinical, financial and demographic
data from departmental information systems within a hospital or IDS, and
integrates that data into a patient-centered clinical data repository. This
repository typically contains a wide variety of data gathered from existing
departmental information systems, such as registration, scheduling, laboratory,
radiology, pharmacy and accounting systems, as well as information entered by
clinicians at the point of
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care. Oacis provides access to this information through applications with
graphical user interfaces that enable physicians, nurses and other clinicians to
input, view and act on the data on a real-time basis.
The Oacis system is comprised of two elements: the Oacis Healthcare
Network, which supports the connectivity (integration) and storage (data
repository) function of the system, and Oacis Clinical Care applications, which
facilitate the input and delivery of clinical information at the point of care.
The Oacis Healthcare Network and Oacis Clinical Care applications are typically
integrated and licensed as a system although they each contain a number of
modules. Customers may license all or some combination of the modules. For
the years ended December 31, 1996, 1995 and 1994, substantially all of the
Company's revenues were generated through licensing, installing and supporting
the Oacis system.
The Oacis Healthcare Network modules which are commercially available
include:
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Oacis Data Repository The Oacis Data Repository ("ODR") is
a relational database designed to
store and manage a full range of
clinical, financial, and demographic
data. The ODR organizes its data by
patient rather than by encounter and
therefore is designed to provide the
basis for building longitudinal,
patient-centered electronic medical
records across the continuum of care.
The ODR data schema, called the
"Service Model," provides Oacis with
the flexibility and scalability
required to meet the changing
information requirements of hospitals
and IDSs. The ODR can be configured
and maintained using the Oacis System
Assistant, a database extension and
management tool that configures the
ODR and generates software code that
operates on the database.
Gateway++ Gateway++ is an open architecture
integration engine that is designed
to enable the exchange of data among
the many different information
systems within a hospital or IDS,
such as registration, scheduling,
laboratory, radiology, pharmacy and
accounting systems. Gateway++
accepts, translates, reformats and
routes data between various
information systems located
throughout a hospital or IDS while at
the same time updating the ODR using
the Company's proprietary Data Base
Loader technology. Gateway++
performance, feeder system status and
transaction flows are monitored using
the Gateway Monitor application.
Enterprise Member/ The Enterprise Member/Patient Index
Patient Index ("EMPI") is designed to manage and
reconcile duplicate medical records
coming from disparate information
systems that use different patient
identifiers. EMPI is designed to
support those healthcare
organizations which have multiple and
changing sources of patient
identification and registrations and
other situations where the same
population is served by more than one
care provider. EMPI is designed to
detect multiple patient identifiers
across an enterprise for the same
patient or member, assigns a single
patient identifier for such patient
or member and merges patient data
from multiple sources into one
comprehensive record in the clinical
database. EMPI is based on licensed
technology.
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The Oacis Clinical Care applications which are commercially available
include:
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Clinical Display Clinical Display integrates all
elements of the ODR into a highly
summarized patient roster form with
"drill-down" capabilities to access
more detailed information. This
patient roster format allows
clinicians to prioritize work upon
sign-on to the system, highlights
user-defined critical data and
contains time indicators for the age
of data and a viewed/not viewed
status. Graphs and lists can be
customized to match each clinical
user's method of practicing medicine.
Clinical Display also provides
clinical users with schedules that
contain clinical interventions to be
performed for each patient. The
schedules can be configured by
disease, provider or location so the
clinical user can more effectively
manage specific patient populations
over a period of time.
Clinical Documentation
- Clinical Data Entry Clinical Data Entry, the first in a
series of applications addressing
Clinical Documentation, enables a
clinical user to enter clinical
data, such as notes, results, vital
signs, functional status, and
outcomes directly into the ODR.
Clinical Documentation is designed
for keyboard, mouse or pen-based
input.
Order Entry Order Entry enables a clinical user
to order or schedule medical services
provided in a hospital or IDS,
including clinical laboratory tests,
diagnostic tests, prescriptions and
medical procedures. Order Entry can
be customized to reflect individual
user or institutional protocols of
care. This application is intended
to be superseded by Oacis Order
Management, an Oacis application
currently in beta release.
Workstation Tools OaBuilder enables customers to
configure workstations for use with
the Oacis System. Other tools
include Workstation Security System,
On-Line Help, Site Defined Reporting
and Softcopy, an on-line
documentation program. The Form
Wizard, another Oacis application
tool, was phased out as a product
offering during 1996.
StatLAN. The initial version of the Company's open architecture clinical
information system, StatLAN was introduced in 1986. StatLAN collects
and presents, but does not store, medical record information from existing
legacy and departmental systems. StatLAN incorporates a minicomputer-based
interface engine along with the software required to retrieve data on a
network of PC-based workstations. The Company is no longer marketing StatLAN,
but is continuing to support and may continue to enhance StatLAN.
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Products in Beta Release
The Company has developed and is currently in the process of
installing the beta version of the following new Oacis Clinical Care
Applications:
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Oacis Order Management
(formerly named Enhanced
Order Entry) Oacis Order Management is designed to
provide capability for the clinician
to request services or place clinical
orders as clinical decisions are
being made. This application is
designed using a "trees and tabs"
interaction model which provides for
improved user navigation and is
designed to be highly intuitive,
thereby requiring minimal physician
training and use of the keyboard.
The application includes an order
communication function that is
tightly integrated with the Clinical
Display application allowing the
physician to place an order while
reviewing clinical results and
eliminates the need to learn multiple
systems.
Oacis Census Management Oacis Census Management is designed
to provide capability for the
clinician to perform patient
admission, discharge and transfer
("ADT") functions directly into the
Oacis Data Repository with no
interruptions to workflow or
dependent external systems. This
application interacts with the
customer's legacy ADT system through
the Oacis Gateway ++.
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Product Development
The Company is currently developing the following new modules for the
Oacis Healthcare Network and new Oacis Clinical Care applications:
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Oacis Passport The Company is currently completing
the development of its Internet based
application - Passport. Passport is
designed to enable clinicians to
explore the electronic medical record
from remote locations including over
the Internet. Passport is designed
to provide access to the Oacis Data
Repository from multiple personal
computing hardware platforms using
the Oacis Application Server and
standard browser technology thereby
reducing the need to replace existing
desktop or laptop technology.
Passport is based on many of the
design principals found in Oacis
Clinical Display and enables patient
data to be configured and viewed
according to each clinicians practice
patterns.
Oacis II Architecture The Company is currently modifying
its technology architecture to
take greater advantage of available
industry standards including the use
of Corba distributed obects and to
utilize a three-tier or multi-tier
technology. The re-architecture to
Oacis II is designed to internet-
enable Oacis applications developed
for this new architecture, enhance
system scaleability and performance
in larger installations, and
facilitate expanding the systems
functionality through partnering with
other vendors.
Enhancements to Oacis
Order Manangement The Company is currently working with
another healthcare information
systems vendor to incorporate their
pharmacy vocabulary management
application and Drug Toolkit
application into the Oacis Order
Management product. This application
is being designed to provide
medication ordering capability at the
point of care. A further extension
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of this relationship and product
enhancement is expected to be the
addition of an "expert patient
dosing" application which takes
advantage of the vendor's knowledge
server (rules engine and database) to
assist caregivers as they construct
patient specific dosages of
medications.
Enhancement to EMPI The Company is currently develping
an enhancement to EMPI that
incorporates both a 32 bit
architecture and enhanced user
interaction model to the workstation
and adds an unmerge capability to the
EMPI and Oacis Data Repository
products.
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Other Oacis Clinical Care applications that are in various stages of
design and are planned for future development by the Company include the
following enhancements to the Clinical Documentation and Order Management
applications: Problem Management, Vocabulary Management, Clinical Design Support
and Protocols, Care Guidelines and Patient Care Planning applications.
Additionally, the Company is in the process of designing a distributed
architecture model for the Oacis Data Repository.
SERVICES
The Company provides installation and support services to its
customers. An Oacis installation typically requires approximately nine to 18
months and involves tasks which usually are performed by a complement of
personnel from the Company's installation organization and the customer's
internal information services department, sometimes with assistance from outside
consulting companies. Typical installation services include project planning,
hardware integration, interface development and testing, database specification
and configuration, workflow engineering, screen design and configuration,
integration testing and tuning, and training customer personnel in system
operation, maintenance and use. To improve the efficiency of the installation
process and to reduce installation times, the Company and its customers have
developed a set of predefined display and data entry screens that provide
templates for customizing the system for the customer's specific needs.
The Company also provides telephone and other support services to its
customers 24 hours a day, seven days a week, after installation is complete, as
well as other services such as customization services, technical and user
training programs, network analysis and troubleshooting.
CUSTOMERS
The Company's customers include hospitals, major medical centers and
IDSs throughout the United States, Canada, Europe and Australia.
The Company licenses its Oacis and StatLAN systems and provides
installation, training and support services to customers pursuant to the terms
of a software license and support agreement. Under the software license and
support agreements, the Company generally grants to the customer a
non-exclusive and non-transferable right to use the system for data processing
and related operations, and data storage, retrieval and manipulation, all in
connection with providing health care services. In addition, the Company
provides installation and training services pursuant to a workplan mutually
created by the Company and the customer, and maintenance and support services
which typically are provided on a renewable annual basis. In exchange, the
customer is obligated to pay to the Company a fixed software license fee
(payable in increments depending on the achievement of certain installation
milestones), installation and training fees, and fixed maintenance and support
fees. The term of the software license is perpetual, although either party can
generally terminate the license upon the material default, bankruptcy or
insolvency of the other. The Company typically indemnifies its customers
against all costs, damages and losses it may suffer based on a claim that the
system infringes a third party's trade secret, U.S. patent or U.S. copyright,
and each customer typically indemnifies the Company against all costs, damages
and losses incurred by the Company in connection with any claim arising out of
or resulting from the use or operation of the system by the customer, including
claims based on any theory of product liability. In addition, the Company
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typically warrants that its system will meet certain performance criteria,
including criteria concerning response time and system availability.
SALES AND MARKETING
The Company sells its systems in North America through 8 direct sales
personnel supported by a staff of 3 clinical sales specialists and 4 client
services account executives who conduct in-depth system presentations and
demonstrations, and 5 sales support personnel who prepare sales proposals.
Additionally, the Company has entered into a marketing agreement with VHA,
Inc. to market certain of the Company's products to its membership of
approximately 1400 healthcare organizations in the United States. The
sales cycle for health care information systems is typically 12 to 18 months
from initial contact to contract execution and can be lengthened by a number of
factors, including merger and acquisition activity and general consolidation of
healthcare organizations.
Outside of North America, the Company's products are sold through
distribution arrangements which typically require minimal sales support from
the Company. The Company currently has formal distribution and marketing
relationships in Australia, New Zealand, and Norway.
The Company's marketing organization is responsible for product
management including the development of new product specifications, oversight
of the products development progress, product marketing, positioning and
pricing strategies and product introduction including support in the
development of sales strategy. In addition, the marketing organization is
responsible for corporate marketing and advertising and customer interaction
through coordination of both a customer operated User Group and a selected
customer Quality Council.
TECHNOLOGY
General Architecture. The Oacis system is based on a client-server
model utilizing object-oriented programming. This model enables Oacis to
distribute information processing across multiple computers and scale server
and client hardware in increments to accommodate expansion and contraction in
utilization. Servers perform all data management functions for the Oacis
system and client workstations support the user interface for all application
functions. Application logic is distributed across both servers and
workstations. This architecture is designed to provide remote access to
clinical information through various technologies, including LANs, WANs, phone
lines, and the Internet.
Hardware Platform. The Oacis Healthcare Network operates on Sun
Microsystems and Hewlett-Packard servers designed for high volume, on-line
transaction processing. The Company believes that it can port the Oacis
Healthcare Network to other hardware platforms and intends to do so
commensurate with market demand. The Oacis Clinical Care applications operate
on Intel-based 486 and Pentium class PC workstations.
Software Architecture. The Company uses industry standard software
whenever possible to minimize development and maintenance costs. The Oacis
Healthcare Network operates on a UNIX operating system. The ODR is built on
Sybase Structured Query Language ("SQL") Server relational database management
software. Sybase's SQL server provides the throughput and functional
characteristics necessary to deliver large scale, high performance database
management. The PC workstation operating system is Microsoft Windows. All
major Oacis software components are written in C++, the workstation user
interface is written in Visual Basic and C++, the database is accessed with
SQL, and application logic is created with a combination of Sybase stored
procedures, C++ and Visual Basic. All software components are assembled in a
layered architecture to facilitate the replacement of layers, such as the
relational database, as new technology becomes available and as market demand
dictates.
The Company's systems also incorporate a number of third-party
computer software products. In particular, both the Gateway++ and Oacis Data
Repository components of Oacis incorporate a Sybase relational database. In
addition, Oacis includes a number of embedded software products licensed from
third parties.
RESEARCH AND DEVELOPMENT
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The Company's research and development efforts focus on (i) extending
the functionality of Oacis through the development or integration of new
applications, extensions to existing applications and integration of
third-party technologies, (ii) ongoing efforts to enhance system performance
and reliability as the number of users, interfaces and databases grows, (iii)
extending the Oacis Healthcare Network architecture to give Oacis more
flexibility and the ability to service increasingly large IDSs and (iv) staying
current with advancing technologies.
As of December 31, 1996, the Company had 57 employees engaged in
research and development activities. For the years ended December 31, 1996,
1995, and 1994, the Company's research and development expenditures before
capitalization of development costs were approximately $6.9 million, $6.4
million and $7.3 million, respectively. The Company capitalized $506,000 and
$275,000 of research and development expenses associated with the development
of certain components of Oacis after technological feasibility had been
established in 1996 and 1995, respectively. The Company did not capitalize
software development costs in 1994. The Company anticipates capitalizing
additional software development costs in the future.
COMPETITION
The Company believes that the principal competitive factors for
selecting a clinical information system are the system's ability to operate
with and preserve existing departmental and legacy systems, ease of
installation, clinical focus, reliability, ease of use, functionality and price
as well as the reputation, breadth of product offerings, size and financial
stability of the system vendor.
Competition in the market for clinical information systems and
services is intense and is expected to increase. The Company's competitors
include other providers of health care information systems and services, and
health care consulting firms. The Company's principal competitors include 3M
Health Information Systems, Cerner Corporation, Epic Systems Corporation, HBO &
Company, HealthVISION, Inc. and Shared Medical Systems Corporation.
Furthermore, other major health care information companies not presently
offering clinical information systems may enter the Company's markets. Many of
the Company's competitors and potential competitors have significantly greater
financial, technical, product development, marketing and other resources and
market recognition than the Company. Many of the Company's competitors also
currently have, or may develop or acquire, substantial installed customer bases
in the health care industry. As a result of these factors, the Company's
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company.
PROPRIETARY RIGHTS
The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and other contractual provisions to protect its
proprietary rights. The Company has not filed any patent applications covering
its technology or registered any of its copyrights with state or federal
agencies. There can be no assurance that measures taken by the Company to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop systems and services that are
substantially equivalent or superior to those of the Company.
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA") is
responsible for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act. Computer products are subject to
regulation when they are used or are 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. The FDA could determine in the future that predictive applications
of the Company's systems and applications make them clinical decision tools
subject to FDA regulation. Medical devices are subject to regulation by the
FDA, which requires, among other things, premarket notifications or approvals
and compliance with labeling, registration and listing requirements, good
manufacturing practices and records and reporting requirements. Compliance
with
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these regulations could be burdensome, time consuming and expensive. The
Company also could become subject to future legislation and regulations
concerning the manufacture and marketing of medical devices and health care
software systems. These could increase the cost and time necessary to market
new products and could affect the Company in other respects not presently
foreseeable. The Company cannot predict the effect of possible future
legislation and regulation.
The confidentiality of patient records and the circumstances under
which such records may be released for inclusion in the Company's databases is
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and use of confidential patient medical
record information. Although compliance with these laws and regulations is
principally the responsibility of the hospital, physician or other health care
provider with access to the Company's information system, 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 such
information to implement security measures that may be of substantial cost to
the Company. There can be no assurance that changes to state or federal laws
will not materially restrict the ability of health care providers to submit
information from patient records to the Company's systems.
EMPLOYEES
As of December 31, 1996, the Company had 172 employees, including 57
in research and development, 60 in installation and support services, 35 in
sales and marketing and 20 in finance and administration. None of the
Company's employees is represented by a labor organization, and the Company is
not a party to any collective bargaining agreement. The Company has never had
any employee strike or work stoppages and considers its relations with its
employees to be good. The Company is reliant on highly skilled personnel in
all facets of its business. Particularly with respect to research and
development and installation personnel who typically have a mixture of computer
programming and clinical skills, the market for such highly skilled personnel
is extremely competitive and there can be no assurance that the Company will be
able to hire the personnel it requires to complete its product development
activities or install its products in accordance with its business plan either
of which could result in a material adverse affect on the Company's business,
financial condition and results of operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 33,946 square feet of office space in
Greenbrae, California for its corporate headquarters. The Company also leases
approximately 10,518 square feet of office space in Atlanta, Georgia for
installation and support services. These leases expire on February 28, 1998.
In March 1997, the Company entered into a lease for approximately 55,000 square
feet of office space located in San Rafael, California, where it plans to
relocate is corporate headquarters upon expiration of its existing lease. The
Company is not required to pay rent on this facility until April 1998 at which
time it plans to take occupancy of the new facility. The Company is currently
negotiating with its current landlord for the extension of its existing lease
in Greenbrae, California to accommodate its planned relocation in April 1998.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceeding involving the Company pending
at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "OCIS." As of March 21, 1997 there were approximately 78
holders of record of the Company's Common Stock. The Company has never paid
any cash dividends on its capital stock. The Company currently intends to
retain any future earnings to fund operations and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
The Company consummated its initial public offering on May 21, 1996.
The following table sets forth, for the periods indicated, the range of the low
and high sales prices for the Company's Common Stock as reported on the Nasdaq
National Market for the quarters ended since consummation of the initial public
offering.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1996:
Second Quarter . . . . . . . . 18 1/4 10 1/4
Third Quarter . . . . . . . . . 13 1/8 7 1/4
Fourth Quarter . . . . . . . . 12 1/2 6 1/2
</TABLE>
-12-
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain financial data for the Company
and Bell Atlantic Healthcare Systems, Inc., the predecessor to the Company (the
"Predecessor"). The results of operations for the Predecessor for the period
January 1, 1994 through May 13, 1994 and the Company for the period May 14,
1994 through December 31, 1994 have been determined based upon the historical
cost bases of the Predecessor and the Company, and have been combined to
facilitate presentation of the results of operations on a calendar year basis.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis or Plan of Operations" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Form 10-KSB. The
Company's historical operating results are not necessarily indicative of the
results for any future period.
<TABLE>
<CAPTION> Predecessor
and the
Company
The Company Combined
--------------------------- ----------
Year Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C>
Statement of Operations Data:
-----------------------------
(In thousands, except per share data)
Total revenue $20,444 $13,554 $9,301
Gross profit 10,063 4,434 1,422
Operating expenses 15,480 13,635 13,797
Loss from operations (5,417) (9,201) (12,375)
Interest income/(expense), net 844 (123) (337)
Net loss (4,573) (9,324) (12,712)
Pro forma net loss per share (0.48) (1.22) *
Weighted average number of common and
common equivalent shares 9,431,277 7,667,243
</TABLE>
<TABLE>
<CAPTION>
December 31,
Balance Sheet Data: -------------------------------------------
1996 1995 1994
-------------------
(In thousands) ------------------------------------------
<S> <C> <C> <C>
Cash and short term investments $23,141 $3,900 $201
Working capital 23,840 1,704 (493)
Total assets 32,712 11,878 7,383
Long term debt 669 3,000 4,735
</TABLE>
* Pro Forma Net loss per share for 1994 is not presented since such
amounts are not deemed meaningful due to the change in ownership
of Oacis on May 13, 1994.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
Background
The Company develops, markets, licenses, installs, and supports
clinical information systems primarily for major medical centers, hospitals and
integrated healthcare delivery systems. In 1986, the Company introduced
StatLAN, the initial version of the Company's clinical information system. In
1994, the Company introduced
-13-
<PAGE> 13
Oacis. Oacis is comprised of the Oacis Healthcare Network, which includes an
interface engine, a clinical data repository and an Enterprise Member/Patient
Index, and Clinical Care applications, which facilitate the input and delivery
of information at the point of care.
Substantially all of the Company's revenues are currently derived from
licenses of Oacis. The Company intends to focus its sales and marketing
efforts on Integrated Delivery Systems ("IDSs"), which are a relatively new
type of organization and which currently account for a small portion of the
overall market for clinical information systems. The formation of IDSs and a
general consolidation in the healthcare industry has a number of effects which
include the creation of larger healthcare networks with greater market
concentration. The Company believes that while such consolidation may result
in an increase in demand for open architecture clinical information systems
such as the Company provides, the near term effect of such consolidation
reduces the resources available for IDSs to invest in clinical information
systems until such time as the rate of consolidation slows. Accordingly, the
Company believes that the market for the Company's products may continue to
develop slowly in the near term and that sales cycles will continue to be long.
The Company's future success and financial performance depends in
large part upon the Company's ability to provide the increasing system
functionality required by its customers through the timely development and
successful introduction of new applications and enhancements to Oacis. The
Company has historically devoted significant resources to system enhancements
and research and development and believes that significant continuing
development efforts will be required to sustain the Company's operations.
Additionally, the Company's ability to develop, market, sell and install its
systems depends on the Company's ability to retain, recruit and hire highly
skilled personnel in a number of technical and clinical fields. The market for
this highly skilled workforce is extremely competitive.
Revenue Recognition
The Company's revenues consist of license fees for the perpetual use
of its software, installation revenues associated with installing and
configuring the software to meet specific customer needs, revenues from the
sale of third-party hardware and software, and ongoing support services. The
price of an Oacis system varies depending on a number of factors, including the
modules licensed and the volume of outpatient visits and inpatient days for the
customer organization, and generally ranges from more than six hundred
thousand dollars to a few million dollars. The Company resells third-party
hardware and software pursuant to standard reseller agreements.
Software license fee and installation services revenues from contracts
where Oacis is actively involved in the installation of the system, which are
primarily in the United States and Canada, are recognized on a percentage of
completion basis measured by the ratio of (i) labor hours incurred to install
and configure the system to (ii) total estimated labor hours. The Company
generally bills its installation services as the services are provided.
Software license fees are generally billed in accordance with installation
milestones. Accordingly, revenues recognized in advance of achieving billing
milestones are recorded as unbilled accounts receivable and collections
resulting from billing milestones achieved in advance of recognizing revenues
are recorded as unearned revenues on the consolidated balance sheet. If the
total estimated cost of a contract is expected to exceed the contract price,
determined primarily by the installation component of the contract, the total
estimated loss is charged to expense in the period the loss is identified.
Software license revenues from contracts where Oacis is not actively
involved in the installation of the system, primarily contracts outside of
North America, are typically recognized as contract amounts become due and
payable on a milestone basis. Because Oacis is not actively involved in
these international installations, milestone attainment and consequently
revenue recognition on these contracts may be delayed for reasons which include
delays caused by the customer, or Oacis' international partner, both of which
are beyond the control of Oacis.
The Company also recognizes revenues from support fees and sales of
third-party hardware and software. Support agreements generally cover a one
year period and the associated revenues are recognized ratably over the period
of the support agreement. Third-party hardware and software revenues are
recognized upon delivery of the
-14-
<PAGE> 14
related hardware and software. Third-party hardware and software are generally
sold pursuant to a purchase order and are not governed by the terms of the
software license and services agreement.
Sales to Major Customers
During 1996, two customers accounted for 17% and 11%, respectively,
of the Company's revenue and at December 31, 1996, these customers accounted
for 5% and 7%, respectively, of total receivables. One additional customer
accounted for 10% of total receivables at December 31, 1996. The Company
anticipates that its concentration of revenues and accounts receivable will
decline in future periods as the Company generates additional customers.
Backlog
The Company had backlog of $13.8 million and $11.4 million at December
31, 1996 and 1995, respectively. Backlog consists of the unrecognized portion
of contractually committed software license fees, estimated installation fees,
and maintenance and support fees. The Company adjusts the timing of an
installation to accommodate customer needs and because a typical installation
requires nine to 18 months to complete, there can be no assurance that the
amounts in backlog will be recognized in the next 12 months. Due to the
relative size of a typical system sale and installation contract compared to
the Company's annual revenues, a termination or installation delay of one or
more contracts could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the
Company and the Predecessor expressed as a percentage of total revenues.
The results of operations for the Predecessor for the period January 1, 1994
through May 13, 1994 and the Company for the period May 14, 1994 through
December 31, 1994 have been determined based upon the historical cost bases of
the Predecessor and the Company, and have been combined to facilitate
presentation of the results of operations on a calendar basis. The Company's
historical operating results are not necessarily indicative of the results for
any future period.
<TABLE>
<CAPTION>
Predecessor and
The Company
The Company Combined
-------------------------- --------------
Year Ended December 31,
--------------------------------------------
Revenues: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software licenses . . . . . . . . . . . 38.6% 25.0% 24.8%
Installation and support services . . . 32.4 43.0 41.5
Third-party hardware and software . . . 29.0 32.0 33.7
--------- -------- --------
Total revenues . . . . . . 100.0 100.0 100.0
-------- ------- -------
Cost of revenues:
Software licenses . . . . . . . . . . . 1.2 1.0 1.4
Installation and support services . . . 27.5 38.6 48.1
Third-party hardware and software . . . 22.1 27.7 35.2
--------- ------- --------
Total cost of revenues . . 50.8 67.3 84.7
--------- ------- --------
Gross profit . . . . . . . . . . . . . . 49.2 32.7 15.3
--------- ------- --------
Operating expenses:
Sales and marketing . . . . . . . . . . 27.4 35.9 30.1
Research and development . . . . . . . . 31.2 44.9 79.0
General and administrative . . . . . . . 17.1 19.8 39.3
---- ---- ----
Total operating expenses . 75.7 100.6 148.4
-------- ------- -------
</TABLE>
-15-
<PAGE> 15
<TABLE>
<S> <C> <C> <C>
Loss from operations . . . . . . . . . . . (26.5) (67.9) (133.1)
Interest income/(expense), net. . . . . . . 4.1 (0.9) (3.6)
--------- --------- ----------
Net loss . . . . . . . . . . . . . . . . . (22.4)% (68.8)% (136.7)%
---------- --------- ----------
</TABLE>
YEAR ENDED DECEMBER 31, 1996 AND 1995
Revenues
In the year ended December 31, 1996, total revenues increased 51% to
$20.4 million from $13.6 million in the year ended December 31, 1995. Of these
amounts, software license fee revenues increased 133% to $7.9 million,
installation and support service revenues increased 14% to $6.6 million and
third-party hardware and software revenues increased 37% to $5.9 million. The
increase in software license fee and installation and support services revenue
in 1996 was due to an increase in the average selling price of installations in
progress, a higher component of international software license fee revenue, and
the number of installations in progress during the year ended December 31,
1996. The increase in the average selling price of installations in progress
was due to a combination of factors including the size of the customer and an
expanded product offering. During 1996, the international component of total
revenues accounted for 4% of total revenues. The Company expects that
international revenues will continue to be less than 10% of revenues in the
coming year. The increase in third-party hardware and software revenue was due
to an increase in the average size of third-party sales transactions.
Cost of Revenues
Cost of revenues were $10.4 million, or 51% of total revenues in the
year ended December 31, 1996, compared to $9.1 million, or 67% of total
revenues in the year ended December 31, 1995. Cost of software license fee
revenue increased 103% to $252,000 in the year ended December 31, 1996, due
to an increase in amortization of capitalized software development costs in
1996 as well as distributor fees related to international sales. Cost of
installation and support services increased 7% to $5.6 million in the year
ended December 31, 1996 from $5.2 million in the year ended December 31, 1995,
due to an increase in the average cost of installation and support personnel,
as well as an increase in the average number of such personnel during 1996.
Gross profit as a percentage of revenue increased to 49% in the year ended
December 31, 1996 from 33% in the year ended December 31, 1995, due to a shift
in the mix of revenue to higher margin software license fee revenue as well as
an increase in gross margins from third-party hardware and software product
sales. Gross profit for software license fees, installation and support
services, and third-party hardware and software products totaled 97%, 15% and
24% respectively during the year ended December 31, 1996 as compared to 96%,
10% and 13%, respectively, during the year ended December 31, 1995. Gross
profit on installation and support service revenues increased due to an
increase in the billable component of installation services as well as improved
implementation methodologies during 1996 offset by the impact of delays in
closing new business, the hiring and training of new employees and a focus on
methodology development for new product releases. Gross profit on third-party
hardware and software products increased due to improved pricing programs and
the mix of third-party products sold. The Company anticipates that its third-
party hardware and software product gross margins will approximate lower,
historical levels in future periods due to increased competitive pressures for
third-party pricing as well as changes in certain third-party pricing programs.
Sales and Marketing
Sales and marketing expenses increased 15% to $5.6 million in the year
ended December 31, 1996 from $4.9 million in the year ended December 31, 1995,
and decreased as a percentage of total revenue from 36% in 1995 to 27% in 1996.
The increase in sales and marketing expenses was a result of an increase in
personnel, an increase in travel related expenses resulting from increased
sales prospecting activity, and an increase in consulting and advertising
related expenses offset by a decrease in commission expenses resulting from
changes in the Company's sales incentive compensation programs. In 1996, the
Company implemented a new commission structure which extended the period over
which commissions are earned. Accordingly, the Company will recognize
commission expenses as earned over the contract term. The Company expects that
it will continue to increase its
-16-
<PAGE> 16
staffing of the sales and marketing organization in 1997 and that accordingly,
sales and marketing expenses will increase in 1997.
Research and Development
Research and development expenses increased 5% to $6.4 million in the
year ended December 31, 1996 from $6.1 million in the year ended December 31,
1995 and decreased as a percentage of total revenues from 45% in the year ended
December 31, 1995 to 31% in the year ended December 31, 1996. The increase in
research and development expenses was primarily attributable to the acquisition
(license) costs of certain technology which forms the basis of the Oacis
Enterprise Member/Patient Index ("EMPI"), a component of the Oacis Healthcare
Network, and the costs associated with the continuing development of that
technology offset by increased levels of software capitalization during 1996.
Because the licensed technology had not reached technological feasibility and
had no alternative future use when it was acquired, the $700,000 license fee was
charged to expense in the first quarter of 1996. Additionally, during 1996 the
Company capitalized $506,000 of software development costs representing 7% of
total 1996 development expenditures. During 1995, the Company capitalized
$275,000 in software development costs representing 5% of 1995 development
expenditures. Excluding the impact of the licensed technology and software
capitalization, research and development expenses decreased 3% in the year
ended December 31, 1996 over the same period in 1995 as a result of lower
personnel costs partially offset by higher consulting costs. The Company
expects that it will increase its research and development expenditures during
1997 and that software capitalization will also be increased in future periods.
General and Administrative
General and administrative expenses increased 30% to $3.5 million in
the year ended December 31, 1996 from $2.7 million in the year ended December
31, 1995, but decreased as a percentage of total revenues to 17% in the year
ended December 31, 1996 from 20% in the year ended December 31, 1995. The
increase in general and administrative expenses was a result of an increase in
personnel, increased corporate recruiting expenses as well as increased
consulting expenses related in part to certain process improvement initiatives.
YEAR ENDED DECEMBER 31, 1995 AND 1994
Revenues
In 1995, total revenues increased 46% to $13.6 million from $9.3
million in 1994. Of these amounts, software license revenues increased 47% to
$3.4 million and installation and support service revenues increased 51% to
$5.8 million due to an increase in the number of installations in progress in
1995, a generally higher level of productivity on those installations, and an
increased average contract price. Third-party hardware and software revenues
increased 39% reflecting an increase in the number of contracts signed during
1995.
Cost of Revenues
Cost of revenues increased to $9.1 million, or 67% of total revenues
in 1995, compared to $7.9 million, or 85% of total revenues, in 1994. Cost of
software licenses remained relatively unchanged in 1995 at $124,000 as compared
to $125,000 in 1994. Cost of installation and support services increased 17%
in 1995 to $5.2 million from $4.5 million in 1994, as a result of an increase
in the number of installation and support personnel. Gross profit as a
percentage of total revenues increased to 33% in 1995 from 15% in 1994. The
improvement in gross profit as a percentage of total revenues resulted
primarily from an increase in the billable component of installation services
in 1995 over 1994. In 1994, and to a lesser degree in 1995, the Company was
required to complete certain contracts entered into by the Predecessor which
reflected lower margins. In addition, gross profit on third-party hardware and
software increased to 13% in 1995 from a loss of 5% in 1994, due primarily to
improved pricing programs from third-party hardware and software vendors.
Additionally, during the period January 1, 1994 to May 13, 1994, the
Predecessor recorded $250,000 in hardware losses resulting from the Predecessor
having to purchase computer hardware upgrades for certain of its customers.
-17-
<PAGE> 17
Sales and Marketing
In 1995, sales and marketing expenses increased 74% to $4.9 million
from $2.8 million in 1994, and increased as a percentage of total revenues to
36% in 1995 from 30% in 1994. The increase in sales and marketing expense was
a result of an increase in personnel as well as an increase in commission
payments due to the increase in contract signings in 1995 over 1994. In 1995
and 1994, sales commissions were earned and recognized upon contract signing.
In addition, during 1995, the Company incurred additional sales and marketing
expenses in connection with the initiation of a marketing campaign.
Research and Development
In 1995, research and development expenses decreased 17% to $6.1
million from $7.3 million in 1994 and decreased as a percentage of total
revenues to 45% in 1995 from 79% in 1994. In 1994, the Company charged to
operations in-process research and development totaling $1.4 million in
connection with the Acquisition. Excluding this charge, research and
development expenses increased 2% to $6.1 million from $5.9 million due
primarily to costs of performing the alpha testing on certain Oacis modules.
During 1995, the Company capitalized $275,000 of direct costs associated with
the development of a component of Oacis after technological feasibility had
been established.
General and Administrative
In 1995, general and administrative expenses decreased 27% to $2.7
million from $3.7 million in 1994, and decreased as a percentage of total
revenues to 20% in 1995 from 39% in 1994. The decrease in general and
administrative expenses was due to the write off in 1994 of certain accounts
receivable and losses related to a customer contract aggregating $1.2 million.
This decrease was offset in part by increased personnel costs resulting from
the need to rebuild the Company's administrative support services which were
depleted prior to the Acquisition.
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's operating results for the
eight quarters in the period ended December 31, 1996. The information for each
of these quarters is unaudited and has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Form 10-KSB. In the
opinion of management, all necessary adjustments (consisting only of normal
recurring adjustments) have been included to present fairly the unaudited
quarterly results when read in conjunction with the audited Consolidated
Financial Statements of the Company and the Notes thereto appearing elsewhere
in this Form 10-KSB. These operating results are not necessarily indicative of
the results for any future period.
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Quarterly revenues and operating results may fluctuate
as a result of a variety of factors, including the following: the Company's
long sales cycle; demand for the Company's systems, applications and services,
including variability in demand and orders for the third-party hardware and
software; the number, timing and significance of announcements and releases of
system enhancements and new applications by the Company and its competitors;
the termination of, or a reduction in, offerings of the Company's systems,
applications and services; the loss of customers due to consolidation in the
healthcare industry or caused by other factors; the timing of revenue
recognition; the amount of backlog at the beginning of any particular quarter;
customer budgeting cycles and changes in customer budgets; investments by the
Company in marketing, sales, research and development and administrative
personnel necessary to support the Company's anticipated operations; marketing
and sales promotional activities; software defects and other system quality
factors; and general economic conditions.
-18-
<PAGE> 18
<TABLE>
<CAPTION>
Quarterly Financial Results
(In thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------
1996 Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $3,905 $4,097 $6,651 $5,791
Gross margin 1,735 1,871 2,888 3,569
Net income (loss) (2,850) (1,989) (246) 512
Pro forma net income (loss) per share (0.37) (0.23) (0.02) 0.05
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1995 Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $2,426 $3,247 $4,564 $3,317
Gross margin 468 1,104 1,739 1,123
Net income (loss) (2,107) (2,160) (1,484) (3,573)
Pro forma net income (loss) per share (0.29) (0.29) (0.19) (0.46)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Liquidity and Capital Resources
At December 31, 1996 the Company's cash and cash equivalents and
short-term investments totaled $23.1 million as compared to $3.9 million at
December 31, 1995. The Company completed an initial public offering of
3,220,000 shares of Common Stock on May 16, 1996 at $10.00 per share resulting
in net proceeds to the Company of $28.9 million. Subsequent to the closing of
this offering, the Company repaid $4.0 million in long-term obligations.
In April 1996, the Company entered into a master lease agreement with
Comdisco, Inc. which enables the Company to finance the purchase of new
equipment, or sell and lease back certain existing equipment, up to an
aggregate of $1.0 million. The lease term is 42 months from the date of
funding, and the annual interest rate is 8.5%. As of December 31, 1996,
$578,000 of new equipment was financed under this agreement.
In April 1996, the Company borrowed $1.0 million pursuant to a Loan
and Security Agreement with Comdisco, Inc. which was secured by all property
and equipment of the Company. In June 1996, the Company repaid the outstanding
principal balance of this loan with a portion of the proceeds of the initial
public offering.
During 1996, the Company invested $922,000 in capital expenditures
primarily related to computers and office equipment. Of this amount $578,000
was purchased under the capital lease agreement with Comdisco. The Company
expects that its capital expenditures will increase in 1997 due to increased
investment in computers and technology and in 1998 due to anticipated
expenditures for leasehold improvements associated with the relocation of the
Company's Corporate headquarters.
The Company's working capital and capital requirements will depend
upon numerous factors including possible customer installation delays, lengthy
sales cycles, the Company's plans for developing, acquiring or licensing new
applications and technologies, the Company's requirements to purchase
additional capital equipment and the level of resources that the Company
devotes to its sales and marketing activities. The Company believes that its
existing capital resources and available equipment lease financing arrangements
will be adequate to fund its current operations for at least the next 18
months. Thereafter, the Company may require additional funds to support its
operations and may seek to raise such additional funds through public or
private equity financing or from other sources. There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information
about Capital Structure". The Statements are both effective for periods ending
after December 15, 1997. The Company has not yet determined the impact on its
consolidated financial statements.
-19-
<PAGE> 19
FACTORS AFFECTING OPERATING RESULTS
This report on Form 10-KSB contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated by such forward-looking statements as a result of
certain factors including those set forth below.
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. The Company has incurred
net losses of $4.6 million, $9.3 million and $12.7 million for the years ended
December 31, 1996, 1995 and 1994, respectively and at December 31, 1996 had an
accumulated deficit of $22 million. The Company has not achieved consistent
profitability on a quarterly basis and has not achieved annual profitability.
The Company's prior operating history, consolidation and uncertainty in the
healthcare industry, depencence on the emerging market for IDSs, dependence on
Oacis as its principal product, long sales and installation cycles, and
dependence upon key personnel and third parties, competition, and general
economic and other factors make the prediction of future operating results
difficult. There can be no assurance that any of the Company's business
strategies will be successful or that the Company will be able to achieve
consistent revenue growth or achieve profitability on a quarterly or annual
basis.
CONSOLIDATION AND UNCERTAINTY IN THE HEALTH CARE INDUSTRY, DEPENDENCE ON
EMERGING MARKET FOR IDSS. Many health care providers are consolidating to
create larger health care networks and IDSs with greater market concentration.
The Company focuses its sales and marketing efforts primarily on IDSs, which
are a relatively new type of organization and currently account for a
small portion of the overall market for clinical information systems. The
Company believes that consolidation and formation of IDSs will continue and may
ultimately result in an increase in demand for open architecture clinical
information systems such as the Company provides, and accordingly focuses its
sales and marketing efforts on this market. However, the near term effect of
such consolidation includes reducing the resources available for IDSs to invest
in clinical information systems until such time as the rate of consolidation
slows. Accordingly, the Company believes that the market for the Company's
products may continue to develop slowly in the near term and that sales cycles
will continue to be long. In addition, continued consolidation could erode the
Company's existing customer base and reduce the size of the Company's target
market. Additionally, the resulting enterprises could have greater bargaining
power, which could lead to price erosion of the Company's systems and services.
The reduction in the size of the Company's target market resulting from
industry consolidation or delays in purchasing clinical information systems
due to industry consolidation or the failure of the Company to maintain
adequate price levels could have a material adverse effect on the Company's
business, financial condition and results of operations. The health care
industry also is subject to changing political, economic and regulatory
influences that may affect the procurement practices and operation of health
care industry participants. During the past several years, the United States
health care industry has been subject to an increase in governmental
regulation and reform proposals. These reforms may increase governmental
involvement in health care, lower reimbursement rates and otherwise change the
operating environment for the Company's customers. Health care industry
participants may react to these proposals and the uncertainty surrounding such
proposals by curtailing or deferring investments, including those for the
Company's systems and services. The failure of the Company to maintain
adequate price levels or sales as a result of legislative or market-driven
reforms could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON OACIS; MARKET ACCEPTANCE; SYSTEM ENHANCEMENTS. Substantially all
of the Company's revenues are currently derived from licenses of Oacis.
Therefore, any significant reduction in licensing of Oacis could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future success and financial performance
depends in large part upon the Company's ability to provide the
increasing system functionality required by its customers through the timely
development and successful introduction of new applications and enhancements to
Oacis. The Company has historically devoted significant resources to system
enhancements and research and development and believes that significant
continuing development efforts will be required to sustain the Company's
operations. There can be no assurance that the Company will successfully
develop, introduce, market and sell new system enhancements or applications,
or that system enhancements or new applications developed by the Company will
meet the requirements of health care providers and achieve market acceptance.
-20-
<PAGE> 20
LONG SALES AND INSTALLATION CYCLES. The sales cycle for large scale clinical
information systems is lengthy. The Company's sales cycle is subject to delays
associated with the lengthy approval process that typically accompanies
significant capital expenditures, customer budgeting cycles and changes in
customer budgets, changes or the anticipation of changes in the regulatory
environment affecting healthcare organizations, changes in the customer's
strategic information system initiatives, competing information systems
projects within the customer organization, consolidation in the health care
industry in general, the highly sophisticated nature of the Company's products
and competition in the market for clinical information systems. Additionally,
during the sales process, the Company expends substantial time, effort and
funds preparing a contract proposal, demonstrating the system, arranging visits
to customer reference sites and negotiating the contract. For these and other
reasons, the Company's sales cycle is lengthy and the Company does not have the
ability to predict when or if the sales process with a prospective customer
will result in a signed contract.
The time required to install the Company's systems can vary significantly
depending on the needs and skill sets of its customers. Installation of an
Oacis system typically requires nine to 18 months, depending on a number of
factors including the size of the customer, the system licensed, the number of
legacy systems to be interfaced, the degree of customization requested by the
customer and the customer's installation schedule. This period may be longer
if unforeseen technical, integration or other problems arise during the
installation process, if the Company has insufficient trained installation
personnel to handle several installations simultaneously or if a customer
decides to delay the installation schedule. Due to this long installation
cycle, the Company's future results of operations depend in large part on
maintaining efficient and timely installation procedures, particularly since a
typical system license and installation contract is relatively large compared
to the Company's annual revenues. In addition, payments to the Company are
dependent upon achievement of certain milestones the achievement of which is
generally dependent upon the customer and other third-parties. If installation
is delayed, then payments and revenue recognition will also be delayed. Any
failure by the Company to install its clinical information systems on a timely
basis could have a material adverse effect on the Company's business,
financial condition and results of operations.
INTERNATIONAL SALES. The Company has licensed clinical information systems to
customers located outside of the United States and expects to continue
marketing its systems to foreign customers. In 1994 and 1995, revenues from
international customers were immaterial, however, revenues from international
customers accounted for approximately 4% of the total revenues in 1996. The
Company anticipates that international revenues may account for a larger
percentage of total revenues in future periods. The Company's operating
results may be subject to the risks inherent in international transactions,
including difficulties in staffing and managing foreign sales operations,
changes in regulatory requirements, exchange rates, tariffs or other barriers,
and other factors including dependence on third-party distributors and
installers of the Company's products.
POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS. The Company's quarterly
revenues and operating results have varied significantly in the past and are
likely to vary substantially from quarter to quarter in the future. Quarterly
revenues and operating results may fluctuate as a result of a variety of
factors, including the following: the Company's long sales cycle; demand for
the Company's systems, applications and services, including variability in
demand, orders for and shipment of hardware; the number, timing and
significance of announcements and releases of system enhancements and new
applications by the Company and its competitors; the termination of, or a
reduction in, offerings of the Company's systems, applications and services;
the loss of customers due to consolidation in the health care industry; delays
in installations requested by customers or caused by other factors; the timing
of revenue recognition; the amount of backlog at the beginning of any
particular quarter; customer budgeting cycles and changes in customer budgets;
investments by the Company in marketing, sales, research and development, and
administrative personnel necessary to support the Company's anticipated
operations; marketing and sales promotional activities; software defects and
other system quality factors; and general economic conditions. In particular,
the timing of revenue recognition can be affected by many factors, including
the timing of customer installation of the Company's systems. As a result of
the relatively large size of each customer contract, combined with the
Company's method of revenue recognition, quarterly results are likely to be
significantly affected by small changes in the number of customer contracts in
process during a particular quarter. There can be no assurance that the
Company will not experience delays in recognizing revenue in the future,
particularly considering the complexity and large scale of installations of
the Company's systems. In addition, since purchase of the
Company's systems generally involves a significant commitment of capital, any
downturn in any potential customer's business or the economy in general,
including changes in the health care market, could have a material adverse
effect on the Company's business, financial condition and results of
operations. Moreover, the Company's operating expense levels are relatively
fixed and, to a large degree, are based on anticipated revenues. If revenues
are below expectations, net income is likely to be disproportionately affected.
Further, it is likely that in some future quarter the Company's unit sales
volume, revenue, backlog or operating results will be below the expectations of
public market analysts and investors. In such event, the trading price of the
Company's Common Stock would likely be materially adversely affected.
-21-
<PAGE> 21
HIGHLY COMPETITIVE MARKET. Competition in the market for clinical information
systems and services is intense and is expected to increase. The Company's
competitors include other providers of health care information systems and
services, and health care consulting firms. The Company's principal
competitors include 3M Health Information Systems, Cerner Corporation, Epic
Systems Corporation, HBO & Company, HealthVISION, Inc. and Shared Medical
Systems Corporation. Furthermore, other major health care information
companies not presently offering clinical information systems may enter the
Company's markets. Increased competition could result in price reductions,
reduced gross margins, and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations. In addition, many of the Company's competitors and potential
competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than the
Company. Many of the Company's competitors also currently have, or may develop
or acquire, substantial installed customer bases in the health care industry.
As a result of these factors, the Company's competitors may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products than the Company. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.
NEED TO MANAGE CHANGING OPERATIONS; DEPENDENCE UPON KEY PERSONNEL. The
Company's anticipated future operations may place a strain on its management
systems and resources. The Company expects that it will be required to
continue to improve its financial and management controls, reporting systems
and procedures, and will need to expand, train and manage its work force.
There can be no assurance that the Company will be able to effectively manage
these tasks, and the failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company intends to hire a significant number of additional installation,
research and development and sales personnel in 1997 and beyond. Competition
for such personnel is intense, and there can be no assurance that the Company
will be able to attract, assimilate or retain additional highly qualified
employees in the future. If the Company is unable to hire and retain such
personnel, particularly those in key positions, the Company's business,
financial condition and results of operations could be materially adversely
affected. The Company's future success also depends in significant part upon
the continued service of its executive officers and other key sales, marketing,
development and installation employees. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the Company's business, financial condition and results of operations.
Since acquisition of the Predecessor in May 1994, the Company has experienced
turnover in certain key positions of the Company and high turnover in general.
Additions of new and departures of existing personnel can be disruptive and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON THIRD PARTY PRODUCTS. The Company's systems are dependent upon a
number of third-party computer hardware and software products. There can be no
assurance that financial or other difficulties experienced by third-party
providers will not have an adverse impact upon the technologies incorporated by
the Company's systems, or that, if such technologies become unavailable, the
Company will be able to find suitable alternatives. In particular, both the
Gateway++ and Oacis Data Repository components of Oacis incorporate a Sybase
relational database. Any significant failure by Sybase to meet the Company's
database requirements could have a material adverse effect on the Company's
business, financial condition and results of operations. A decline in Sybase's
reputation could reduce the appeal of the Company's products to its potential
customers. Although the Company believes that it can port Oacis to other
relational database platforms, such efforts would require substantial time and
investment and would have an adverse affect on the Company's operations,
including its ability to complete other product development. In addition,
Oacis includes a number of embedded software products licensed from third
parties. Failure of such third parties to maintain or enhance their products
could impair the functionality of Oacis and could require the Company to obtain
alternative products from other sources or to develop such software internally,
either of which could involve costs and delays as well as diversion of
engineering resources. In addition, modifications or enhancements by these
third-party vendors often require that the Company modify its own software
products to operate with these enhancements or modifications. There can be no
assurance
-22-
<PAGE> 22
that the Company will be able to modify its own software to accommodate
third-party changes or that the effort to make such changes will not adversely
affect the Company's other development projects.
RISK OF SYSTEM DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA. Systems as
complex as those offered by the Company frequently contain errors or failures,
especially when first introduced or when new versions are released. Although
the Company conducts extensive testing, the Company has in the past released
systems that contain defects, has discovered software errors in certain of its
enhancements and applications after their introduction and, as a result, has
experienced delays in recognizing revenues and incurred higher than expected
operating expenses during certain periods in order to correct these errors.
The Company's systems are intended for use in a clinical health care setting,
to collect and display clinical information used in the diagnosis and treatment
of patients. As a result, the Company expects that its customers and potential
customers have a greater sensitivity to system defects than the market for
software products generally. In addition, customer contracts typically provide
that the Oacis system is warranted to meet certain performance criteria
concerning response time and system availability. The Company also will
generally recommend hardware configurations that it believes will be adequate
to achieve user acceptable response time performance and system availability.
Failure of a customer's system to meet these performance criteria could
constitute a material breach under such contracts, and could delay revenue
recognition and require that the Company incur additional expense in order to
make the system meet these performance criteria or to purchase additional
hardware where the recommended hardware configurations have been determined to
be inadequate. Although to date the Company has not experienced material
adverse effects resulting from any software errors or performance failures,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors or performance failures will not occur in new
enhancements or applications after commencement of commercial shipments,
resulting in loss of revenue or delay in market acceptance, diversion of
development resources, damage to the Company's reputation, or increased service
and warranty costs, any of which could have a material adverse effect upon the
Company's business, financial condition and results of operations.
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT. The Company relies on a
combination of trade secrets, copyright and trademark laws, nondisclosure and
other contractual provisions to protect its proprietary rights. The Company
has not filed any patent applications covering its technology or registered any
of its copyrights with state or federal agencies. There can be no assurance
that measures taken by the Company to protect its intellectual property will be
adequate or that the Company's competitors will not independently develop
systems and services that are substantially equivalent or superior to those of
the Company. Substantial litigation regarding intellectual property rights
exists in the software industry, and the Company expects that software products
may be increasingly subject to third-party infringement claims as the number of
competitors in the Company's industry segment grows and the functionality of
systems overlap. Although the Company believes that its systems and
applications do not infringe upon the proprietary rights of third parties,
there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that a license or similar agreement
will be available on reasonable terms in the event of an unfavorable ruling on
any such claim. In addition, any such claim may require the Company to incur
substantial litigation expenses or subject the Company to significant
liabilities and could have a material adverse effect on the Company's business,
financial condition and results of operations.
PRODUCT LIABILITY. The Company's clinical information systems provide clinical
information used by clinicians in the diagnosis and treatment of patients. Any
failure by the Company's systems to provide accurate, reliable and timely
information, or to adequately protect the confidentiality of the information,
could result in claims against the Company. The Company maintains insurance to
protect against claims associated with the use of its systems, but there can be
no assurance that its insurance coverage would adequately cover any claims
asserted against the Company. A successful claim brought against the Company
in excess of its insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations. Even
unsuccessful claims could result in the Company's expenditure of funds in
litigation and diversion of management time and resources. There can be no
assurance that the Company will not be subject to product liability claims that
will result in liability in excess of its insurance coverage, that the
Company's insurance will cover such claims or that appropriate insurance will
continue to be available to the Company in the future at commercially
reasonable rates.
-23-
<PAGE> 23
GOVERNMENT REGULATION. The United States Food and Drug Administration (the
"FDA") is responsible for assuring the safety and effectiveness of medical
devices under the Federal Food, Drug and Cosmetic Act. Computer products are
subject to regulation when they are used or are 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. The FDA could determine in the future that predictive
applications of the Company's systems and applications make them clinical
decision tools subject to FDA regulation. Medical devices are subject to
regulation by the FDA, which requires, among other things, premarket
notifications or approvals and compliance with labeling, registration and
listing requirements, good manufacturing practices and records and reporting
requirements. Compliance with these regulations could be burdensome, time
consuming and expensive. The Company also could become subject to future
legislation and regulations concerning the manufacture and marketing of medical
devices and health care software systems. These could increase the cost and
time necessary to market new products and could affect the Company in other
respects not presently foreseeable. The Company cannot predict the effect of
possible future legislation and regulation.
The confidentiality of patient records and the circumstances under which such
records may be released for inclusion in the Company's databases is subject to
substantial regulation by state governments. These state laws and regulations
govern both the disclosure and use of confidential patient medical record
information. Although compliance with these laws and regulations is
principally the responsibility of the hospital, physician or other health care
provider with access to the Company's information system, 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 such
information to implement security measures that may be of substantial cost to
the Company. There can be no assurance that changes to state or federal laws
will not materially restrict the ability of health care providers to submit
information from patient records to the Company's systems.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. The Company may in the future
pursue acquisitions of complementary products, technologies or businesses.
Future acquisitions by the Company may result in potentially dilutive issuances
of equity securities, the incurrence of additional debt and amortization
expenses related to goodwill and other intangible assets, which could adversely
affect the Company's results of operations. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
products and personnel of the acquired company, the diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has no direct prior experience, and the potential loss of key employees
of the acquired company. There can be no assurance that the Company will ever
successfully complete an acquisition.
-24-
<PAGE> 24
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Financial Statements:*
Balance Sheets - December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995
and 1994
Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements
* Note: Consolidated Financial Statements for 1996 and 1995 represent
the results of the Company whereas the consolidated financial statements for
1994 represent the combined results of the Company and the Predecessor.
(All other schedules are omitted because they are not applicable, not required
or the information required to be set forth therein is included in the
financial statements or in the notes thereto.)
-25-
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Oacis Healthcare Holdings Corp.
We have audited the accompanying consolidated balance sheets of Oacis
Healthcare Holdings Corp. (the "Company") and its subsidiary as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1996 and
1995 and for the period from May 14, 1994 through December 31, 1994. We have
also audited the accompanying statements of operations, stockholders' equity
and cash flows of Bell Atlantic Healthcare Systems, Inc. (a wholly-owned
subsidiary of Bell Atlantic Systems Group, Inc.) for the period from January 1,
1994 through May 13, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly,
in all material respects, the financial position of the Company at December 31,
1996 and 1995, and the results of operations and cash flows of the Company and
Bell Atlantic Healthcare Systems, Inc. for the periods described in the first
paragraph above, in conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
San Jose, California
January 10, 1997
-26-
<PAGE> 26
OACIS HEALTHCARE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 4,307 $ 3,900
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . 18,834 -
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 6,449 5,105
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 308 327
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 29,898 9,332
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 2,143 2,296
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671 250
--------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,712 $ 11,878
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 620 $ 1,725
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,113 2,652
Unearned revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 2,325 3,251
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . 6,058 7,628
--------- ---------
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 669 3,000
--------- ---------
Commitments (Note 13)
Stockholders' equity:
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized; none issued or outstanding;
(1995 - 10,400,000 authorized: 10,067,000 issued and outstanding) -- 100
Common Stock, $0.01 par value, 30,000,000 shares
authorized; 10,064,000, shares issued and outstanding
(1995 - 1,732,000) . . . . . . . . . . . . . . . . . . . . . . . . . . 101 17
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 47,905 18,631
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (21,871) (17,298)
Deferred stock compensation . . . . . . . . . . . . . . . . . . . . . (150) (200)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 25,985 1,250
--------- ---------
Total liabilities and stockholders' equity . . . . . . . . . . . $ 32,712 $ 11,878
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
<PAGE> 27
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
The Company Predecessor
--------------------------------------------- -----------
May 14 January 1
Year Ended December 31, through through
---------------------------- December 31, May 13,
1996 1995 1994 1994
---- ---- ---- ----
|
<S> <C> <C> <C> | <C>
Revenues: |
Software licenses . . . . . . . . . . . . . $ 7,887 $ 3,388 $ 1,371 | $ 938
Installation and support services . . . . . 6,626 5,825 2,551 | 1,312
Third-party hardware and software . . . . . 5,931 4,341 1,770 | 1,359
----------- ----------- ----------- | -----------
Total revenues . . . . . . . . . . . . . 20,444 13,554 5,692 | 3,609
----------- ----------- ----------- | -----------
|
Costs of revenues: |
Software licenses . . . . . . . . . . . . . 252 124 54 | 71
Installation and support services . . . . . 5,610 5,237 2,751 | 1,724
Third-party hardware and software . . . . . 4,519 3,759 1,687 | 1,592
----------- ----------- ----------- | -----------
Total cost of revenues . . . . . . . . . 10,381 9,120 4,492 | 3,387
----------- ----------- ----------- | -----------
Gross profit . . . . . . . . . . . . . . . . . . 10,063 4,434 1,200 | 222
----------- ----------- ----------- | -----------
Operating expenses: |
Sales and marketing . . . . . . . . . . . . 5,614 4,874 1,605 | 1,196
Research and development . . . . . . . . . . 6,375 6,080 4,916 | 2,424
General and administrative . . . . . . . . . 3,491 2,681 2,418 | 1,238
----------- ----------- ----------- | -----------
Total operating expenses . . . . . . . . 15,480 13,635 8,939 | 4,858
----------- ----------- ----------- | -----------
|
Loss from operations . . . . . . . . . . . . . . (5,417) (9,201) (7,739) | (4,636)
|
Interest income(expense), net . . . . . . . . . 844 (123) (235) | (102)
----------- ----------- ----------- | -----------
Net loss . . . . . . . . . . . . . . . . . . . . $ (4,573) $ (9,324) $ (7,974) | $ (4,738)
=========== =========== =========== | ===========
Pro forma:
Net loss per common and common
equivalent share . . . . . . . . . . . . . . $ (0.48) $ (1.22)
=========== ===========
Weighted average number of common
and common equivalent shares . . . . . . . . 9,431,277 7,667,243
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-28-
<PAGE> 28
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Deferred Total
--------------- ------------ Paid-in Accumulated Stock Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Equity
------ ------ ------ ------ ------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 . 1 $ 41,343 $ (40,268) $ 1,075
Capital contribution . . . . . 9,990 9,990
Net loss . . . . . . . . . . . (4,738) (4,738)
--------- ----- -------- --------- -------
Balance at May 13, 1994 . . . . 1 $ 51,333 $ (45,006) $ 6,327
========== ====== ======== ========= ========
- ----------------------------------------------------------------------------------------------------------------------------
Issuance of Series A
Preferred Stock, net . . 2,950,000 $ 29 $ 5,222 $ 5,251
Issuance of Common Stock, net . 1,327,000 $ 13 570 583
Net loss . . . . . . . . . . . $ (7,974) (7,974)
---------- ------ --------- ----- -------- --------- -------
Balance at December 31, 1994 . 2,950,000 29 1,327,000 13 5,792 (7,974) (2,140)
Issuance of Series A
Preferred Stock, net . . . 838,000 8 1,499 1,507
Issuance of Series B
Preferred Stock, net . . . 6,229,000 62 10,875 10,937
Issuance of Common Stock, net 377,000 3 167 170
Exercise of stock options . . . 50,000 1 28,000 1 98 100
Deferred stock compensation . . 200 $(200) -
Net loss . . . . . . . . . . . (9,324) (9,324)
---------- ------ --------- ----- -------- --------- ----- -------
Balance at December 31, 1995 . 10,067,000 100 1,732,000 17 18,631 (17,298) (200) 1,250
---------- ------ --------- ----- -------- --------- ----- -------
Conversion of Series A Preferred
Stock to Common Stock. . . (3,838,000) (38) 1,919,000 19 19 --
Conversion of Series B Preferred
Stock to Common Stock. . . (6,229,000) (62) 3,115,000 31 31 --
Issuance of Common Stock, net . 3,220,000 32 28,865 28,897
Net loss . . . . . . . . . . . (4,573) (4,573)
Common Stock issued for services 5,000
Exercise of stock options . . . 28,000 1 12 13
Employee Stock Purchase Plan . 45,000 1 347 348
Amortization of deferred
stock compensation . . . . 50 50
---------- ------ --------- ----- -------- --------- ----- -------
Balance at December 31, 1996 . -- $ -- 10,064,000 $ 101 $ 47,905 $ (21,871) $ (150) $25,985
========== ====== ========= ===== ======== ========= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-29-
<PAGE> 29
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
The Company Predecessor
-------------------------------------------- -----------
May 14 January 1
Year Ended December 31, through through
---------------------------- December 31, May 13,
1996 1995 1994 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . $ (4,573) $ (9,324) $ (7,974) $ (4,738)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization . . . . 1,164 1,535 1,174 514
Stock compensation expense . . . . . . 50 -- -- --
Acquired in-process research
and development . . . . . . . . . . 700 -- 1,399 --
Changes in assets and liabilities:
Accounts receivable, net . . . . . . . (1,344) (1,129) 1,563 1,149
Other assets . . . . . . . . . . . . . 15 (209) 46 112
Accounts payable . . . . . . . . . . . (1,105) 515 690 176
Accrued expenses . . . . . . . . . . . (92) 1,060 578 (703)
Unearned revenues . . . . . . . . . . (926) 1,265 (286) 881
Other liabilities . . . . . . . . . . -- -- -- (629)
----------- ----------- ----------- -----------
Net cash used in operating activities . . . (6,111) (6,287) (2,810) (3,238)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment . . (344) (718) (325) (116)
Purchase of short-term investments . . (22,769) -- -- --
Sale of short-term investments . . . . 3,935 -- -- --
Capitalized software development costs (506) (275) -- --
Acquisition of Bell Atlantic Healthcare
Systems, Inc., net of cash acquired . -- -- (2,498) --
----------- ----------- ----------- -----------
Net cash used in investing activities . . . (19,684) (993) (2,823) (116)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from Common Stock
issuance . . . . . . . . . . . . . . . 28,897 170 583 --
Net proceeds from Preferred Stock
issuance . . . . . . . . . . . . . . . -- 12,444 5,251 --
Proceeds from employee stock purchase plan 348 -- -- --
Proceeds from options exercises . . . . . . 13 100 -- --
Principal payment on note payable . . . . . (4,000) (1,735) -- --
Payments under capital leases . . . . . . . (56) -- -- --
Proceeds from notes payable . . . . . . . . 1,000 -- -- --
Proceeds from borrowings from affiliate . . -- -- -- (6,636)
Capital contributions from parent . . . . . -- -- -- 9,990
----------- ----------- ----------- -----------
Net cash provided by financing
activities . . . . . . . . . . . . . . 26,202 10,979 5,834 3,354
----------- ----------- ----------- -----------
Increase in cash and cash equivalents . . . 407 3,699 201 --
Cash and cash equivalents,
beginning of period . . . . . . . . . 3,900 201 -- 2
----------- ----------- ----------- -----------
Cash and cash equivalents,
end of period . . . . . . . . . . . . $ 4,307 $ 3,900 $ 201 $ 2
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-30-
<PAGE> 30
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Oacis Healthcare Holding Corp. (the Company) was incorporated in
Delaware on April 18,1994. On May 14, 1994, the Company acquired 100% of the
outstanding common stock of Bell Atlantic Healthcare Systems, Inc. (a
wholly-owned subsidiary of Bell Atlantic Systems Group, Inc.) and renamed it
Oacis Healthcare Systems, Inc. (Oacis). Prior to the acquisition of Oacis, the
Company had no substantive operations. Through Oacis, the Company develops,
markets, licenses, installs and supports clinical information systems primarily
for major medical centers, hospitals and integrated healthcare networks.
The Oacis acquisition was accounted for as a purchase with the
purchase price consisting of $2,710 in cash (including direct acquisition
costs), issuance of a $4,500 promissory note and issuance of warrants to
purchase 293,211 shares of the Company's Common Stock with an exercise price of
$0.44 per share. At the acquisition date, the warrants were considered to have
nominal fair value. The purchase price was allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their fair values at the acquisition date. Approximately $1,399 of the
purchase price was allocated to in-process research and development. Because
such in-process technology had not reached the stage of technological
feasibility and had no alternative future use, the amount was immediately
charged to operations.
The accompanying financial statements present the consolidated
accounts of the Company and Oacis for the years ended December 31, 1996, 1995
and the period from May 14, 1994 to December 31, 1994, after elimination of all
intercompany accounts and transactions, and the accounts of Bell Atlantic
Healthcare Systems, Inc. (the "Predecessor") for the period from January 1,
1994 to May 13, 1994. The accompanying financial statements reflect the
historical cost bases under the periods of different ownership and the
segregation of operating activities for such periods. See Note 14 -- Related
Party Transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company's revenues consist of license fees for the perpetual use
of its software, installation revenues associated with installing and
configuring the software to meet specific customer needs, revenues from the
sale of third-party hardware and software, and ongoing support services.
Revenues from contracts where Oacis is actively involved in the
installation of the system, which are primarily in the United States and
Canada, are recognized for software license fees and installation services
under the percentage of completion method using labor hours incurred as a
measure of progress toward completion. Revenues recognized in advance of
achieving billing milestones are recorded as unbilled accounts receivable and
collections resulting from billing milestones achieved in advance of
recognizing revenues are recorded as unearned revenues on the consolidated
balance sheet. Provisions for contract adjustments and losses are recorded in
the period such items are identified.
Software license revenues from contracts where Oacis is not actively
involved in the installation of the system, primarily international contracts,
are typically recognized as contract amounts become due and payable on
-31-
<PAGE> 31
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
a milestone basis.
The Company also recognizes revenues from support fees and sales of
third-party hardware and software. Support agreements generally cover a one
year period and the associated revenues are recognized ratably over the period
of the support agreement. Third-party hardware and software revenues are
recognized upon delivery of the related hardware and software.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents and those with maturities
greater than three months are considered short-term investments.
The Company has classified all short-term investments as
available-for-sale in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". At December 31, 1996, the estimated fair value of the
investments approximated cost, and the amounts of gross unrealized gains and
losses were not significant.
UNBILLED ACCOUNTS RECEIVABLE
Unbilled accounts receivable represent the amount of licensing and
installation fees for delivered products and services recognized as revenue
under the percentage-of-completion method but not yet billed to the customer.
Unbilled accounts receivable are billable and collectible by the Company within
one year in accordance with contract provisions.
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are recorded at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets which range from three to four years. Amortization
of leasehold improvements is calculated using the straight-line method over the
shorter of the remaining economic life or the lease term. Additions and
improvements are capitalized, while repairs and maintenance are charged to
expense as incurred.
SOFTWARE DEVELOPMENT COSTS
Software development costs not qualifying for capitalization are
expensed as research and development costs. Capitalized costs are amortized on
a product-by-product basis in accordance with SFAS No. 86. The Company
evaluates the estimated net realizable value of each software product at each
balance sheet date and records a write-down to net realizable value for any
products for which the net book value is in excess of net realizable value
in the future.
The Company capitalized $506 and $275 of software development costs in 1996 and
1995, respectively. No software development costs were capitalized in 1994.
Capitalized software development costs arise from the development of certain
components of the Oacis Healthcare Network and are being amortized on a
straight-line basis over the estimated future life of these products. During
the year ended December 31, 1996, 1995 and the period from January 1, 1994
through May 13, 1994, amortization of software development costs totaled $89,
$25 and $36, respectively.
-32-
<PAGE> 32
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
INCOME TAXES
The provision for income taxes is calculated in accordance with SFAS
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, a current tax
liability or asset is recognized for the estimated taxes payable or refundable
on tax returns for the current period. A deferred tax liability or asset is
recognized for the estimated future tax effects attributable to temporary
differences between the carrying amount and tax bases of assets, liabilities
and tax carryforwards. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
For the period from January 1, 1994 through May 13,1994, Bell Atlantic
Healthcare Systems, Inc. was included in the federal consolidated tax returns
of Bell Atlantic Systems Group, Inc. and was allocated income tax benefits
under an intercompany tax sharing arrangement. The tax provision for these
periods have been computed on a separate return method in accordance with SFAS
No. 109 and the differences between such provisions and the amounts allocated
have been reflected as capital contributions.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of stock options and warrants (using the
treasury stock method), are excluded from the computation if their effect is
anti-dilutive.
Prior to May 17, 1996, the effective date of the Company's initial
public offering, common equivalent shares consisting of Preferred Stock (using
the if-converted method), and stock options and warrants (using the treasury
stock method) are anti-dilutive and excluded from the weighted average share
computation, except that pursuant to a Securities and Exchange Commission Staff
Accounting Bulletin, shares of Common Stock and common stock equivalents issued
within 12 months prior to the Company's initial public offering have been
included in the computation as if they were outstanding for each period
presented.
Net loss per share for periods prior to December 31, 1995, have not
been presented since such amounts are not deemed meaningful due to the change
in ownership of Oacis on May 13, 1994, and the significant change in the
Company's capital structure that occurred in connection with the initial public
offering.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of bank deposits,
short-term investments and accounts receivable. The Company places its cash
and cash equivalents and short-term investments primarily in checking and money
market accounts, certificates of deposits, United States treasury bills and
high grade corporate instruments. The Company's accounts receivable are
derived from revenues earned from customers located primarily in the United
States and Canada. The Company performs ongoing evaluations of its customers'
financial condition and maintains an allowance for doubtful accounts based upon
the expected collectibility.
During 1996, two customers accounted for 17% and 11%, respectively, of
the Company's revenue and at December 31, 1996, these customers accounted for
5% and 7%, respectively, of total receivables. One additional
-33-
<PAGE> 33
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
customer accounted for 10% of total receivables at December 31, 1996.
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123 "Accounting for Stock Based Compensation" which establishes a
fair value based method of accounting for stock-based compensation, also
permits an election to continue following the accounting requirements of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosures of
pro forma net income and net income per share under the new method. The
Company has elected to continue accounting for stock-based compensation in
accordance with APB No. 25 and has included the disclosure provisions of SFAS
No. 123 in the footnotes to the consolidated financial statements.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses. Significant estimates used in the preparation of these financial
statements include those relating to the percentage-of-completion of
installations in process which determine revenue recognition during the
reporting period as well as estimates relating to the capitalization and
related amortization of software development costs. The estimate of a product's
useful life and its net realizable value may be affected by increased
competitive pressures and developing technologies. These factors could result
in a significant reduction in the amount of capitalized software development
costs in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of
Information about Capital Structure". The Statements are both effective for
periods ending after December 15, 1997. The Company has not yet determined the
impact on its consolidated financial statements.
RECLASSIFICATION
Certain balance sheet items have been reclassified to conform with
current year presentation.
-34-
<PAGE> 34
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest for the years ended December 31, 1996 and 1995
was $149 and $253, respectively. There was no cash interest paid in 1994.
NONCASH FINANCING ACTIVITIES
Equipment purchased under capital lease obligations for the year ended
December 31, 1996 was $578.
During 1994, in conjunction with the Oacis acquisition, assets
acquired and liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired:
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,642
In-process research and development . . . . . . . . . . . . . . . . . . 1,399
Cash paid from common stock and acquisition costs . . . . . . . . . . . (2,710)
Promissory note issued from common stock . . . . . . . . . . . . . . . . (4,500)
--------
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . $ 3,831
=========
</TABLE>
During 1994, $235 of accrued interest on the note payable to Bell
Atlantic Systems Group, Inc. was converted into note principal.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,288 $ 4,035
Unbilled accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 2,694 1,692
-------- --------
6,982 5,727
Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . (533) (622)
-------- --------
$ 6,449 $ 5,105
======== ========
</TABLE>
-35-
<PAGE> 35
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Computer and office equipment . . . . . . . . . . . . . . . . . . . . . . $ 4,583 $ 3,727
Equipment and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . 752 686
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . 568 568
------- --------
5,903 4,981
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . (3,760) (2,685)
------- --------
$ 2,143 $ 2,296
======= ========
</TABLE>
Included in property and equipment at December 31, 1996 is $578 of
computer and office equipment acquired under capital leases. Depreciation
expense for the year ended December 31, 1996, 1995, and 1994 was $1,075, $1,510
and $1,174, respectively including $62 of amortization of capital leases in
1996.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . $ 1,306 $ 1,086
Hardware and other contract-related . . . . . . . . . . . . . . . . . . . 898 922
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909 644
------- --------
$ 3,113 $ 2,652
======= ========
</TABLE>
7. LONG-TERM OBLIGATIONS
TECHNOLOGY LICENSE
In February 1996, the Company licensed technology from an independent
party that was incorporated into the Enterprise Member/Patient Index (EMPI), a
component of the Oacis Healthcare Network. Because the technology had not yet
reached technological feasibility at the date of license, and had no alternative
future use, the $700 license fee was charged to research and development
expense.
The license fee is payable without interest at varying amounts through
June 1998, based upon the volume of Oacis contracts that include the EMPI
product. Payment obligations through August 1997 total $400 and are included in
accrued expenses. An additional $300 is due between September 1997 and August
1998 which is included in long-term obligations.
-36-
<PAGE> 36
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
NOTE PAYABLE
In connection with the Oacis acquisition, the Company issued a $4,500
note payable to Bell Atlantic Systems Group, Inc. Interest on the note was at
8% per annum payable quarterly and was secured by the Common Stock of Oacis.
At the completion of the Company's initial public offering in May, 1996, the
note was repaid.
8. INCOME TAXES
No provision for income taxes has been recorded for any of the periods
presented since the Company and its Predecessor incurred net operating losses
for tax purposes.
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets are comprised of the following:
Net operating loss carryforwards . . . . . . . . . . . . . . $ 8,300 $ 6,400
Tax credit carryforwards . . . . . . . . . . . . . . . . . . 620 200
Non-deductible accruals . . . . . . . . . . . . . . . . . . 1,490 830
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 240 110
--------- -------
10,650 7,540
Deferred tax valuation allowance . . . . . . . . . . . . . . (10,650) (7,540)
--------- -------
$ -- $ --
========= =======
</TABLE>
Based on a number of factors including the lack of a history of
profits and the fact that the market in which the Company competes is intensely
competitive and characterized by rapidly changing technology, management
believes that there is sufficient uncertainty regarding the realizability of
deferred tax assets such that a full valuation allowance has been provided.
At December 31, 1996, the Company had federal and California net
operating loss carryforwards of approximately $21,000 and $8,000, respectively,
which expire in varying amounts through 2011 and 2001, respectively. The
difference between the federal and California net operating loss carryforwards
results primarily from apportionment and a 50 percent limitation on the
California loss carryforward amounts.
At December 31, 1996, federal net operating loss carryforwards and net deferred
tax assets include pre-acquisition net operating loss carryforwards of $3,200,
which expire in varying amounts through 2002. Under the Tax Reform Act of 1986,
the benefit from net operating loss carryforwards are restricted by cumulative
ownership changes of 50 percent or more over a three-year period, as defined.
Due to cumulative changes in the Company's ownership, utilization of the
Company's pre-acquisition net operating loss carryforwards are subject to annual
limitation of approximately $400 a year. In addition, due to cumulative changes
in the Company's stock ownership from May 14, 1994 to the issuance of Series B
Preferred Stock in May 1995, approximately $9,340 of federal post-acquisition
operating losses and $2,141, of California post-acquisition operating losses may
also be subject to annual limitation.
-37-
<PAGE> 37
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
9. STOCKHOLDERS' EQUITY
In May 1996, the Company completed its initial public offering of
3,220,000 shares of its Common Stock at a per share price of $10.00. At
December 31, 1995, the Company's capitalization included 10,067,000 shares of
Series A and B Convertible Preferred Stock and 1,732,000 shares of Common
Stock. The Series A and B Convertible Preferred Stock automatically converted
- - at a ratio of 2 to 1 - into newly issued shares of Common Stock upon closing
of the Company's initial public offering.
10. COMMON STOCK WARRANTS
In connection with the Oacis acquisition, the Company issued warrants
to purchase 293,211 shares of Common Stock. The warrants are exercisable at a
price of $0.44 per share and expire on May 13, 2000. At the date of
acquisition, the exercise price of the warrants approximated the fair market
value of the underlying equity instruments. In April 1996, the Company issued
warrants to purchase 19,133 shares of Common Stock at $7.84 per share in
connection with a capital lease arrangement and a secured loan agreement. The
exercise price of these warrants, which expire in May 1998, approximated their
fair value at the date of issuance.
11. STOCK COMPENSATION PLANS
In 1996, the Company adopted the 1996 stock option plan (the "1996 Plan") which
provides for the grant of incentive stock options to employees and nonstatutory
stock options and stock purchase rights to employees and consultants. A total
of 850,000 shares of Common Stock have been reserved for issuance under the
1996 Plan, 432,750 of which are available for grant at December 31, 1996. The
Company has also issued incentive stock options under prior option plans
referred to as the 1995 Plan and 1994 Plan. There are no shares available for
grant under either the 1995 Plan or 1994 Plan. The exercise price of options
granted under all of these Stock Compensation Plans is determined by the Board
of Directors and is generally not less than the fair market value of the stock
at the date of the grant. Options granted under these plans are exerciseable
for periods not exceeding 10 years from the date of grant. Options granted
under the 1995 Plan have an acceleration feature in the event of the sale of
the Company.
The Company's Director Stock Option Plan (the "Director Plan") provides each
nonemployee director with an option to purchase 10,000 shares of common stock.
In addition, on the first day following each annual meeting of stockholders,
each re-elected nonemployee director who has served as a Director for at least
six months will receive an option to purchase 2,500 shares of Common Stock.
The exercise price of all options granted under the Director Plan will be the
fair market value of the Company's Common Stock on the date of grant. Options
granted under the Director Plan vest monthly over twelve months from the date
of grant. A total of 200,000 shares of Common Stock have been reserved for
issuance under the Director Plan, 150,000 of which are available for grant at
December 31, 1996.
-38-
<PAGE> 38
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
The Company's employee stock purchase plan (the "Purchase Plan") permits
eligible employees to purchase Common Stock through payroll deductions of up to
15% of an employee's compensation, up to a maximum of $21,250 for all purchases
ending within the same calendar year. The price at which Common Stock will be
purchased under the Purchase Plan is equal to 85% of the fair market value of
the Common Stock on the first day of the applicable offering period or the last
day of the applicable purchase period, whichever is lower. A total of 250,000
shares of Common Stock have been reserved for issuance under the Purchase Plan,
204,676 of which are available for purchase at December 31, 1996.
During 1995, the Company recorded $200 of deferred stock compensation
expense for the excess of the deemed fair market value over the exercise price
at the date of grant related to certain options granted in 1995. The
compensation expense is being recognized over the option vesting period of four
years. During 1996, the Company recognized $50 compensation expense related to
deferred stock compensation.
During 1994, the Board of Directors granted non-qualified stock
options to purchase 58,600 shares of Preferred Stock and 26,340 shares of
Common Stock to certain members of the Company's management. During 1995,
46,880 and 21,072 options to purchase Preferred Stock and Common Stock,
respectively, were exercised. The remaining unexercised options expired during
1995.
Stock option transactions under the 1994 Plan, the 1995 Plan, the 1996
Plan and the Director's Plan for the year ended December 31, 1996, 1995 and
the period from May 14, 1994 through December 31, 1994 are summarized below:
<TABLE>
<CAPTION>
Weighted
Exercise Average Exercise
Shares Price Price
------ ----- -----
<S> <C> <C> <C>
Granted 348,185 $0.44 $0.44
------- ------- -----
Outstanding at December 31, 1994 348,185 0.44 0.44
Granted 875,384 0.44 - 1.50 0.62
Exercised (4,587) 0.44 0.44
Canceled (25,462) 0.44 - 1.50 0.57
-------- ------------- ----
Outstanding at December 31, 1995 1,193,520 0.44 - 1.50 0.57
Granted 650,775 2.50 - 15.00 7.58
Exercised (27,946) 0.44 0.44
Canceled (149,643) 0.44 - 6.70 1.38
--------- ----------- ----
Outstanding at December 31, 1996 1,666,706 $0.44 - 15.00 3.31
Options exercisable at December 31, 1996 648,992 $0.44 - 15.00 $1.58
</TABLE>
-39-
<PAGE> 39
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
The following tables summarize information about stock options outstanding at
December 31, 1996:
Options Outstanding at December 31, 1996
<TABLE>
<CAPTION>
Weighted
Average Remaining Weighted Average
Range of Exercise Prices Number Outstanding Contractual Life Exercise Price
------------------------ ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
$ 0.44 - $0.44 898,457 8.5 $ 0.44
1.50 - 2 .50 150,907 9.0 1.58
6.00 - 10.00 568,092 9.4 7.36
10.01 - 15.00 49,250 9.5 14.09
---------
1,666,706
=========
</TABLE>
Options Exercisable at December 31, 1996
<TABLE>
<CAPTION>
Weighted Average
Range of Exercise Prices Number Exercisable Exercise Price
------------------------ ------------------ --------------
<S> <C> <C> <C>
$ 0.44 - $0.44 511,723 $ 0.44
1.50 - 2 .50 48,525 1.76
6.00 - 10.00 83,361 7.64
10.01 - 15.00 5,383 13.92
--------
648,992
========
</TABLE>
Had compensation cost for the Company's 1996 Plan, 1995 Plan and 1994
Plan been determined based on the fair value at the grant dates, as prescribed
in SFAS 123, the net loss and pro forma net loss per share would have been as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Net Loss
As reported $ 4,573 $ 9,324
Pro Forma $ 5,095 $ 9,341
Pro Forma Net Loss Per Share
As reported $ 0.48 $ 1.22
Pro forma $ 0.54 $ 1.22
</TABLE>
The Company calculated the fair value of each option grant on the date
of grant using the Black Scholes binomial pricing method with the following
assumptions: dividend yield at 0%; weighted average expected option term of 4
years; risk free interest rate of 5.25% to 6.6% and 5.63% to 6.77% for the year
ended December 31, 1996 and 1995, respectively. The Company also assumed a
volatility factor of approximately 40% for the period subsequent to May 17,
1996, the date of its initial public offering. The weighted average fair value
of options, granted during 1996 and 1995 was $7.58 and $0.62, respectively.
Additionally, the fair value of the shares granted under the Purchase Plan is
considered to have an immaterial impact on the calculation.
-40-
<PAGE> 40
OACIS HEALTHCARE HOLDINGS CORP.
AND
BELL ATLANTIC HEALTHCARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share data)
12. EMPLOYEE BENEFIT PLANS
On May 14, 1994, the Company adopted the Oacis Healthcare Systems,
Inc. 401(k) Plan (the "401 (k) Plan") covering all eligible employees. Under
the 401 (k) Plan provisions, participants may elect to contribute up to 15
percent of their salary, subject to statutorily prescribed annual limits, on a
tax deferred basis. The 401 (k) Plan permits, but does not require, employer
matching and profit sharing contributions. All administrative expenses of the
401 (k) Plan are paid by the Company. During 1996, the Company contributed $46
to the 401 (k) Plan.
13. COMMITMENTS
The Company leases its office facilities under noncancelable operating
lease agreements which expire in February 1998 and certain computer and office
equipment under capital leases which expire through July 2000. Future minimum
payments under noncancelable operating leases and capital leases as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------ ------
<S> <C> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,008 $ 190
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 190
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 186
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 27
-------- --------
Total Minimum Lease Payments . . . . . . . . . . . . . . . . $ 1,201 593
========
Less amount representing interest . . . . . . . . . . . . . (71)
Amount due within one year . . . . . . . . . . . . . . . . . (153)
--------
Present value of future minimum lease payments,
less amounts due within one year . . . . . . . . . . . . $ 369
========
</TABLE>
Rent expense under noncancelable operating leases totaled $1,096 and
$1,133 for the year ended December 31, 1996 and 1995, $687 for the period from
May 14, 1994 through December 31, 1994, and $378 for the period from January 1,
1994 through May 14, 1994. In March 1997, the Company entered into a lease in
anticipation of the relocation of its corporate headquarters. Rent under this
lease is expected to commence in early 1998 when the facility is ready for
occupancy.
14. RELATED PARTY TRANSACTIONS
During the period from January 1, 1994 through May 13, 1994, Bell
Atlantic Systems Group, Inc. provided a working capital line of credit to Bell
Atlantic Healthcare Systems, Inc. and charged interest of $102.
During the period from January 1, 1994 through May 13, 1994, capital
contributions totaled $9,990 from Bell Atlantic Systems Group, Inc.,
including $9,158 for working capital and $832 for intercompany tax benefits.
-41-
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NOT APPLICABLE
-42-
<PAGE> 42
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning the directors and executive officers of the
Company is incorporated by reference to the sections entitled "Proposal No. 1:
Election of Directors - Nominees" and "Management - Executive Officers"
contained in the Company's definitive proxy statement with respect to the
Company's 1997 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission not later than 120 days after the end of the fiscal
year covered by this form 10-KSB (the "Proxy Statement"). Information
concerning compliance with Section 16(a) of the Exchange Act of 1934 is
incorporated by reference to the section entitled "Compliance with Section
16(a) of the Exchange Act" contained in the Company's Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by
reference to the sections entitled "Proposal No. 1: Election of Directors -
Director Compensation," "Management - Summary Compensation Table," "Management
- - Option Grants in Last Fiscal Year," "Management - Aggregated Option Exercises
in Last Fiscal year and Fiscal Year-End Option Values" and "Management -
Employment Agreement" contained in the Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial
owners and management is incorporated by reference to the section entitled
"Information Concerning Solicitation and Voting - Security Ownership of Certain
Beneficial Owners and Management" contained in the Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated by reference to the section entitled "Certain Transactions"
contained in the Company's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1* Certificate of Incorporation of Registrant
3.2x Bylaws of Registrant.
4.1+ Form of Common Stock certificate.
10.1+ 1996 Stock Plan and form of agreement
thereunder.
10.2+ 1996 Director Option Plan and form of
option agreement thereunder.
10.3+ 1996 Employee Stock Purchase Plan and form of
subscription agreement thereunder.
10.4+ Form of Indemnification Agreement entered
into between Registrant and its directors and
executive officers.
10.5+ Restated Stockholders Agreement dated as of
April 8, 1996 between the Registrant and
certain stockholders.
-43-
<PAGE> 43
10.6+ Lease dated August 30, 1990 for facilities
located at 100 Drake's Landing Road,
Greenbrae, California, together with related
expansion and extension agreements and work
agreements.
10.7+ Lease dated July 10, 1992 for facilities
located in Atlanta, Georgia, together with
an addendum thereto dated March 29, 1993.
10.8+ Employment Agreement dated May 17, 1995
between Jim McCord and Oacis Healthcare
Systems, Inc., a wholly-owned subsidiary of
the Registrant ("Subsidiary").
10.9+ Master Lease Agreement and Equipment Schedule
VL-1, each dated as of March 1, 1996, between
Comdisco, Inc. and Subsidiary.
10.11+ Standard form of Software License Agreement
for the Oacis System.
10.12 Lease dated March 19, 1997 for Facility
located at 1101 5th Avenue, San Rafael,
Marin County, California
11.1 Computation of Pro Forma Net Loss Per Share.
21.1+ Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (see page 45)
27.0 Financial Data Schedule.
* Incorporated by reference to Exhibit 3.2 previously filed with the
Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
x Incorporated by reference to Exhibit 3.3 previously filed with the Company's
Registration Statement on Form SB-2 (No. 333-02804-LA)
+ Incorporated by reference to the same numbered exhibit previously filed with
the Company's Registration Statement on Form SB-2 (No. 333-02804-LA)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three months ended December 31, 1996.
-44-
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of
Greenbrae, California, on March 30, 1997.
OACIS HEALTHCARE HOLDINGS CORP.
By: /s/ Stephen Ghiglieri
---------------------------------
Stephen Ghiglieri, Vice President of
Finance and Administration, Chief
Financial Officer and Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jim McCord and Stephen Ghiglieri, and
each of them acting individually, as his attorney-in-fact, each with the power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jim McCord Chairman of the Board and Chief Executive Officer March 30, 1997
- ------------------------------------- (Principal Executive Officer)
Jim McCord
/s/ John Kingery President, Chief Operating Officer and Director March 30, 1997
- -------------------------------------
John Kingery
/s/ Stephen Ghiglieri Vice President of Finance and Administration, Chief March 30, 1997
- ------------------------------------- Financial Officer and Secretary (Principal Financial
Stephen Ghiglieri and Accounting Officer)
Director
/s/ Alan W. Crites Director March 30, 1997
- -------------------------------------
Alan W. Crites
/s/ David Dominik Director March 30, 1997
- -------------------------------------
David Dominik
/s/ Fred Goad Director March 30, 1997
- -------------------------------------
Fred Goad
/s/ Dennis Sisco Director March 30, 1997
- -------------------------------------
Dennis Sisco
/s/ William H. Younger, Jr. Director March 30, 1997
- -------------------------------------
William H. Younger, Jr.
</TABLE>
-45-
<PAGE> 1
EXHIBIT 10.12
1101 FIFTH AVENUE
OFFICE BUILDING LEASE
1. PARTIES. This Lease, dated, for reference purposes only, March ___,
1997 is made by and between Jonathan Parker, an individual, Thomas Monahan, an
individual, and Harold A. Parker, an individual, as tenants in common (herein
called "Lessor") and Oacis Healthcare Systems, Inc., a California corporation
(herein called "Lessee").
2. PREMISES. Lessor does hereby lease to Lessee and Lessee hereby leases
from Lessor space on the first, second, and third floors or that certain
"Building" to be constructed by Lessor at 1101 Fifth Avenue, San Rafael,
California more particularly described on attached Exhibit A-1 (the "Real
Property"), in accordance with the Improvement Agreement attached hereto as
Exhibit B (the "Improvement Agreement"). The Building will consist of
approximately 76,600 sq. ft. of rentable area, of which approximately 53,659
sq. ft. of rentable area (all of the second and third floors and approximately
2,100 sq. ft. of rentable area on the ground floor) will be included in the
Premises. Attached as Exhibit A-2 is a space plan for the building indicating
the location of the Premises on each floor. The parties will measure the floor
rentable area of the Building and the Premises upon completion of the work
anticipated by the Improvement Agreement using the BOMA Z65.1-1996 standard
(provided, however that the area of the lobby atrium above the ground floor,
the roof deck area, if any, approved by Lessor pursuant to the Improvement
Agreement, and those portions of the parking garage of the Building, other than
the mechanical rooms that serve the Premises located in the parking garage,
shall not be considered in any measurement and further provided that any floor
space omitted from the Building for a second/third floor lobby atrium will be
included in the floor rentable area calculation). Upon such determination of
the rentable area of the Premises and the Building, Lessor and Lessee shall
execute an amendment to this Lease setting forth the accurate square footage of
the Premises and the Building and the accurate Lessee's proportionate share of
common operating expenses. Said Lease is subject to the terms, covenants and
conditions herein set forth and the Lessee covenants, as a material part of the
consideration for this Lease, to keep and perform each and all of said terms,
covenants and conditions by it to be kept and performed and that this Lease is
made upon the condition of said performance.
3. TERM.
a. Initial Term. The term of this Lease ("Lease Term") shall
commence on the "Commencement Date" which is the later of April 15, 1998 or the
"Substantial Completion" of the Base Building and the Interior Improvements (as
defined in the Improvement Agreement), as more particularly defined in the
Improvement Agreement and continue for a period of one hundred twenty lease
months. For the purposes of this lease the first "lease month" shall mean the
calendar month in which the Commencement Date occurs, if the Commencement Date
occurs on or before the 15th day of a calendar month or, if the Commencement
Date of the Lease occurs after the 15th day of a calendar month, the first
"lease month" shall mean the partial calendar month containing the
Commencement Date plus the succeeding full calendar month. The second "lease
month" shall mean
<PAGE> 2
the lease month following the first lease month and so forth for a period of
one hundred twenty lease months. The first "lease year" shall be the first
twelve lease months, the second calendar year shall be the thirteenth through
twenty-fourth lease months and so on throughout the ten lease years of the
Lease Term.
b. Option to Extend. Lessee is given two separate, consecutive
options to extend the Lease Term on all the provisions contained in this Lease,
each for a five-year period (the "extended terms") following expiration of the
initial term by giving notice of exercise of each option ("option notice") to
Lessor at least nine months nor earlier than fifteen months before the
expiration of the prior term, as the same may be extended; provided that, if
Lessee is in default as of the date of giving the option notice, the option
notice shall be ineffective. The rent for the extended term shall be 100% of
the fair market rental value of the Premises as of the date of commencement of
the extended term, and shall be determined in accordance with the following:
(1) Determination of Fair Market Rent.
(a) The parties shall endeavor by good faith
negotiations to agree upon the fair market rental within thirty (30) days after
Lessor's receipt of the option notice.
(b) In the event the Lessor or Lessee cannot
agree on the rent within thirty (30) days after Lessor's receipt of the option
notice, then within 15 days thereafter each party, at its own cost and by
giving notice to the other party, shall appoint a real estate broker with at
least five (5) years' full time commercial leasing experience in the San
Francisco Bay Area, to appraise and determine the fair market rental value of
the Premises ("fair market rent"). If, in the time provided, only one party
shall notice appointment of a broker, the single broker appointed shall
determine the fair market rent. If two brokers are appointed by the parties,
the two brokers shall independently, and without consultation between them,
prepare an appraisal of the fair market rent within 15 days. Each broker shall
seal its respective appraisal after completion. After both appraisals are
completed, the resulting estimates of the fair market rent shall be opened and
compared. If the value of the appraisals differ by no more than ten percent
(10%) of the value of the higher appraisal, then the fair market rent shall be
the average of the two appraisals.
(c) If the values of the appraisals differ by
more than ten percent (10%) of the value of the higher appraisal, the two
brokers shall designate a third broker meeting the qualifications set forth in
subparagraph b, above. If the two brokers have not agreed on a third broker
after ten (10) days, either Lessor or Lessee, by giving ten (10) days' notice
to the other party, may apply to the then Presiding Judge of the Superior Court
for the county in which the Building is located for the selection of a third
broker who meets the qualifications set forth in subparagraph (ii), above. The
third broker, however selected, shall be a person who has not previously acted
in any capacity for either party. The third broker shall make an appraisal of
the fair market rent within ten (10) days after selection and without
consultation with the first two brokers. The three appraisals shall then be
added together and their total divided by three, and the resulting quotient
shall be the fair market rent. If, however, the low appraisal and/or the high
appraisal are/is more than 10% lower and/or higher than the middle appraisal,
the low appraisal and/or the high appraisal shall be
-2-
<PAGE> 3
disregarded. If one appraisal is disregarded, the remaining two appraisals
shall be added together and their total divided by two, and the resulting
quotient shall be the fair market rent. If both the low appraisal and the high
appraisal are disregarded as provided in this subparagraph, the middle
appraisal shall be the fair market rent.
(2) Delay. If the determination of the rent is delayed
beyond the commencement of the extended term, Lessee shall pay rent based on
the average of the appraisals received under subparagraph (1)(b), above, as of
the extended term commencement until the first day of the month following the
determination of the rent or, if two appraisals have not been received, the
rent payable for the month immediately preceding the extension. On the first
day of the month following the determination of the rent, there shall be an
adjustment made to the rent payment then due for the difference between the
amount of rent Lessee has paid to Lessor since the extended term commencement
and the amount that Lessee would have paid if the rent as adjusted pursuant to
this subparagraph had been in effect as of the extended term commencement.
(3) Costs. Each party shall pay the fees and expenses of
their own broker, and 50% of the fees and expenses of the third broker.
(4) Criteria. The brokers shall determine the fair
market rent using the "market comparison approach," with the relevant market
being that for first class office space in the immediate area where the
Building is located. The brokers shall use their best efforts to fairly and
reasonably appraise and determine the fair market rental value of the Premises
in accordance with the terms of the lease, and shall not act as advocates for
either Lessor or Lessee. In determining the fair market rent for the Premises,
the brokers shall consider the terms and conditions of this Lease and the
condition of the Premises (ignoring for this purpose any alterations and
improvements constructed in the Premises at Lessee cost), as compared to the
terms and conditions and condition of the market comparison alternatives, and
shall make proper adjustments for any tenant inducements given to other lessees
which are not provided to Lessee under the terms of this Lease.
(5) No Further Extension. Lessee shall have no further
option to extend the term of this Lease, except as provided above.
(6) Last Month of Option Term Rent. On or before the
first day of an option term, Lessee shall pay to Lessor, in full discharge of
the Lessee's obligation to pay rent for the last month of the option term, an
amount equal to the fair market rent for the first month of the option term
determined in accordance with this Section. If this Lease terminates prior to
the expiration of the full option period, then within seven (7) days following
said termination of the Lease, the Lessor shall refund to Lessee the rent for
the last month of the option term, provided, however, that if the termination
occurs during the last month, the amount of the prepaid rent so prepaid by
Lessor to Lessee shall be prorated based on the actual number of days in said
month of the option term and if the Lease is terminated as a consequence of
Lessee's default, the reimbursement owing to Lessee may be applied by Lessor to
any unpaid rent or other damages owing to Lessor on account of Lessee's default
(with any excess refundable amount paid to Lessee as aforesaid). Sums not
timely refunded to
-3-
<PAGE> 4
Lessee by Lessor as required by this Section shall bear interest at the rate of
twelve percent (12%) per annum until refunded.
4. POSSESSION.
a. Delay. If the Substantial Completion (as defined in the
Improvement Agreement) of the Base Building and the Interior Improvements is
delayed as a consequence of a Lessee Delay, then the Substantial Completion
Date shall be deemed the date that Substantial Completion would have occurred
absent the Lessee Delay, but not earlier than the Scheduled Completion Date
specified in the Construction Schedule prepared by Lessor and Lessee pursuant
to the Improvement Agreement. Lessor hereby acknowledges that any delay in the
Substantial Completion of the Base Building and the Interior Improvements (as
so adjusted for Lessee Delay) beyond the Scheduled Completion Date therefor as
specified in the Construction Schedule (as the same may be amended by the
written agreement of the parties), will cause Lessee to incur costs not
compensated by the mere abatement of rent for the delay period and the exact
amount of such costs will be extremely difficult to ascertain. Accordingly, if
the Substantial Completion Date of the Base Building and the Interior
Improvements (as so adjusted for Lessee Delay) is delayed beyond the Scheduled
Completion Date for the Base Building and the Interior Improvements, then, in
Lessee's sole discretion, Lessee may pursue the remedies for delay specified in
the Improvement Agreement.
b. Condition of Premises on Commencement Date. On the
Commencement Date, the common, outside, and garage areas of the Base Building
and the Interior Improvements will have been constructed by well trained,
adequately supervised workers, in a good and workmanlike manner, free from
design, material and workmanship defects in accordance with the Construction
Documents (as defined in the Improvement Agreement) and all applicable laws
(including without limitation the Americans With Disabilities Act), building
codes, ordinances, rules, and regulations ("Laws") and with any title
covenants, conditions, and restrictions and casualty underwriters' requirements
applicable to said improvements or their intended use. Notwithstanding
anything to the contrary in this Lease, Lessee's acceptance or occupancy of the
Premises shall not waive the foregoing warranty and Lessor shall promptly
remedy all violations of the warranty at its sole cost and expense.
c. Early Entry. Lessor shall permit Lessee to enter the
Premises prior to the Commencement Date of the Lease Term for the purposed of
completing Lessee's Additional Work (as defined in the Improvement Agreement).
Such entry shall be subject to all the provisions of this Lease (other than
payment of Rent or Additional Rent). Said early entry shall not advance the
termination date hereinabove provided.
5. HOLDING OVER. Any holding over after the expiration of the said term,
with or without the express consent of Lessor, shall be construed as a tenancy
from month to month, and shall be on the terms and conditions herein specified,
so far as applicable. Such holding over shall not constitute an extension of
this Lease. During such holding over, Lessee shall pay rent at 125% of the
amount which would apply had the term been extended pursuant to the terms
hereunder, for such period as Lessee shall be in possession of the Premises,
and either party shall provide the other with written
-4-
<PAGE> 5
notice at least one month in advance of the date of termination of such
monthly tenancy of his intention to terminate such tenancy.
6. RENT.
a. Generally. Lessee agrees to pay to Lessor as rental, without
prior notice or demand, as "monthly rent" the sum of $2.35 per rentable square
foot of the Premises (as determined in accordance with Section 2 of this
Lease), in advance, on or before the sixty-second day following the
Commencement Date and on or before the first day of each and every successive
calendar month thereafter during the term hereof. Rent for any lease month
period during the term hereof which is for less than a full calendar month
shall be a prorated, based upon a thirty (30) day month. Said rental shall be
legal tender at the time of payment at the Office of the Building, or to such
other person or at such other place as Lessor may from time to time designate
in writing. Notwithstanding the foregoing, the sum of $378,296.00 (the
"Prepaid Monthly Rent") shall be paid by Lessee as follows: One half
($189,148) of the Prepaid Monthly Rent shall be paid to the Lessor upon
execution of this Lease. The remaining one-half of the Prepaid Monthly shall
be paid as follows:
$ 63,049 will be paid by Lessee to Lessor when the Lessor has
entered into a construction contract with the General
Contractor in accordance with the Improvement Agreement.
$ 63,049 will be paid by Lessee to Lessor when Lessor and Bank
of America have closed a construction loan for approximately
$12,000,000 with respect to the construction of the Building
Shell and the Interior Improvements executed and have
delivered the loan agreement, note, deed of trust and other
loan documents in connection therewith.
$ 63,050 will be paid by Lessee to Lessor when the General
Contractor has completed phase one of its contract (i.e.,
obtained the superstructure permit).
The Lessee's payment of said sums to Lessor shall fully discharge Lessee's
obligations to pay all monthly rent for the first sixty-one days of the Lease
Term and for the thirty-sixth, and the one hundred twentieth lease months (as
defined in Section 3.a of this Lease) of the Lease Term. If this Lease
terminates prior to the expiration of the one hundred twentieth lease month of
the Lease Term, then within seven (7) days following said termination of the
Lease, the Lessor shall refund to Lessee the Prepaid Monthly Rent as follows:
If the termination occurs prior to the Commencement Date, Lessor (or its
successor in interest) shall refund all of the Prepaid Monthly Rent Amount to
Lessee. If the termination occurs during the first lease month, the Lessor
shall refund 2/3 of the Prepaid Monthly Rent Amount plus a prorated portion of
the remaining 1/3 of the Prepaid Monthly Rent Amount based on the actual number
of calendar days in the first lease month. If the termination occurs prior to
the thirty-sixth lease month, the Lessor shall refund 2/3 of the Prepaid
Monthly Rent Amount. If the termination occurs during the thirty-sixth lease
month, Lessor shall refund 1/3 of the Prepaid Monthly Rent Amount plus a
prorated portion of 1/3 of the Prepaid Monthly Rent Amount based on the actual
number of calendar days in the thirty-sixth lease month. If the termination
occurs prior to
-5-
<PAGE> 6
the one hundred twentieth lease month, the Lessor shall refund 1/3 of the
Prepaid Monthly Rent Amount. If the termination occurs during the one hundred
twentieth lease month, Lessor shall refund a prorated portion of 1/3 of the
Prepaid Monthly Rent Amount based on the actual number of calendar days in the
thirty-sixth lease month. Further notwithstanding the foregoing, if the
termination of the Lease results from a default by Lessee, then any amount of
the Prepaid Monthly Rent refundable to the Lessee may be applied by Lessor to
any unpaid rent or other damages owing to Lessor on account of Lessee's
default, with any excess refundable amount paid to Lessee as aforesaid. Sums
not timely refunded to Lessee by Lessor as required by this Section shall bear
interest at the rate of twelve percent (12%) per annum until refunded. Rent
for any period of less than one lease month shall be prorated based on a 30-day
month.
b. Rent Schedule. The monthly rent payable under paragraph 6
shall be as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Lease Month Rent Amount
----------- -----------
- ------------------------------------------------------------------------------
<S> <C>
1 Prepaid as provided in Section 6.a
- ------------------------------------------------------------------------------
2 No rent due
- ------------------------------------------------------------------------------
3-24 $2.3500 psf*
- ------------------------------------------------------------------------------
25-35 $2.4205 psf
- ------------------------------------------------------------------------------
36 Prepaid as provided in Section 6.a
- ------------------------------------------------------------------------------
37-48 $2.4931 psf
- ------------------------------------------------------------------------------
49-60 $2.5679 psf
- ------------------------------------------------------------------------------
61-72 $2.6449 psf
- ------------------------------------------------------------------------------
73-84 $2.7242 psf
- ------------------------------------------------------------------------------
85-96 $2.8060 psf
- ------------------------------------------------------------------------------
97-108 $2.8902 psf
- ------------------------------------------------------------------------------
109-119 $2.9769 psf
- ------------------------------------------------------------------------------
120 Prepaid as provided in Section 6.a
- ------------------------------------------------------------------------------
</TABLE>
*psf = per square foot of floor rentable area of the Premises determined in
accordance with Section 2 of this Lease.
7. OPERATING EXPENSE ADJUSTMENTS. For the purposes of this Article, the
following terms are defined as follows:
-6-
<PAGE> 7
<TABLE>
<S> <C>
Base Year: The period (i) commencing on the Commencement Date, if
the Commencement Date is the first day of a calendar
month, or on the first day of the first full calendar
month immediately succeeding the Commencement Date, if
the Commencement Date is not the first day of a
calendar month, and ending on the day immediately
preceding the first annual anniversary of the first
day of said period.
Base Year Amount: For the first Comparison Year, the Base Year Amount is
equal to the Direct Expenses for the Base Year, and
for each Comparison Year after the first Comparison
Year (i.e., for the third Lease Year and following)
the Base Year Amount shall be equal to 103% of the
Base Year Amount for the previous Comparison Year.
Comparison Year: Each Lease Year commencing with the second Lease Year
of the Lease Term.
Lessee's
Proportionate Share: That percentage derived by dividing the rentable area
of the Premises by the rentable area of the Building,
calculated based on the BOMA Z65.1-1996 standard.
Direct Expenses: All direct costs of operation and maintenance, as
determined in accordance with generally accepted
accounting practices, consistently applied, and shall
include the following costs by way of illustration,
but not be limited to: real property taxes and
assessments; water and sewer charges; insurance
premiums; utilities; janitorial services; labor; costs
incurred in the management of the Building, if any;
air-conditioning and heating; elevator maintenance;
supplies; materials; equipment; and tools; including
maintenance, costs, and upkeep of all parking and
common areas. Notwithstanding anything to the contrary
in this Lease, in no event shall Lessee have any
obligation to perform or to pay directly, or to
reimburse Lessor (as a Direct Expense or otherwise)
for, all or any portion of the following repairs,
maintenance, improvements, replacements, premiums,
claims, losses, fees, charges, costs and expenses
(collectively, "Costs"):
A. Losses Caused by Others: Costs occasioned by
the act, omission or violation of Law by Lessor, any
other occupant of the Building, or their respective
agents, employees or contractors.
B. Casualties and Condemnations: Costs occasioned
by fire, acts of God, or other casualties or by the
exercise of the power of eminent domain.
C. Structural Repairs and Construction Defects:
Costs for all repairs, improvements and alterations of
the structural portions of the Building and the
Premises (including the bearing wall, the foundation,
and the roof structure) and Costs to correct any
failure of the Building or the Premises to be in the
</TABLE>
-7-
<PAGE> 8
<TABLE>
<S> <C>
Commencement Date condition required by this Lease and
the Improvement Agreement.
D. Capital Improvements: Costs (whether incurred
as a purchase, a capital lease or otherwise) relating
to repairs, alterations, improvements, equipment and
tools which could properly be capitalized under
generally accepted accounting principles, except that
subject to subparts A, B, C, E, H, and O of this
subpart (1) the entire amount of any capital repairs,
improvements or replacements completed in any
Comparison Year at a Cost of (a) less than $5,000 for
each such capital item or related series of capital
items, and (b) less than twenty thousand dollars
($20,000) for all such Costs in any Comparison Year,
shall be included in Direct Costs; and (2) the
"amortized amount" of any other Costs reasonably
incurred by Lessor (i) to complete any other capital
repairs and replacements for the common, outside, and
garage areas of the Building or the Premises, (ii) to
complete any other capital improvement or repair
required to comply with a Law applicable to said areas
of the Building or the Premises (other than a Law
applicable to the Building or the Premises on the
Commencement Date), or (iii) to make any other capital
improvement or replacement for the purpose of reducing
other Direct Costs (but only to the extent of such
reduction in Direct Cost), shall be included in Direct
Costs. The "amortized amount" of the Cost of a
capital item shall be the monthly amount derived by
amortizing all Costs reasonably incurred by Lessor
(together with the Lessor's reasonable financing
costs) with respect to such capital item over the
total months in the useful life of the capital item;
provided that the amortized amount for any month in
the useful life of the capital item after an
adjustment of the monthly rent based on the fair
market rental value of the Premises pursuant to
Section 3.b shall be deemed to be zero (to reflect the
fact that the fair market rental determination will
consider the condition of the Premises and the common,
outside and parking areas of the Building).
E. Reimbursable Expenses: Costs for which Lessor
has a right of reimbursement from others.
F. Real Estate Taxes: Taxes, assessments, all
other governmental levies, and any increases in the
foregoing occasioned by or relating to (i) land and
improvements not reserved for Lessee's exclusive or
nonexclusive use, (ii) assessments and other fees for
improvements and services which do not benefit the
Premises, or (iii) construction of improvements for
other occupants of the Building.
G. Utilities or Services: Costs (i) arising from
the disproportionate use of any utility or service
supplied by Lessor to any other occupant of the
Building, or (ii) associated with utilities and
services of a type not provided to Lessee.
</TABLE>
-8-
<PAGE> 9
<TABLE>
<S> <C>
H. Interior Improvements: The cost of any
renovation, improvement, painting or redecorating of
any portion of the Building not made available for
Lessee's use.
I. Leasing Expenses: Fees, commissions,
attorneys' fees, Costs or other disbursements incurred
in connection with negotiations or disputes with any
other occupant of the Building and Costs arising from
the violation by Lessor or any occupant of the
Building (other than Lessee) of the terms and
conditions of any lease or other agreement.
J. Reserves: Depreciation, amortization or other
expense reserves.
K. Mortgages: Interest, charges and fees
incurred on debt, payments on mortgages and rent under
ground leases.
L. Concessions and Parking: Costs incurred in
connection with the operation of any parking or
commercial concession within the Building.
M. Promotion and Art: Advertising and
promotional Costs and the Cost of sculptures,
fountains, paintings and other art objects.
N. Insurance: Insurance Costs for earthquake and
flood coverage or to the extent not customarily paid
by lessees of similar buildings in the vicinity of the
Premises, other insurance coverages, increases in
insurance Costs caused by the activities of another
occupant of the Building, insurance deductibles, and
co-insurance payments.
O. Hazardous Materials: Costs incurred to
investigate the presence of any material or substance
that has been designated as hazardous or toxic by any
governmental authority or that is regulated a threat
to human health or the environment (herein a
"Hazardous Material"), Costs to respond to any claim
of Hazardous Material contamination, personal injury,
or damage, Costs to remove any Hazardous Material from
the Building or the Premises and any judgments or
other Costs incurred in connection with any Hazardous
Material exposure or releases, except to the extent
caused by the Hazardous Material in question was
introduced into the Building by Lessee.
P. Management: Wages, salaries, compensation,
and labor burden for any employee of Lessor or its
agents or contractors and any fee paid to third
parties or retained by Lessor or its affiliates for
management and administration of the Building in
excess of an aggregate amount for all such Costs equal
to 32% of the monthly rent payable under this Lease.
</TABLE>
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<PAGE> 10
<TABLE>
<S> <C>
Q. Duplication: Costs and expenses for which
Lessee reimburses Lessor directly or which Lessee pays
directly to a third person.
</TABLE>
If the Direct Expenses paid or incurred by the Lessor for the
Comparison Year on account of the operation or maintenance of the Building of
which the Premises are a part differ from the Base Year Amount for such
Comparison Year, then the Lessee shall pay its Proportionate Share of such
difference. If, at any time (including the Base Year), less than one hundred
percent (100%) of the rentable area of the Building is occupied, Direct
Expenses will be adjusted by Lessor to reasonably approximate the Direct
Expenses that would have occurred if the Building were one hundred percent
(100%) occupied. Lessor shall estimate the amount of any increase in Direct
Expenses payable by Lessee for the first Comparison Year on or before December
31st of the Base Year, which estimate shall be divided by 12 and paid monthly
by Lessee together with Base Rent for each month during said Comparison Year.
Thereafter, Lessor shall endeavor to give to Lessee on or before the sixtieth
(60th) day following the end of a Comparison Year a statement of the Direct
Expense for said Comparison Year and the Lessor's estimate of the increases, if
any, payable by Lessee hereunder for the ensuing Comparison Year; but failure
by Lessor to give such statement by said date shall not constitute a waiver by
Lessor or Lessee of its rights under this Section. On of before the fifteenth
(15th) day following Lessee's receipt of the statement of the actual Direct
Expenses for the first Comparison Year, Lessee shall pay in full any difference
between the Base Year Amount and the Direct Expenses for the first Comparison
Year. Each year after the first Comparison Year, the actual Direct Expenses
for the prior Comparison Year shall be used as an estimate of the Direct
Expenses for said Comparison Year and Lessee shall pay to Lessor concurrently
with the regular monthly rent payments following the receipt of such statement,
an amount which will result in payment by Lessee of any excess in such estimate
of Direct Expenses over the Base Year Amount for such Comparison Year by the
end of the calendar year, taking into account any Direct Expenses payments by
Lessee prior to the statement delivery. Subsequent installments shall be
payable concurrently with the regular monthly rent payments for the balance of
that calendar year and shall continue until the next Comparison Year's
statement is rendered. If for any Comparison Year, the Direct Expenses for
such year differs from the Base Year Amount for such Comparison Year and the
estimated installments paid by Lessee for such Comparison Year is not equal to
such difference, then upon receipt of Lessor's statement for such Comparison
Year Lessee shall pay a lump sum equal to such amount (or there shall be
credited against the monthly rent next due under this Lease such amount) as may
be required to insure that Lessee has paid any such difference, and no more.
Even though the Lease Term has expired and Lessee has vacated the Premises,
when the final determination is made of the Direct Expenses for a Comparison
Year in which this Lease terminates, Lessee shall immediately pay any increase
due over the estimated expenses paid and conversely any overpayment made in the
event said Direct Expenses for the Comparison Year are less than the Base Year
Amount for such Comparison Year shall be immediately rebated by Lessor to
Lessee. If the last Comparison Year is less than an entire calender year the
Base Year Amount and the Direct Expenses for such Base Year shall be equitably
prorated to reflect the portion of the Comparison Year in the Lease Term.
8. USE. Lessee shall use the Premises for general office purposes and
shall not use or permit the Premises to be used for any other purpose without
the prior written consent of Lessor.
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<PAGE> 11
Lessee shall not do or permit anything to be done in or about the
Premises nor bring or keep anything therein which will in any way increase the
existing rate of or affect any fire or other insurance upon the Building or any
of its contents (unless Lessee pays such increase), or cause cancellation of
any insurance policy covering said Building or any part thereof or any of its
contents. Lessee shall not do or permit anything to be done in or about the
Premises which will in any way unreasonably obstruct or interfere with the
rights of other Lessees or occupants of the Building nor injure or annoy them
or use or allow the Premises to be used for any immoral or unlawful purpose,
nor shall Lessee cause, maintain or permit any nuisance in, on or about the
Premises. Lessee shall not commit or suffer to be committed any waste in or
upon the Premises.
9. COMPLIANCE WITH LAW. Lessee shall not use the Premises or permit
anything to be done in or about the Premises which will in any way conflict
with any Law now in force or which may hereafter be enacted or promulgated.
Lessee shall, at its sole cost and expense, promptly comply with all Laws now
in force or which may hereafter be in force, and with the requirements of any
board of fire insurance underwriters or other similar bodies now or hereafter
constituted, relating to, or affecting the condition, use or occupancy of the
Premises, excluding structural changes not related to or affected by Lessee's
improvements or acts. The judgement of any court of competent jurisdiction or
the admission of Lessee in any action against Lessee, whether Lessor is a party
thereto or not, that Lessee has violated any Law shall be conclusive of that
fact as between the Lessor and Lessee.
10. ALTERATIONS AND ADDITIONS. Lessee shall not make or suffer to be made
any alterations, additions or improvements ("Alterations") to or of the
Premises or any part thereof without the written consent of Lessor first had
and obtained; provided, however, that Lessee may construct (a) nonstructural
Alterations which do not materially and adversely affect the Premises or
building service systems for other tenants without Lessor's prior approval as
to the Alteration or the contractor, if the cost of such work does not exceed
Ten Thousand Dollars ($10,000) (b) after obtaining Lessor's consent to the
plans and specifications therefore (which approval shall not be unreasonably
withheld or delayed), Lessee may construct a deck on the roof of the Premises
and (c) Lessee may construct (as part of the initial Interior Improvements or
as an Alteration an atrium between the 2nd and 3rd floors of the Building
within the Premises. Any such Alterations shall be constructed at the sole
expense of the Lessee, but without any increase or decrease in the rent payable
by the Lessee under the terms of this Lease (provided, however, that any
increase or decrease in the cost of constructing the Base Building as a
consequence of the second/third floor atrium (and associated skylight) shall be
added to the Allowance or for the Interior Improvement Construction Cost as
provided in the Improvement Agreement. If Lessor's consent is required for an
Alteration it shall not be unreasonably withheld and, if Lessor does not notify
Lessee in writing of its disapproval and the reasonable grounds therefor within
seven (7) days following Lessee's request for approval, then Lessor shall be
deemed to have approved the proposed Alteration. Upon Lessee's request, Lessor
shall advise Lessee in writing whether it reserves the right to require Lessee
to remove any Alterations from the Premises upon termination of the Lease;
provided, however, upon Lessor's request, that Lessee shall replace any floor
area between the 2nd and 3rd floors of the Building removed for the
construction of an atrium between said floors. Upon the expiration or sooner
termination of the term hereof, Lessee shall, upon written demand by Lessor,
given at least thirty (30)
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<PAGE> 12
days prior to the end of the term, at Lessee's sole cost and expense, forthwith
and with all due diligence remove any Alterations made by Lessee, designated by
Lessor to be removed which Lessor has not previously agreed can be surrendered
with the Premises, and Lessee shall, forthwith and with all due diligence at
its sole cost and expense, repair any damage to the Premises caused by such
removal. All Alterations, and any other trade fixtures and personal property
installed in the Premises at Lessee's expense ("Lessee's Property") shall at
all times remain Lessee's property and Lessee shall be entitled to all
depreciation, amortization and other tax benefits with respect thereto. Except
for Alterations which cannot be removed without structural injury to the
Premises, at any time Lessee may remove Lessee's Property from the Premises,
provided Lessee repairs all damage caused by such removal. Lessor shall have
no lien or other interest whatsoever in any item of Lessee's Property, or any
portion thereof or interest therein located in the Premises or elsewhere, and
Lessor hereby waives all such liens and interests. Within ten (10) days
following Lessee's request, Lessor shall execute documents in form reasonably
acceptable to Lessee to evidence Lessor's waiver of any right, title, lien or
interest in Lessee's Property located in the Premises. In the event Lessor
consents to the making of any alterations, additions or improvements to the
Premises by Lessee, the same shall be made by Lessee at Lessee's sole cost and
expense, and any contractor or person selected by Lessee to make the same must
first be approved of in writing by the Lessor.
11. REPAIRS.
a. Lessee Obligations. Lessee shall, upon the expiration or
sooner termination of this Lease hereof, surrender the Premises to the Lessor
in the condition existing at the Commencement Date, ordinary wear and tear,
acts of God, casualties, condemnation, Hazardous Materials (other than those
introduced into the Premises by Lessee or its agents, employees and
contractors), and Alterations which Lessor states in writing may be surrendered
at the termination of the Lease, excepted. In addition, if floor area is
removed between the second and third floors of the Building to accommodate the
second/third floor atrium, the Lessee shall reimburse Lessor for the reasonable
cost actually incurred by Lessor to restore said removed floor area (up to the
maximum restoration cost agreed upon in writing by Lessor and Lessee at the
time the floor area was mutually agreed to be removed). Except as specifically
provided in this Lease and the Improvement Agreement, Lessor shall have no
obligation whatsoever to alter, remodel, improve, repair, decorate or paint the
Premises or any part thereof and, except as expressly provided in this Lease
and the Improvement Agreement, the parties hereto affirm that Lessor has made
no representations to Lessee respecting the condition of the Premises or the
Building except as specifically herein set forth.
b. Lessor Obligations. Lessor shall repair and maintain, and
Lessee shall have no duty to repair or maintain, all the common, outside and
garage portions of the Building and Lessee's Premises in good operating
condition and repair and in accordance with all applicable Laws. Lessee's
obligation, if any, to reimburse Lessor for the costs of such repairs and
maintenance shall be governed by Section 8 of this Lease. Lessor shall not be
in default for failing to make repairs until an unreasonable time has elapsed
after written notice of the need of such repairs or maintenance is given to
Lessor by Lessee. Except as expressly provided in this Lease, there shall be
no abatement of rent and no liability of Lessor by reason of any injury to or
interference with Lessee's business arising from the making of any repairs,
alterations or improvements in or to any portion of the Building or the
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<PAGE> 13
Premises or in or to fixtures, appurtenances and equipment therein, provided
however that the foregoing shall not waive any claim (apart from an offset to
rent) which Lessee may have against Lessor.
c. Hazardous Materials. To the best knowledge of Lessor: (i) no
Hazardous Material is present on or about the Building, or the soil, surface
water or groundwater thereof; (ii) no underground storage tanks or asbestos
containing building materials are present on the real property where the
Premises are located; and (iii) no action, proceeding, or claim is pending or
threatened regarding said real property concerning any Hazardous Material or
pursuant to any environmental law, rule regulation or code. Lessor has
delivered to Lessee all reports and environmental assessments concerning the
Building or any surrounding property conducted at the request of or otherwise
available to Lessor, and Lessor has complied with all environmental disclosure
obligations imposed upon Lessor by applicable Law with respect to this
transaction. Lessor, for itself and its successors and assigns, hereby waives
and releases all claims, liabilities, actions, suits, attorneys' fees, experts'
fees, cost or expenses (a "Claim"), which Lessor or its successors or assigns
may now or hereafter have against Lessee or Lessee's officers, directors,
shareholders, employees, agents, contractors, subtenants, successors and
assigns (collectively with Lessee herein after referred to as the "Lessee
Indemnitees") and Lessor hereby agrees to indemnify, defend, protect and hold
harmless the Lessee Indemnitees from any and all Claims, to the extent arising
out of or in connection with any Hazardous Material now or hereafter present on
or about the Building or the soil, groundwater, air, or building materials
thereof, except to the extent of any such Hazardous Material introduced into
the Building by a Lessee Indemnitee. Lessee, for itself and its successors
and assigns, hereby waives and releases all Claims, which Lessee or its
successor or assigns may now or hereafter have against Lessor or Lessor's
officers, directors, shareholders, employees, agents, contractors, subtenants,
successors and assigns (collectively with Lessor herein after referred to as
the "Lessor Indemnitees"), and Lessee hereby agrees to indemnify, defend,
protect and hold harmless the Lessor Indemnitees from any and all Claims, to
the extent arising out of or in connection with any Hazardous Material
introduced into the Building by a Lessee Indemnitee. This Section and Section
7.O of this Lease constitute the entire agreement of Lessor and Lessee
regarding Hazardous Materials and environmental laws, rules, regulations and
codes; and no other provision of the Lease shall be deemed to apply thereto.
12. LIENS. Lessee shall keep the Premises and the property in which the
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Lessee. Lessor may require, at
Lessor's sole option, that Lessee shall provide to Lessor, at Lessee's sole
cost and expense, a lien and completion bond or other reasonable security
against liens in a reasonable amount not exceeding one and one-half (12) times
any and all estimated cost of any improvements, additions, or alterations in
the Premises, to insure Lessor against any liability for mechanics' and
materialmen's liens and to insure completion of the work, for any work of
improvement costing in excess of $50,0000.
13. ASSIGNMENT AND SUBLETTING. Lessee shall not either voluntarily or by
operation of law assign, transfer, mortgage, pledge, hypothecate or encumber
this Lease or any interest therein, and shall not sublet the said Premises or
any part thereof, or any right or privilege appurtenant
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<PAGE> 14
thereto, or suffer any other person (the employees, agents, servants and
invitees of Lessee excepted) to occupy or use the said Premises, or any portion
thereof, without the written consent of Lessor first had and obtained, which
consent shall not be unreasonably withheld, and a consent to one assignment,
subletting, occupation or use by another person shall not be deemed to be a
consent to any subsequent assignment, subletting, occupation or use by another
person. Any such assignment or subletting without such consent shall be void,
and shall, at the option of the Lessor, constitute a default under this Lease.
Lessor's consent to any proposed assignment or subletting shall not be
unreasonably withheld nor delayed beyond the seventh (7th) day following
delivery by Lessee to Lessor of the final version of the assignment or
sublease agreement, financial statements sufficient for Lessor to reasonably
discern the financial status of the transferee, a reasonably complete
description of the transferee and the business it will be conducting in the
Premises, and such other information as Lessor shall reasonably request within
seven (7) days after Lessee's deliver of the other items required by this
sentence to Lessor. If Lessor's consent is not reasonably withheld within the
allowed time period, Lessor's consent shall be deemed not given.
Notwithstanding the foregoing, Lessee may, without Lessor's prior written
consent sublet the Premises or any portion thereof, or assign the Lease or any
interest therein, to: (i) a subsidiary, affiliate, division or corporation
controlling, controlled by or under common control with Lessee; (ii) a
successor corporation related to Lessee by merger, consolidation, nonbankruptcy
reorganization, or government action; or (iii) a purchaser of substantially all
of Lessee's assets located in the Premises. For the purpose of this Lease,
sale of Lessee's capital stock through any public exchange shall not be deemed
an assignment, subletting, or any other transfer of the Lease or the Premises.
14. HOLD HARMLESS. Lessee shall indemnify and hold harmless Lessor
against and from any and all claims to the extent arising from Lessee's use of
Premises for the conduct of its business or from any activity, work, or other
thing done, permitted or suffered by the Lessee in or about the Building, and
shall further indemnify and hold harmless Lessor against and from any and all
claims to the extent arising from any breach or default in the performance of
any obligation on Lessee's part to be performed under the terms of this Lease,
or to the extent arising from any negligence of the Lessee, or any officer,
agent, employee, guest or invitee of Lessee, and from all and against all cost,
attorneys' fees, expenses and liabilities reasonably incurred in or about any
such claim or any action or proceeding brought thereon, and, in any case,
should action or proceeding be brought against Lessor by reason of any such
claim, Lessee upon notice from Lessor shall defend the same at Lessee's expense
by counsel reasonably satisfactory to Lessor and as permitted by any Lessee's
insurer covering the claim. Except as expressly provided herein to the
contrary, Lessee as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons within the demising
walls of the Premises from any cause other than Lessor's negligence or breach
of this Lease, and Lessee hereby waives all claims in respect thereof against
Lessor.
Except as expressly provided herein to the contrary, Lessor or its
agents shall not be liable for any damage to property of Lessee or its agents
or employees entrusted to employees of the Building, nor for loss or damage to
any such property by theft or otherwise, nor for any injury to or damage to
persons or property resulting from fire, explosion, falling plaster, steam,
gas, electricity, water or rain which may leak from any part of the Building or
from the pipes, appliances or plumbing works therein or from the roof, street
or subsurface or from any other place resulting from dampness or any other
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<PAGE> 15
cause whatsoever, unless caused by or due to the negligence of Lessor, its
agents, servants or employees. Lessee shall give prompt notice following
discovery to Lessor in case of fire or accidents in the Premises or in the
Building or of defects therein or in the fixtures or equipment.
Notwithstanding anything to the contrary in this Lease, Lessor shall
indemnify and hold harmless Lessee against and from any and all claims to the
extent arising from any breach or default in the performance of any obligation
on Lessor's part to be performed under the terms of this Lease, or to the
extent arising from any negligence of the Lessor, or any officer, agent,
employee, guest or invitee of Lessor, and from all and against all cost,
attorneys' fees, expenses and liabilities reasonably incurred in or about any
such claim or any action or proceeding brought thereon, and, in any case,
should action or proceeding be brought against Lessee by reason of any such
claim, Lessor upon notice from Lessee shall defend the same at Lessor's expense
by counsel reasonably satisfactory to Lessee.
15. SUBROGATION. Notwithstanding anything to the contrary in this Lease,
the parties hereto release each other and their respective agents, employees,
successors, assignees and sublessees from all liability for injury to any
person or damage to any property that is caused by or results from a risk which
is actually insured against, which is required to be insured against under this
Lease, or which would normally be covered by the standard form of "all
risk-extended coverage" casualty insurance, without regard to the negligence or
willful misconduct of the entity so released. Each party shall obtain any
special endorsements, if required by their insurer to evidence compliance with
the aforementioned waiver. Except as expressly provided in this subsection,
nothing in this Lease shall release Lessor from, nor shall Lessee be required
to indemnify Lessor with respect to, (i) the negligence or willful misconduct
of Lessor, the other occupants of the Building, or their respective agents,
contractors, licensees or invitees; or (ii) a breach of Lessor's obligations or
representations under this Lease.
16. INSURANCE.
a. Lessee's Insurance. Lessee shall, at Lessee's expense, obtain
and keep in force during the Lease Term a policy of Combined Single Limit
Bodily Injury and Property Damage Insurance insuring Lessor and Lessee against
the liabilities typically covered by such policies and arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be in an amount not less than
$1,000,000 per occurrence. The limit of said insurance shall not, however,
limit the liability of the Lessee hereunder. Lessee may carry said insurance
under a blanket policy, providing, however, said insurance by Lessee shall have
a Lessor's protective liability endorsement attached thereto. If Lessee shall
fail to procure and maintain said insurance, Lessor may but shall not be
required to, procure and maintain same, but at the expense of Lessee.
Insurance required hereunder, shall be in companies rated A+11 or better in
"Best's Insurance Guide".
b. Lessor's Insurance. Lessor shall at all times during the
Lease Term carry the following insurance: (i) full replacement cost,
all-risk, extended coverage, casualty insurance covering the
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<PAGE> 16
Building and the improvements therein owned by the Lessor; (ii) rental loss
insurance covering loss of rents (including Lessee's Proportionate Share of
Direct Expenses in excess of the Base Year Amount) for up to 12 months from the
perils insured against pursuant to subparts (i) and (ii) of this sentence.
17. EVIDENCE OF INSURANCE. Lessee shall deliver to Lessor prior to
occupancy of the Premises copies of policies of liability insurance required
herein or certificates evidencing the existence and amounts of such insurance
with loss payable clauses reasonably satisfactory to Lessor. No policy shall
be cancelable of coverage except after ten (10) days' prior written notice to
Lessor.
18. SERVICES AND UTILITIES. Lessor agrees to furnish to the Premises
during reasonable hours of generally recognized business days, and subject to
the reasonable rules and regulations applicable to all tenants of the Building
of which the Premises are a part attached hereto as Exhibit C, electricity for
all lighting and power supplies shown on the Final Plans for the Interior
Improvements, heat and air conditioning required for the comfortable use and
occupation of the Premises, and daily janitorial service. Lessor shall also
maintain in good condition and repair and keep lighted the common stairs,
common entries, common toilet rooms and all other common areas within and
without the Building of which the Premises are a part. At a minimum, Lessor
shall furnish to Lessee the minimum levels of the following utilities and
building services set forth below without adjustment of the monthly rent and
without an obligation for Lessee to pay for such utilities and services, except
as provided in Section 8 of this Lease:
Lighting 24 hours - 7 days per week
HVAC sufficient to maintain a comfortable temperature
and ventilation in the Premises (comparable to
similar office uses) during the hours of 7 am to 7
pm, Monday thru Friday (national holidays excepted)
(the "Standard Weekday Hours") and during such
additional hours and for portions of the Premises as
Lessee shall specify for Saturdays, Sundays, national
holidays, and other Monday through Friday hours
(other than the Standard Weekday Hours). Direct
Expenses for the Base Year and each Comparison Year
shall include the cost incurred by the Lessor to
operate the HVAC during the Standard Weekday Hours
and for the equivalent of an additional four (4)
hours of full HVAC operation for the entire Premises
at other times each week. Any HVAC service in excess
of the amount to be included in Direct Expenses shall
be charged directly to the Lessee at Lessor's actual
cost.
Janitorial Service of the quality typically provided
for first class office buildings in Marin County,
Monday through Friday, except national holidays
A Limited access security system for the parking
garage, as mutually approved by Lessor and Lessee.
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<PAGE> 17
Except as otherwise expressly provided in this Lease, Lessor shall not
be liable for, and Lessee shall not be entitled to, any reduction of rental by
reason of Lessor's failure to furnish any of the foregoing to the extent such
failure is caused by accident, breakage, repairs, strikes, lockouts or other
labor disturbances or labor disputes of any character, or by any other cause,
similar or dissimilar, if the foregoing is beyond the reasonable control of
Lessor. Except as otherwise expressly provided in this Lease, Lessor shall
not be liable under any circumstances for a loss of or injury to property,
however occurring, through or in connection with or incidental to failure to
furnish any of the foregoing.
Whenever heat generating machines or equipment not reasonably
anticipated by the Interior Improvement Plans and not typically associated with
Lessee's original intended use of the Premises are used in the Premises, which
affect the temperature otherwise maintained by the air conditioning system,
after written notice to Lessee, Lessor reserves the right to install
supplementary air conditioning units in the Premises and the reasonable cost
thereof, including the reasonable cost of installation, and the reasonable cost
of operation and maintenance thereof shall be paid by Lessee to Lessor upon
demand by Lessor.
If Lessee should require water, electric current, or other additional
services and utilities in excess of the services required to be furnished by
Lessor under the terms of this Lease, Lessee shall first procure the written
consent of Lessor, which Lessor may reasonably refuse unless Lessee agrees to
pay all of Lessor's increased out-of-pocket costs associated therewith. The
Premises shall thereupon be separately metered for electricity, water, and HVAC
usage. Lessor may cause, and upon request by Lessee shall cause, other
services to be separately metered, so as to measure the amount of utilities and
services consumed for any such use can be equitably apportioned between Lessee
and the other tenants of the Building and the cost of any such meters and of
installation, maintenance and repair thereof shall be paid for by the party
initiating the installation. Lessee agrees to pay to Lessor promptly upon
demand therefor by Lessor for all such additional services and utilities
consumed as shown by said meters, at the rates charged for such services by the
local public utility furnishing the same. If a separate meter is not
installed, such cost for such water, electric current, and other utilities
consumed by Lessee in the Premises will be established by an estimate
reasonably made by a utility company or engineer.
19. PROPERTY TAXES. Lessee shall pay, or cause to be paid, before
delinquency, any and all taxes levied or assessed and which become payable
during the Lease Term upon all Lessee's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Premises; except that
which has been paid for by Lessor, and is the standard of the Building. In the
event any or all of the Lessee's leasehold improvements, equipment, furniture,
fixtures and personal property of Lessee shall be assessed and taxed with the
Building, Lessee shall pay to Lessor its share of such taxes within ten (10)
days after delivery to Lessee by Lessor of a statement in writing setting forth
the amount of such taxes applicable to Lessee's property. Lessee shall have
the right to contest the amount of any tax or assessment which Lessee is
required to pay or reimburse to Lessor under this Lease, unless Lessor notifies
Lessee that it will use all reasonable efforts to contest the tax within seven
(7) days following Lessor's receipt of Lessee's notice of its intention to
contest the tax. Lessee's Proportion
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<PAGE> 18
Share of any tax reimbursement or savings for period in the Lease Term shall
inure to the benefit of and be paid to Lessee.
20. RULES AND REGULATIONS. Lessee shall faithfully observe and comply
with the rules and regulations that Lessor shall from time to time promulgate.
Lessor reserves the right from time to time to make all reasonable
modifications to said rules. The additions and modifications to those rules
shall be binding upon Lessee upon delivery of a copy of them to Lessee. Lessor
shall not be responsible for the nonperformance of any said rules by any other
Lessees or occupants; however, to the extent such non-performance by other
tenants or occupants shall adversely affect Lessee's right to quiet enjoyment
of the Premises and upon notice to that effect by Lessee, Lessor shall take all
steps available to Lessor under its lease with such other tenant or occupant to
restore Lessee's quiet enjoyment of the Premises. Notwithstanding anything in
this Lease to the contrary, Lessee shall not be required to comply with any
rule or regulation, or change thereto unless (i) the same applies
non-discriminatorily to all occupants of the Building and does not unreasonably
interfere with Lessee's use of the Premises or Lessee's parking rights, (ii)
the Direct Expenses and other costs payable by Lessee under the Lease are not
thereby increased, (iii) such rules and regulations do not materially increase
the obligations or decrease the rights of Lessee under the Lease, and (iv) such
rules and regulations are similar to those in effect at comparable buildings in
the area.
21. ENTRY BY LESSOR. Lessor reserves and shall at any and all times have
the right to enter the Premises, inspect the same, supply janitorial service
and any other service to be provided by Lessor to Lessee hereunder, to submit
said Premises to inspection by prospective purchasers or Lessees, to post
notices of non-responsibility, and repair the Premises and any portion of the
Building of which the Premises are a part that Lessor may deem necessary or
desirable, without abatement of rent and may for that purpose erect scaffolding
and other necessary structures where reasonably required by the character of
the work to be performed, always providing that the entrance to the Premises
shall not be blocked thereby, and further providing that the business of the
Lessee shall not be interfered with unreasonably. Lessor and Lessor's agents,
except in the case of an emergency, shall provide Lessee with twenty-four (24)
hours' notice prior to entry of the Premises. During any such entry, Lessor
and Lessor's agents shall at all times be accompanied by Lessee. Lessee hereby
waives any claim for damages or for any injury or inconvenience to or
interference with Lessee's business, any loss of occupancy or quiet enjoyment
of the Premises, and any other loss occasioned thereby. For each of the
aforesaid purposes, Lessor shall at all times have and retain a key with which
to unlock all of the doors in, upon and about the Premises, excluding Lessee's
vaults, safes and files, and Lessor shall have the right to use any and all
means which Lessor may deem proper to open said doors in any emergency, in
order to obtain entry to the Premises without liability to Lessee except for
any failure to exercise due care for Lessee's property. Any 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 entry into, or a
detainer of, the Premises, or an eviction of Lessee from the Premises or any
portion thereof.
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22. RECONSTRUCTION.
a. Insured Casualty. In the event the Premises or the Building
of which the Premises are a part are damaged by fire or other peril which is
covered by insurance or which is required to be covered by casualty insurance
under the terms of this Lease ("Insured Perils"), Lessor agrees to forthwith
repair the same; and this Lease shall remain in full force and effect, except
that Lessee shall be entitled to a proportionate reduction of the rent while
such repairs are being made, such proportionate reduction to be based upon the
extent to which the destruction and/or the making of such repairs shall
interfere with the business carried on by the Lessee in the Premises. If the
damage is due to the fault or neglect of Lessee or its employees, there shall
be no abatement of rent, except to the extent of the proceeds of rental
abatement insurance carried by or required to be carried by Lessor under the
terms of this Lease.
b. Uninsured Casualty. In the event the Premises or the Building
of which the Premises are a part are damaged or otherwise rendered not
reasonably habitable for the Lessee's intended use as a result of any cause
other than Insured Perils ("Uninsured Perils"), then Lessor shall forthwith
repair the same, provided the extent of the destruction be less than fifteen
(15%) percent of said full replacement cost of the Building of which the
Premises are a part. In the event the destruction of the Premises or the
Building is to an extent greater than fifteen (15%) percent of said full
replacement cost (and Lessee does not agree to pay the restoration cost in
excess of said 15% amount), then Lessor shall have the option; (1) to repair or
restore such damage, this Lease continuing in full force and effect, but the
monthly rent to be proportionately reduced as hereinabove in this Article
provided; or (2) give written notice to Lessee at any time within sixty (60)
days after such damage terminating this Lease as of the date specified by
Lessee, which date shall be the date shall be no later than the one hundred
twenty (120) day after Lessor's giving of such notice. In the event of giving
such notice, this Lease shall expire and all interest of the Lessee in the
Premises shall terminate on said date and the Rent, reduced by a proportionate
amount, based upon the extent, if any, to which such damage interfered with the
business carried on by the Lessee in the Premises, shall be paid up to the time
of such termination, unless Lessee elects to pay the reconstruction cost of the
Premises in excess of said fifteen percent (15%) of the replacement value of
the Building. The replacement value of the Building shall in no event be less
than the original cost incurred by Lessor to construct the Base Building and
the Lessee's Interior Improvements pursuant to the Improvement Agreement,
adjusted to reflect any increases in construction cost and code compliance
prior to the date of the destructive event. In addition, to its other rights
hereunder in the event of a casualty, if Lessor is entitled to elect and does
elect to terminate this Lease on account of damage to the Building and Lessor
thereafter repairs the Building, then Lessee shall have a right of first
refusal to lease any space in the Building which was included in the Premises
on the terms and at the rental rate specified in this Lease for a term equal to
the remaining Lease Term of this Lease as of the date of Lessor's notice of
termination.
c. Damage at the End of the Term. Notwithstanding anything to
the contrary contained in this Article, Lessor shall not have any obligation
whatsoever to repair, reconstruct or restore the Premises due to an Insured or
an Uninsured Peril which during the last twelve (12) months of the Lease Term,
or any extension thereof; provided, however, that any such termination shall be
nullified by the Lessee's exercise of any option it may have to extend the
Lease Term. Lessee shall exercise
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<PAGE> 20
any such extension within fifteen (15) days following receipt of Lessor's
termination notice pursuant to this subsection.
d. Lessee's Right to Terminate. Lessor shall notify Lessee
within forth-five (45) days following any Insured or Uninsured Peril of the
length of time Lessor reasonably estimates to be necessary for completion of
restoration of the Premises and the common, outside and garage areas of the
Building. Lessee shall have the right to terminate the Lease within thirty
(30) days following receipt of such notice, if restoration or repair of the
Premises and such areas of the Building can be reasonably expected to require
more than one hundred eighty (180) days or if the actual time required to
restore such areas of the Building and the Premises actually takes more than
sixty (60) days longer than the estimated time contained in Lessor's notice.
e. Abatement of Rent. The monthly rent and excess amounts of
Direct Expenses payable by Lessee to Lessor under this Lease shall be equitable
abated to the extent of the interference with Lessee's use of the Premises
caused by an Insured or Uninsured Peril.
f. Construction Standard. If the Lease is not terminated by
Lessor or Lessee following a casualty, Lessor shall restore the Building and
the Premises to the condition in which they existed immediately prior to the
destructive event. Lessor shall not be required to repair any injury or damage
by fire or other cause, or to make any repairs or replacements of any of
Lessee's Alteration or other Lessee's Property in the Premises. The Lessee
shall not be entitled to any compensation or damages from Lessor for loss of
the use of the whole or any part of the premises, Lessee's personal property or
any inconvenience or annoyance occasioned by such damage, repair,
reconstruction or restoration, except as expressly provided to the contrary in
this Lease. The parties waive all statutory rights to terminate this Lease and
agree to solely rely on the termination provisions set forth in this Lease.
23. DEFAULT. The occurrence of any one or more of the following events
shall constitute a default and breach of this Lease by Lessee.
a. The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of seven (7) days after written notice
thereof by Lessor to Lessee.
b. The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by the Lessee, other than described in Article 24.b. below, where such failure
shall continue for a period of thirty (30) days after written notice thereof by
Lessor to Lessee; provided, however, that if the nature of Lessee's default is
such that more than thirty (30) days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commences such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion.
c. The making by Lessee of any general assignment or general
arrangement for the benefit of creditors; or the filing by or against Lessee of
a petition to have Lessee adjudged as
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bankrupt, or a petition or reorganization or arrangement under any law relating
to bankruptcy (unless, in the case of a petition filed against Lessee, the same
is dismissed within sixty (60) days); or the appointment of a trustee or a
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interests in this Lease, where such seizure is not
discharged in thirty (30) days.
24. REMEDIES IN DEFAULT. In the event of any such material default or
breach by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of a right or remedy which
Lessor may have by reason of such default or breach:
a. Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by
necessary renovation and alteration of the Premises to put the Premises in the
surrender condition required by this Lease, reasonable attorneys' fees, any
real estate commission actually paid applicable to the unexpired Lease Term;
the worth at the time of award by the court having jurisdiction thereof of the
amount by which the unpaid rent for the balance of the Lease Term after the
time of such award exceeds the amount of such rental loss for the same period
that Lessee proves could be reasonably avoided; that portion of the leasing
commission paid by Lessor and applicable to the unexpired Lease Term. Unpaid
installments of rent or other sums shall bear interest from the date due at the
rate of ten (10%) percent per annum. In the event Lessee shall have abandoned
the Premises, Lessor shall have the option of (a) taking possession of the
Premises and recovering from Lessee the amount specified in this paragraph, or
(b) proceeding under the provisions of the following Section 24.b.
b. Maintain Lessee's right to possession, in which case this
Lease shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
right and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder, subject, however, to Lessor's obligation at law to
mitigate damages.
c. Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decision of the State in which the Premises are
located.
25. EMINENT DOMAIN. If so much of the Premises shall be taken or
appropriated by any public or quasi-public authority under the power of eminent
domain as to materially interfere with the use thereof by Lessee, Lessee shall
have the right, at its option, to terminate this Lease, and Lessor shall be
entitled to any and all income, rent, award, or any interest therein whatsoever
which may be paid or made in connection with such public or quasi-public use or
purpose, and Lessee shall have no claim against Lessor for the value of any
unexpired Lease Term. In all other cases of a taking of the Premises, the
rental thereafter to be paid shall be equitably reduced. Notwithstanding the
foregoing, Lessee shall receive that portion of the condemnation proceeds
(whether by award or payment under
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threat of condemnation) for: (i) the value of any improvements installed in
the Premises at Lessee's expense; (ii) Lessee's moving cost; (iii) loss to
Lessee's goodwill as a consequence of the condemnation; and (iv) Lessee's trade
fixtures and other personal property.
26. OFFSET STATEMENT. Lessee and Lessor shall at any time and from time
to time upon not less than ten (10) days prior written notice execute,
acknowledge and deliver to the other a statement in writing, (a) certifying
that this Lease is unmodified and in full force and effect (or, if modified,
stating the nature of such modification and certifying that this Lease as so
modified, is in full force and effect), and the date to which the rental and
other charges are paid in advance, if any, and (b) acknowledge that there are
not, to Lessee's knowledge, any uncured defaults on the part of the Lessor
hereunder, or specifying such defaults if any are claimed. Any such statement
shall be requested only for the benefit of third parties in connection with
loan, purchase, merger, sales, and leasing transactions, and may be relied upon
by any prospective purchaser or encumbrancer or other third party.
27. PARKING. Lessor agrees that Lessee shall have the non-exclusive
right to use not less than 150 spaces in the underground parking garage and
approximately 22 spaces in the above ground parking court in the common area of
the Building. In addition, if Lessor assigns any exclusive parking spaces,
without charge, Lessee shall be given the exclusive use of Lessee's
Proportionate Share of all assigned parking spaces in substitution of the
non-exclusive spaces provided to Lessee by this Section. Lessor shall in no
event oversubscribe parking.
28. AUTHORITY OF LESSEE. If Lessee is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation, in accordance with a duly adopted resolution of the board of
directors of said corporation or in accordance with the by-laws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
29. GENERAL PROVISIONS.
a. Plats and Riders. Clauses, plats and riders, if any, signed
by the Lessor and the Lessee and endorsed on or affixed to this Lease are a
part hereof.
b. Waiver. The waiver by Lessor or Lessee of any term, covenant
or condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition on any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Lessor shall not be deemed to be a waiver of any preceding breach
by Lessee of any term, covenant or condition of this Lease, other than the
failure of the Lessee to pay the particular rental so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of the acceptance of
such rent.
c. Notices. All notices and demands which may or are to be
required or permitted to be given by either party to the other hereunder shall
be in writing. All notices and demands by the
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Lessor to the Lessee shall be sent by express, next business day United States
Mail, postage prepaid, addressed to the Lessee at the Premises, or to such
other places as Lessee may from time to time designate in a notice to the
Lessor. All notices and demands by the Lessee to the Lessor shall be sent by
United States Mail, postage prepaid, addressed to the Lessor at the Office of
the Building, or to such other person or place as the Lessor may from time to
time designate in a notice to the Lessee.
d. Joint Obligation. If there be more than one Lessee the
obligations hereunder imposed upon Lessees shall be joint and several.
e. Marginal Headings. The marginal headings and Article titles
to the Articles of this Lease are not a part of this Lease and shall have no
effect upon the construction or interpretation of any part hereof.
f. Time. Time is of the essence of this Lease and each and all
of its provisions in which performance is a factor.
g. Successors and Assigns. The covenants and conditions herein
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
h. Recordation. Lessor shall record a short form memorandum
hereof within ten (10) days following execution of this Lease.
i. Quiet Possession. Lessee shall have quiet possession of the
Premises for the entire term hereof, subject to all the provisions of this
Lease, until this Lease expires or is terminated in accordance with its terms.
j. Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent or other sums due hereunder 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 upon
Lessor by terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of monthly Base Rent or estimated Direct
Expenses due from Lessee shall not be received by Lessor or Lessor's designee
within ten (10) days after said amount is due or any other amount payable by
Lessee is not received by the 10th day following delivery to Lessee of a
delinquency notice, then Lessee shall pay to Lessor a late charge equal to five
(5%) percent of such overdue amount. The parties hereby agree that such late
charges represent a fair and reasonable estimate of the cost that Lessor will
incur by reason of the late payment by Lessee. Acceptance of such late charges
by the 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 granted hereunder.
k. Prior Agreements. This Lease and the Addendum contain all of
the agreements of the parties hereto with respect to any matter covered or
mentioned in this Lease, and no prior agreements or understanding pertaining to
any such matters shall be effective for any purpose. No provision of
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<PAGE> 24
this Lease may be amended or added to except by an agreement in writing signed
by the parties hereto or their respective successors in interest. This Lease
shall not be effective or binding on any party until fully executed by both
parties hereto and no amendment shall be binding on a party as a consequence of
the execution of the amendment by its successor.
l. Inability to Perform. This Lease and the obligations of the
Lessee hereunder shall not be affected or impaired because the Lessor or Lessee
is unable to fulfill any of its obligations hereunder or is delayed in doing
so, if such inability or delay is caused by reason of strike, labor troubles,
acts of God, or any other cause beyond the reasonable control of the Lessor.
m. Attorneys' Fees. In the event of any action or proceeding
brought by either party against the other under this Lease the prevailing party
shall be entitled to recover all costs and expenses including the fees of its
attorneys in such action or proceeding in such amount as the court may adjudge
reasonable as attorneys' fees.
n. Sale of Premises by Lessor and Lessee's Right of First
Refusal. In the event of any sale of the Building, Lessor shall be and is
hereby entirely freed and relieved of all liability under any and all of its
covenants and obligations contained in or derived from this Lease arising out
of any act, occurrence or omission occurring after the consummation of such
sale, to the extent such liability is assumed by Lessor's successor; and the
purchaser, at such sale or any subsequent sale of the Premises shall be deemed,
without any further agreement between the parties or their successors in
interest or between the parties and any such purchaser, to have assumed and
agreed to carry out any and all of the covenants and obligations of the Lessor
under this lease. However, If Lessor should decide to sell or otherwise
transfer, or to offer to sale or otherwise transfer, the Building, or any
portion thereof or interest therein (the "Offered Estate"), except (a) to the
spouse or lineal descendants or the transferee, (b) to a trust for the benefit
of the transferee and/or its spouse and lineal descendants, or (c) to a
corporation, partnership, limited liability company or other entity owned by
the same person who are the beneficial owners of the Lessor immediately prior
to the transfer or by said persons spouses or lineal descendants, then Lessor
shall notify Lessee of the "Basic Sales Terms" on which Lessor is willing to so
sell or transfer the Offered Estate. The Basic Sales Terms shall include all
consideration payable by the transferee for the transfer, the state of title to
be transferred, the closing date of the transaction, the parties respective
responsibilities for closing costs, and any other terms material to the
transaction which differ from the custom for transfer of real property in Marin
County, California. On or before the tenth (10th) day following Lessee's
receipt of the offer notice, Lessee shall notify the Lessor which of the
following alternatives it will elect:
(a) Lessee will acquire the Offered Estate, in
which event Lessor shall transfer the Offered Estate
to Lessee on the Basic Sales Terms stated in Lessor's
notice and otherwise in accordance with the real
property conveyancing customs of Marin County,
California.
(b) Lessee is desirous of acquiring the Offered
Estate, if agreement can be reached on terms for
transfer other than the Basic Sales Terms contained
in Lessor's notice, in which event Lessee shall
concurrently notify Lessor as to the changes to the
Basic Sales Terms contained in Lessor's notice that
are
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necessary to make such terms acceptable to the Lessee
(the "Lessee's Best Offer"). Within seven (7) days
following delivery of Lessee's Best Offer to Lessor,
Lessor shall elect to accept said offer or convey the
Offered Estate to a third party subject to the
conditions of this subpart. If Lessor elects to
accept the Lessee's Best Offer, Lessor shall convey
the Offered Estate to Lessee on the terms stated in
Lessor's notice, as amended by Lessee's Best Offer,
and in accordance with the real property conveyancing
customs of Marin County, California not inconsistent
therewith. If Lessor elects to convey the Offered
Estate to a third party, any such third party
conveyance (i) shall require payment of consideration
(calculated on a discounted present value basis) of
not less than 90% of consideration contained in the
Lessee's Best Offer and shall otherwise be on terms
and conditions, which are not in the aggregate
materially more favorable to the third party than the
other terms and conditions contained in Lessee's Best
Offer, and (ii) shall become binding upon the Lessor
and the third party not later than the one hundred
eightieth (180th) day following Lessor's receipt of
Lessee's Best Offer. If Lessor wishes to enter into
a transaction with a third party on terns which do
not comply with the foregoing or after the allowed
time, such transaction shall be deemed a new election
by Lessor to transfer the Offered Estate and shall be
subject to all of the terms and conditions of this
Section 29.n(b), except that Lessee's time for making
an election shall be reduced to three (3) business
days following Lessee's receipt of the Lessor's
reoffer notice. Lessor's failure to notify Lessee as
to whether it accepts Lessee's Best Offer shall be
deemed an election to refuse Lessee's Best Offer and
to sell the Expansion Property to a third party
subject to the provisions of this subsection.
(c) Lessee declines to acquire the Offered Estate
on any terms or conditions, in which event Lessor may
transfer the Offered Estate to any third party on
such terms as Lessee shall find acceptable, provided
such transfer closes within one-year following
delivery of the Lessee's declination notice to
Lessor. If Lessor wishes to enter into a transaction
with a third party after the allowed time, such
transaction shall be deemed a new election by Lessor
to transfer the Offered Estate and shall be subject
to all of the terms and conditions of this Section
29.n(c), except that Lessee's time for making an
election shall be reduced to three (3) business days
following Lessee's receipt of the Lessor's reoffer
notice.
Lessee's failure to provide a notice electing one of the foregoing options
within the permitted time shall be deemed an election by the Lessee under
subpart (c). The Lessee's failure to make an election or to exercise its
right to acquire any Offered Estate on any particular occasion shall not waive
Lessee's rights under this Section with respect to any other Offered Estate or
with respect to the Offered Estate on any other occasion.
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<PAGE> 26
o. Subordination, Attornment. As a condition to the
effectiveness of this Lease, Lessor shall obtain from the Lessor's construction
lender a recognition and non-disturbance agreement in form reasonably
acceptable to Lessee, which (i) provides that this Lease shall not be
terminated so long as Lessee is not in default under this Lease, (ii)
recognizes all of Lessee's rights hereunder following any foreclosure or
deed-in-lieu of foreclosure, and (iii) imposes upon the acquiror of the
Premises by foreclosure or deed-in-lieu of foreclosure the obligation to
perform the unperformed obligations of the Lessor accruing after the date such
holder acquires ownership of the Premises (herein a "recognition agreement").
Upon request of the Lessor, Lessee will in writing subordinate its rights
hereunder to the lien of any first mortgage, or first deed of trust to any
bank, insurance company or other lending institution, now or hereafter in force
against the land and Building of which the Premises are a part, and upon any
buildings hereafter placed upon the land of which the Premises are a part, and
to all advances made or hereafter to be made upon the security thereof;
provided that Lessee shall not be required to subordinate this Lease nor
execute any documents subordinating this Lease to any of the foregoing, unless
the ground lessor, lender, or other holder of the interest to which this Lease
shall be subordinated contemporaneously executes a recognition agreement. In
the event any proceedings are brought for foreclosure, or in the event of the
exercise of power of sale under any mortgage or deed of trust made by the
Lessor covering the Premises, the Lessee shall attorn to the purchaser upon any
such foreclosure or sale and recognize such purchaser as the Lessor under this
Lease, if the successor-in-interest or ground lessor in question assumes, in
writing, all unperformed obligations of the Lessor under this Lease.
p. Name. Lessee shall not use the name of the Building or of the
development in which the Building is situated for any purpose other than as an
address of the business to be conducted by the Lessee in the Premises.
q. Separability. Any provision of this Lease which shall prove
to be invalid, void or illegal shall in no way effect, impair or invalidate any
other provision hereof and such other provision shall remain in full force and
effect.
r. Cumulative Remedies. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
s. Choice of Law. This Lease shall be governed by the laws of
the State of California.
t. Signs and Auctions. Lessee shall not place any sign upon the
Premises or Building or conduct any auction thereon without Lessor's prior
written consent.
u. Right to Cure Lessor's Default. In addition to all of
Lessee's other rights and remedies at law or in equity, upon Lessor's default
of its obligations hereunder for a period of ten (10) days after delivery to
Lessor by Lessee of a notice of default (except in the case of an emergency
when no notice of default shall be required), Lessee shall have the right to
cure such default and to demand reimbursement by Lessor of the reasonable cost
of such cure, with interest thereon at the rate of twelve percent (12%) per
annum from the date of the expenditure until repaid.
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v. Signage. Lessor shall install a marquee sign indicating
Lessee's identity and logo on the exterior of the Building, in the most
prominent size and location and in the lobby(ies) of the Building in keeping
with Lessee's primary occupancy of the Building, as Lessee shall request,
subject to the requirements of applicable Law and the consent of Lessor, which
shall not be unreasonably withheld. The lobby signage shall be provided at
no cost to Lessee and all exterior signage shall be constructed at Lessee's
cost (except that upon request Lessee may include such work in the Interior
Improvements pursuant to the Improvement Agreement). The Building shall be
known and referred to as the Oacis Building so long as Lessee is the tenant
thereof.
w. Brokers. Lessee and lessor warrant that it has had no
dealings with any real estate broker or agents in connection with the
negotiation of this Lease excepting only Keegan & Coppin Company, Inc. and TRI
Commercial Brokerage and it knows of no other real estate broker or agents in
connection with this Lease.
x. Approvals. Notwithstanding anything to the contrary in the
Lease Form, whenever the Lease requires an approval, consent, designation,
determination or judgment by either Lessor or Lessee, such approval, consent,
designation, determination or judgment (including, without limiting the
generality of the foregoing, those required in connection with assignment and
subletting) shall not be unreasonably withheld or delayed and in exercising any
right or remedy hereunder, each party shall at all times act reasonably and in
good faith.
y. Reasonable Expenditures. Notwithstanding anything to the
contrary in the Lease Form, any expenditure by a party permitted or required
under the Lease, for which such party is entitled to demand and does demand
reimbursement from the other party, shall be limited to the fair market value
of the goods and services involved, shall be reasonably incurred, and shall be
substantiated by documentary evidence available for inspection and review by
the other party or its representative during normal business hours.
z. Lessor's Authority to Execute. Lessor warrants and
represents to Lessee that Lessor has the full right, power and authority to
enter into this Lease and has obtained all necessary consents and approvals
required under the documents governing its affairs in order to consummate the
Lease contemplated hereby. The persons executing this Lease on behalf of
Lessor represent to the Lessee that they have the full right, power and
authority so to do and affirm the foregoing warranty on behalf of Lessor, that
they hold all rights, fee title, and interest in the Real Property, and that
the signature of no other person is required to make the Lease binding upon
them or upon the Real Property.
aa. Lessee's Rights to Lease Additional Space in the Building.
(1) Option Rights.
(A) Expansion for 36-60 Lease Month. Lessor
hereby grants to Lessee the option to lease the area marked on Exhibit D as the
"36-60 Expansion Space" in accordance with this
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<PAGE> 28
Section. At any time during the period commencing with the first day of the
twenty-fourth (24th) lease month and ending on the last day of the thirtieth
(30th) lease month, Lessor shall give Lessee written notice (a "36-60
Availability Notice") of the date when the 36-60 Expansion Space can be
available for Lessee's occupancy, which date shall be no (i) earlier than the
first day of the third (3rd) lease year, nor (ii) later than last day of the
fifth (5th) Lease Year. If the Lessor fails to deliver a 36-60 Availability
Notice to Lessee on or before the last day of the fifty-fourth (54th) lease
month, then Lessor shall be deemed to have given Lessee a 36-60 Availability
Notice on said last day of the fifty-fourth (54th) lease month, reciting a
36-60 Availability Date of the first day of the sixth (6th) lease year. On or
before the thirtieth (30th) day following the date the Lessor's 36-60
Availability Notice is delivered or deemed delivered, Lessee shall notify
Lessor in writing whether it will exercise its option to lease the 36-60
Expansion Space. Lessee's failure to timely exercise its option shall be
deemed a refusal to exercise the option. If Lessee exercises its option to
lease the 36-60 Expansion Space, then on or before the 36-60 Availability Date,
Lessor shall deliver possession of the 36-60 Expansion Space to Lessee, broom
clean and in good condition and repair, with all electrical, water, sewer,
HVAC, security, life safety, and other building utilities and systems in good
operating condition and Lessor shall pay to Lessee an interior improvement and
moving allowance in the amount of Eighteen Dollars ($18.00) per rentable square
foot of the 36-60 Expansion Space (the "36-60 Allowance"), which Lessee shall
use for the refurbishing and improvement of the 36-60 Expansion Space and for
any moving costs reasonably incurred by Lessee. On the later of the 36-60
Availability Date or the date possession of the 36-60 Expansion Space and the
36-60 Allowance are delivered to the Lessee, (a) the Premises shall be deemed
to include the 36-60 Expansion Space, (b) the monthly rent shall be increased
by an amount equal to the rentable square footage of the 36-60 Expansion Space
times the monthly rental rate per square foot of the Premises applicable to the
Premises as of the date the 36-60 Expansion Space is added to the Premises, (c)
the Tenant's Proportionate Share of Direct Expenses shall be adjusted to the
addition of the 36-60 Expansion Space (with appropriate adjustments of the
parking spaces allocated to the Lessee hereunder), and (d) all other terms and
conditions of this Lease shall apply to the 36-60 Expansion Space. Lessee's
failure to exercise its option with respect to the 36-60 Expansion Space shall
not waive Lessee's rights under any other provisions of this Section.
(B) Expansion for 84-120 Lease Month. Lessor
hereby grants to Lessee the option to lease the area marked on Exhibit D as the
"84-120 Expansion Space" in accordance with this Section. At any time during
the period commencing with the first day of the seventy-eighth (78th) lease
month and ending on the last day of the one hundred fourteenth (114th) Lease
Month, Lessor shall give Lessee written notice (an "84-120 Availability
Notice") of the date when the 84-120 Expansion Space can be available for
Lessee's occupancy, which date shall be no (i) earlier than the first day of
the seventh (7th) lease year, nor (ii) later than last day of the initial Lease
Term. If the Lessor fails to deliver an 84-120 Availability Notice to Lessee
on or before the last day of the one hundred fourteenth (114th) lease month,
then Lessor shall be deemed to have given Lessee an 84-120 Availability Notice
on said last day of the one hundred fourteenth (114th) lease month, reciting an
84-120 Availability Date of the first day of the first option term of the
Lease. On or before the thirtieth (30th) day following the date the Lessor's
84-120 Availability Notice is delivered or deemed delivered, Lessee shall
notify Lessor in writing whether it will exercise its option to lease the
84-120 Expansion Space. Lessee's failure to timely exercise its option shall
be deemed a refusal to exercise
-28-
<PAGE> 29
the option. If Lessee exercises its option to lease the 84-120 Expansion
Space, then on or before the 84-120 Availability Date, Lessor shall deliver
possession of the 84-120 Expansion Space to Lessee, broom clean and in good
condition and repair, with all electrical, water, sewer, HVAC, security, life
safety, and other building utilities and systems in good operating condition.
On the later of the 84-120 Availability Date or the date possession of the
84-120 Expansion Space are delivered to the Lessee, (a) the Premises shall be
deemed to include the 84-120 Expansion Space, (b) the monthly rent shall be
increased by an amount equal to the 100% of the fair market rent for the 84-120
Expansion Space determined by the agreement of the parties, or if the parties
cannot agree within fifteen (15) days following delivery of the Lessee's notice
of exercise of the option, then by an appraisal conducted in accordance with
Section 3.B (with respect only to the 84-120 Expansion Space), (c) the Tenant's
Proportionate Share of Direct Expenses shall be adjusted to the addition of the
84-120 Expansion Space (with appropriate adjustments of the parking spaces
allocated to the Lessee hereunder), and (d) all other terms and conditions of
this Lease shall apply to the 84-120 Expansion Space. Lessee's failure to
exercise its option with respect to the 84-120 Expansion Space shall not waive
Lessee's rights under any other provisions of this Section.
(2) First Refusal Rights: If Lessor should decide to
lease or otherwise grant any occupancy right in, or to offer to lease or
otherwise grant any occupancy right in, any other space in the Building outside
of the Premises, including the 36-60 and 84-120 Expansion Space if such spaces
have not been leased by the Lessee (the "Expansion Space"), then Lessor shall
notify Lessee of the "Basic Lease Terms" upon which Lessor is willing to lease
the Expansion Space. The Basic Lease Terms shall include a description of the
Expansion Space, the rental rate (including any rental adjustments) the
leasehold improvements that Lessor will construct at no cost to the lessee, the
amount of any allowance Lessor will provide for construction of leasehold
improvements, the lessee's obligations to pay directly or reimburse the Lessor
for maintenance, taxes, insurance and the other costs of owing and operating
the Building and the Expansion Space, the lease term (including any options to
extent), any lease expansion or termination rights, and such other terms and
conditions as the Lessor shall elect to specify. On or before the tenth (10th)
business day after Lessee's receipt of Lessor's notice, Lessee shall notify
Lessor which of the following alternatives it will elect:
(a) Lessee will Lease the Expansion Space, in
which event Lessor shall lease to Lessee the
Expansion Space on the Basic Lease Terms stated in
Lessor's notice and the terms of this Lease not
inconsistent with the terms contained in the Lessor's
notice;
(b) Lessee is desirous of leasing the Expansion
Space, if agreement can be reached on lease terms
other than the Basic Lease Terms contained in
Lessor's notice, in which event Lessee shall
concurrently notify Lessor as to the changes to the
Basic Lease Terms contained in Lessor's notice that
are necessary to make such terms acceptable to the
Lessee (the "Lessee's Best Offer"). Within seven
(7) days following delivery of Lessee's Best Offer
to Lessor, Lessor shall elect to accept said offer or
to lease the Expansion Space to a third party subject
to the conditions of this subpart. If Lessor elects
to accept the Lessee's Best Offer, Lessor shall
lease to Lessee the Expansion Space on the terms
-29-
<PAGE> 30
stated in Lessor's notice, as amended by Lessee's
Best Offer, and the terms of this Lease not
inconsistent therewith. If Lessor elects to lease
the Expansion Space to a third party, any such third
party lease (i) shall require rent payments
(calculated on a discounted present value basis) of
not less than 90% of the rent payments under
Lessee's Best Offer and shall otherwise be on terms
and conditions, which are not in the aggregate
materially more favorable to the third party than the
other terms and conditions contained in Lessee's Best
Offer, and (ii) shall become binding upon the Lessor
and the third party not later than the one hundred
eightieth (180th) day following Lessor's receipt of
Lessee's Best Offer. If Lessor wishes to enter into
a transaction with a third party on terms which do
not comply with the foregoing or after the allowed
time, such transaction shall be deemed a new election
by Lessor to lease the Expansion Premises and shall
be subject to all of the terms and conditions of this
Section 29(aa)(2), except that Lessee time for making
an election shall be reduced to three (3) business
days following receipt by Lessee of the Lessor's
reoffer notice. Lessor's failure to notify Lessee as
to whether it accepts Lessee's Best Offer shall be
deemed an election to refuse the Lessee's Best Offer
and to sell the Expansion Property to a third party
subject to the provisions of this subsection.
(c) Lessee declines to lease the Expansion Space
on any terms or conditions, in which event Lessor may
lease the offered Expansion Space to any third party
on such terms as Lessee shall find acceptable,
provided such lease becomes binding upon Lessor and
the third party on within one-year following delivery
to Lessor of Lessee's declination notice. If Lessor
wishes to enter into a transaction with a third party
after the allowed time, such transaction shall be
deemed a new election by Lessor to lease the
Expansion Premises and shall be subject to all of the
terms and conditions of this Section 29(aa)(2),
except that Lessee's time for making an election
shall be reduced to three (3) business days following
Lessee's receipt of the Lessor's reoffer notice.
Lessee's failure to provide a notice electing one of the foregoing options
within the permitted time shall be deemed an election by the Lessee under
subpart (c). The Lessee's failure to make an election or to exercise its
right to lease any Expansion Space offered to Lessee on any particular occasion
shall not waive Lessee's rights under this Section with respect to any other
Expansion Space or with respect to the offered Expansion Space on any other
occasion.
[SIGNATURES ON NEXT PAGE]
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<PAGE> 31
LESSOR: LESSEE:
_______________________________ Oacis Healthcare Systems, Inc.,
Jonathan Parker a California corporation
_______________________________ By:_______________________________
Thomas Monahan
Printed
_______________________________ Name:_____________________________
Harold A. Parker
Its:______________________________
Dated: ________________________
By: ____________________________
Printed
Name:_____________________________
Its: ____________________________
Dated: ___________________________
-31-
<PAGE> 32
Exhibits
A-1 - Legal Description of Real Property
A-2 Site Plan
B - Improvement Agreement
C - Rules and Regulations
-32-
<PAGE> 33
EXHIBIT C
RULES AND REGULATIONS
1. Except as otherwise provided in the Lease, no sign, placard, picture,
advertisement, name or notice shall be inscribed, displayed or printed or
affixed on or to any part of the outside or inside of the Building (outside of
the Premises) without the written consent of Lessor first had and obtained and
Lessor shall have the right to remove any such sign, placard, picture,
advertisement, name or notice without notice to and at the expense of Lessee.
All approved signs or lettering on doors shall be printed, painted,
affixed or inscribed at the expense of Lessee by a person approved of by
Lessor.
Lessee shall not place anything or allow anything to be placed near
the glass of any window, door, partition or wall which may appear unsightly
from outside the Premises.
2. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by any of the Lessees or used by them for any
purpose other than for ingress and egress from their respective Premises and as
required for the moving of Lessee's Property into and from the Building.
3. Lessee shall not alter any lock or install any new or additional locks
or any bolts on any doors or windows of the Premises or the card key system.
4. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage, or damage resulting from the violation of
this rule shall be borne by the Lessee who, or whose employees or invitees
shall have caused it.
5. Lessee shall not overload the floor of the Premises or in any way
deface the Premises or any part thereof.
6. Furniture, freight or large equipment of any kind shall be brought
into the Building in such manner as Lessor shall reasonably designate so as not
be cause excess cost to Lessee. Safes or other heavy objects shall, if
considered necessary by Lessor, stand on supports of such thickness as is
necessary to properly distribute the weight. Except as otherwise expressly
provided in the Lease, Lessor will not be responsible for loss of or damage to
any such safe or property from any cause and all damage done to the Building by
moving or maintaining any such safe or other property shall be repaired at the
expense of the Lessee.
7. Lessee shall not use, keep or permit to be used or kept any foul or
noxious gas or substance in the Premises, or permit or suffer the Premises to
be occupied or used in a manner offensive or
<PAGE> 34
objectionable to the Lessor or other occupants of the Building by reason of
noise, odors, electromagnetic radiation, and/or vibrations, or interfere in any
way with other Lessees or those having business therein, nor shall any animals
or birds be brought in or kept in or about the Premises or the Building.
8. No commercial cooking appliances shall be used or permitted by any
Lessee on the Premises, nor shall the Premises be used for the storage of
merchandise, for washing clothes, for lodging, or for any illegal or immoral
purpose.
9. Lessee shall not use or keep in the Premises of the Building any
kerosene, gasoline, or inflammable or combustible fluid or material (other than
typical janitorial and office supplies in reasonable quantities) nor use any
method of heating or air conditioning other than that supplied by Lessor.
10. Lessor will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires will be
allowed without the consent of the Lessor. The location of telephones, call
boxes and other office equipment affixed to the Premises shall be subject to
the approval of Lessor.
11. On Sundays and legal holidays, Saturdays before 8:00 a.m. and after
1:00 p.m., and on other days between the hours of 7:00 p.m. and 7:00 a.m. the
following day, access to the Building, or to the halls, corridors, elevators or
stairways in the Building, or to the Premises may be refused unless the person
seeking access is known to the person or employee of the Building in charge and
has a pass or is properly identified. The Lessor shall in no case be liable
for damages for any error with regard to the admission to or exclusion from the
Building of any person. In case of invasion, mob, riot, public excitement, or
other commotion, the Lessor reserves the right to prevent access to the
Building during the continuance of the same by closing of the doors or
otherwise, for the safety of the Lessees and protection of property in the
Building and the Building.
12. Lessor reserves the right to exclude or expel from the Building any
person who, in the reasonable judgment of Lessor, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in
violation of any of the rules and regulations of the Building.
13. Lessee shall not unreasonably disturb nor solicit or canvass any
occupant of the Building and shall cooperate to prevent same.
14. Lessor shall have the right to control and operate the common areas of
the Building (including without limitation the lobby and exterior plaza), and
the public facilities, and heating and air conditioning, as well as facilities
furnished for the common use of the Lessees, so long as such control is
reasonable and does not unreasonably interfere with the use of the Premises by
the Lessee, increase the Direct Expenses payable by Lessee, or interfere with
Lessee's parking rights.
15. All entrance doors in the Premises shall be left locked when the
Premises are not in use, and all doors opening to public corridors shall be
kept closed except for normal ingress and egress from the Premises.
-2-
<PAGE> 1
Exhibit 11.1
Computation of Pro Forma Net Loss Per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Actual weighted shares: 1996 (1) 1995 (1)
<S> <C> <C>
Series A preferred stock 748 1,919
Series B preferred stock 1,215 3,114
Common stock 6,785 1,746
Dilutive Employee stock options and warrants 614 884
Warrants 69 4
----------- ----------
Total common and common equivalent shares 9,431 7,667
=========== ==========
Net loss $ (4,573) $ (9,324)
=========== ==========
Pro Forma Net loss per share $ (0.48) $ (1.22)
============ ==========
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-14633) of our report dated January 10, 1997
appearing on page 26 of the Annual Report on Form 10-KSB of Oacis Healthcare
Holdings Corp. for the year ended December 31, 1996.
PRICE WATERHOUSE LLP
San Jose, California
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET, STATEMENT OF OPERATIONS, STATEMENT OF EQUITY AND STATEMENT OF CASH FLOW
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-KSB.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,307
<SECURITIES> 18,834
<RECEIVABLES> 6,449
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,898
<PP&E> 2,143
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,712
<CURRENT-LIABILITIES> 6,058
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 25,884
<TOTAL-LIABILITY-AND-EQUITY> 32,712
<SALES> 13,818
<TOTAL-REVENUES> 20,444
<CGS> 0
<TOTAL-COSTS> 10,381
<OTHER-EXPENSES> 15,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,573)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,573)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,573)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> 0
</TABLE>
