<PAGE>
As filed with the Securities and Exchange Commission on October 28, 1999
Registration No. 333-87985
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
under
The Securities Act of 1933
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eBenX, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 7389 41-1758843
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code Number)
organization) Number)
--------------------
5500 Wayzata Boulevard, Suite 1450
Minneapolis, Minnesota 55416-1241
(612) 525-2700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Scott P. Halstead
eBenX, Inc.
5500 Wayzata Boulevard, Suite 1450
Minneapolis, Minnesota 55416-1241
(612) 525-2700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------
Copies to:
KENNETH L. CUTLER LELAND E. HUTCHINSON
SCOTT L. BARRINGTON GREGORY J. BYNAN
SCOTT A. NICHOLAS Winston & Strawn
Dorsey & Whitney LLP 35 West Wacker Drive
220 South Sixth Street Chicago, Illinois 60601
Minneapolis, Minnesota 55402-1498 (312) 558-5600
(612) 340-2600
--------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Maximum
Aggregate
Titles of Each Class of Offering Price Amount of
Securities to be Registered (1) Registration Fee
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<S> <C> <C>
Common Stock, $.01 par value.................... $69,000,000 $19,182(2)
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</TABLE>
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(1)Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
(2)$19,182 of this fee was previously paid with the original filing.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED [ ], 1999
[EBENX, INC. LOGO]
[ ] Shares
Common Stock
This is our initial public offering and no public market currently exists for
our common stock. We expect that our common stock will trade on the Nasdaq
National Market under the symbol "EBNX." We anticipate that the initial public
offering price will be between $[ ] and $[ ] per share.
--------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 4.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ [ ] $ [ ]
Underwriting Discounts..................................... $ [ ] $ [ ]
Proceeds to eBenX.......................................... $ [ ] $ [ ]
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters a 30-day option to purchase up to an
additional [ ] shares of our common stock to cover overallotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of our common stock to
purchasers on [ ], 1999.
--------------
BancBoston Robertson Stephens
Warburg Dillon Read LLC
Thomas Weisel Partners LLC
The date of this prospectus is [ ], 1999.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
We are offering to sell, and seeking offers to buy, shares of our common
stock only in jurisdictions where offers and sales are permitted. You should
rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. Information on the eBenX and Network Management Services,
Inc. Web sites are not part of this prospectus. The information in this
document is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our common stock. Except
as the context otherwise requires, the terms "eBenX," "we," "us" and "our" as
used in this prospectus refer to eBenX, Inc., together with its consolidated
subsidiary (unless the context otherwise requires).
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 4
Forward-Looking Statements .............................................. 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 17
Business................................................................. 24
Management............................................................... 38
Certain Transactions..................................................... 46
Principal Shareholders................................................... 47
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 53
Experts.................................................................. 54
Additional Information................................................... 54
Index to Financial Statements............................................ F-1
</TABLE>
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BEN-NET(R) is a registered trademark and WebElect(R) is a registered service
mark of eBenX. eBenX(TM), BenX(TM) and Benefit Exchange Network(TM) are also
our trademarks. This prospectus contains other product names, trade names and
trademarks of eBenX and of other organizations.
<PAGE>
SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially
"Risk Factors" and the consolidated financial statements and notes, before
deciding to invest in shares of our common stock.
eBenX, Inc.
We provide business-to-business e-commerce and connectivity solutions to
employers and health plans for the purchase, eligibility administration and
premium payment of group health insurance benefits. Through our proprietary and
licensed technology, we facilitate the flow of employee and dependent
eligibility and financial data between employer purchasers of group health
insurance benefits and health plan suppliers. The plan information, data and
financial exchange requirements in this $600 billion market are extremely
complex. Our proven Web-enabled services and high volume eligibility and
financial data pipelines provide the critical connectivity necessary for
employers and health plans to communicate electronically. Today, we connect
customers such as Bell Atlantic Corporation, PepsiCo, Inc., Northwest Airlines
Corporation and GE Capital Services Corporation to their wide array of health
plan trading partners.
The widespread acceptance of the Internet as a business communications
platform has created a foundation for business-to-business e-commerce that
enables employers and health plans to streamline complex processes, lower costs
and improve productivity. The purchasing, eligibility administration and
premium payment process is encumbered by inefficient procedures for gathering
and transferring data and executing payment transactions. These inefficiencies,
along with other factors unique to the group health insurance benefits market,
create an environment which is conducive to e-commerce solutions. However,
unlike other e-commerce products and services, such as buying books or
individual insurance, the complexities of the group health insurance benefits
market require deep domain knowledge and advanced technology. Currently,
employers and health plans face the following challenges:
. fragmented marketplace: multi-site, multi-state employers must purchase
health insurance from multiple, locally-based health plans;
. increasing costs: employers face pressure to purchase benefits more
effectively due to the escalating costs of providing group health
insurance benefits to employees and retirees;
. complex data: employers and health plans must exchange complex, detailed
and dynamic data in multiple formats using various system platforms;
. complex pricing and payment reconciliation: employers and health plans
must establish price on a case-by-case basis and continually reconcile
complex billing and settlement transactions; and
. government regulation: federal, state and local laws and regulations
burden the process of purchasing group health insurance benefits through
additional reporting and coverage requirements.
We are pioneering the use of the Internet to automate the purchase,
eligibility administration and premium payment process for the group health
insurance benefits market. By using our proprietary and licensed technology we
enable employers to streamline the administrative process and make purchasing
decisions in a more competitively priced market. Based on our six years of
industry experience with Fortune 1000 companies, we have developed a technology
platform that automates the data exchange, payment and reconciliation process
in this market. In 1999, we extended this technology platform to enable
enrollment data collection and plan information distribution, thus creating an
integrated end-to-end e-commerce solution for the group health insurance
benefits market.
Our technology platform enables us to introduce the first fully integrated
end-to-end e-commerce solution for the procurement of group health insurance
benefits. We believe that with this technology platform and our
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industry expertise we can fundamentally change the way group health insurance
benefits are purchased. Using this e-commerce solution, our near-term strategy
is to increase our penetration of, and service offerings to, the Fortune 1000
market, to leverage our technology through relationships with insurance brokers
to penetrate the mid-size employer market and to establish additional strategic
relationships.
The Offering
<TABLE>
<C> <S>
Common stock offered................................ [ ] shares
Common stock to be outstanding after this offering.. [ ] shares
Use of proceeds..................................... We intend to use the net
proceeds of this offering
for general corporate
purposes, including
working capital, sales
and marketing
expenditures, development
of new products and
services, investment in
technology infrastructure
and possible
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.............. EBNX
</TABLE>
Common stock to be outstanding after this offering does not include:
. 1,098,366 shares issuable upon exercise of outstanding stock options
under existing stock option plans;
. 27,805 shares issuable upon exercise of outstanding warrants; and
. 1,118,974 shares available for future grant or issuance under our stock
option plans.
See "Management--Employee Benefit Plans," "Description of Capital Stock" and
Note 4 of "Notes to Financial Statements," beginning on page F-9.
--------------------
Our headquarters are located at 5500 Wayzata Boulevard, Suite 1450,
Minneapolis, Minnesota 55416-1241 and our telephone number is (612) 525-2700.
Our Web site addresses are www.ebenx.com and www.networkmanagementinc.com. In
September 1999, we changed our name from Network Management Services, Inc. to
eBenX, Inc.
The foregoing information reflects a [ ]-for-one split of our common stock
on [ ], 1999. Unless otherwise indicated, all information contained in this
prospectus assumes that the underwriters' overallotment option is not exercised
and reflects the conversion of all outstanding preferred stock into common
stock immediately prior to the commencement of this offering.
2
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Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months
Year Ended December 31, ended June 30,
-------------------------------------- ---------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------- ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............. $ 904 $2,497 $4,360 $7,093 $10,122 $3,929 $ 7,108
(Loss) income from
operations............ (177) 31 (779) (713) (1,186) (998) (1,262)
Net (loss) income....... (166) 62 (581) (500) (1,042) (915) (1,112)
Basic and diluted net
(loss) income per
share................. $ (.15) $ .06 $ (.53) $ (.45) $ (.90) $ (.80) $ (.95)
Shares used in basic and
diluted net income
(loss) per share...... 1,078 1,098 1,104 1,125 1,154 1,150 1,165
Pro forma basic and
diluted net loss per
share................. (.42) (.46)
Shares used in pro forma
net loss
per share............. 2,162 2,409
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------------
Actual As Adjusted
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(unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 9,268 $
Working capital........................................ 10,821
Total assets........................................... 14,303
Long-term obligations, net of current portion.......... --
Total shareholders' equity............................. 12,772
</TABLE>
The "as adjusted" column in the Balance Sheet Data table gives effect to the
receipt and application of the estimated net proceeds from our sale of the [
] shares of common stock offered by this prospectus at an assumed initial
public offering price of $[ ] per share, after deducting the estimated
underwriting discount and offering expenses that we will pay. See "Use of
Proceeds" and "Capitalization" for a further description of the estimated
proceeds of this offering.
See Note 1 of "Notes to Financial Statements," beginning on page F-7, for an
explanation of the methods used to compute basic and diluted net (loss) income
per share data and pro forma basic and diluted net loss per share data.
3
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to purchase shares of our common stock. If
any of the following risks actually occur, our business and operating results
could be harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have had net losses over the past several years and we may not be able to
achieve or maintain profitability in the future.
Our business strategy may be unsuccessful and we may never achieve or
maintain significant revenues or profitability. With the exception of fiscal
1995, we have incurred net losses each year since we began operations in 1993.
We had net losses of approximately $1.0 million for the year ended December 31,
1998 and $1.1 million for the six month period ended June 30, 1999, and an
accumulated deficit of $3.3 million as of June 30, 1999. We expect to continue
to incur significant development, sales and marketing and other operational
expenses in connection with our business. We may also incur expenses in
connection with acquisitions or other strategic relationships. As a result of
these expenses, we will need to generate significant quarterly revenue
increases to achieve and maintain profitability. We expect that we will incur
net losses for the next several years.
We rely significantly on a limited number of customers and the loss of any
material customer could harm our business and operating results.
In 1998, two customers accounted for approximately 40% of our total revenue.
In 1999 to date, ten customers have accounted for approximately 90% of our
total revenue. The loss of a material customer would significantly reduce our
revenue and harm our business and operating results. Further, because increased
employee participation from existing customers has substantially contributed to
our revenue growth, the loss of any material customer would harm our prospects
for future growth. We may continue to depend upon a small number of customers
for a substantial percentage of our revenue in the future.
Our success depends on industry acceptance of our products and services.
Our success depends on our ability to provide products and services to a
large number of employers with a substantial base of participating employees
and to efficiently and accurately collect and process eligibility data and
execute payment transactions with numerous health plans. The acceptance by
employers of our products and services will require that all participants in
the group health insurance benefits market adopt new methods of administering
benefits, exchanging eligibility information and executing payment
transactions. These industry participants may not accept our products and
services as a replacement for traditional methods of operation.
Further, our products and services facilitate competition among health plans
at the employer level by creating an infrastructure that allows multiple health
plans to service a single employer. Health plans have in the past resisted
servicing smaller companies on a non-exclusive basis. This resistance may
inhibit our growth, especially in the mid-size employer market.
We face intense competition in our industry and, if we are unable to compete
successfully, our business and operating results will be seriously harmed.
The group health insurance benefits industry is intensely competitive,
rapidly evolving and subject to sudden technological change. We believe that
the principal competitive factors in this market are health
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and managed care expertise, data integration and transfer technology, benefits
processing technology, customer service and support and product and service
fees. We expect competition to increase in the future. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any one of which could seriously harm our business and operating
results.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the human resource and
information systems departments of the Fortune 1000 companies that perform
their own health care administration services. In the mid-size employer market
we compete with health benefit brokers and regional brokers. In addition, many
human resource systems and service companies have the health care expertise and
financial strength to develop the technology necessary to compete with us. As
the market evolves we expect increased competition from Internet-based service
providers in both the health care connectivity market between suppliers and
providers (e.g., physicians, hospitals and pharmacies) and the online insurance
market.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than we do. In addition, many of our competitors have well-
established relationships with our current and potential customers and have
extensive knowledge of our industry. Current and potential competitors have
established or may establish strategic relationships among themselves or with
third parties to increase the ability of their products and services to address
employer needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share.
Failure to manage our growth effectively will harm our business and operating
results.
Continued rapid growth will place significant strain upon our management and
operational systems and resources. Failure to manage our growth effectively
will harm our business and operating results. We will need to expand our
existing information systems or acquire new systems to meet the requirements of
our future operations. Any expansion or replacement of our information systems
may not be sufficient to meet our needs. In addition, we may experience
interruptions of service as we expand these systems.
We recently have hired a significant number of new employees, including key
executives. We will continue to add personnel to maintain our ability to grow
in the future. We must integrate our new employees and key executives into a
cohesive team and at the same time increase the total number of employees and
train and manage our employee work force in a timely and effective manner to
expand our business. We may not be able to do so successfully.
Unsuccessful efforts or incurrence of unanticipated expenses in selling our
products and services could harm our business and operating results.
The time, expense and effort of securing customers may exceed our
expectations and may harm our business and operating results. The decision to
implement our products and services requires a substantial and technical
analysis of a customer's healthcare benefits offerings and requirements and
time-intensive education of the customer of the advantages of our products and
services. Consequently, the length of our sales cycle generally varies from
three to twelve months. We, therefore, often devote significant resources and
incur costs without any assurance that a prospective customer will purchase our
products or services.
Our future growth depends upon our establishment and maintenance of successful
relationships with strategic partners.
We believe that our future growth depends in part upon the successful
creation and maintenance of relationships with strategic partners such as
front-end healthcare information collection companies, human resources
information services firms, healthcare benefits consultants and brokers and
other industry participants. To date, we have established only a limited number
of strategic relationships. Strategic partners may offer
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products or services of several different companies, including products and
services that compete with our products or services. Strategic partners and
potential strategic partners may be influenced by our competitors to scale back
or end their relationships with us. We may not establish additional strategic
relationships and these relationships may not be ultimately successful. Our
strategic partners may not devote adequate resources to selling our products
and services.
If we are unable to establish and maintain successful strategic
relationships, we may have to devote substantially more resources to the sales
and marketing of our products and services.
Our quarterly results likely will fluctuate which may subject the market price
of our common stock to rapid and unpredictable change.
Historically, we obtain 75% of each year's new customer commitments during
the months of February through May because most employers have open enrollment
periods for the selection of health plans by their employees in the fall. We
expect this seasonality in our business to continue. Our expenses are
relatively fixed in the short term and are based in part on our expectations of
future revenues, which may vary significantly. If we do not achieve expected
revenue targets, we may be unable to adjust our spending quickly enough to
offset any revenue shortfall which could harm our business and operating
results. Quarterly fluctuations in our operating results may subject the market
price of our common stock to rapid and unpredictable change.
Other factors that may cause such quarterly fluctuations include:
. the number and size of new customers starting services;
. the decision of one or more customers to delay implementation or cancel
ongoing services;
. seasonality;
. our ability to design, develop and introduce new services and features
for existing services on a timely basis;
. costs associated with strategic acquisitions and alliances or
investments in technology;
. the success of any such strategic acquisition, alliance or investment;
. costs to transition to new technologies;
. expenses incurred for geographic and service expansion;
. price competition;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
Failure to retain our key executives or attract and retain qualified technical
personnel could harm our business and operating results.
The loss of one or more of our executive officers could inhibit the
development of our business and, accordingly, harm our business and operating
results. While we generally enter into employment agreements with our key
executive officers, we may not be able to retain them.
Qualified personnel are in great demand throughout the Internet and
healthcare industries. Our future growth and our ability to achieve our
financial and operational objectives will depend in large part upon our ability
to attract and retain highly skilled technical, engineering, sales and
marketing and customer support personnel. Our failure to attract and retain
personnel may limit the rate at which we can expand our business, including the
development of new products and services and the retention of additional
customers, which could harm our business and operating results.
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<PAGE>
We could be subject to potential liability claims related to our products and
services.
Errors in the performance of our products or services on behalf of an
employer could result in the delay of processing of healthcare eligibility
information or execution of payment transactions or could otherwise result in
financial or other damages to our customers. These errors also may result in
the improper denial of healthcare benefits to employees. A liability claim
brought against us by an employer or an employee, even if not successful, would
likely be time consuming and costly and could seriously harm our business and
reputation.
Our customer agreements generally require that we indemnify our customers for
certain losses and liabilities incurred by them that are caused by us. Any
indemnification payments required under these agreements may harm our business
and operating results.
We also may become party to litigation brought by a participating employee
against an employer or health plan. We may not successfully avoid liability for
problems related to the provision of healthcare benefits even though we do not
make medical determinations or coverage decisions. Any claims or litigation
also could require expenditures in terms of management time and other resources
to defend ourselves. This could require us to implement measures to reduce our
exposure to this liability, which may require us, among other things, to expend
substantial resources or to discontinue certain product or service offerings or
to take other precautions. Liability of this type could harm our business and
operating results.
Failure to raise additional capital to fund our future operations and satisfy
working capital needs may harm our business and operating results.
We do not currently generate sufficient cash to fully fund operations. To
date, we have financed our operations principally through the issuance of
equity securities and, to a limited extent, through borrowings. We may need to
raise additional capital in the future to fund our ongoing operations and to
support expansion of our business. We may not be able to obtain additional
financing when needed or on terms favorable to us. Any difficulty in obtaining
additional financing may require us to limit our operations or may inhibit our
future growth.
The failure to successfully integrate any future acquisitions could harm our
business and operating results.
In order to remain competitive or to expand our business, we may find it
necessary or desirable to acquire other businesses, products or technologies.
If we identify an appropriate acquisition candidate, we may not be able to
negotiate the terms of the acquisition successfully, to finance the acquisition
or to integrate the acquired businesses, products or technologies into our
existing business and operations. Further, completing a potential acquisition
and integrating an acquired business may strain our resources and require
significant management time. Acquisition financing may not be available on
terms that are favorable to us, if available at all. In addition, we may be
required to amortize significant amounts of goodwill and other intangible
assets in connection with future acquisitions which would harm our operating
results.
Consolidation in the healthcare industry may interfere with our business.
Our products and services are, in large part, beneficial to employers because
we are able to coordinate the exchange of eligibility and financial data and
execute payment transactions between an employer and its numerous health plans.
Consolidation in the healthcare industry may require us to reconfigure our
products, services and systems to accommodate a change in data formats and
codes utilized by recently acquired or consolidated health plans. Further, the
consolidation of health plans operating in the same geographic market may
substantially reduce the number of competitive health plans in that market.
Existing and potential customers, especially mid-size market employers that
operate in only one geographic market, may not find our products and services
beneficial if there is only limited competition among health plans.
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Our business will suffer if the integrity of our systems is inadequate.
Our systems process vast amounts of eligibility and financial data and
execute large numbers of payment transactions. Any delay or failure in our
systems or in our ability to communicate electronically with employers and
health plans or in our ability to collect, store, analyze or process accurate
eligibility and financial data may result in the denial of healthcare benefits,
or in the delay or failure to execute payment transactions accurately. This
type of denial or failure would harm our business and operating results.
The occurrence of a catastrophic event or other system failure at our
facilities could interrupt our operations or result in the loss or corruption
of stored data. In addition, we depend on the efficient operation of Internet
and network connections among our systems, employers and health plans. These
connections depend on the efficient operation of data exchange tools, Web
browsers, Internet service providers and Internet and network backbone service
providers. In the past, Internet users have occasionally experienced
difficulties with Internet and online services due to system failures. Any
disruption in Internet or network access provided by third parties could harm
our business and operating results. Further, we are dependent on hardware
suppliers for prompt delivery, installation and service of equipment used to
deliver our services.
Our business will suffer if we or our business partners experience Year 2000
compliance problems or related system failures.
We may experience Year 2000 compliance problems requiring substantial
revisions to our systems. In addition, third party software, hardware or other
technology incorporated into our information systems or upon which our business
depends may need to be revised or replaced as a result of Year 2000 compliance
problems. Any revision to our systems or revision or replacement of third-party
software, hardware or other technology could be time consuming and expensive.
In addition, a failure to identify, fix and/or replace these systems or third-
party software, hardware or other technology in a timely manner could disrupt
our business operations and result in lost revenue, increased operating costs,
the loss of customers and other business interruptions.
Our customers may also experience Year 2000 compliance problems or related
system failures. These problems and failures could result in our inability to
properly collect eligibility and financial data and process payments on behalf
of employers and could generally interrupt our delivery of products and
services. Any inability to perform, or interruption in the performance of,
services on behalf of any employer or health plan could harm our business and
operating results.
Furthermore, our business depends upon products, services and technology
provided by third parties, such as health care providers and insurers,
insurance and health care brokers, information technology consultants, network
support providers, telecommunication companies, Internet service and access
providers, third-party service providers, vendors, business partners and others
outside our control. These parties' information and non-information systems may
not be Year 2000 compliant. Any failure by such entities to be Year 2000 ready
could result in a disruption of our business, or could result in a systemic
failure beyond our control. A prolonged Internet or communications failure
could also prevent us from performing services on behalf of customers. A
failure of any of these parties to be Year 2000 ready could harm our business
and operating results. Also, a systemic failure could require potential
customers to dedicate substantial resources towards fixing or resolving Year
2000 compliance problems and may make the sales and marketing of our services
more difficult.
Our business and reputation may be harmed if we are unable to protect the
privacy of our customer information.
Our information systems and Internet communications may be vulnerable to
damage from physical break-ins, computer viruses, programming errors, attacks
by computer hackers or similar disruptive problems. A user who is able to
access our computer or communication systems could gain access to confidential
employer, employee or health plan information or our own confidential
information. A material security breach could
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harm our business and our reputation or could result in liability to us.
Therefore, it is critical that our facilities and infrastructure remain secure.
The occurrence of any of these events could result in the interruption, delay
or cessation of our services, which could harm our business or operating
results. Further, our reputation may suffer if third parties were to obtain
this information and we may be liable for this disclosure. Any effect on our
reputation or any liability for any disclosure could harm our business and
operating results.
We depend in part on increasing use of the Internet and on the growth of e-
commerce.
Rapid growth in the use of the Internet is a recent phenomenon. As a result,
its acceptance and use may not continue to develop at historical rates and a
sufficiently broad base of business customers may not adopt or continue to use
the Internet as a medium of commerce. Demand and market acceptance for recently
introduced products and services over the Internet are subject to a high level
of uncertainty, and there exist few proven products and services.
Our future profitability depends, to a certain extent, upon increased
employer demand for additional Internet and e-commerce solutions that we are in
the process of developing or may develop in the future.
We may be unable to adequately protect our intellectual property rights. We may
be subject to substantial claims if we infringe upon the intellectual property
rights of third parties.
Our success depends in part upon our intellectual property rights to products
and services which we develop. We rely on a combination of contractual rights
including non-disclosure agreements, trade secrets, copyrights and trademarks
to establish and protect our intellectual property rights in our products,
services and related technology. Loss of intellectual property protection on
any of our confidential information or technology could harm our business and
operating results.
We currently have no registered patents or pending patent applications
covering any of our technology. We have received a U.S. trademark registration
for BEN-NET and a U.S. service mark registration for WebElect. These
registrations may not be enforceable or effective in protecting the BEN-NET or
WebElect marks. We may in the future file patent, trademark or service mark
applications. These applications may not be approved or, if approved, may not
be enforceable or effective in protecting our technology, trademarks or service
marks.
We typically enter into non-disclosure and confidentiality agreements with
our employees and consultants with access to sensitive information. These
agreements may not be adequate to protect our intellectual property rights or
prevent misappropriation of our technology. Products and services with features
similar to our products and services may be independently developed.
Although we believe that our core technology has been independently developed
and that none of our technology or intellectual property infringes on the
rights of others, third parties may assert infringement claims against us in
the future. We may be required to modify our products, services, internal
systems or technologies or to obtain a license to permit our continued use of
those rights. We may not be able to do either in a timely manner or upon
reasonable terms and conditions. Failure to do so could harm our business and
operating results. In addition, future litigation relating to these matters
could result in substantial cost to, and diversion of resources by, us. Adverse
determinations in any such litigation or proceedings also could subject us to
significant liabilities to third parties and could prevent us from using
certain of our products, services, internal systems or technologies.
Rapidly changing technology may impair our financial performance.
Our business depends upon the use of software, hardware, networking and
Internet technology and systems. These technologies and systems are rapidly
evolving and are subject to rapid change and obsolescence. As these
technologies mature, we must be able to quickly and successfully modify our
products
9
<PAGE>
and services to adapt to such change. We may encounter difficulties that could
delay or harm the performance of our products or services. We may not be able
to respond to technological changes in a timely and cost-effective manner. In
addition, our competitors may develop technologically superior products and
services. Further, data formatting and eligibility rules within a particular
employer or health plan, or within the group health benefits industry as a
whole, may change and may require substantial and expensive re-engineering of
eligibility data and adjustment of the tools we use to process this eligibility
data.
State, federal and local laws could harm our business and operating results.
The healthcare industry is highly regulated by federal, state and local laws.
The application of existing laws, or the implementation of new laws, applicable
to our business could harm our business and operating results. For example, the
confidentiality of patient records and the circumstances under which records
may be released for inclusion in our databases may be subject to substantial
regulation by state governments. These state laws govern both the disclosure
and the use of confidential patient medical records. Although compliance with
these laws currently is principally the responsibility of health care providers
and health plans, these regulations may be extended to cover our business and
the eligibility data and other information that we include in our databases.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
mandates the use by health plans of standard transactions, identifiers,
security and other provisions by the year 2000. We have designed our products
and services to comply with HIPAA, but any change in federal standards would
require us to expend additional resources. In addition, the success of our
compliance efforts may be dependent on the success of healthcare industry
participants in dealing with these new standards.
Further, our role in facilitating payments by employers to health plans may
subject us to the Employee Retirement Income Security Act. This act imposes
certain fiduciary duties on employers and health plans with respect to payments
made on behalf of participating employees and it is possible that these
fiduciary duties could be deemed to apply to us. In that event, we may become
subject to greater liability with respect to such payments and may experience
higher operating costs in order to comply with such regulation. These increases
in operating costs may harm our business and operating results.
State laws and regulations concerning the sale, marketing or distribution of
insurance over the Internet may adversely affect our business and operating
results.
The insurance industry is subject to extensive regulation under state laws.
Insurance laws and regulations cover all aspects of the insurance process,
including sales techniques, underwriting for eligibility, rates, claim payments
and record keeping by licensed insurance companies and insurance agents.
A company that does business as an insurance agent is generally required to
be licensed in each state in which it conducts that business. In the future,
our business or other activities may be considered by insurance regulatory
authorities to fall under their licensing jurisdiction. Should our business
activities require our licensing as an insurance agent, we would incur
increased costs and restrictions on our business which could harm our business
and financial results. Further, because the application of e-commerce to the
insurance market is relatively new, the impact of current or future insurance
laws and regulations on our business is difficult to anticipate.
Risks Related to this Offering and Ownership of Our Common Stock
The price for our common stock may be volatile due to a number of variables.
Prior to this offering, there has not been a public market for our common
stock. An active trading market for our common stock may not develop or be
sustained after completion of this offering. The initial public offering price
of our common stock may not be indicative of the prices that will prevail in
the public market
10
<PAGE>
after the offering, and the market price of our common stock could fall below
the initial public offering price. You may not be able to resell your shares at
or above the initial public offering price due to a number of factors,
including:
. actual or anticipated quarterly variations in our operating results;
. changes in expectations as to our future financial performance or
changes in financial estimates, if any, of securities analysts;
. announcements of new healthcare products, services or technological
innovations;
. announcements relating to strategic relationships and transactions;
. customer relationship developments;
. strategic alliance developments;
. regulatory changes;
. conditions generally affecting the group health insurance benefits
industry;
. success of our operating strategy;
. competition; and
. the operating and stock price performance of other comparable companies.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
Internet and e-commerce companies and which have often been unrelated to the
operating performance of these companies.
Future sales of our common stock in the public market after the offering could
cause the price of our common stock to decline.
We cannot predict the timing or amount of future sales of shares of our stock
or the effect, if any, that market sales of shares, or the availability of
shares for sale, will have on the prevailing market price of our common stock.
If our shareholders sell substantial amounts of our common stock in the public
market following the offering, the price of our common stock could fall. Upon
completion of the offering, we will have [ ] outstanding shares of common
stock, assuming no exercise of outstanding options or warrants. Of these
shares, the [ ] shares sold in this offering will be freely tradeable.
This leaves 3,265,481 shares that will be eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<S> <C>
98,247 Available for immediate sale on the date of this prospectus
84,260 Available for sale 90 days after the date of this prospectus
3,082,974 Available for sale 180 days after the date of this prospectus
</TABLE>
Shortly after the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register a total of 2,600,000
shares of common stock issuable under the 1993 Stock Option Plan, the 1999
Stock Incentive Plan and the Stock Purchase Plan.
The holders of 2,082,974 shares of our preferred shares have registration
rights for the shares of common stock issuable upon conversion of these
preferred shares. All preferred shares will be converted into a total of
2,082,974 shares of common stock immediately prior to the offering. After the
offering, the holders of 2,082,974 shares of our common stock, which represent
[ %] of our outstanding common stock after this offering assuming no exercise
of the underwriters' overallotment option and no exercise of outstanding
options or warrants after June 30, 1999, will be entitled to have the resale of
their shares registered under the Securities
11
<PAGE>
Act. If these holders cause a large number of securities to be registered and
sold in the public market, such sales could harm the market price for our
common stock. In addition, if we include in a company-initiated registration
statement shares held by these holders pursuant to the exercise of their
registration rights, such sales may harm our ability to raise needed capital.
Concentration of ownership may give some shareholders substantial influence and
may prevent or delay a change in control.
We anticipate that certain shareholders, including officers and directors of
the company, will, in the aggregate, beneficially own approximately [ %] of
our outstanding common stock following completion of this offering. These
shareholders may be able to exercise substantial influence over all matters
requiring shareholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of discouraging third party offers to acquire our
company or of delaying or preventing a change in control of our company.
Our charter documents and Minnesota law may discourage an acquisition of our
company.
Provisions of our articles of incorporation, bylaws and Minnesota law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our shareholders. For instance, our bylaws provide for a
classified board of directors with each class of directors subject to re-
election every three years. This will make it more difficult for third parties
to insert their representatives on our board of directors and gain control of
our company. These provisions could also discourage proxy contests and make it
more difficult for you and other shareholders to elect directors and take other
corporate actions. Further, the Minnesota Control Share Acquisition Act and the
Minnesota Business Combination Act may make it more difficult for third parties
to secure control of our company or to complete an acquisition. These acts may
discourage unsolicited takeover offers.
Management could use the proceeds of this offering in ways with which the
shareholders may not agree.
Our management can spend or invest the proceeds from this offering in ways
with which the shareholders may not agree. The investment of these proceeds may
not yield a favorable return.
You will incur immediate and substantial dilution.
If you purchase shares of our common stock, you will incur immediate and
substantial dilution in pro forma net tangible book value. If the holders of
outstanding options or warrants exercise those options or warrants, you will
experience further dilution.
We do not intend to pay dividends.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding the development and
growth of our business and, therefore, do not expect to pay any dividends in
the foreseeable future.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements based on our current
expectations and projections about future events. These statements are subject
to risks, uncertainties and assumptions about us, including, among other
things:
. uncertainty of our future operating results;
. delays or losses of sales due to long sales and implementation cycles for
our products and services;
. actions of our competitors; and
. other factors discussed under "Risk Factors."
We undertake no obligation to publicly update or revise any forward-looking
statements. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus may not occur.
USE OF PROCEEDS
We estimate our net proceeds from the sale of our common stock in this
offering will be approximately $[ ] million, or approximately $[ ] million
based on an assumed initial public offering price of $[ ] per share and after
deducting the estimated underwriting discounts and offering expenses.
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital, sales and marketing expenditures,
development of new products and services and investment in technology
infrastructure. In addition, a portion of the net proceeds may be used for
acquisitions of businesses, products and technologies that are complementary to
ours. We currently have no agreements with respect to any material acquisitions
as of the date of this prospectus. Pending use of the net proceeds for the
above purposes, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings to fund the development and growth
of our business.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999 (a) on
an actual basis, (b) on a pro forma basis to reflect the conversion of all
outstanding shares of preferred stock into shares of common stock immediately
prior to the commencement of this offering, and (c) on a pro forma, as
adjusted, basis to give effect to the receipt and application of the estimated
net proceeds from the sale of [ ] shares of our common stock in this offering
at an assumed initial public offering price per share of $[ ] after deducting
the estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
As of June 30, 1999
-----------------------------------
Pro Forma,
Actual Pro Forma As Adjusted
------- -------------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term debt and capitalized lease
obligations, non-current
portion.................................. $ -- $ --
Shareholders' equity:
Preferred stock, $.01 par value per
share; 2,088,974 shares authorized,
2,082,974 shares outstanding, actual;
no shares issued and outstanding, pro
forma and pro forma as adjusted........ 21 --
Common stock, $.01 par value per share;
7,000,000 shares authorized, 1,171,157
shares outstanding, actual;
100,000,000 shares authorized,
3,254,131 shares outstanding, pro
forma; 100,000,000 shares authorized,
[ ] shares outstanding, pro forma as
adjusted............................... 12 33
Additional paid-in capital............... 16,073 16,073
Accumulated deficit...................... (3,334) (3,334)
------- ------- ---
Total shareholders' equity............ 12,772 12,772
------- ------- ---
Total capitalization................ $12,772 $12,772 $
======= ======= ===
</TABLE>
- --------
The preceding table excludes:
. 928,616 shares issuable upon exercise of stock options outstanding under
our stock option plans as of June 30, 1999;
. 27,805 shares issuable upon exercise of warrants outstanding as of June
30, 1999; and
. 1,050,074 shares available for future grant or issuance under our stock
option plans as of June 30, 1999.
14
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately after this offering. Pro forma net
tangible book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common stock immediately
after completion of this offering.
Our pro forma net tangible book value as of June 30, 1999 was $12.8 million,
or $3.92 per share of common stock, assuming the conversion of all outstanding
shares of preferred stock into shares of common stock. Pro forma net tangible
book value per share represents the amount of our shareholders' equity, less
intangible assets, divided by the total number of shares of common stock
outstanding for the period immediately prior to this offering. After giving
effect to the sale of the [ ] shares of common stock offered in this
prospectus at an assumed initial public offering price of $[ ] per share and
after deducting the estimated underwriting discounts and offering expenses, our
adjusted pro forma net tangible book value as of June 30, 1999 would have been
$[ ], or $[ ] per share of common stock. This represents an immediate
increase in net tangible book value of $[ ] per share to existing shareholders
and an immediate dilution of $[ ] per share to new investors purchasing shares
in this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
Pro forma net tangible book value per share as of June 30,
1999......................................................... $ 3.92
Increase per share attributable to new investors...............
------
Pro forma net tangible book value per share after this
offering.....................................................
----
Net tangible book value dilution per share to new investors.... $
====
</TABLE>
The following table summarizes as of June 30, 1999, on the pro forma basis
described above, the number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by existing
shareholders and by investors purchasing shares of common stock in this
offering and before deducting estimated underwriting discounts and offering
expenses:
<TABLE>
<CAPTION>
Average
Price Per
Shares Purchased Total Consideration Share
----------------- ------------------- ---------
Number Percent Amount Percent Percent
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 3,254,131 % $16,062,000 % $4.94
New investors..................
--------- --- ----------- --- -----
Total........................ 100% $ 100% $
========= === =========== === =====
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
or warrants after June 30, 1999. As of June 30, 1999, there were options and
warrants to purchase a total of 956,421 shares of common stock. To the extent
that any of these options or warrants are exercised, there will be further
dilution to new investors. See "Capitalization," "Management--Employee Benefit
Plans," "Description of Capital Stock" and Note 4 of "Notes to Financial
Statements."
15
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data should be read together with the
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus. The selected statement of operations data shown below for
the years ended December 31, 1996, 1997 and 1998 and the balance sheet data as
of December 31, 1997 and 1998 are derived from our audited financial statements
included elsewhere in this prospectus. The selected statement of operations
data shown below for the years ended December 31, 1994 and 1995 and the balance
sheet data as of December 31, 1994, 1995 and 1996 are derived from our audited
financial statements not included elsewhere in this prospectus. The selected
financial data for the six months ended June 30, 1998 and 1999 has been derived
from our unaudited financial statements which, in the opinion of management,
include all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of the financial information shown in these
statements. The results for the six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full year or for
any future period.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------ ------ -------- ------ --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $ 904 $ 2,497 $4,360 $7,093 $ 10,122 $3,929 $ 7,108
Operating expenses
Cost of revenues....... 330 1,323 2,480 4,496 6,958 2,935 5,233
Selling, general &
administrative....... 358 538 1,796 2,068 2,831 1,319 2,010
Research and
development.......... 393 605 863 1,242 1,519 673 1,127
------ ------- ------ ------ -------- ------ --------
Total operating
expenses............ 1,081 2,466 5,139 7,806 11,308 4,927 8,370
------ ------- ------ ------ -------- ------ --------
Operating income
(loss)................ (177) 31 (779) (713) (1,186) (998) (1,262)
Interest income......... 11 31 198 213 144 83 150
------ ------- ------ ------ -------- ------ --------
Net (loss) income....... $ (166) $ 62 $ (581) $ (500) $ (1,042) $ (915) $ (1,112)
====== ======= ====== ====== ======== ====== ========
Basic and diluted net
(loss) income per
share................. $ (.15) $ .06 $ (.53) $ (.45) $ (.90) $ (.80) $ (.95)
Shares used in basic and
diluted net income
(loss) per share...... 1,078 1,098 1,104 1,125 1,154 1,150 1,165
Pro forma basic and
diluted net loss per
share................. (.42) (.46)
Shares used in pro forma
net loss per share.... 2,162 2,409
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------- ----------
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- ------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents... $ 690 $ 472 $ 1,614 $ 1,009 $ 1,681 $ 9,268
Working capital............. 482 411 3,981 3,102 1,782 10,821
Total assets................ 1,177 1,253 5,179 5,084 5,596 14,303
Long-term obligations, net
of current portion........ -- -- -- -- -- --
Total shareholders' equity.. 869 991 4,904 4,423 3,391 12,772
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We were co-founded in 1993 by Mark Tierney, Michael Bingham and Barbara
Seykora, all of whom remain active with us today. From inception until June
1999, our activities principally involved providing back-end exchange services
for large, multi-site employers such as GE Capital, PepsiCo and Bell Atlantic.
In the second quarter of 1999, we initiated activities to leverage our success
in the large employer market to also serve the mid-size employer market
segment. From inception until September 1999, we were incorporated under the
name Network Management Services, Inc. In September 1999, we changed our name
to eBenX, Inc.
Our principal source of revenue is derived from providing ongoing group
health eligibility and financial data exchange services. Exchange services
revenue is typically priced on a per employee per month basis with adjustments
made to accommodate the number of health plan interfaces that the customer
requires. In many cases, we allow fixed and variable fee structures to permit
volume-adjusted pricing. We recognize revenue for exchange services as the
services are performed. In addition, we earn revenue from health benefit plan
procurement and implementation fees for exchange services, which we recognize
on a percentage-of-completion basis or as services are performed. We typically
enter into contracts with our large employer customers that are three years in
length. Customers may purchase some or all of our services and the customer
relationship may evolve from utilizing procurement services to utilizing
implementation services and per employee-based exchange services. A significant
percentage of our revenues are earned from a few customers, most notably Bell
Atlantic and PepsiCo.
The establishment of new customer relationships involves lengthy and
extensive sales and implementation processes. The sales process typically takes
four to six months, and the implementation process takes an additional two to
four months. The sales process is accounted for under the selling, general and
administrative expense category. The implementation process affects cost of
services but may also impact research and development expense to the extent new
customer relationships require new or enhanced service offerings.
Cost of services consists primarily of personnel costs for account
management, operations, production and procurement and certain information
technology costs for both ongoing procurement and exchange services and for
customer implementation expense. The information technology costs relate to
personnel costs for implementing and maintaining customer and health plan
computer interfaces and computer hardware and software expenses related to
computer processing. A significant portion of cost of services consists of new
customer implementation expenses. Therefore, increasing numbers of new
customers will cause the cost of services as a percentage of net revenue to
increase.
Selling, general and administrative expenses consist primarily of payroll and
payroll-related expenses associated with sales and marketing, executive
management and corporate administrative personnel, as well as professional fees
and expenditures for advertising, public relations and promotional efforts. We
intend to significantly increase our sales and marketing expenses over the next
several years. We intend to invest substantially in an integrated marketing
program, including the expansion and enhancement of our penetration into the
mid-size employer market through broker partners. At the same time, we intend
to devote additional resources to develop partnerships and relationships with
human resource services and systems organizations. We expect that, in support
of the continued growth and operation of our business, selling, general and
administrative expenses will continue to increase for the foreseeable future.
Research and development expenses consist primarily of development personnel
and external contractor costs related to the development of new products and
services, enhancement of existing products and services, quality assurance and
testing. To date, we have not capitalized any of our software development
costs. Because the timing of the commercial release of our services has
substantially coincided with technological feasibility, all research and
development costs have been expensed as incurred. We intend to continue to
expand our
17
<PAGE>
product offerings by adding additional services. We expect these activities
will require additional personnel. Accordingly, we expect our research and
development expenses will continue to increase for the foreseeable future.
Since our inception, we have incurred losses. As of June 30, 1999, we had an
accumulated deficit of $3.3 million. These losses and this accumulated deficit
have resulted from the significant costs incurred in the development of our
technology platform, the establishment of relationships with our customers, and
the development and maintenance of our customer and health plan interfaces. We
intend to continue to invest heavily in research and development, sales and
marketing and in our computer and administrative infrastructure. As a result,
we believe that we will incur substantial operating losses for the foreseeable
future. Although we have experienced significant revenue growth in recent
periods, our operating results for future periods are subject to numerous
uncertainties. In view of the rapidly evolving nature of our business and our
limited operating history, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
Results of Operations
The following table sets forth for the periods indicated selected statement
of operations data expressed as a percentage of net revenues.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
--------------------- -----------------
1996 1997 1998 1998 1999
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services................. 56.9 63.4 68.7 74.7 73.6
Selling, general and
administrative................. 41.2 29.2 28.0 33.6 28.3
Research and development......... 19.8 17.5 15.0 17.1 15.9
----- ----- ----- ------- -------
Total operating costs and
expenses.................... 117.9 110.1 111.7 125.4 117.8
----- ----- ----- ------- -------
Loss from operations............... (17.9) (10.1) (11.7) (25.4) (17.8)
Interest income (expense), net..... 4.5 3.0 1.4 2.1 2.1
----- ----- ----- ------- -------
Net loss........................... (13.4)% (7.1)% (10.3)% (23.3)% (15.7)%
===== ===== ===== ======= =======
</TABLE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net revenues. Net revenues increased from $3.9 million for the six months
ended June 30, 1998 to $7.1 million for the same period in 1999, representing
an increase of $3.2 million, or 80.9%. This increase primarily was due to a new
contract with Bell Atlantic and the expansion of our relationship with PepsiCo.
Cost of services. Cost of services increased from $2.9 million for the six
months ended June 30, 1998 to $5.2 million for the same period in 1999,
representing an increase of $2.3 million, or 78.3%. This increase primarily was
due to increased personnel and computer-related infrastructure costs necessary
to support the increased demand for our services. Cost of services, as a
percentage of net revenues, decreased from 74.7% for the six months ended June
30, 1998 to 73.6% for the same period in 1999. Because a significant portion of
cost of services consists of new customer implementation expenses, we
anticipate that as we add new customers cost of services will increase as a
percentage of net revenues.
Selling, general and administrative. Selling, general and administrative
expenses increased from $1.3 million for the six months ended June 30, 1998 to
$2.0 million for the same period in 1999, representing an increase of $0.7
million, or 52.4%. This increase primarily was due to the establishment of a
sales team in late 1998 and additions to management. We anticipate that sales
and marketing expenses will increase substantially in future periods as we
expand our sales and marketing efforts.
Research and development. Research and development expenses increased from
$0.7 million for the six months ended June 30, 1998 to $1.1 million for the
same period in 1999, representing an increase of
18
<PAGE>
$0.4 million, or 67.5%. This increase primarily was due to additions to our
research and development staff. We anticipate that we will continue to devote
substantial resources to our research and development efforts and that research
and development expenses will increase for the foreseeable future.
Interest income (expense), net. Net interest income includes income earned
from our invested cash, income earned from facilitating our customers' payments
to their health plans and expenses related to outstanding debt obligations
under our bank credit facility. Net interest income increased from $83,000 for
the six months ended June 30, 1998 to $150,000 for the same period in 1999. In
the first six months of 1999, interest expense was incurred for bank
borrowings. There were no borrowings in the first six months of 1998.
Years Ended December 31, 1996, 1997 and 1998
Net revenues. Net revenues increased from $7.1 million in 1997 to $10.1
million in 1998, or 42.7%. Net revenues in 1997 represented a 62.7% increase
over 1996 net revenues of $4.4 million. The increase in 1998 primarily was due
to a new contract with Bell Atlantic and servicing additional divisions of
PepsiCo. The increase in 1997 primarily was due to new contracts with The Blue
Cross/Blue Shield Association and R.R. Donnelley & Sons and the sale of
additional services to PepsiCo and General Electric.
Cost of services. Cost of services increased from $4.5 million in 1997 to
$7.0 million in 1998, or 54.8%. Cost of services in 1997 represented an 81.3%
increase over 1996 cost of services of $2.5 million. The increase in 1998
primarily was due to increases in personnel and investments in computer
hardware and software infrastructure. The increase in 1997 primarily was due to
additions in personnel. Cost of services, as a percentage of net revenues,
increased from 56.9% in 1996 to 63.4% in 1997 and to 68.7% in 1998. A
significant portion of cost of services consists of new customer implementation
expenses. Therefore, increasing numbers of new customers will cause the cost of
services as a percentage of net revenue to increase.
Selling, general and administrative. Selling, general and administrative
expenses increased from $2.1 million in 1997 to $2.8 million in 1998, or 36.9%.
Selling, general and administrative expenses in 1997 represented a 15.1%
increase over 1996 selling, general and administrative expenses of $1.8
million. The 1998 increase primarily was due to the establishment of a sales
team. The 1997 increase primarily was due to additions to management. Selling,
general and administrative expenses, as a percentage of net revenues, decreased
from 41.2% in 1996 to 29.2% in 1997 and to 28.0% in 1998.
Research and development. Research and development expenses increased from
$1.2 million in 1997 to $1.5 million in 1998, or 22.3%. Research and
development expenses in 1997 represented a 43.9% increase over 1996 R&D
expenses of $0.9 million. These increases primarily were due to the hiring of
additional personnel.
Interest income (expense), net. Net interest income decreased from $213,000
in 1997 to $144,000 in 1998, or 32.4%. Net interest income in 1997 represented
a 7.6% increase over 1996 net interest income of $198,000. The decrease from
1997 to 1998 primarily was due to decreased cash reserves resulting from the
losses incurred in 1998. The increase from 1996 to 1997 primarily was due to
increased cash reserves resulting from the sale of preferred stock in mid-1996.
Income taxes. As of December 31, 1998, we had unused federal and state
research and development tax credit carryforwards of approximately $100,000
which expire at various times through 2011. In addition, we had unused federal
net operating loss carryforwards at December 31, 1998 of approximately $1.8
million which expire at various times through 2013. The utilization of these
carryforwards is dependent upon our ability to generate sufficient taxable
income during carryforward periods.
Selected Quarterly Operating Results
The following table shows unaudited statement of operations data expressed in
dollars (in thousands) and as a percentage of net revenues for the last three
quarters in our fiscal year ended December 31, 1998 and for
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the first two quarters in our fiscal year ending December 31, 1999. In
management's opinion, this unaudited quarterly information has been prepared on
the same basis as the audited financial statements and related notes and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the quarters
presented, when read in conjunction with the audited financial statements and
related notes included elsewhere in this prospectus. We believe that quarter-
to-quarter comparisons of our financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............ $2,158 $2,740 $3,454 $3,342 $3,766
Operating expenses:
Cost of services...... 1,585 1,856 2,166 2,355 2,878
Selling, general and
administrative...... 671 667 845 859 1.151
Research and
development......... 342 345 502 545 582
------ ------ ------ ------ ------
Total operating
expenses......... 2,598 2,808 3,513 3,759 4,611
------ ------ ------ ------ ------
Loss from operations.... (440) (128) (59) (417) (845)
Interest income
(expense), net........ 38 20 42 45 105
------ ------ ------ ------ ------
Net loss................ $ (402) $ (108) $ (17) $ (372) $ (740)
====== ====== ====== ====== ======
<CAPTION>
Three Months Ended
--------------------------------------------------------
June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1999 1999
-------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services...... 73.4 67.8 62.7 70.5 76.4
Selling, general and
administrative...... 31.1 24.3 24.5 25.7 30.6
Research and
development......... 15.8 12.6 14.5 16.3 15.5
------ ------ ------ ------ ------
Total operating
expenses......... 120.3 104.7 101.7 112.5 122.5
------ ------ ------ ------ ------
Loss from operations.... (20.3) (4.7) (1.7) (12.5) (22.5)
Interest income
(expense), net........ 1.7 0.7 1.2 1.3 2.8
------ ------ ------ ------ ------
Net (loss) income....... (18.6)% (4.0)% (0.5)% (11.2)% (19.7)%
====== ====== ====== ====== ======
</TABLE>
Our business is characterized by seasonality. As a result, our revenue may be
subject to seasonal fluctuations, with the largest percentage of annual revenue
typically being realized in the fourth quarter. This is primarily due to
implementation of services to new customers in the third and fourth quarters
and providing open enrollment services to new and existing customers in the
fourth quarter. Further, our operating expenses typically increase in the
second and third quarters as we add personnel in anticipation of acquiring new
customers and implementing and providing services to such new customers, most
of which begin using our services in the third and fourth quarters. In
addition, cost of services typically increases as a percentage of net revenues
as we implement services for new customers.
Our quarterly operating results have in the past, and will in the future,
vary significantly depending on a variety of factors, including:
.the number and size of new customers starting services;
.the decision of one or more customers to delay implementation or cancel
ongoing services;
.seasonality;
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. our ability to design, develop and introduce new services and features
for existing services on a timely basis;
. costs associated with strategic acquisitions and alliances or
investments in technology;
. the success of any such strategic acquisition, alliance or investment;
. costs to transition to new technologies;
. expenses incurred for geographic and service expansion;
. price competition;
. a reduction in the number of employees of our customers; and
. acquisitions of our customers by other companies.
Revenue typically increases in the third and fourth quarters due to open
enrollment periods and new customer implementations. A substantial majority of
our operating expenses, particularly personnel and related costs, depreciation
and rent, are relatively fixed in advance of each quarter. Our agreements with
our customers generally do not have penalties for cancellation. As a result,
any decision by a customer to delay or cancel implementation of our services or
our underutilization of personnel may cause significant variations in operating
results in a particular quarter and could result in losses for such quarter. As
we secure larger customers, the time required for implementing our services
increases, which could contribute to larger fluctuations in revenue. It is
possible that in some future quarter our results of operations will be below
the expectations of public market analysts and investors. In either case, the
market price of our common stock could be materially adversely affected.
Liquidity and Capital Resources
Historically, we have funded operations primarily through the private sales
of preferred stock, with net proceeds of approximately $16.0 million, limited
bank borrowings and equipment leases. All shares of our preferred stock will be
converted automatically into common stock immediately prior to the closing of
this offering. As of June 30, 1999, we had $9.3 million in cash and cash
equivalents and a secured revolving line of credit of $1.5 million, which bears
a variable interest rate of 1% above the lender's base rate and expires in
December 1999. At June 30, 1999, there were no borrowings under the line of
credit.
Our operating activities used cash of $0.8 million in 1996, provided cash of
$67,000 in 1997 and used cash of $1.3 million in 1998. Our operating activities
used cash of approximately $1.5 million in the six months ended June 30, 1999.
The use of cash from operations in 1998 and for the first six months of 1999
primarily was due to our net loss and an increase in accounts receivable,
partially offset by an increase in depreciation.
Our investing activities used cash of $2.5 million in 1996 and $0.7 million
in 1997, provided cash of $1.2 million in 1998 and used cash of $0.6 million
for the first six months of 1999. In 1996, $0.5 million of the cash used for
investing activities was for additions to equipment and $2.0 million was for
the purchase of U.S. Treasury Notes using proceeds from the sale of preferred
stock. In 1997, our investing activities used cash for additions to equipment.
In 1998, our investing activities used cash of $0.8 million for additions to
equipment and we received proceeds of $2.0 million from the sale of U.S.
Treasury Notes. For the first six months of 1999, our investing activities used
cash for additions to equipment.
Our financing activities provided cash of $4.5 million in 1996, $19,000 in
1997, $0.8 million in 1998 and $9.8 million in the first six months of 1999.
For 1996, financing activities provided cash principally from the sale of
preferred stock. In 1997, financing activities provided cash from the exercise
of common stock options. In 1998, financing activities provided cash
principally from bank borrowings in December 1998 of $0.75 million. For the
first six months of 1999, financing activities provided cash from the sale of
$10.5 million in preferred stock, partially offset by the repayment of bank
borrowings.
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Our equipment additions consist primarily of computer hardware and software,
office furniture and equipment and leasehold improvements. We expect that our
equipment additions will continue to increase in the future. Since inception,
we have generally funded equipment additions either through the use of working
capital or with operating leases. We expect to continue to add computer
hardware and software and to use operating leases to finance these additions.
In connection with the planned relocation of our headquarters, we expect to
make approximately $3.0 million in leasehold improvements and also need to
purchase additional office furniture. We intend to enter into a real estate
lease agreement that will finance the leasehold improvements over the term of
the lease. We intend to enter into a loan agreement to finance the office
furniture. To the extent we are unable to secure this financing, we may be
required to apply a portion of the proceeds from this offering toward these
expenditures.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital
expenditures, will constitute a material use of our cash resources. In
addition, we may utilize cash resources to fund acquisitions or investments in
complementary businesses, technologies or service lines. We believe that the
net proceeds from the sale of the common stock in this offering and cash from
operations will be sufficient to meet our working capital and operating
resource expenditure requirements for the foreseeable future. Thereafter, we
may find it necessary to obtain additional equity or debt financing. In the
event additional financing is required, we may not be able to raise it on
acceptable terms or at all.
Year 2000 Issue
Many currently installed computer systems and software are coded to accept
only two-digit entries in the date code fields. These date code fields will
need to accept four-digit entries to distinguish 21st century dates from 20th
century dates. This problem could result in system failures or miscalculations
causing disruptions of business operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in other
similar business activities. As a result, many companies' computer systems and
software will need to be upgraded or replaced in order to comply with Year 2000
requirements. The potential global impact of the Year 2000 problem is not
known, and, if not corrected in a timely manner, could affect us and the United
States and world economies generally.
We have analyzed the potential effect of the Year 2000 issue on both the
system software included in our services and our word processing, billing and
other internal systems software, including information technology ("IT") and
non-IT systems (which systems contain embedded technology in manufacturing or
process control equipment containing microprocessors or other similar
circuitry). Our Year 2000 compliance program includes the following phases:
identifying systems that need to be modified or replaced; carrying out
remediation work to modify existing systems or convert to new systems; and
conducting validation testing of systems and applications to ensure compliance.
We are currently in the remediation phase of this program with respect to
software purchased or licensed from software vendors by us and used internally
and have completed the validation phase of this program with respect to our own
products.
The amount of remediation work required to address Year 2000 problems is not
expected to be extensive. We have tested all of the system software included in
our services and determined that they are Year 2000 compliant. We also have
requested and received documentation from vendors supplying software for our
primary business applications addressing Year 2000 compliance. In all cases,
vendors' responses indicated that their applications were either currently Year
2000 compliant or that they would be compliant by the end of 1999. Therefore,
we will be required to modify some of our existing software applications in
order for our internal computer systems to function properly in the year 2000
and thereafter. We estimate that we will complete our Year 2000 compliance
program for all of our significant internal systems no later than December 31,
1999. We also have had discussions with our customers and the vast majority of
their health plans regarding their efforts to address the Year 2000 problem.
These actions are intended to help mitigate the possible external impact of the
Year 2000 problem. However, it is impossible to fully assess the potential
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<PAGE>
consequences in the event service interruptions occur or in the event that
there are disruptions in such infrastructure areas as utilities,
communications, transportation, banking and government.
Because essentially all of our services and internal systems were created in
the last few years, such products and internal systems were designed to avoid
the year 2000 problem. As a result, the total cost for resolving our Year 2000
issues is expected to be less than $50,000, a negligible amount of which has
been spent as of the date of the prospectus. The total cost estimate includes
the cost of replacing or upgrading non-compliant systems that were otherwise
planned or which have significant improvements and benefits unrelated to Year
2000 issues. Estimates of Year 2000 costs are based on numerous assumptions,
and there can be no assurance that the estimates are correct or that actual
costs will not be materially greater than anticipated.
We are developing a contingency plan to provide for continuity of processing
in the event of various problem scenarios based on the outcome of the
validation phase of all of our systems and any additional results from surveys
of our major customers and their health plans with respect to their Year 2000
compliance.
Based on our assessments to date, we believe we will not experience any
material disruption as a result of Year 2000 problems with respect to our
services and the third-party systems we use for our internal functions, and, in
any event, we do not anticipate the Year 2000 issues we will encounter will be
significantly different from those encountered by other computer-related
service providers. For example, if certain critical third-party suppliers, such
as those supplying electricity, water or telephone service, experience
difficulties resulting in disruption of service to us, a shutdown of our
operations could occur for the duration of the disruption. Assuming no major
disruption in service from utility companies or other critical third-party
suppliers, we believe that we will be able to manage our total Year 2000
transition without any material effect on our results of operations or
financial condition.
Recent Accounting Pronouncements
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This statement provides guidance on accounting for
the costs of computer software developed or obtained for internal use and
identifies characteristics of internal use software as well as assists in
determining when computer software is for internal use. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. We do not expect the adoption of this SOP to have a material impact
on our financial statements.
In March 1998, the Accounting Standards Committee issued AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities." This statement
provides guidance on the financial reporting of start-up costs and organization
costs. It requires that the cost of start-up activities and organization costs
be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, with earlier application permitted. We do not expect the
adoption of this SOP to have a material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
changes the previous accounting definition of derivatives which focused on
freestanding contracts, including, for example, options and forwards, futures
and swaps, expanding it to include embedded derivatives and many commodity
contracts. Under the statement, every derivative is recorded on the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. We do not anticipate
that the adoption of SFAS 133 will have a material impact on our financial
position or results of operations. We currently do not hold derivative
instruments or engage in hedging activities.
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<PAGE>
BUSINESS
Overview
We provide business-to-business e-commerce and connectivity solutions to
employers and health plans for the purchase, eligibility administration and
premium payment of group health insurance benefits. Through our proprietary and
licensed technology, we facilitate the flow of eligibility and financial data
between employers and health plans. Our proven, Web-enabled and high volume
eligibility and financial data pipelines provide the critical connectivity
necessary for employers and health plans to communicate electronically. The
result is reduced administrative and medical costs for employers, reduced
administrative costs for health plans, and broader access and improved quality
of care for employees and dependents.
[Diagram of Group Health Insurance Benefits Market Sector (to be provided)]
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Group Health Insurance Benefits
General Industry Background
Health care expenditures in the United States totaled more than $1.1 trillion
in 1998 and are expected to double by 2007. Employers are a significant
purchaser of group health insurance benefits for their employees, retirees and
their dependents. Currently, more than half of the U.S. population receives
group health insurance benefits through their employers. In 1998, the group
health insurance benefits market generated more than $600 billion in services
and payments between the two trading partners, employers and health plans.
Employers can be segmented into three categories:
. large employers, such as Fortune 1000 companies and federal, state and
local governments;
. mid-size employers with 50 to 5,000 employees; and
. small employers with less than 50 employees.
In 1998, the average cost of providing coverage for active and retired
workers was approximately $4,168 per employee. We expect this average cost to
increase by 7% this year. In 1998, on average, each active employee contributed
approximately 25% of this amount through payroll deductions and co-payments. We
believe that this percentage will increase.
Broadly characterized, health plans consist of any organization that
reimburses physicians, hospitals, pharmacies and other direct providers of
health care. These organizations include:
. health maintenance organizations;
. preferred provider organizations;
. point of service plans;
. indemnity carriers;
. third party administrators; and
. pharmacy benefit managers.
Prior to the 1980s, employers typically purchased health benefits through a
single third-party administrator or national indemnity insurance carrier.
However, with the growth of managed care in the 1980s and 1990s, employers
began to purchase coverage through an increasing number of health plans because
the managed care system is comprised of numerous provider networks that have
limited geographic locations. Among HMOs alone, there are over 700 licensed
local health plans in the United States. Reflecting this proliferation of new
types of plans and payers, we estimate that each Fortune 1000 employer today
contracts with an average of 60 different plans.
Purchasing, Eligibility Administration and Premium Payment Process
The purchasing, eligibility administration and premium payment process that
connects employers and health plans is complex, cumbersome, expensive and
highly inefficient. In particular, the financing arrangements are extremely
variable and complicated, making administration difficult. In general, health
plans either charge employers based on the number of projected enrolled
employees and their projected actuarial risk or, alternatively, pay providers
on behalf of the employer and then are reimbursed from the employer's account.
Therefore, depending on the financing arrangements, an individual employer is
subject to multiple administrative arrangements from multiple health plans.
The purchasing, eligibility administration and premium payment process
consists of two basic components commonly referred to as the "front-end" and
"back-end" processes.
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<PAGE>
Front-end
The front-end process refers to the selection of various health plans by an
employer, the communication of health plan information to employees and the
collection and ongoing maintenance of enrollment and eligibility data.
Health plan selection. Employers annually solicit rate quotes from health
plans and select which plans will be made available to their employees.
Employers may choose as few as one health plan or as many as 150 or more health
plans depending on the employers' geographic locations and the employers'
desire to offer health plan choices. Large and mid-size employers usually offer
multiple health plans to provide greater choice, geographic coverage and access
to specialized services for their employees. Employers choose various financing
mechanisms depending on the level of risk they wish to retain. These include
self funded, fully insured, partially insured, or a combination of all three
financing mechanisms. To make these decisions, benefit managers of large
employers usually are supported by consultants while benefit managers of mid-
size employers generally use brokers.
Communication of health plan information to employees. Employers annually
provide information to employees regarding which health plans are available and
the material features of each plan. The process entails distribution of printed
materials, mailings and other manual, paper-based communications. On average,
this distribution costs $8 to $12 per employee. Due to the continuous changes
in the list of providers utilized by health plans, printed materials usually
are outdated by the time of delivery.
Collection of enrollment and eligibility information. Employees enroll in one
of the available health plans during an annual open enrollment period.
Employers collect enrollment and eligibility data using a wide variety of
methods, including paper forms, telephone-based systems and Web-based self-
service enrollment systems. Enrollment data includes information on the
employee's health plan choice and primary care provider. Eligibility
information is basic information about the employee and his or her
dependent(s), such as name, address, date of birth, social security number,
employment code, benefit status, coverage level and eligibility period.
Ongoing member management. In addition to collecting annual enrollment and
eligibility information, employers need to obtain and communicate daily life
event changes that affect coverage status. These changes include employee
marriages, divorces, child births and address changes, as well as career events
such as new hires, terminations and movements from hourly to salaried status.
No other benefit offered by employers requires as high a level of information
collection and continuous monitoring and modification because group health
insurance is the only benefit that must maintain and store precise family
history.
Back-end
While the front-end process focuses on communication of information between
employers and employees, the back-end process focuses on managing and storing
eligibility and financial data for communication with health plans and using
this data to reconcile payments.
Enrollment and eligibility data management. Once enrollment and eligibility
data is collected, employers undertake a cumbersome process to authenticate,
edit, categorize and organize the data. This process also requires the ongoing
classification of employees by employment status, such as active, retired,
surviving spouse, student and COBRA-eligible, in order to accommodate diverse
collection and payment processes for each category. This data management is
critical to accurate billing and reconciling of payments between an employer
and its health plans.
Eligibility data distribution. Eligibility data should be transferred on a
daily or weekly basis from employers to health plans and in a manner that
assures it will be correctly recorded. Today, however, this data is transferred
far less frequently and with little assurance that it will be correctly
interpreted. It is communicated electronically between legacy systems at best
and, at worst, via hard copy data entry. Ultimately, this eligibility data is
required when employees and dependents present themselves to physicians
26
<PAGE>
and other providers for health care services. Providers obtain patient
eligibility information via telephone or computer from patients' health plans
prior to rendering services.
Billing, reconciliation and settlement. Health plans bill employers on a
weekly or monthly basis based on either enrollment numbers and quoted rates or
on claims paid. Employers pay these multiple paper bills without auditing these
bills. They then manually reconcile the number of enrolled employees and their
eligibility status using their own internal data. Because of data discrepancies
and delays in transfer and billing cycles, the health plans' data and the
employers' data are rarely the same and thus ongoing payment disputes are
common.
Factors influencing the marketplace and related issues
The purchasing, eligibility administration and premium payment process is
encumbered by inefficient procedures for rate setting, gathering and
transferring data and executing payment transactions. These inefficiencies,
together with other factors unique to health care delivery, result in the
following significant challenges:
Fragmented employers and health plans. There are more than 30,000 large and
mid-sized employers in the United States, many of which have a broadly
dispersed employee base frequently located in multiple sites across the United
States. In contrast, there are over 700 independent HMOs in the United States
today, which generally operate in a single or limited geographic area. As a
result, employers contract with multiple health plans to provide complete
geographic coverage for all of their employees.
Increasing group health insurance benefit costs. The average cost of employee
and retiree health care will increase by approximately 7% this year. As these
costs rise, employers likely will seek more cost-effective health insurance
benefits solutions. Employers will be more critical in their selection of
health plans and will demand a more competitive bidding process. In addition,
they will need to be able to switch health plans when necessary, and they
likely will shift more costs to employees.
Complex data management. Health plans collect complex, detailed and dynamic
data in varying formats from multiple employers. Conversely, employers must
distribute this data in varying formats to multiple health plans. A failure to
accurately update eligibility and financial data in a timely fashion may result
in additional administrative costs and financial reconciliation problems and
can lead to employees and their dependents being wrongfully denied healthcare
services.
Varied data formats. Eligibility and financial data formats vary considerably
throughout the health care industry and typically are unique to each particular
employer and health plan. The collection, storage and transmission of this data
remains a labor-intensive, paper-based and error-prone process. As a result,
most health plans are unable to frequently update this data. Some efforts have
been made to develop a common standard. However, these standards do not meet
the complex needs of multiple purchasers and have not been widely accepted.
Varied systems platforms. Most employers use their own unique human resources
information systems and other benefit and payroll related systems to
communicate with multiple health plans. These health plans in turn rely on
their own unique legacy systems. Often, within a single employer or health
plan, there are several systems in place for collecting and storing this data
that are unable to communicate with one another. Each system has its own code
data rules, syntax and semantics, requiring substantial information technology
resources to interface.
Inefficient pricing, billing, reconciliation and settlement
processes. Employers must obtain rate quotes from health plans based on the
estimated risk of the employers' employee population. Rates are difficult to
compare because of differing plan designs and underwriting methodologies.
Employers receive bills from each of their health plans in different formats
and in some cases for different coverage periods. These bills are
27
<PAGE>
calculated using data provided by health plans. If a plan is late in
recognizing an employee's termination, the employer must perform an audit to
determine this. Depending on the number of health plans and the diversity of
the payment arrangements, this can be an arduous task. Inaccurate payments
require significant manual intervention by employers and health plans to
reconcile accounts.
Brokers have limited transaction processing capability. In the mid-size
employer market, employers and health plans trade primarily through brokers. As
a result, brokers have been positioned to administer the processes required to
facilitate this trading. However, brokers generally do not have access to the
capital needed to develop e-commerce systems. Consequently, this process
essentially remains a labor-intensive, paper-based and highly inefficient
process. Because of increasing demand for business-to-business e-commerce
solutions, brokers likely must either embrace new technology or risk being
disintermediated.
Added complexity caused by government regulation. Numerous federal, state and
local laws and regulations govern the healthcare industry. These laws and
regulations change frequently. In recent years, the responsibilities of
employers to provide their employees with access to health care have increased
significantly. In particular, COBRA and HIPAA have added substantial burdens to
employers administering employee health insurance benefits. The proposed
legislation covering patients' bill of rights includes a provision that may put
health plans and employers at more risk of litigation. This may have the effect
of pushing employers toward a defined contribution and voucher-based approach
to their employees' healthcare insurance benefits.
Opportunity for Business-to-Business E-Commerce Solutions for Group Health
Insurance Benefits
The ubiquitous nature, low cost and scalability of the Internet have created
new opportunities for conducting commerce. Recently, the widespread adoption of
intranets and the acceptance of the Internet as a business communications
platform has created a foundation for business-to-business e-commerce that
enables organizations to streamline complex processes, lower costs and improve
productivity. It is projected that business-to-business e-commerce, which is
estimated to grow from $50 billion in revenue in 1998 to $1.3 trillion in 2003,
will account for more than 74% of the value of e-commerce in the United States.
Group health insurance benefits purchasing, eligibility administration and
premium payment transactions lend themselves to Internet processing since most
of these transactions are information-based and do not require delivery of
durable goods at the point of payment. However, unlike other e-commerce
opportunities, such as purchasing books or individual insurance, group health
insurance benefits transactions involve complex group insurance pricing,
complex product presentation, and ongoing data management between multiple
organizations.
We believe that business-to-business e-commerce technology solutions in this
market will require the following Internet-enabled components:
Front-end quote and enrollment:
. quote systems that provide quick rate information from multiple plans;
and
. annual and ongoing enrollment update tools that accommodate enrollment
in numerous health plans, and content engines that provide plan
descriptions, provider networks and rate information.
Back-end eligibility and financial exchange:
. exchange systems that transfer eligibility and financial data files
between trading partners and execute payment transactions with all
applicable parties.
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[Diagram of Group Health Insurance Benefits e-Commerce (to be provided)]
Currently, there are numerous front-end Internet-based solutions that support
enrollment. However, we believe true e-commerce can only exist if there is
seamless end-to-end integration of the front- and back-end processes. We have
focused our efforts on developing our proprietary back-end eligibility and
financial data exchange platform, which we now are coupling with front-end
applications. As a result, we are able to provide a fully integrated end-to-end
solution for group health insurance benefits e-commerce.
Our Solution
We provide the business-to-business e-commerce and connectivity solutions for
the purchase, eligibility administration and premium payment of group health
insurance benefits. Our Internet-based enrollment, eligibility and financial
exchange addresses requirements of both front- and back-end processes. During
the first six years of our operations, we focused on data and financial
management systems and on building custom and electronic connections between
customers, such as PepsiCo, Bell Atlantic, Northwest Airlines and GE Capital
and the United States' largest regional and local health plans. This effort has
resulted in connectivity to health plans that collectively serve approximately
85% of the managed care enrollment in the United States.
In 1999, we began attaching this proprietary technology to multiple front-end
enrollment applications, including those offered by Healtheon,
PricewaterhouseCoopers and Watson Wyatt. It is this front-end/back-end
continuity that delivers the end-to-end business-to-business e-commerce
solutions for group health insurance benefits.
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Value Proposition to Trading Partners
Our solution provides value to the trading partners through the collection,
management and storage of employee enrollment, eligibility and financial data
and the ongoing transmission of this data to health plans. Additionally, we
manage and execute the reconciling of payments between trading partners.
For employers, our e-commerce solution:
. streamlines the enrollment process by moving it from paper or
telephone voice response systems to self-service Internet
applications;
. reduces administrative costs associated with disseminating basic
health plan information to employees, the enrollment transaction,
and the management and transfer of data among parties;
. eliminates the employer's responsibility for transmitting accurate
enrollment and eligibility information to a variety of health plans
and gives all trading partners access to real time eligibility via
Web-enabled tools;
. eliminates the payment reconciling responsibilities currently
imposed on both trading partners and delivers automated, accurate
and retroactively adjusted payments to health plans;
. allows more choice of plans by lowering the barriers to entry for
health plans thereby significantly reducing the cost of switching
between competing health plans;
. reduces the cost of procuring health benefits by increasing health
plan competition in the bidding process; and
. increases the ability to attract and retain employees through more
diverse benefit offerings.
For health plans, our e-commerce solution:
. improves timeliness and accuracy and lowers the cost of receiving
eligibility and financial data;
. reduces the administrative burden associated with receiving
eligibility and financial data;
. provides improved customer service and provider claims adjudication
through twenty-four hour, seven day a week Web-enabled access to
employers' eligibility and financial data;
. reduces distribution costs for the delivery of health plan
information to employees; and
. opens new channels for them to distribute products and services over
the Web.
For group health insurance brokers, our e-commerce solution:
. allows access to technology without significant capital expense;
. moves services from a paper process to a more efficient Web-based
solution;
. allows them to more easily offer multiple health plans to employer
clients;
. provides significant differentiation from competing brokers; and
. allows them to retain a service position in a disintermediating
marketplace by increasing customer retention and market share.
For employees, our e-commerce solution:
. provides more opportunity for choice of plans and, through more
competitive pricing, lower costs;
. provides Web-based enrollment and plan information; and
. improves quality of services, including the reduction of instances
of wrongful denial of coverage due to eligibility data errors and
incorrect calculation of co-payments.
Products and Services
Since 1993, we have been servicing the back-end processing requirements of
our Fortune 1000 customers using our proprietary BEN-NET technology platform.
This platform provides a connective infrastructure and
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neutral eligibility and financial data exchange mechanism. Leveraging our
client base, we have invested in building customized electronic connections
from our customers to their health plans.
We are able to receive complex and dynamic data from employers and transmit
this data to fragmented health plans. Our core eligibility data and financial
exchange technology incorporates the business rules of each of the relevant
trading partners, as well as the format translations needed to automatically
reconcile and pay bills. Our solution creates the standard for group health
connectivity without causing employers or health plans to make major changes to
their disparate systems. Our technology enables the employer to send data in
whatever format and via whatever media the employer chooses. Once received, our
system edits and translates the data into a standard format. To facilitate
connectivity to the health plans, our systems then translate that data into the
format that is compatible with each of the computer systems of the individual
health plans utilized by our employer customer. This translated information is
then transmitted in whatever medium is acceptable to the health plan. Our BEN-
NET system electronically stores more current eligibility data than the data
held by employers or health plans that use our system, which helps us to
accurately bill the parties concerned.
In 1999, we extended our suite of product offerings to support the data
management, communications and online transaction requirements for successful
group health insurance benefits e-commerce. We have done this by partnering
with other front-end application developers. We will provide end-to-end
processing for employers, brokers, health plans and employees through which
they will exchange information and transact business.
This Internet-based solution will bring together the components necessary for
full transaction group health e-commerce: proposal requests, rate quotes,
online enrollment, eligibility management and financial exchange services.
Our Products and Services
<TABLE>
<CAPTION>
Front or
Product/Service Process solution Status Back-end
--------------- ---------------- ------ --------
<C> <S> <C> <C>
eBenX Import Export Two sets of data In service Back-end
(BEN-NET platform) pipelines: one to front- Mid-market interfaces
end applications and in development
employer's human resource
information systems and
the other to health plans
and payroll companies
- --------------------------------------------------------------------------------
eBenX Financial "Self bill" to health In service Back-end
(BEN-NET platform) plans and consolidated
invoice to employer
supports full financial
distribution; self-funded
management; auto-
adjudication and
consolidated premium
management
- --------------------------------------------------------------------------------
eBenX Inquiry Internet-based real time, In service Back-end
(BEN-NET platform) enrollment eligibility
database access tool
- --------------------------------------------------------------------------------
eBenX Data Access Internet-based, real time In development Back-end
(BEN-NET platform) reporting; standard
consolidated reports;
online financial reports
- --------------------------------------------------------------------------------
eBenX Enroll and Internet-based employee In service via Front-end
Member Maintenance and human resource self- front-end license
service benefit election;
Internet-based online
daily manager of employee
adds, deletes and
coverage changes from
life events
- --------------------------------------------------------------------------------
eBenX RFP Internet-based census In development Front-end
acquisition and proposal
request tools to support
the competitive bidding
process
</TABLE>
We sell our products and services in selected packages designed to meet the
needs of each customer.
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<PAGE>
Health Benefit Plan Procurement Services
We also provide health benefit plan procurement services to a number of our
Fortune 1000 customers. We undertake these services on a project basis. We
assist and advise our customers on selection of potential suppliers,
preparation of requests for proposals, evaluation of proposals, and rate
negotiations. Approximately 20 of our employees engage in delivering these
services. Our principal customers for these services are General Electric,
Eastman Kodak and Bell Atlantic. We view these activities as a complement to
the sales and customer development process for exchange services. In addition,
we gain valuable knowledge regarding market conditions and processes from
providing these services.
Our Strategy
Our objective is to be the leading provider of Internet-based business-to-
business e-commerce for the purchase, eligibility administration and premium
payment of group health insurance benefits. Key elements to our strategy
include the following:
Implement end-to-end e-commerce solution. We will implement an end-to-end e-
commerce solution by connecting with front-end applications and developing our
own front-end applications where appropriate. In the Fortune 1000 and mid-size
employer markets, front-end applications are being deployed by human resources
information systems platforms, by human resources record keeping service
companies, and enrollment software companies. We will aggressively pursue
front-end application providers to together offer a complete solution to
employers by linking our back-end eligibility and financial exchange services
with their front-end applications. In addition, through licensed technology, we
are deploying our own front-end applications.
Increase penetration of the Fortune 1000 market. We will continue to focus on
marketing our services to Fortune 1000 companies. We demonstrate to these
companies the administrative efficiencies, cost savings and participant
satisfaction that we provide. We now provide services to 20 of the
approximately 1,500 U.S. companies that have more than 5,000 employees,
including PepsiCo, Bell Atlantic, Northwest Airlines, General Electric, Eastman
Kodak, Chevron, Dayton Hudson, Georgia-Pacific and Reader's Digest. The
remaining companies provide us with substantial growth opportunities.
Expand service offerings to existing Fortune 1000 customers. We intend to
continue to aggressively expand our service offerings to our existing Fortune
1000 customers. We have been successful in increasing our revenues from most of
our current Fortune 1000 clients through an expanded level of services provided
to additional divisions, subsidiaries and locations of those clients.
Expand to the mid-size employer market. We intend to leverage our technology
through relationships with insurance brokers to penetrate the mid-size employer
market. Mid-size employers typically purchase group health insurance benefits
using insurance brokers.
Pursue key strategic relationships to further enhance our service offering
and client base. We intend to pursue key strategic relationships, including
customer agreements and acquisitions. We believe that making strategic
acquisitions and developing strategic relationships will enable us to enhance
our service offerings and expand our client base.
Develop new products. We intend to use our market knowledge and experience to
develop new products to fully leverage the market channels opened by the
implementation of our technology. For example, we are developing Preferred
Plans.com, a prepackaged group health insurance solution for multi-site, multi-
state employers that will provide mid-size employers with rate quotes and
access to best-practice, best-value health plans throughout the United States.
This will give the health plan supplier access to the purchaser via the
Internet for the first time. In addition, we are designing our technology to
support the sophisticated data and financial reconciling requirements implicit
in the post-enrollment risk-adjusted payments to health plans that would result
from defined contribution and voucher systems that may constitute the future of
the health care benefit system.
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<PAGE>
Customers
The following is a representative list of our customers.
American Medical Response, Inc. Northwest Airlines Corporation
Bass Hotels & Resorts, Inc. PepsiCo, Inc.
Bell Atlantic Corporation Promus Hotel Corporation
Benefits Alliance, LLC R.R. Donnelley & Sons Company
Blue Cross Blue Shield Association Reader's Digest Association, Inc.
Dayton Hudson Corporation State of Kansas
Eastman Kodak Company W.W. Grainger, Inc.
GE Capital Services Corporation White Consolidated Industries Inc.
Georgia-Pacific Corporation Xerox Corporation
KPMG LLP
Connected Health Plans
The following is a representative list of the health plans to which we have
built customized electronic communication pipelines.
Aetna, Inc. Plans Kaiser Foundation Health Plan
Blue Cross Blue Shield Plans Merck-Medco
CIGNA Health Plans, Inc. PacifiCare Health Systems
Delta Dental UnitedHealth Group Corporation Plans
Harvard Pilgrim Health Care More than 25 Blue Cross/Blue Shield
Plans
Sales and Marketing
Our sales and marketing staff is organized according to our three key
targeted customer segments: Fortune 1000, brokers for mid-size employers, and
human resource service and systems companies. Our sales force targets
significant potential customers in the Fortune 1000 and mid-size employer
segments. Senior management plays an active role in our sales and marketing
efforts.
Due to the technical nature of our products and services, our typical sales
cycle in the Fortune 1000 market is four to six months and usually involves a
competitive bidding process. Our sales process also is somewhat seasonal
because most large employers undergo the open enrollment process in the fall of
each year. We obtain approximately 75% of our customer commitments during the
months of February through May. The mutual intent is that our systems will be
integrated with the customer's system and become operational prior to the open
enrollment period later that year.
Fortune 1000. We sell directly to the Fortune 1000 market. As of September
15, 1999, we employed one senior vice president in charge of sales and
marketing to this market. He is supported by three sales people. We expect to
hire two additional sales personnel in the next several months. In addition,
this senior vice president is supported by two marketing assistants who assist
him with trade shows and developing prospective clients, and by a vice
president and four strategic procurement consultants who spend a portion of
their time cross-selling administrative services to the Fortune 1000 market.
Brokers for Mid-size Employers. We utilize existing brokerage distribution
systems to penetrate the market of mid-size employers. As of September 15,
1999, we employed three senior staff members who are specifically focused on
developing our sales and marketing efforts to brokers. We intend to hire two
additional marketing employees to assist them and to further develop our broker
distribution network. We believe that emphasizing our collection and payment
capabilities to interface with numerous health plans will be a critical factor
in winning acceptance in this market.
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Human Resource Service and Systems Companies. We partner with human resource
service and systems companies to re-sell our products and services as a
component of the products and services that they offer to employers. This
effort is being led by one of our co-founders. We expect to add personnel to
this area as our partnership efforts develop.
Customer Support
We believe a high level of customer support is necessary to broaden the
acceptance of our products and services. We provide a wide range of customer
support services through our call service center, our account managers, our
customer service staff and an e-mail help desk. By providing consolidated
customer service through our service center, we eliminate the need for our
customers to maintain numerous contact lists across benefit vendors in order to
resolve enrollment, eligibility and billing issues. We provide each customer
with a telephone number for it and its participants to use regarding enrollment
choices, grievances and benefit clarification. Our service center is open from
7:00 a.m. to 7:00 p.m. Central Time, Monday through Friday. When the service
center is closed, calls for existing clients are forwarded to our voice mail
system. We also offer Internet-based support services that are available 24
hours a day, 7 days a week. Finally, we use proprietary automated tracking
systems to ensure resolution of all inquiries. As of September 15, 1999, we had
35 employees in customer support functions.
Competition
The market for health care administration services is intensely competitive,
rapidly evolving and subject to sudden technological change. Many of our actual
and potential competitors have announced or introduced solutions that compete,
at least in part, with our products and services. We believe that the principal
competitive factors in this market are health and managed care expertise, data
integration and transfer technology, health insurance benefits processing
technology, customer service and support and price. We believe our products and
services are competitive with respect to these factors and that no other
competitor has the Internet-based technology capabilities combined with managed
care expertise that we have. Further, we believe we are currently the only
participant in this market with both the connectivity link between employers
and health plans and our range of services. However competitors may develop
similar products or we may not be able to successfully market our products or
successfully develop and introduce products that are less costly than or
superior to those of our competitors.
We compete with administrative service providers and benefits consultants
with administrative capabilities. We also compete with the internal information
systems departments of the Fortune 1000 companies that perform their own health
care administration services. In the mid-size employer market, we compete with
other technology solutions that serve the automation and administration needs
of health benefit brokers. In addition, many human resource service and systems
companies have the healthcare expertise and financial strength to develop the
technology necessary to compete with us. As the market evolves we expect
increasing competition from Internet-based service providers in both the health
care connectivity market and the online insurance market. We believe that our
established and proven technology and our knowledge of the healthcare market
provide us with the necessary capabilities to adapt to the evolving market and
to increasing competition.
Systems and Technology
Primary Systems Information
Historically, our services have been delivered using our proprietary BEN-NET
technology as the core eligibility and financial exchange engine. BEN-NET was
originally designed and implemented in 1994 to serve two distinct customer
bases: Fortune 1000 employers and health insurance purchasing coalitions.
Though the latter market never fully developed, the business requirements and
attendant system capabilities such as our permanent, member level detail have
provided additional benefit to our Fortune 1000 clients. We have incorporated a
number of enhancements to BEN-NET in three subsequent major releases.
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BEN-NET and its fully integrated attendant applications are delivered using a
multi-tier information system comprised of multiple midrange servers, PCs and
workstations. The midrange servers, Sun Enterprise Servers running Sun's
Solaris Unix operating system, are used to provide middle-tier application
component logic and as a platform for eBenX's relational database management
system. Batch and end-user local and Internet applications employ a number of
different languages, primarily PowerBuilder, C, and Java.
Our production processing environment, maintained at our Minneapolis
facility, is composed of multiple servers, permitting maximum flexibility in
organizing and protecting client data. The environment in which our database
runs, UNIX, is a highly scalable platform. Given this platform, we are able to
add capacity relatively easily, we can also physically organize our databases
on different servers to optimize the processing performed on each server. For
example, an entire production server can be dedicated to a single large client
if this client has extensive processing requirements. Within this processing
environment, we establish separate physical production databases for each of
our Fortune 1000 customers to ensure that customer data remains confidential
and secure. This also ensures that it maintains its integrity. In so doing, we
are able to provide customer data access to customer specified user groups.
Secure, real time Internet-based customer and health plan access to source data
brings trading partners into alignment and reduces support costs.
We believe our proprietary data import and export management application is a
key differentiator for our services. Electronic Vendor Interface Management
(EVIM) delivers the ability and flexibility to receive and transmit data
between trading partners. This application incorporates not only a library of
health plan data maps, but also a deep knowledge of the business rules that
must be incorporated in the complex managed care market.
Electronic imports and exports (an average of 1,000 files per week with each
file ranging from 500-50,000 records) are managed via EVIM, ensuring automated,
timely distribution of data, payments, and reports to clients and vendors. This
precise management of the flow of data also supports a key function of BEN-NET,
which is the dynamic application of customer-related business rules to
customer-delivered eligibility data, streamlining both health plan delivery of
service and payment.
Redundancy, System Backup, Security and Disaster Recovery
We believe our facilities and operations include sufficient redundancy, back-
up and security to ensure minimal exposure to systems failure or unauthorized
access. A disaster recovery plan has been prepared and will be put in place
should the need arise. Incremental backups of both software and databases are
performed on a daily basis and a full system backup is performed weekly. Backup
tapes are stored at an offsite location along with copies of
schedules/production control procedures, procedures for recovery using an off-
site data center, documentation and other critical information necessary for
recovery and continued operation. Our current facility has two separate power
feeds to provide a level of redundancy should a power outage occur.
We employ rigorous physical and electronic security to protect customer data.
Our data center is isolated within our corporate offices with restricted card
key access, and appropriate additional physical security measures. Electronic
protections include encryption, firewalls, multi-level access controls and
separate customer databases.
Proprietary Rights
We rely upon a combination of contractual rights, trade secrets, copyrights,
technical measures, non-disclosure agreements and trademarks to establish and
protect proprietary rights in our products and technologies. However, we
believe that intellectual property protection is less important than our
ability to continue to develop new applications and services that meet the
requirements of our industry. We typically enter into non-disclosure and
confidentiality agreements with our employees and distributors with access to
sensitive information. These agreements may be breached and we may not have
adequate remedies for any
35
<PAGE>
breach. Others may acquire substantially equivalent proprietary technologies or
otherwise gain access to our proprietary technologies. In addition, any
particular technology may not be regarded as a trade secret under applicable
law. As a result of the reliance that we place on our trade secrets, loss of
our trade secret protection could harm our business and results of operations.
We have no registered patents or pending patent applications. The steps taken
by us to protect our proprietary rights may not be adequate to prevent
misappropriation of our technology or independent development or sale by others
of software products with features based upon, or otherwise similar to, our
products.
Although we believe that our technology has been independently developed and
that none of our technology or intellectual property infringes on the rights of
others, third parties may assert infringement claims against us in the future.
If such infringement were established, we would, under certain circumstances,
be required to modify our products or technologies or obtain a license to
permit our continued use of those rights. We may not be able to do either in a
timely manner or upon acceptable terms and conditions, and any failure to do so
could harm our business and results of operations. In addition, any future
litigation necessary to protect our trade secrets, know-how or other
proprietary rights, to defend ourselves against claimed infringement of the
rights of others or to determine the scope and validity of the proprietary
rights of others could result in substantial cost to us and diversion of our
resources. Adverse determinations in any litigation or proceedings also could
subject us to significant liabilities to third parties and could prevent us
from producing, selling or using certain of our products or technologies. We
may not have the resources to defend or prosecute a proprietary rights
infringement claim or other action.
Government Regulation
The healthcare industry is highly regulated by state, federal and local laws
and regulations, which are subject to change. Currently, few of such laws and
regulations apply directly to our business but rather apply primarily to health
plans or employers. For example, the confidentiality of patient records and the
circumstances under which records may be released for inclusion in our
databases may be subject to substantial regulation by state governments. These
state laws and regulations govern both the disclosure and the use of
confidential patient medical records. Although compliance with these laws and
regulations currently is principally the responsibility of health care
providers and we typically do not include confidential patient medical
information in our databases, these regulations may be extended to cover our
business and the eligibility and other data that we do include in our
databases. Additional legislation governing the dissemination of medical
records has been proposed at both the state and federal level. This legislation
may require holders of these records to implement security measures that may
require substantial expenditures by us. Changes to federal, state or local laws
may materially restrict employers' and health plans' ability to store and
transmit medical records using our products and services.
Laws and regulations may be adopted with respect to the Internet or other on-
line services covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. The adoption of any additional laws or regulations may impede the
growth of the Internet or other on-line services. This could decrease the
demand for our products and services and increase our cost of doing business.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing property ownership, sales taxes and other forms of
taxation, libel and personal privacy is uncertain and may remain uncertain for
a considerable length of time.
HIPAA mandates the use of standard transactions, identifiers, security and
other provisions by the year 2000. We have designed our products and services
to comply with HIPAA. However, any change in federal standards would require us
to expend additional resources. In addition, the success of our compliance
efforts may be dependent on the success of healthcare industry participants in
dealing with these new standards.
Finally, our function as a conduit for payment by employers to health plans
may subject us to the ERISA. ERISA imposes certain fiduciary duties on
employers and health plans with respect to payments made on behalf of
participants. Although we believe our role in the payment process is a purely
mechanical one, it is
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possible that these fiduciary duties could be deemed to apply to us. In that
event, we may become subject to greater liability with respect to such payments
and may experience higher operating costs in order to comply with such
regulation.
Properties
Our offices are located in Minneapolis, Minnesota where we lease or sublease
approximately 37,100 square feet of office space. Our lease for 29,630 square
feet of this space expires on April 30, 2000 and the lease for the remainder
expires on February 28, 2003. We believe our existing facilities are adequate
to meet our needs until the expiration of our principal lease. Any future
growth during this period can be accommodated through the leasing of additional
or alternative space near our current facilities. Due to our current sales and
marketing plan, we anticipate the need for additional office space in the year
2000 and we currently are negotiating to lease approximately 70,000 square feet
of office space located in the Minneapolis metropolitan area upon the
expiration of our principal lease on April 30, 2000.
Employees
As of September 15, 1999, we had 238 full-time employees, including 83 in
information technology, 80 in operations, 30 in account management, 6 in sales
and marketing, 23 in consulting and 16 in administration and executive
management. We have never had a work stoppage and none of our employees
currently are represented under collective bargaining agreements. We consider
our relations with our employees to be good. We believe that our future success
will depend in part on the continued service of our senior management and key
technical personnel and our ability to attract, integrate, retain and motivate
highly qualified technical and managerial personnel. This is particularly true
for sales and marketing personnel because of our plans to significantly expand
our sales and marketing groups. Competition for qualified personnel in our
industry and geographical location is intense. We may not continue to be
successful in attracting and retaining a sufficient number of qualified
personnel to conduct our business in the future.
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MANAGEMENT
Executive Officers and Directors
The following table provides information as of September 10, 1999 regarding
our executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Mark W. Tierney... 50 Chairman and Director
John J. Davis..... 40 Chief Executive Officer and Director
Michael C.
Bingham......... 37 Senior Vice President, Business Development and Director
Scott P.
Halstead........ 36 Chief Financial Officer and Secretary
Paul V. Barber.... 37 Director
James P. Bradley.. 47 Director
Daniel M. Cain.... 54 Director
William J. Geary.. 40 Director
John M. Nehra..... 51 Director
</TABLE>
Mr. Tierney is one of our co-founders. He has been our Chairman since
September 1993 and a member of our board of directors since September 1993.
Prior to founding our company, Mr. Tierney founded a joint venture company with
UnitedHealth Group Corporation which specializes in patient demand management,
patient advocacy and case management services to Fortune 500 companies and
served as its President and Chief Executive Officer from July 1985 to August
1993. From July 1983 to July 1985, Mr. Tierney served as Senior Vice President
of Medical Services for Allina Health System, the largest HMO in the
Minneapolis-St. Paul metropolitan area. Prior to July 1983, he held management
positions with CIGNA Health Plans, Inc. and Kaiser Permenente Southern
California. Mr. Tierney holds a master's degree in Hospital and Health Care
Administration from the University of Minnesota and today serves on their
clinical faculty.
Mr. Davis has been our Chief Executive Officer since April 1999 and a member
of our board of directors since June 1999. From 1996 to 1999, Mr. Davis served
as President and Chief Executive Officer of MedManagement, L.L.C., a national
and leading provider of pharmacy management and medication use consulting
services to hospitals and health systems. Prior to his work with MedManagement,
L.L.C., Mr. Davis served for ten years in a number of operations and executive
management positions at UnitedHealth Group Corporation. Most recently, from
1994 to 1996, Mr. Davis served as President of Healthmarc, a UnitedHealth Group
Corporation specialty company providing innovative managed care services to
employers with populations resident outside health plan service areas. Mr.
Davis holds a bachelor's degree from St. John's University, Collegeville,
Minnesota.
Mr. Bingham is one of our co-founders. He has been our Senior Vice President,
Business Development since August 1999 and a member of our board of directors
since September 1993. In addition, Mr. Bingham has held leadership roles in
many aspects of our company since its inception. Prior to founding our company,
Mr. Bingham held various management positions at UnitedHealth Group
Corporation, McKinsey & Company and Maxicare Health Plans. Mr. Bingham holds an
M.B.A. degree from the Wharton School at the University of Pennsylvania and a
bachelor's degree in economics from Claremont McKenna College.
Mr. Halstead has been our Chief Financial Officer since February 1997. Prior
to joining our company, he spent six years with The Dun & Bradstreet
Corporation in various financial management positions in North America, Europe
and Asia. Most recently he was Chief Financial Officer of an operating division
of The Dun & Bradstreet Corporation. Mr. Halstead holds an M.B.A. degree from
the Wharton School at the University of Pennsylvania and a bachelor's degree in
Industrial Engineering from Northwestern University.
Mr. Barber has been a director since June 1999. Mr. Barber is a Managing
Member of JMI Associates III, LLC, the general partner of JMI Equity Fund III,
L.P., a venture capital limited partnership. From 1990 to 1998, he was Managing
Director and head of the software investment banking practice of Deutsche Bank
Alex.
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Brown, an investment banking firm. Mr. Barber serves on the board of directors
of several privately held companies. Mr. Barber holds an M.B.A. from Harvard
Business School and a bachelor's degree in Economics from Stanford University.
Mr. Bradley has been a director since 1997. Mr. Bradley has been Chairman and
Chief Executive Officer of Abaton.com, Inc., a Web-based healthcare information
company, since January 1997. From 1989 to October 1995, Mr. Bradley was Chief
Information Officer of UnitedHealth Group Corporation. From October 1995 to
January 1997, Mr. Bradley was President of Health Systems Integration, Inc., a
healthcare software information company. Mr. Bradley holds an M.S. degree in
Bio Statistics and Data Processing and a bachelor's degree in Genetics and
Statistics from the University of Illinois.
Mr. Cain has been one of our directors since March 1999. Mr. Cain is
President and Chief Executive Officer of Cain Brothers, LLC, a healthcare
investment bank which has served the financial and capital needs of the health
and medical industry since 1982, and a Manager of CB Health Ventures, L.L.C.
Mr. Cain is a director of New England Funds, a family of mutual funds and
Universal Health Realty Income Trust, a health care REIT. Mr. Cain is a trustee
of the Norman Rockwell Museum and Sharon Hospital and the National Committee
for Quality Health Care. Mr. Cain holds an M.B.A. degree from Columbia
University and a bachelor's degree in American Civilization from Brown
University.
Mr. Geary has been a director since June 1998. Mr. Geary has been a Principal
of North Bridge Venture Partners, L.P. since its inception in March 1994 and a
General Partner of North Bridge Venture Partners II, L.P. since its inception
in September 1996 and in North Bridge Venture Partners II, L.P. since its
inception in August 1998. Mr. Geary also is a director of several private
technology companies. Mr. Geary holds a bachelor's degree from Boston College
and is a C.P.A.
Mr. Nehra has been a director since 1996. Since 1989, Mr. Nehra has been the
managing general partner of Catalyst Ventures, Limited Partnership, a venture
capital limited partnership. Since December 1993, Mr. Nehra has also been a
general partner of New Enterprise Associates VI, VII, and VIII Limited
Partnerships, venture capital limited partnerships. Mr. Nehra has served as
Chairman of the Board of Directors of Celeris Corporation, a biomedical
contract research service company since July 1997 and as a director of Celeris
since November 1992. Mr. Nehra also has served as Chairman of the Board of
Iridex Corporation, a medical device company, since 1994, and as a director
since 1989. Mr. Nehra is also a director of several privately held companies.
Mr. Nehra holds a bachelor's degree from the University of Michigan.
Board Composition
Following this offering, our board of directors will consist of eight
directors divided into three classes with each class serving for a term of
three years. At each annual meeting of shareholders, directors will be elected
by the holders of common stock to succeed those directors whose terms are
expiring. Messrs. Geary and Nehra will be Class I directors whose terms will
expire in 2000; Messrs. Barber, Bradley and Cain will be Class II directors
whose terms will expire in 2001; and Messrs. Bingham, Davis and Tierney will be
Class III directors whose terms will expire in 2002. We intend to add
additional outside directors.
Board Committees
Our board of directors has established a compensation committee and an audit
committee.
Messrs. Bradley, Cain and Nehra are members of our compensation committee and
Mr. Nehra is its chairman. Our compensation committee makes recommendations to
the board of directors concerning executive compensation and administers our
stock option plans and our Employee Stock Purchase Plan.
Messrs. Barber, Geary and Nehra are members of our audit committee and Mr.
Geary is its chairman. Our audit committee reviews the results and scope of the
audit and other accounting related services and reviews our accounting
practices and systems of internal accounting controls.
39
<PAGE>
Director Compensation
We currently do not pay any compensation to directors for serving in that
capacity. We reimburse directors for out-of-pocket expenses incurred in
attending board meetings. Our board of directors has the discretion to grant
options to non-employee directors pursuant to our stock option plans. Mr.
Bradley currently holds options to purchase 15,565 shares of our common stock.
Compensation Committee Interlocks and Insider Participation
Messrs. Bradley, Cain and Nehra currently serve on the compensation
committee. None of these individuals has at any time been an officer or
employee of ours. Prior to formation of the compensation committee, all
decisions regarding executive compensation were made by the full board of
directors. No interlocking relationship exists between the board of directors
or the compensation committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
On March 19, 1996, we sold a total of 636,945 shares of our Series B
Preferred Stock at a purchase price of $7.065 per share, including 424,630
shares to New Enterprise Associates VI, Limited Partnership. On May 3, 1999, we
sold a total of 563,525 shares of our Series C Preferred Stock at a purchase
price of $9.76 per share, including 307,377 shares to CB Healthcare Fund, L.P.
and 102,459 shares to New Enterprise Associates VI, Limited Partnership. On
June 9, 1999, we sold a total of 512,295 shares of our Series C Preferred Stock
at a purchase price of $9.76 per share, including 102,459 shares to CB
Healthcare Fund, L.P.
Mr. Nehra is a general partner of NEA Partners VI, Limited Partnership, which
is the general partner of New Enterprise Associates VI, Limited Partnership.
Mr. Cain is a Manager of CB Health Ventures, L.L.C. which is the general
partner of CB Healthcare Fund, L.P. We believe that the shares issued in the
transactions described above were sold at the then fair market value of the
shares and that the terms of such transactions were no less favorable than we
could have obtained from unaffiliated third parties.
Indemnification Matters and Limitation of Liability
Minnesota law and our bylaws provide that we will, subject to limitations,
indemnify any person made or threatened to be made a party to a proceeding by
reason of that person's former or present official capacity with us. We will
indemnify such person against judgments, penalties, fines, settlements and
reasonable expenses, and, subject to limitations, we will pay or reimburse
reasonable expenses before the final disposition of the proceeding.
As permitted by Minnesota law, our articles of incorporation provide that our
directors will not be personally liable to us or our shareholders for monetary
damages for a breach of fiduciary duty as a director, subject to the following
exceptions:
. any breach of the director's duty of loyalty to us or our shareholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. liability for illegal distributions under section 302A.559 of the
Minnesota Business Corporation Act or for civil liabilities for state
securities law violations under section 80A.23 of the Minnesota
statutes;
. any transaction from which the director derived an improper personal
benefit; and
. any act or omission occurring prior to the effective date of Article
VIII of our articles of incorporation.
In addition, the employment agreements with our officers that are described
in this prospectus require us, to the extent permitted by law, to indemnify
each of these officers and to obtain directors' and officers' liability
insurance coverage in such amount as our board of directors determines to be
appropriate.
40
<PAGE>
Presently, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for indemnification.
Employment Agreements
We entered into employment agreements with Mark Tierney, John Davis and Scott
Halstead in April 1999 that govern their employment with us. The agreements set
forth their compensation levels and eligibility for salary increases, bonuses,
benefits and option grants under our stock option plans. The initial employment
term is five years. During the term of their employment agreements, either
party may terminate the agreement by providing at least 30 days written notice
to the other party.
Mr. Tierney's employment agreement provides for a payment of one year's base
salary and an immediate vesting of 100% of any remaining unvested stock options
in the event of termination of employment by mutual agreement or due to Mr.
Tierney's death or disability. Also, if we terminate his employment other than
for cause, other than as set forth in the preceding sentence, or Mr. Tierney
terminates his employment agreement because of a material reduction in his
duties or compensation or because we require him to relocate, then the
agreement provides for a payment of two years' base salary and an immediate
vesting of 100% of any remaining unvested stock options. If a change in control
occurs prior to April 22, 2001, his employment agreement provides for an
immediate vesting of 100% of any remaining unvested stock options.
Mr. Davis' employment agreement provides for a payment of one year's base
salary and an immediate vesting of 50% of any remaining unvested stock options
in the event of termination of employment other than for cause. If, however,
the termination of employment occurs within two years of a change in control,
the employment agreements provide for severance pay of one year's base salary
and an immediate vesting of 100% of any remaining unvested stock options.
Mr. Halstead's employment agreement provides for a payment of six months'
base salary and an immediate vesting of 50% of any remaining unvested stock
options in the event of termination of employment other than for cause. If,
however, the termination of employment occurs within one year of a change in
control, his employment agreement provides for severance pay of six months'
base salary and an immediate vesting of 100% of any remaining unvested stock
options.
Executive Compensation
The following table provides information concerning compensation paid or
accrued by us to or on behalf of our chief executive officer and each of our
two other most highly compensated executive officers whose salary and bonus
during the fiscal year ended December 31, 1998 was more than $100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
---------------- ------------
Shares
Name and Principal Underlying
Position Salary Bonus Options
- ------------------ -------- ------- ------------
<S> <C> <C> <C>
Mark W. Tierney
Chairman and
Director.............. $152,000 $42,040 10,400
Michael C. Bingham
Senior Vice President,
Business Development.. $104,000 $28,580 7,800
Scott P. Halstead
Chief Financial
Officer and
Secretary............. $120,000 $12,000 3,900
</TABLE>
- --------
. The aggregate amount of perquisites and other personal benefits, securities
or property received by each named executive officer was less than either
$50,000 or 10% of the total annual salary and bonus reported for each
respective named executive officer.
. John Davis became Chief Executive Officer in April 1999. During the fiscal
year ended December 31, 1998, Mark Tierney was Chairman and Chief Executive
Officer. Michael Bingham has been Senior Vice President, Business
Development since August 1999. During the fiscal year ended December 31,
1998, Mr. Bingham was President.
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<PAGE>
The following table provides information concerning the stock option grants
made to each of our named executive officers during the fiscal year ended
December 31, 1998.
Option Grants in Fiscal 1998
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------------
Number of
Securities Percentage of Total
Underlying Options Granted to
Options Employees in Fiscal Exercise Price Expiration
Name Granted 1998 ($/Share) Date
- ---- ---------- ------------------- -------------- ----------
<S> <C> <C> <C> <C>
Mark W. Tierney....... 10,400 5.01% $2.25 6/10/2008
Michael C. Bingham.... 7,800 3.76% $2.25 6/10/2008
Scott P. Halstead..... 3,900 1.88% $2.25 6/10/2008
</TABLE>
- --------
. The above options have a 10-year term from the grant date, and were fully
vested and exerciseable as of the grant date. All stock options were granted
with an exercise price equal to the fair market value of the common stock as
determined by our board of directors on the date of grant.
. The data presented in the Percentage of Total Options Granted to Employees
in Fiscal 1998 column based on an aggregate of 207,650 shares of common
stock subject to options granted to our employees during fiscal 1998.
The following table provides information concerning the exercise of options
to purchase common stock by our named executive officers during fiscal 1998 and
the number and value of unexercised stock options held by these executive
officers as of December 31, 1998.
Aggregated Option Exercises in Fiscal 1998 and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
----------------------- -------------------------
Shares
Acquired on
Name Exercise Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Mark W. Tierney......... -- 25,210 -- $33,174 $ --
Michael C. Bingham...... -- 9,035 -- $ 2,766 $ --
Scott P. Halstead....... -- 12,150 21,750 $ 3,713 $9,788
</TABLE>
- --------
. The value of unexercised in-the-money options is based on a value of $2.25,
the fair market value of our common stock as of December 31, 1998 as
determined by our board of directors, less the applicable per share exercise
price multiplied by the number of shares issued upon exercise of the option.
Benefit Plans
1993 Stock Option Plan
Our 1993 Stock Option Plan provides for the grant of options to purchase
shares of common stock and other long-term incentive awards to any of our full
or part-time employees, officers, directors, consultants and independent
contractors. Options granted under the 1993 Stock Option Plan may qualify as
incentive stock options under the Internal Revenue Code of 1986, or may be
options that do not qualify as incentive stock
42
<PAGE>
options. Other long-term incentive awards that may be granted under the 1993
Stock Option Plan include stock appreciation rights, or SARs, restricted stock
and performance awards. We have reserved 1,300,000 shares of common stock for
issuance under the 1993 Stock Option Plan. The 1993 Stock Option Plan is
administered by our compensation committee. The committee has the discretion to
select the people to whom options are granted and to establish the terms and
conditions of each stock option, subject to the provisions of the 1993 Stock
Option Plan and to any special provisions approved by our board of directors.
The exercise price of an incentive stock option granted under the 1993 Stock
Option Plan must not be less than 100% of the fair market value of the common
stock on the date the option is granted. In the event that a proposed optionee
owns more than 10% of our common stock, any incentive stock option granted to
such optionee must have an exercise price not less than 110% of the fair market
value of our common stock on the grant date. The term of each option is
determined by the compensation committee. However, the term of an incentive
stock option may not exceed 10 years from the date of grant and the term of a
non-qualified stock option may not exceed 15 years from the date of grant. In
the case of an incentive option granted to an owner of more than 10% of our
common stock, the term may not exceed five years from the date of grant. The
1993 Stock Option Plan is subject to amendment by our board of directors,
except that the board may not increase the number of shares which may be issued
under the 1993 Stock Option Plan or decrease the minimum exercise price of
options granted under the 1993 Stock Option Plan without the approval of our
shareholders.
As of December 31, 1998, options to purchase an aggregate of 553,930 shares
of common stock, at a weighted average exercise price of $1.35 per share, were
outstanding under the 1993 Stock Option Plan and a total of 113,961 shares were
available for future option grants.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan was approved by our board of directors and
shareholders in September 1999. The 1999 Stock Incentive Plan provides for the
granting of:
. stock options, including incentive stock options and non-qualified stock
options;
. stock appreciation rights, or SARs;
. restricted stock and restricted stock units;
. performance awards; and
. other stock-based awards.
We have reserved 1,000,000 shares of common stock for issuance under the 1999
Stock Incentive Plan. The 1999 Stock Incentive Plan is administered by our
compensation committee. The compensation committee has the authority
. to establish rules for the administration of the 1999 Incentive Plan;
. to select the persons to whom awards are granted;
. to determine the types of awards to be granted and the number of shares
of common stock covered by such awards; and
. to set the terms and conditions of such awards.
The compensation committee may also determine whether the payment of any
amounts received under any award shall be deferred. Awards may provide that
upon the grant or exercise, the holder will receive shares of common stock,
cash or any combination, as the compensation committee shall determine.
In order to meet the requirements of Section 162(m) of the Internal Revenue
Code, the 1999 Incentive Plan contains a limitation on the number of options
that may be granted to any single person in any one calendar year.
The exercise price per share under any incentive stock option or the grant
price of any SAR cannot be less than 100% of the fair market value of our
common stock on the date of the grant of such incentive stock option
43
<PAGE>
or SAR. In the event that a proposed optionee owns more than 10% of our common
stock, any incentive stock option granted to such optionee must have an
exercise price not less than 110% of the fair market value of our common stock
on the grant date and may not have a term longer than five years. Options may
be exercised by payment in full of the exercise price, either in cash or, at
the discretion of the compensation committee, in whole or in part by the
tendering of shares of common stock or other consideration having a fair market
value on the date the option is exercised equal to the exercise price.
Determinations of fair market value under the 1999 Stock Incentive Plan are
made in accordance with methods and procedures established by the compensation
committee.
The holder of an SAR is entitled to receive the excess of the fair market
value of a specified number of shares over the grant price of the SAR.
The holder of restricted stock may have all of the rights of a shareholder of
our company, including the right to vote the shares subject to the restricted
stock award and to receive any dividends or such rights may be restricted.
Restricted stock may not be transferred by the holder until the restrictions
established by the compensation committee lapse. Holders of restricted stock
units have the right, subject to any restrictions imposed by the compensation
committee, to receive shares of common stock, or a cash payment equal to the
fair market value of such shares, at some future date. Upon termination of the
holder's employment during the restriction period, restricted stock and
restricted stock units shall be forfeited, unless the compensation committee
determines otherwise.
If any shares of common stock subject to any award or to which an award
relates are not purchased or are forfeited, or if any such award terminates
without the delivery of shares or other consideration, the shares previously
used for such awards become available for future awards under the 1999 Stock
Incentive Plan. Except as otherwise provided under procedures adopted by the
compensation committee to avoid double counting with respect to awards granted
in tandem with or in substitution for other awards, all shares relating to
awards granted are counted against the aggregate number of shares available for
granting awards under the 1999 Stock Incentive Plan.
Our board of directors may amend, alter or discontinue the 1999 Stock
Incentive Plan at any time, provided that shareholder approval must be obtained
for any change that absent such shareholder approval:
. would cause Rule 16b-3 of the Exchange Act or section 162(m) of the
Internal Revenue Code to become unavailable with respect to the 1999
Stock Incentive Plan;
. would violate any rules or regulations of the National Association of
Securities Dealers, Inc., the Nasdaq National Market or any securities
exchange applicable to us; or
. would cause us to be unable under the Internal Revenue Code to grant
incentive stock options under the 1999 Stock Incentive Plan.
Under the 1999 Stock Incentive Plan, the compensation committee may permit
participants receiving or exercising awards to surrender shares of common stock
to us to satisfy federal and state withholding tax obligations. In addition,
the compensation committee may grant a bonus to a participant in order to
provide funds to pay all or a portion of federal and state taxes due as a
result of the receipt, exercise or lapse of restrictions relating to an award.
Employee Stock Purchase Plan
Our employee stock purchase plan will become effective upon consummation of
this offering and is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. The stock purchase plan covers
an aggregate of 300,000 shares of common stock. In order to participate in the
stock purchase plan, employees must meet certain eligibility requirements.
Participating employees will be able to direct us to make payroll deductions of
up to 15% of their compensation during a purchase period for the purchase of
shares of common stock. Each purchase period, with the exception of the initial
offering period,
44
<PAGE>
will be six months. The stock purchase plan will provide participating
employees with the right, subject to certain limitations, to purchase our
common stock at a price equal to 85% of the lesser of the fair market value of
our common stock on the first day or the last day of the applicable purchase
period. The price on the first day of the initial purchase period will be the
initial public offering price of the shares of the common stock in this
offering. The stock purchase plan will terminate on such date as our board of
directors may determine, or automatically as of the date on which all of the
shares of common stock reserved for purchase under the stock purchase plan have
been sold.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan for
all of our employees who satisfy eligibility requirements, including
requirements relating to age and length of service. Pursuant to the 401(k)
plan, employees may elect to reduce their current compensation by up to the
lower of 20% or the statutory limit and have the amount of such reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Section 401 of the Code so that contributions by employees or by us to the
401(k) plan, and income earned on plan contributions, are not taxable to
employees until withdrawn from the 401(k) plan. Our contributions, if any, will
be deductible by us when made.
45
<PAGE>
CERTAIN TRANSACTIONS
On March 19, 1996, we sold a total of 636,945 shares of our Series B
Preferred Stock at a purchase price of $7.065 per share as follows:
. 212,315 shares to North Bridge Venture Partners, L.P.; and
. 424,630 shares to New Enterprise Associates VI, Limited Partnership.
On May 3, 1999, we sold a total of 563,525 shares of our Series C Preferred
Stock at a purchase price of $9.76 per share, including:
. 307,377 shares to CB Healthcare Fund, L.P.;
. 102,459 shares to North Bridge Venture Partners, L.P.; and
. 102,459 shares to New Enterprise Associates VI, Limited Partnership.
On June 9, 1999, we sold a total of 512,295 shares of our Series C Preferred
Stock at a purchase price of $9.76 per shares as follows:
. 102,459 shares to CB Healthcare Fund, L.P.;
. 364,754 shares to JMI Equity Fund III, L.P.; and
. 45,082 shares to JMI Equity Side Fund, L.P.
William J. Geary, who is one of our directors, is a principal of North Bridge
Venture Management, L.P. North Bridge Venture Management is a general partner
of North Bridge Venture Partners, L.P.
John M. Nehra, who is one of our directors, is a general partner of NEA
Partners VI, Limited Partnership. NEA Partners VI, Limited Partnership is the
general partner of New Enterprise Associates VI, Limited Partnership.
Daniel M. Cain, who is one of our directors, is a manager of CB Health
Ventures, L.L.C. CB Health Ventures, L.L.C. is the general partner of CB
Healthcare Fund, L.P.
Paul V. Barber, who is one of our directors, is a managing member of JMI
Associates III, LLC. JMI Associates III, LLC, is the general partner of JMI
Equity Fund III, L.P. JMI Equity Side Fund, L.P. is affiliated with JMI Equity
Fund III, L.P. Mr. Barber has no beneficial ownership interest in JMI Equity
Side Fund, L.P.
We believe that the shares issued in the transactions described above were
sold at the then fair market value of the shares and that the terms of such
transactions were no less favorable than we could have obtained from
unaffiliated third parties.
46
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table provides information concerning beneficial ownership of
our common stock as of September 10, 1999 by:
. each shareholder that we know owns more than 5% of our outstanding common
stock;
. each of our named executive officers;
. each of our directors; and
. all of our directors and named executive officers as a group.
The following table lists the applicable percentage of beneficial ownership
based on approximately 3,265,481 shares of common stock outstanding as of
September 10, 1999, as adjusted to reflect the conversion of the outstanding
shares of preferred stock immediately prior to this offering. The table also
lists the applicable percentage beneficial ownership based on [ ] shares of
common stock outstanding upon completion of this offering, assuming no exercise
of the underwriters' overallotment option. Except where noted, the persons or
entities named have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
Unless otherwise indicated, the principal address of each listed 5%
shareholder is c/o eBenX, Inc., 5500 Wayzata Boulevard, Suite 1450,
Minneapolis, Minnesota 55416-1241.
<TABLE>
<CAPTION>
Percentage of
Shares Beneficially
Number of Owned(1)
Shares --------------------
Beneficially Before the After the
Beneficial Owners Owned(1) Offering Offering
- ----------------- ------------ ---------- ---------
<S> <C> <C> <C>
North Bridge Venture Partners, L.P.
950 Winter Street, Suite 4600
Waltham, MA 02451.......................... 684,983 21.0%
New Enterprise Associates VI, Limited
Partnership
1119 St. Paul Street
Baltimore, MD 21202........................ 527,089 16.1
Entities associated with
JMI Equity Fund III, L.P. (2)
12680 High Bluff Drive
San Diego, CA 92130........................ 409,836 12.6
CB Healthcare Fund, L.P.
452 Fifth Avenue, 25th Floor
New York, NY............................... 409,836 12.6
Barbara J. Seykora (3)....................... 198,062 5.9
Mark W. Tierney (4).......................... 645,210 19.5
John J. Davis (5)............................ 49,609 1.5
Michael C. Bingham (6)....................... 409,035 12.5
Scott P. Halstead (7)........................ 22,400 *
Paul V. Barber (8)........................... 364,754 11.2
James P. Bradley (9)......................... 6,339 *
Daniel M. Cain (10).......................... 409,836 12.6
William J. Geary (11)........................ 684,983 21.0
John M. Nehra (12)........................... 527,089 16.1
All directors and executive officers as a
group (9 persons) (13)..................... 3,119,255 91.8
</TABLE>
47
<PAGE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of our common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options, warrants or issuable on the conversion of preferred
stock which are currently exercisable or convertible or may be exercised
or converted within 60 days of September 10, 1999 are deemed to be
outstanding and to be beneficially owned by the person holding these
options, warrants or shares of convertible preferred stock for the
purpose of computing the number of shares beneficially owned and the
percentage ownership of the person or entity holding these securities but
are not outstanding for the purpose of computing the percentage ownership
of any other person or entity.
(2) Includes 364,754 shares held by JMI Equity Fund III, L.P. and 45,082
shares held by JMI Equity Side Fund, L.P. JMI Equity Side Fund, L.P. is
affiliated with JMI Equity Fund III, L.P.
(3) Includes 119,115 shares issuable upon exercise of stock options
exercisable within 60 days of September 10, 1999.
(4) Includes 30,400 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999 and 14,810 shares
issuable upon exercise of immediately exerciseable warrants.
(5) Includes 49,609 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999.
(6) Includes 7,800 shares issuable upon exercise of stock options exerciseable
within 60 days of September 10, 1999 and 1,235 shares issuable upon
exercise of immediately exerciseable warrants.
(7) Includes 22,400 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999.
(8) Includes 364,754 shares held by JMI Equity Fund III, L.P. Mr. Barber, one
of our directors, is a Managing Member of JMI Associates III, LLC, which
is the general partner of JMI Equity Fund III, L.P. JMI Equity Side Fund,
L.P. is affiliated with JMI Equity Fund III, L.P. Mr. Barber disclaims
beneficial ownership of shares held by JMI Equity Fund III, L.P. Mr.
Barber has no beneficial ownership interest in JMI Equity Side Fund, L.P.
(9) Includes 6,339 shares issuable upon exercise of stock options exerciseable
within 60 days of September 10, 1999.
(10) Includes 409,836 shares held by CB Healthcare Fund, L.P. Mr. Cain, one of
our directors, is a Manager of CB Health Ventures, L.L.C., which is the
general partner of CB Healthcare Fund, L.P. Mr. Cain disclaims beneficial
ownership of shares held by CB Healthcare Fund, L.P.
(11) Includes 684,983 shares held by North Bridge Venture Partners, L.P. Mr.
Geary, one of our directors, is a principal of North Bridge Venture
Management, L.P., which is a general partner of North Bridge Venture
Partners, L.P. Mr. Geary disclaims beneficial ownership of shares held by
North Bridge Venture Partners, L.P.
(12) Includes 527,089 shares held by New Enterprise Associates VI, Limited
Partnership. Mr. Nehra, one of our directors, is a general partner of NEA
Partners VI, Limited Partnership, which is the general partner of New
Enterprise Associates VI, Limited Partnership. Mr. Nehra disclaims
beneficial ownership of shares held by NEA Partners VI, Limited
Partnership
(13) Includes 116,548 shares issuable upon exercise of stock options
exerciseable within 60 days of September 10, 1999 and 16,045 shares
issuable upon exercise of immediately exerciseable warrants. Includes
364,754 shares held by JMI Equity Fund III, L.P., 409,836 shares held by
CB Healthcare Fund, L.P., 684,983 shares held by North Bridge Venture
Partners, L.P. and 527,089 shares held by New Enterprise Associates VI,
Limited Partnership. Does not include shares beneficially owned by Barbara
J. Seykora, who is not an executive officer of our company.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of our amended and restated articles of
incorporation immediately prior to the closing of this offering, our authorized
capital stock will consist of 100,000,000 shares of capital stock, par value
$.01 per share. Unless otherwise designated by our board of directors, all
issued shares shall be deemed common stock with equal rights and preferences.
Common Stock
As of September 24, 1999, there were 3,265,481 shares of our common stock
outstanding.
Holders of our common stock do not have cumulative voting rights and are
entitled to one vote for each share held of record on all matters submitted to
a vote of the shareholders, including the election of directors. Holders of our
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of legally available funds. These rights
are subject to the prior rights of any preferred stock then outstanding. See
"Dividend Policy" for a further description of dividend rights.
Upon our liquidation, dissolution or winding up, the holders of our common
stock will be entitled to share ratably in the net assets legally available for
distribution to shareholders after the payment of our debts and other
liabilities. These rights are subject to the prior rights of any preferred
stock then outstanding. Holders of our common stock have no preemptive or
conversion rights or other subscription rights and there are no redemption or
sinking funds provisions applicable to the common stock. All outstanding shares
of common stock are, and the common stock outstanding upon completion of this
offering will be, fully paid and nonassessable.
Preferred Stock
Effective upon the closing of this offering, our board of directors will have
the authority, without further action by the shareholders, to issue shares of
preferred stock in one or more series and to fix the number of shares,
designations and preferences, powers and relative, participating, optional or
other special rights and the qualifications or restrictions on those shares.
The preferences, powers, rights and restrictions of different series of
preferred stock may differ with respect to dividend rates, amounts payable on
liquidation, voting rights, conversion rights, redemption provisions, sinking
fund provisions and purchase funds and other matters.
The issuance of preferred stock could decrease the amount of earnings and
assets available for distribution to holders of common stock or adversely
affect the rights and powers, including voting rights, of the holders of common
stock. It may have the effect of delaying, deferring or preventing a change in
control our company. We currently do not plan to issue any shares of preferred
stock.
Registration Rights
After this offering, the holders of 2,082,974 shares of common stock will be
entitled to rights with respect to the registration of these shares under the
Securities Act as follows:
. Demand Registration Rights: At any time beginning six months following
our initial public offering, the holders of at least 30% of these shares
of common stock can request that we register all or a portion of their
shares. Upon such a request, we must, subject to specific restrictions
and limitations, use our best efforts to cause a registration statement
covering the number of shares of common stock that are subject to the
request to become effective. The holders may only require us to file
three registration statements in response to their demand registration
rights.
. Piggyback Registration Rights: If we propose to register additional
shares of our common stock under the Securities Act, subject to specific
exceptions, the holders of the 2,082,974 shares can request that we
register their shares in connection with our registration. However, the
underwriter of the registration, if any, would have the right to limit
the number of the 2,082,974 shares that may be included in the
registration. These registration opportunities are unlimited.
49
<PAGE>
These registration rights terminate when all of these shares may be sold
during any 90-day period under Rule 144 under the Securities Act.
Provisions of our Restated Articles and Bylaws and State Law Provisions with
Potential Antitakeover Effects
The existence of authorized but unissued preferred stock, described above,
and certain provisions of Minnesota law, described below, could have an anti-
takeover effect. These provisions are intended to provide management with
flexibility, to enhance the likelihood of continuity and stability in the
composition of our board of directors and the policies of our board and to
discourage an unsolicited takeover of our company if our board of directors
determines that such a takeover is not in the best interests of our company and
our shareholders. However, these provisions could have the effect of
discouraging attempts to acquire us, which could deprive our shareholders of
opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Upon the closing of this offering, our board of directors will be divided
into three classes serving staggered three-year terms. As a result of this
division, generally at least two shareholders' meetings will be required for
shareholders to effect a change in control of the board of directors. In
addition, our bylaws will contain provisions that establish specific procedures
for calling meetings of shareholders and appointing and removing members of the
board of directors.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
exceptions, to any acquisition of our voting stock from a person other than us,
and other than in connection with certain mergers and exchanges to which we are
a party, that results in the beneficial ownership of 20% or more of the voting
stock then outstanding. Section 302A.671 requires approval of any such
acquisitions by a majority vote of our shareholders to accord full voting
rights to the acquired shares. In general, shares acquired in the absence of
such approval are denied voting rights and are redeemable at their then fair
market value by us within 30 days after the acquiring person has failed to give
a timely information statement to us or the date the shareholders voted not to
grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by us, or by any of our subsidiaries, with
any shareholder that purchases 10 percent or more of our voting shares within
four years following this interested shareholder's share acquisition date. The
business combination may be permitted if it is approved by a committee of all
of the disinterested members of our board of directors before the interested
shareholder's share acquisition date.
Listing
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "EBNX."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, South Saint Paul,
Minnesota 55075, and its telephone number is (651) 450-4064.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, we will have [ ] shares of
common stock outstanding, assuming no exercise of the underwriters'
overallotment option and no exercise of outstanding options to purchase common
stock. All of our directors and executive officers and 5% shareholders, holding
in the aggregate in excess of [ ]% of the outstanding shares of our common
stock, have agreed that they will not, without the prior written consent of the
representatives of the underwriters, sell or otherwise dispose of any shares of
common stock or options to acquire shares of common stock during the 180-day
period following the closing of this offering. See "Underwriting."
50
<PAGE>
The [ ] shares of common stock being sold in this offering will be freely
tradeable without restriction or further registration under the Securities
Act, except for shares held by our "affiliates," as such term is defined in
Rule 144 under the Securities Act, which may generally only be sold in
compliance with the limitations of Rule 144, described below. The remaining
3,265,481 shares were issued and sold by us in private transactions and are
deemed restricted securities under Rule 144. These shares may be sold in the
public market only if registered under the Securities Act or if exempt from
registration under Rules 144, 144(k) or 701 under the Securities Act, which
rules are summarized below. Subject to the agreements between our shareholders
and the underwriters, described above, and the provisions of Rules 144, 144(k)
and 701, additional shares will be available for sale in the public market,
subject in the case of shares held by affiliates to compliance with volume
restrictions, as follows:
. 98,247 shares will be available for immediate sale in the public market
on the date of this prospectus;
. 84,260 shares will be available for sale 90 days after the date of this
prospectus; and
. 3,082,974 shares will be available for sale under Rules 144 and 701 upon
the expiration of agreements between our shareholders and the
underwriters 180 days after the date of this prospectus.
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person or persons whose shares are aggregated, including an
affiliate, who has beneficially owned restricted shares for at least one year,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of common stock,
or approximately [ ] shares immediately after this offering, or the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the date of such sale. Sales under Rule 144
also are subject to requirements pertaining to the manner and notice of such
sales and the availability of current public information concerning our
company.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
our company at any time during the 90 days before a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell these shares without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of our
company, the transferee's holding period for the purpose of effecting a sale
under Rule 144(k) commences on the date of transfer from the affiliate.
Rule 701 provides that, beginning 90 days after the date of this prospectus,
persons other than affiliates may sell shares of common stock acquired from us
in connection with written compensatory benefit plans, including our 1993
Stock Option Plans, subject only to the manner of sale provisions of Rule 144.
Beginning 90 days after the date of this prospectus, affiliates may sell these
shares of common stock subject to all provisions of Rule 144 except the one-
year minimum holding period.
Shortly after the closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register all shares of
common stock issuable under the 1993 Stock Option Plan, the 1999 Stock
Incentive Plan and the Stock Purchase Plan. See "Management--Benefit Plans"
for a further discussion of these plans. This Form S-8 registration statement
is expected to become effective immediately upon filing and shares covered by
that registration statement will then be eligible for sale in the public
markets, subject to the Rule 144 limitations applicable to affiliates.
Prior to this offering there has been no public market for our common stock,
and no predictions can be made regarding the effect, if any, that sales of
shares in the open market or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of our common stock in the public market could adversely
affect the prevailing market price.
After the closing of this offering, the holders of 2,082,974 shares of our
common stock will be entitled to rights with respect to the registration of
such shares under the Securities Act. Registration of these shares under the
Securities Act would result in these shares becoming freely tradeable without
restriction under the Securities Act, except for shares purchased by
affiliates, immediately upon the effectiveness of registration. For a
discussion of these rights, see "Description of Capital Stock--Registration
Rights."
51
<PAGE>
UNDERWRITING
The underwriters, through their representatives, BancBoston Robertson
Stephens Inc., Warburg Dillon Read LLC and Thomas Weisel Partners LLC, have
severally agreed to purchase from us the number of shares of common stock next
to their respective names below. The underwriters are committed to purchase and
pay for all the shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ----------
<S> <C>
BancBoston Robertson Stephens Inc................................... [ ]
Warburg Dillon Read LLC............................................. [ ]
Thomas Weisel Partners LLC.......................................... [ ]
----------
Total............................................................. [ ]
==========
</TABLE>
The underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at the public offering price less a concession of $[ . ] per
share, of which $[ . ] may be reallowed to other dealers. After the initial
public offering, the public offering price, concession and reallowance to
dealers may be reduced by the representatives. However, no reduction will
change the amount of proceeds to be received by us as set forth on the cover
page of this prospectus. The common stock is offered by the underwriters
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to [ ] additional shares of our common stock at the same price
per share as we will receive for the [ ] shares that the underwriters have
agreed to purchase. If the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of these additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the total shares offered in this offering. These
additional shares will be sold by the underwriters on the same terms as those
on which the [ ] shares are being sold. We will be obligated to sell shares
to the extent the option is exercised. The underwriters may exercise this
option only to cover over allotments made in connection with the sale of the
shares of common stock offered in this offering.
Indemnity. Our underwriting agreement among us and the underwriter contains
covenants of indemnity among the underwriters and us against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
underwriting agreement.
Lock-up Agreements. Under the terms of lock-up agreements, each of our
officers and directors and certain of our shareholders have agreed with the
representatives, for a period of 180 days after the date of this prospectus,
not to offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to, any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock, owned
by these holders or with respect to which they have the power of disposition,
without the prior written consent of BancBoston Robertson Stephens, Inc.
BancBoston Robertson Stephens, Inc. may, in its sole discretion, release all or
any portion of the securities subject to the lock-up agreements. There are no
agreements between the representatives and any of our shareholders providing
consent by the representatives to the sale of shares prior to the expiration of
the period 180 days after this prospectus.
52
<PAGE>
Future Sales. In addition, we have agreed that during the 180 days after the
date of this prospectus, we will not, subject to certain exceptions, without
the prior written consent of BancBoston Robertson Stephens, Inc.:
. consent to the disposition of any shares held by shareholders prior to
the expiration of the period of 180 days after the date of this
prospectus; or
. issue, sell, contract to sell or otherwise dispose of any shares of
common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock, other than the sale of shares
in this offering, the issuance of common stock upon the exercise of
outstanding options or warrants or our issuance of options or shares
under our 1993 Stock Option Plan.
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the public offering price for our
common stock has been determined through negotiations between us and the
representatives. Among the factors considered in these negotiations are
prevailing market conditions, financial information of our market valuations
of other companies that the representatives believe to be comparable to us,
estimates of our business potential, the present state of our development and
other factors deemed relevant.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, certain persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of common stock by the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of
common stock by the underwriters to reduce a short position incurred by the
underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with
this offering if the common stock originally sold by such underwriter or
syndicate member is purchased by the representatives in a syndicate covering
transaction and has therefore not been effectively placed by such underwriter
or syndicate member. The representatives have advised us that these types of
transactions may be effected on the Nasdaq National Market or otherwise and if
commenced may be discontinued at any time.
Costs of Offering. We estimate that total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$[ ].
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 70 filed public offerings of equity securities, of which 39 have
been completed, and has acted as a syndicate member in an additional 34 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
LEGAL MATTERS
The validity of the issuance of shares of common stock offered by us in this
offering will be passed upon for us by Dorsey & Whitney LLP, Minneapolis,
Minnesota. Legal matters related to the offering will be passed upon for the
underwriters by Winston & Strawn, Chicago, Illinois.
53
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998 and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information about us and our common stock,
you should review the registration statement and exhibits and schedules
thereto. You may read and copy any document we file at the Commission's public
reference room in Washington, D.C. Please call the Commission at 1-800-SEC-0330
for further information on the public reference room. Our filings are also
available to the public from the Commission's Web site at http://www.sec.gov.
Upon completion of this offering, we will be required to file periodic
reports, proxy statements and other information with the Commission. These
periodic reports, proxy statements and other information will be available for
inspection and copying at the Commission's public reference room and the Web
site of the Commission referred to above.
54
<PAGE>
EBENX, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statement of Changes in Shareholders' Equity............... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
eBenX, Inc.
We have audited the accompanying consolidated balance sheets of eBenX, Inc.
(formerly known as Network Management Services, Inc.) as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of eBenX, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 22, 1999
F-2
<PAGE>
EBENX, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31 June Pro forma
---------------- 30, June 30,
1997 1998 1999 1999
------- ------- ------- ---------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 1,009 $ 1,681 $ 9,268 $ 9,268
Investments............................. 2,005 -- -- --
Accounts receivable, less allowance of
$51 at December 31, 1997 and 1998 and
June 30, 1999......................... 573 1,964 2,445 2,445
Prepaid expenses........................ 143 324 639 639
Other................................... 33 18 -- --
------- ------- ------- -------
Total current assets................. 3,763 3,987 12,352 12,352
Property and equipment, net............. 1,288 1,568 1,908 1,908
Deposits................................ 33 41 43 43
------- ------- ------- -------
Total assets......................... $ 5,084 $ 5,596 $14,303 $14,303
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 181 $ 837 $ 793 $ 793
Accrued payroll......................... 333 493 590 590
Accrued expenses........................ 83 115 137 137
Deferred revenue........................ 64 10 11 11
Note payable............................ -- 750 -- --
------- ------- ------- -------
Total current liabilities............ 661 2,205 1,531 1,531
Shareholders' equity:
Redeemable Convertible Preferred Stock:
Series A, $.01 par value: Authorized
shares--376,209 Issued and
outstanding shares--370,209;
Liquidation value--$1,000.......... 4 4 4 --
Series B, $.01 par value: Authorized
shares--636,945 Issued and
outstanding shares--636,945;
Liquidation value--$500............ 6 6 6 --
Series C, $.01 par value: Authorized
shares--1,075,820 Issued and
outstanding shares--1,075,820;
Liquidation value--$10,500......... -- -- 11 --
Common Stock, $.01 par value:
Authorized shares--7,000,000; Issued
and outstanding shares--1,148,507--
1997; 1,160,107--1998; 1,171,157--
1999............................... 11 12 12 33
Pro forma issued and outstanding
shares--3,254,131..................
Additional paid-in capital.............. 5,582 5,591 16,073 16,073
Retained deficit........................ (1,180) (2,222) (3,334) (3,334)
------- ------- ------- -------
Total shareholders' equity................ 4,423 3,391 12,772 12,772
------- ------- ------- -------
Total liabilities and shareholders'
equity.................................. $ 5,084 $ 5,596 $14,303 $14,303
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
Year ended December 31 June 30,
-------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue............. $ 4,360 $ 7,093 $ 10,122 $ 3,929 $ 7,108
Costs and expenses:
Costs of revenues..... 2,480 4,496 6,958 2,935 5,233
Selling, general and
administrative...... 1,796 2,068 2,831 1,319 2,010
Research and
development......... 863 1,242 1,519 673 1,127
--------- --------- ---------- --------- ---------
Total costs and
expenses......... 5,139 7,806 11,308 4,927 8,370
--------- --------- ---------- --------- ---------
Loss from operations.... (779) (713) (1,186) (998) (1,262)
Interest income......... 198 213 144 83 150
--------- --------- ---------- --------- ---------
Net loss................ $ (581) $ (500) $ (1,042) $ (915) $ (1,112)
========= ========= ========== ========= =========
Net loss per share:
Basic and diluted..... $ (.53) $ (.45) $ (.90) $ (.80) $ (.95)
========= ========= ========== ========= =========
Shares used in
calculation of net
loss per share:
Basic and diluted..... 1,104,327 1,125,244 1,154,372 1,150,455 1,164,878
========= ========= ========== ========= =========
Pro forma net loss per
share:
Basic and diluted..... $ (.42) $ (.46)
========== =========
Shares used in
calculation of pro
forma net loss per
share:
Basic and diluted..... 2,161,526 2,409,216
========== =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock
-----------------------------
Series A Series B Series C Common Stock Additional
-------------- -------------- ---------------- ---------------- Paid-In Retained
Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Total
------- ------ ------- ------ --------- ------ --------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 370,209 $ 4 -- $ -- -- $ -- 1,098,247 $11 $ 1,075 $ (99) $ 991
Issuance of Preferred
Stock (net of offering
costs of $10)......... -- -- 636,945 6 -- -- -- -- 4,484 -- 4,490
Exercise of stock
options............... -- -- -- -- -- -- 10,560 -- 3 -- 3
Exercise of stock
warrants.............. -- -- -- -- -- -- 1,600 -- 1 -- 1
Net loss............... -- -- -- -- -- -- -- -- -- (581) (581)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at December 31,
1996................... 370,209 4 636,945 6 -- -- 1,110,407 11 5,563 (680) 4,904
Exercise of stock
options............... -- -- -- -- -- -- 38,100 -- 19 -- 19
Net loss............... -- -- -- -- -- -- -- -- -- (500) (500)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at December 31,
1997................... 370,209 4 636,945 6 -- -- 1,148,507 11 5,582 (1,180) 4,423
Exercise of stock
options............... -- -- -- -- -- -- 11,600 1 9 -- 10
Net loss............... -- -- -- -- -- -- -- -- -- (1,042) (1,042)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at December 31,
1998................... 370,209 4 636,945 6 -- -- 1,160,107 12 5,591 (2,222) 3,391
Issuance of Series C
Preferred Stock (net
of offering costs of
$29).................. -- -- -- -- 1,075,820 11 -- -- 10,471 -- 10,482
Exercise of stock
options............... -- -- -- -- -- -- 11,050 -- 11 -- 11
Net loss............... -- -- -- -- -- -- -- -- -- (1,112) (1,112)
------- --- ------- ---- --------- ---- --------- --- ------- ------- -------
Balance at June 30, 1999
(unaudited)............ 370,209 $ 4 636,945 $ 6 1,075,820 $ 11 1,171,157 $12 $16,073 $(3,334) $12,772
======= === ======= ==== ========= ==== ========= === ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
EBENX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Six months
Year ended December 31 ended June 30
------------------------ --------------
1996 1997 1998 1998 1999
------- ------ ------- ----- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss............................. $ (581) $ (500) $(1,042) $(915) $(1,112)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation of property and
equipment......................... 192 327 481 222 315
Noncash expense relating to common
stock issued...................... 3 -- -- -- --
Changes in operating assets and
liabilities:
Accounts receivable................ (440) 27 (1,391) (294) (483)
Other current assets............... 6 (151) (166) (120) (300)
Accounts payable................... (11) 84 656 36 (44)
Accrued expenses................... 62 238 192 21 119
Deferred revenue................... (50) 65 (55) 546 1
Deposits........................... -- (23) (6) -- (1)
------- ------ ------- ----- -------
Net cash (used in) provided by
operating activities............ (819) 67 (1,331) (504) (1,506)
Investing activities:
Additions to property and equipment.. (523) (692) (761) (352) (639)
Purchase of investments.............. (2,006) -- -- -- --
Sale of investments.................. -- 1 2,005 -- --
------- ------ ------- ----- -------
Net cash (used in) provided by
investing activities.............. (2,529) (691) 1,244 (352) (639)
Financing activities:
Proceeds from note payable........... -- -- 750 -- --
Payment of note payable.............. -- -- -- -- (750)
Stock options and warrants
exercised.......................... 1 19 9 1 11
Proceeds from issuance of preferred
stock.............................. 4,490 -- -- -- 10,471
------- ------ ------- ----- -------
Net cash provided by financing
activities........................ 4,491 19 759 1 9,732
------- ------ ------- ----- -------
Net increase (decrease) in cash and
cash equivalents.................... 1,143 (605) 672 (855) 7,587
Cash and cash equivalents at beginning
of year............................. 471 1,614 1,009 1,009 1,681
------- ------ ------- ----- -------
Cash and cash equivalents at end of
year................................ $ 1,614 $1,009 $ 1,681 $ 154 $ 9,268
======= ====== ======= ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Business Description and Summary of Significant Accounting Policies
Business Description
EBenX, Inc. (formerly known as Network Management Services, Inc.), a
Minnesota corporation incorporated in September 1993 (the Company), provides
business-to-business e-commerce and connectivity solutions to employers and
health plans for the purchase, eligibility administration and premium payment
of group health insurance benefits. The Company's customers are located
throughout the United States.
Principles of Consolidation
The consolidated financial statements include the Company and Managed Care
Buyer's Group, Inc., its wholly owned subsidiary. All intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are considered to be available for sale. The carrying value of cash
equivalents approximates fair value at December 31, 1998 and 1997.
Investments
Investments at December 31, 1997 consist of United States Treasury notes
which are classified as available for sale. The cost of investments
approximates fair value.
Property and Equipment
Property and equipment, including purchased software, is stated at cost for
items purchased and at estimated fair value for items contributed by the
founding shareholders. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets of five to seven years. Leasehold
improvements are amortized over the estimated life of the assets or the related
lease term, whichever is less, on a straight-line basis.
Income Taxes
Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between financial reporting and
tax bases of assets and liabilities.
Revenue Recognition
Revenues are recognized when the services are rendered to the customer.
Deferred revenue represents cash received from customers prior to services
being performed by the Company.
Research and Development and Software Development
Research and development costs are expensed when incurred. Software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that technological feasibility and proven
marketability of the product are established.
F-7
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Summary of Significant Accounting Policies
(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for Stock-
Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Net Loss Per Share
Basic earnings per share is based on the weighted average shares outstanding
during the period. Diluted earnings per share increases the shares used in the
per share calculation by the dilutive effects of options, warrants, and
convertible securities. The Company's common stock equivalent shares
outstanding from stock options and warrants are excluded from the diluted
earnings per share computation as their effect is antidilutive.
Pro Forma Shareholders' Equity
Upon the closing of the Company's planned initial public offering, all
outstanding shares of Series A, B and C preferred stock will automatically
convert into 2,082,974 shares of common stock. The pro forma effects of these
transactions are unaudited and have been reflected in the accompanying pro
forma balance sheet at June 30, 1999.
Pro Forma Net Loss Per Share
Pro forma net loss per share for the year ended December 31, 1998 and the six
months ended June 30, 1999 is computed using the weighted average number of
common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's Series A, B and C preferred stock into shares of
the Company's common stock as if such conversion occurred on January 1, 1998,
or at the date of original issuance, if later. The resulting pro forma
adjustment includes an increase in the weighted average shares used to compute
basic and diluted net loss per share of 1,007,154 shares for the year ended
December 31, 1998 and 1,244,370 shares for the six months ended June 30, 1999.
The pro forma effects of these transactions are unaudited.
Interim Financial Statements
The interim financial statements for the six months ended June 30, 1998 and
1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly,
F-8
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business Description and Summary of Significant Accounting Policies
(Continued)
they do not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of the Company's management,
the unaudited interim financial statements contain all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation.
The results of operations for the interim periods are not necessarily
indicative of the results of the entire year.
Reclassification
Certain prior year items have been reclassified to conform to the current year
presentation.
2. Property and Equipment, Net
Property and equipment as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Office equipment.................................... $1,198,887 $ 1,455,009
Purchased software.................................. 363,612 563,532
Furniture and fixtures.............................. 241,763 474,085
Leasehold improvements.............................. 154,488 227,321
---------- -----------
1,958,750 2,719,947
Less accumulated depreciation....................... (670,642) (1,151,684)
---------- -----------
$1,288,108 $ 1,568,263
========== ===========
</TABLE>
3. Note Payable
The Company has a $1,500,000 revolving promissory note with a bank with
interest at 1% over the bank's base rate (8.75% at December 31, 1998). The
promissory note is secured by all business assets of the Company and matures
on December 31, 1999. The loan is guaranteed by the Company's wholly owned
subsidiary. At December 31, 1998, the outstanding balance was $750,000. The
promissory note was repaid during 1999.
4. Shareholders' Equity
Common Stock
The Company had agreements with two founding shareholders which entitled the
Company to repurchase one-half of the shares held by these shareholders for
$.01 per share if the shareholders' employment was terminated with cause or in
the event that the employee terminated employment under certain circumstances.
These agreements expired in August 1997 and no shares were repurchased under
the agreements.
Convertible Preferred Stock
Under provisions of stock purchase agreements, the holders of the Company's
preferred stock are entitled to:
. liquidation preference of $2.701 and $7.065 for each Series A and Series
B preferred share, respectively, plus unpaid accumulated dividends.
After payment of this preference amount, remaining distributable assets,
if any, will be distributed on a pro rata basis between the preferred
and common shareholders.
. Annual preferential noncumulative dividends of $.2701 (Series A) and
$.7065 (Series B) for each share payable only if declared by the Board
of Directors.
F-9
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Shareholder's Equity--(Continued)
. Voting rights similar to common shareholders.
. One director each, to the Company's Board of Directors for Series A and
Series B.
Each preferred share may be converted to common shares at the option of the
holder. In addition, the preferred shares shall be automatically converted to
common shares if (i) the Company closes the issuance and sale of common shares
in a public offering in which the gross proceeds equal or exceed $10,000,000,
or (ii) 80% of the preferred stock has been converted. The number of shares
issuable in exchange for each preferred share upon either optional or automatic
conversion shall be equal to $2.701 (Series A) and $7.065 (Series B) divided by
the conversion price then in effect, as defined. The initial conversion price
of $2.701 (Series A) and $7.065 (Series B) will be adjusted as necessary to
prevent dilution resulting from, among other things, issuance of additional
common stock, options or convertible securities.
On November 1, 1999 and March 19, 2001, and on each of the first and second
anniversaries thereof, the Company shall offer to redeem 33 1/3%, 50% and 100%,
respectively, of the Series A preferred shares for $2.701 and Series B
preferred shares for $7.065, respectively, per share plus accrued but unpaid
dividends.
The preferred stock purchase agreements contain certain restrictive covenants
which prohibit, among other things, the Company from authorizing additional
shares of Series A and Series B preferred stock or new classes of capital stock
with preferences greater than those given to the Series A and Series B
preferred shareholder, merging or consolidating with another corporation, or
effecting a change in control of the Company. In addition, capital expenditures
in excess of $100,000 for any item or related items require the approval of the
director elected by the preferred shareholders.
5. Income Taxes
At December 31, 1997 and 1998, the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 409,000 $ 665,000
Bonus and vacation................................. 127,000 188,000
Accounts receivable allowance...................... 19,000 19,000
--------- ---------
555,000 872,000
Deferred tax liabilities:
Depreciation....................................... (96,000) (93,000)
--------- ---------
(96,000) (93,000)
--------- ---------
Net deferred tax assets before valuation allowance... 459,000 779,000
Less valuation allowance............................. (459,000) (779,000)
--------- ---------
Net deferred tax assets.............................. $ -- $ --
========= =========
</TABLE>
As of December 31, 1998, the Company has unused federal and state research and
development tax credit carryforwards of approximately $100,000 which expire at
various times through 2011. In addition, the Company has unused federal net
operating loss carryforwards at December 31, 1998 of approximately $1,751,000,
which expire at various times through 2013. The utilization of these
carryforwards is dependent upon the Company's ability to generate sufficient
taxable income during the carryforward periods.
F-10
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Operating Leases
The Company leases or subleases its office space and certain equipment under
terms of noncancelable operating lease agreements which expire through February
2003. Future lease payments for all operating leases, excluding executory
costs, such as management and maintenance fees are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999............................................................ $1,100,020
2000............................................................ 863,391
2001............................................................ 530,439
2002............................................................ 118,730
2003............................................................ 19,840
----------
$2,632,420
==========
</TABLE>
Rent expense, including the Company's pro rata share of certain operating
costs, was $239,042, $560,281 and $975,731 in 1996, 1997 and 1998,
respectively.
7. Significant Customers
Significant customer activity as a percent of the Company's net revenue in 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Customer A................................................... 21% 13% 19%
Customer B................................................... 17% -- 17%
Customer C................................................... 13% 14% 14%
Customer D................................................... 7% 6% 10%
Customer E................................................... -- 10% 9%
Customer F................................................... -- 13% --
</TABLE>
8. Stock Options and Warrants
In 1993, the Company adopted the 1993 Stock Option Plan (the Plan) to encourage
stock ownership by employees, directors and other individuals as determined by
the Board of Directors. The Plan provides that options granted thereunder may
be either incentive stock options (ISOs), as defined by the Internal Revenue
Code, or nonqualified stock options.
The Board of Directors determines who will receive options under the Plan and
sets the terms, including vesting dates. Options may have a maximum term of no
more than ten years except in the case of a shareholder possessing more than
10% of the total voting power of all classes of stock (a 10% shareholder) in
which case the maximum term is five years. The exercise price of ISOs granted
under the Plan must be at least equal to the fair market value (or in the case
of a 10% shareholder, 110% of the fair market value) of the common stock on the
date of grant. The exercise price of nonqualified options is determined by the
Board of Directors.
The exercise price may be paid in cash, shares of previously owned common
stock, or by issuance of a promissory note. In addition, the Plan also contains
a provision allowing the Company to permit option holders to pay their
withholding obligation through share redirection. If an option expires,
terminates or is canceled, the shares not purchased thereunder may become
available for additional option awards under the Plan. The Plan expires in
2003.
F-11
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Stock Options and Warrants--(Continued)
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Shares Weighted
Available for Outstanding Average Price
Grant Under the Plan Per Share
------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1996..................... 227,676 389,915 $ .54
Granted.................. (204,615) 204,615 $1.80
Exercised................ -- (38,100) $ .49
Canceled................. 100,400 (100,400) $ .95
-------- -------- ----- ---
Balance at December 31,
1997..................... 123,461 456,030 $1.02
Additional shares
reserved for issuance.. 100,000 -- --
Granted.................. (207,650) 207,650 $2.13
Exercised................ -- (11,600) $ .81
Canceled................. 98,150 (98,150) $ .50
-------- -------- ----- ---
Balance at December 31,
1998..................... 113,961 553,930 $1.35
======== ======== ===== ===
</TABLE>
The weighted average fair value of options granted in 1998 and 1997 was $.45
and $.42 per share, respectively. The exercise prices are equal to the
estimated fair value of the common stock as determined by the Board of
Directors on the grant dates. The options are exercisable over a four-year to
five-year vesting period and expire at various dates through 2003. At December
31, 1998 and 1997, options to purchase 159,026 and 96,868 shares of common
stock are exercisable, respectively, at weighted average exercise prices of
$.68 and $.39, respectively. Exercise prices for options outstanding as of
December 31, 1998 and 1997, ranged from $.30 to $1.80 and $.30 to $2.25,
respectively. The weighted average remaining contractual life of those options
at December 31, 1998 and 1997 is 4.4 and 4.5 years, respectively.
Pro forma information regarding net loss and loss per share is required by
Statement 123, an has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the minimum
value option pricing model with the following weighted average assumptions for
1998 and 1997: risk free interest rate of 5.50%, dividend yield of 0%, and a
weighted average expected life of the option of five years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net loss is not materially different from the amounts reported for 1998,
1997 and 1996.
The pro forma effect on net loss of 1998 is not representative of the pro forma
effect on net loss in future years.
During September 1995, the Company entered into a line of credit agreement to
borrow up to $550,000, which expired in August 1996. In connection with the
agreement, the Company issued a warrant to purchase 6,000 shares of the
Company's Series A Convertible Preferred Stock at $2.701 per share. The
warrants are exercisable over ten years.
During 1995, the Company granted three employees warrants to purchase 21,805
shares of common stock at $.01 per share. The warrants, which are immediately
exercisable and expire at various times between June 30, 2000 and August 31,
2000, were granted in lieu of cash compensation.
F-12
<PAGE>
EBENX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Employee Benefit Plans
The Company has a 401(k) plan covering substantially all employees. Under the
terms of the plan, participants may contribute 2% to 20% of their salary to the
plan. Employees are eligible after one day of service and upon attainment of
age 21. The Company may make matching contributions based on a discretionary
formula or may contribute a discretionary amount. The Company did not make any
contributions in 1996, 1997 or 1998.
10. Subsequent Event (Unaudited)
In May and June 1999, the Company sold a total of 1,075,820 shares of Series C
preferred stock resulting in net proceeds to the Company of $10,471,005. The
Series C shareholders have liquidation preference of $9.76 per share, plus
accumulated dividends. Annual preferential cumulative dividends of $.49 per
share are payable only if declared by the Board. The Series C preferred
shareholders are able to elect two members on the Company's Board of Directors.
The Series C preferred shares have voting rights similar to common
shareholders. The Series C preferred shares are convertible into common shares
at a conversion rate of $9.76 per share.
F-13
<PAGE>
[Inside Back Cover]
<PAGE>
Until [ ], 1999 25 days after the date of this prospectus, all dealers that
buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
[eBenX Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Except as set forth below the following fees and expenses will be paid by
eBenX in connection with the issuance and distribution of the securities
registered hereby and do not include underwriting commissions and discounts.
All such expenses, except for the SEC registration, NASD filing and Nasdaq
listing fees, are estimated.
<TABLE>
<S> <C>
SEC registration fee................................................ $19,182
NASD filing fee..................................................... $ 7,400
Nasdaq National Market listing fee.................................. $
Legal fees and expenses............................................. $
Accounting fees and expenses........................................ $
Transfer Agent's and Registrar's fees............................... $
Printing and engraving expenses..................................... $
Miscellaneous....................................................... $
-------
Total............................................................. $
=======
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 302A.521 of the Minnesota Statutes provides that a corporation shall
indemnify any person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of such person against
judgments, penalties, fines (including, without limitation, excise taxes
assessed against such person with respect to any employee benefit plan),
settlements and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with the proceeding, if,
with respect to the acts or omissions of such person complained of in the
proceeding, such person (1) has not been indemnified therefor by another
organization or employee benefit plan for the same judgments, penalties or
fines; (2) acted in good faith; (3) received no improper personal benefit and
Section 302A.255 (with respect to director conflicts of interest), if
applicable, has been satisfied; (4) in the case of a criminal proceeding, had
no reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions in such person's official capacity for the corporation,
reasonably believed that the conduct was in the best interests of the
corporation, or in the case of acts or omissions in such person's official
capacity for other affiliated organizations, reasonably believed that the
conduct was not opposed to the best interests of the corporation. Section
302A.521 also requires payment by a corporation, upon written request, of
reasonable expenses in advance of final disposition of the proceeding in
certain instances. A decision as to required indemnification is made by a
disinterested majority of the Board of Directors present at a meeting at which
a disinterested quorum is present, or by a designated committee of the Board,
by special legal counsel, by the shareholders or by a court.
Provisions regarding indemnification of officers and directors of eBenX to
the extent permitted by Section 302A.521 are contained in eBenX's Bylaws.
In addition, the employment agreements with officers of eBenX that are
described in this prospectus require eBenX, to the extent permitted by law, to
indemnify each of these officers and to obtain directors' and officers'
liability insurance coverage in such amount as the board of directors of eBenX
determines to be appropriate.
Item 15. Recent Sales of Unregistered Securities
During the three years prior to the date of this Registration Statement, we
have sold and issued the following securities:
(1) In December 1997, pursuant to Rule 701 of the Securities Act, we
issued and sold 38,100 shares of common stock to employees for aggregate
consideration of $18,670 upon the exercise of stock options issued
pursuant to our 1993 Stock Option Plan.
II-1
<PAGE>
(2) From May until August 1998, pursuant to Rule 701 of the Securities
Act, we issued and sold 11,100 shares of common stock to employees for
aggregate consideration of $8,415 upon the exercise of stock options
issued pursuant to our 1993 Stock Option Plan.
(3) From March until September 1999, pursuant to Rule 701 of the
Securities Act, we issued and sold 19,450 shares of common stock to
employees for aggregate consideration of $16,200 upon the exercise of
stock options issued pursuant to our 1993 Stock Option Plan.
(4) In May and June 1999, we issued and sold 1,075,820 shares of
Series C Convertible Preferred Stock to certain accredited investors for
aggregate consideration of $10,500,003.20 pursuant to Rule 506 of
Regulation D of the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions.
All recipients had adequate access, through their relationships with us, to
information about us. No placement agents were used in any of the foregoing
transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Underwriting Agreement.
3.1** Fifth Amended and Restated Articles of Incorporation of the Company
(proposed to be effective immediately prior to the offering).
3.2** Amended and Restated Bylaws of the Company (proposed to be effective
immediately prior to the offering).
4.1* Form of Certificate of Common Stock of the Company.
5.1* Opinion of Dorsey & Whitney LLP.
10.1** 1993 Stock Option Plan.
10.2** 1999 Stock Incentive Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4+ Services Agreement by and between the Company and PepsiCo, Inc.,
dated June 1, 1997.
10.5+ Services Agreement by and between the Company and Bell Atlantic
Corporation, dated July 1, 1998.
10.6+ Administrative Services Agreement by and between the Company and The
Blue Cross Blue Shield Association, dated May 6, 1999.
10.7+ Administrative Services Agreement by and between the Company and GE
Capital Services Corporation, dated January 1, 1996.
10.8+ Services Agreement by and between the Company and General Electric
Company, dated January 1, 1997.
10.9** Employment Agreement by and between the Company and Mark Tierney,
dated as of April 22, 1999 and amended and restated on September 28,
1999.
10.10** Employment Agreement by and between the Company and John Davis, dated
as of April 12, 1999.
10.11** Employment Agreement by and between the Company and Scott Halstead,
dated as of April 22, 1999.
10.12 Standard Office Lease by and between Minnesota CC Properties, Inc.
and The Prudential Insurance Company of America, dated December 31,
1993.
10.13 Office Sublease by and between the Company and The Prudential
Insurance Company of America, dated March 19, 1997.
10.14 First Amendment of Sublease by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999.
10.15 Consent of Landlord, by and among the Company, Teachers Insurance and
Annuity Association (successor to Minnesota CC Properties, Inc.), and
The Prudential Insurance Company of America, dated August 30, 1999.
10.16 Standard Office Lease by and between the Company and ND Properties,
Inc., dated March 12, 1997.
</TABLE>
II-2
<PAGE>
(a) Exhibits (continued)
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.17 Amendment No. 1 to Lease Agreement by and between the Company and ND
Properties, Inc., dated October 1, 1997.
10.18 Amendment No. 2 to Lease Agreeement by and between the Company and ND
Properties, Inc., dated December 23, 1997.
10.19 Amendment No. 3 to Lease Agreement by and between the Company and
Teachers Insurance and Annuity Association of America (successor to ND
Properties, Inc.), dated January 19, 1999.
23.1** Consent of Ernst & Young LLP.
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (included on signature page).
27.1** Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+ Confidential information has been omitted from these exhibits and filed
separately with the Securities and Exchange Commission accompanied by a
confidential treatment request pursuant to Rule 406 under the Securities Act
of 1933, as amended.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on October 26, 1999.
EBENX, INC.
/s/ John J. Davis
By: _________________________________
John J. Davis,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed on October 26, 1999 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Mark W. Tierney Chairman and Director
____________________________________ (principal executive
Mark W. Tierney officer)
/s/ John J. Davis President, Chief Executive
____________________________________ Officer and Director
John J. Davis (principal executive
officer)
/s/ Scott P. Halstead Chief Financial Officer and
____________________________________ Secretary (principal
Scott P. Halstead financial officer and
principal accounting
officer)
/s/ Michael C. Bingham Senior Vice President,
____________________________________ Business Development and
Michael C. Bingham Director
* Director
____________________________________
Paul V. Barber
* Director
____________________________________
James P. Bradley
* Director
____________________________________
Daniel M. Cain
* Director
____________________________________
William J. Geary
* Director
____________________________________
John Nehra
</TABLE>
/s/ Scott P. Halstead
*By: _____________________
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Underwriting Agreement.
3.1** Fifth Amended and Restated Articles of Incorporation of the Company
(proposed to be effective immediately prior to the offering).
3.2** Amended and Restated Bylaws of the Company (proposed to be effective
immediately prior to the offering).
4.1* Form of Certificate of Common Stock of the Company.
5.1* Opinion of Dorsey & Whitney LLP.
10.1** 1993 Stock Option Plan.
10.2** 1999 Stock Incentive Plan.
10.3** 1999 Employee Stock Purchase Plan.
10.4+ Services Agreement by and between the Company and PepsiCo, Inc.,
dated June 1, 1997.
10.5+ Services Agreement by and between the Company and Bell Atlantic
Corporation, dated July 1, 1998.
10.6+ Administrative Services Agreement by and between the Company and The
Blue Cross Blue Shield Association, dated May 6, 1999.
10.7+ Administrative Services Agreement by and between the Company and GE
Capital Services Corporation, dated January 1, 1996.
10.8+ Services Agreement by and between the Company and General Electric
Company, dated January 1, 1997.
10.9** Employment Agreement by and between the Company and Mark Tierney,
dated as of April 22, 1999, and amended and restated on September 28,
1999.
10.10** Employment Agreement by and between the Company and John Davis, dated
as of April 12, 1999.
10.11** Employment Agreement by and between the Company and Scott Halstead,
dated as of April 22, 1999.
10.12 Standard Office Lease by and between Minnesota CC Properties, Inc.
and The Prudential Insurance Company of America, dated December 31,
1993.
10.13 Office Sublease by and between the Company and The Prudential
Insurance Company of America, dated March 19, 1997.
10.14 First Amendment of Sublease, by and between the Company and The
Prudential Insurance Company of America, dated August 10, 1999.
10.15 Consent of Landlord, by and among the Company, Teachers Insurance and
Annuity Association (successor to Minnesota CC Properties, Inc.), and
The Prudential Insurance Company of America, dated August 30, 1999.
10.16 Standard Office Lease by and between the Company and ND Properties,
Inc., dated March 12, 1997.
10.17 Amendment No. 1 to Lease Agreement by and between the Company and ND
Properties, Inc., dated October 1, 1997.
10.18 Amendment No. 2 to Lease Agreement by and between the Company and ND
Properties, Inc., dated December 23, 1997.
10.19 Amendment No. 3 to Lease Agreement by and between the Company and
Teachers Insurance and Annuity Association of America (successor to
ND Properties, Inc.), dated January 19, 1999.
23.1** Consent of Ernst & Young LLP.
23.2* Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (included on signature page).
27.1** Financial Data Schedule.
</TABLE>
<PAGE>
- --------
*To be filed by amendment.
**Previously filed.
+Confidential information has been omitted from these exhibits and filed
separately with the Securities and Exchange Commission accompanied by a
confidential treatment request pursuant to Rule 406 under the Securities Act
of 1933, as amended.
<PAGE>
Exhibit 10.4
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement") is entered into as of June 1, 1997 by
and between PepsiCo, Inc. with an address of 700 Anderson Hill Rd. Purchase, NY
10577, ("PepsiCo" or "Company"), and Network Management Services, Inc., with an
address of 5500 Wayzata Boulevard, Suite 1450, Minneapolis, MN 55416-1241
("NMS").
RECITALS
WHEREAS, PepsiCo desires to retain NMS to provide certain administrative
services for certain Participant benefit Plans maintained by PepsiCo; and
WHEREAS, NMS desires to provide such services on the terms and conditions set
forth in this agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual promises
contained herein, and subject to the terms and conditions set forth below, NMS
and PepsiCo hereby agree as follow:
ARTICLE 1. CERTAIN DEFINITIONS
- -------------------------------
As used in the Agreement, the following terms shall have the following meanings:
"BEN-NET(TM)" shall mean NMS' proprietary technology services software program
providing services including but not limited to group set-up, Vendor set-up,
enrollment management, enrollment data edits, eligibility distribution to
Vendors, retroactive enrollment adjustments, payments to Vendors, COBRA and
other direct individual billing administration.
"Company and PepsiCo" shall refer to the corporate offices of PepsiCo and not
the individual PepsiCo divisions.
"Enrollment Form" shall mean the application a Participant completes to obtain
covered benefits from a Vendor.
"Participant" shall mean an individual identified by PepsiCo eligible to
participate in one or more or PepsiCo's Plans as specified by PepsiCo. A
participant includes both primary subscribers and their eligible dependents.
"Plan" or "Plans" shall mean any of the Participant benefit plans of PepsiCo
with respect to which NMS provides services, as defined in Appendix A to this
Agreement.
"Vendor" shall mean an organization authorized to provide or arrange for health
care or other Participant financial /welfare benefits and shall include but not
be limited to health maintenance organizations, preferred provider
organizations, pharmacy benefits managers, indemnity insurance organizations,
third party administrators, mental health/substance abuse service organizations,
short and long term disability managers, life insurance organizations, retiree
plan administrators, flexible benefit administrators, and employee assistance
program administrators, that has contracted with PepsiCo.
"Vim-in" shall mean those data feeds from PepsiCo or its Vendors to NMS which
are needed by NMS to perform the obligations of this service Agreement. Vim-ins
are categorized into three levels of complexity. The categories serve as a
pricing guide for set up and ongoing cost for any Vim-ins beyond those
identified in this initial contract.
"Vim-out" those data feeds from NMS to PepsiCo vendors which are needed by NMS
to perform the obligations of this service Agreement. Vim-outs are categorized
into three levels of complexity. The categories serve as a pricing guide for set
up and ongoing cost for any Vim-outs beyond those identified in this initial
contract.
<PAGE>
ARTICLE 2. NMS RESPONSIBILITIES
- ---------------------------------
NMS shall be responsible for PepsiCo benefit Vendor eligibility and financial
data management including, data receipt from PepsiCo divisions, warehousing and
data distribution and financial reconciling between Corporate and all benefit
Vendors. NMS is further responsible for generating standard accounting reports
associated with these functions. NMS shall produce a thirteen (13) month billing
report to be used by Corporate for purposes of divisional allocation. It is
further understood that the Vendors will be paid based on a separate twelve (12)
month data base and that the two data bases will not fully reconcile at any
point in time.
Specific contracted responsibilities are expressed in the Service and Pricing
document attached as Appendix A. Specific performance requirements are expressed
in the Performance Guarantee document attached as Appendix B.
ARTICLE 3. COMPANY RESPONSIBILITIES
- --------------------------------------
1. Company shall supply to NMS, according to a mutually agreed to schedule,
regular electronic files relating to Participant's selection of Vendors.
If Company does not transmit data in a timely fashion or sends incomplete
or inaccurate data, Company shall recognize that NMS may not be able to
administer its services in complete conformity to the standards and content
contained in this Agreement.
2. Company shall respond to inquiries from NMS, relating to administering the
services contained in this Agreement, in a timely and complete fashion
which allows NMS to fulfill its obligations contained herein.
3. Company shall reasonably communicate to Participants instructions for
completing enrollment information and otherwise communicating with NMS.
Company shall comply with reasonable NMS requests to improve Company's
communication and general human resource policies relating to
administrative services provided by NMS.
4. Company shall execute all requests for fund transfers from NMS to Vendors
and NMS according to Appendix C unless, in Company's opinion, the request
is inaccurate, incomplete or otherwise does not meet reasonable standards
for completeness and documentation.
5. Company, not NMS, shall be responsible for any late payment or
reinstatement fees levied by Vendors relating to improper or late payment
of premiums, service fees or claims funding request. If late fee is
assessed due to NMS negligence (as mutually agreed upon by NMS and
PepsiCo), NMS will be responsible for payment of said late fee to the
appropriate vendor.
6. Company shall reimburse NMS according to Appendix A of this Agreement and
also subject to the following:
a. Fees for routine administrative services, including but not limited to
the Global Fee, 13 period billing, ad hoc reporting and retiree base fee
shall be immediately and fully payable to NMS on a monthly basis at the
time PepsiCo reimburses Vendors.
b. Fees, services, and expenses not reimbursed to NMS on a regular monthly
basis, including but not limited to Consulting Services and special
projects, are due to NMS thirty (30) days after the invoice receipt
date.
c. PepsiCo shall reimburse NMS for all approved travel related expenses
including but not limited to airfare, ground transportation, hotel and
meal expenses. Expense reimbursements are due to NMS thirty (30) days
after the invoice receipt date.
<PAGE>
d. Any costs for printing, mailing and overnight delivery charges relating
to the distribution of information to Company, Participants or Vendors
are the sole responsibility of Company unless otherwise described in
Appendix A.
ARTICLE 4. INDEMNIFICATION, INSURANCE AND FIDUCIARY STATUS
- -----------------------------------------------------------
Indemnity. Each party (the "Indemnifying Party") shall indemnify and hold
harmless the other party (the "Indemnified Party") from and against any costs,
claims, damages, liabilities, or losses (including costs and expenses and
attorney fees incurred in connection therewith) ("Claims") arising from the
negligence or willful misconduct of the indemnifying Party. The Indemnified
Party shall notify the Indemnifying Party promptly of any Claim. The
Indemnifying Party may, but shall not be required to, assume the defenses of any
such Claims. The Indemnified Party shall cooperate with the Indemnifying Party
in the defense of any such claim, and shall not settle or compromise such Claim
without the prior written consent of the Indemnifying Party.
Insurance. During the term of this Agreement, NMS shall maintain in force the
following insurance coverage:
1. Workers' Compensation and related insurance as prescribed by the law of the
state(s) in which the work is to be performed
2. General comprehensive liability coverage, with limits of *** per occurrence
and *** in the aggregate
3. Property damage coverage in the amount of *** per occurrence
4. E&O data processing insurance with limits of ***
Upon PepsiCo's request, NMS shall provide certificates of insurance evidencing
the aforementioned coverages.
Fiduciary Status. PepsiCo and NMS understand and intend that NMS shall not be a
fiduciary within the meaning of the Employee Retirement Income Security Act of
1974 as amended, or any state law with respect to any Plan. NMS shall not have
any discretion with respect to the management or administration of any Plan or
with respect to determining or changing the rules or policies pertaining to
eligibility or entitlement of any participant in any Plan to benefits under such
Plan. NMS also shall not have any control or authority with respect to any
assets of any Plan, including the investment or disposition thereof. All
discretion and control with respect to the terms, administration or assets of
any Plan shall remain with PepsiCo or with the named fiduciaries under such
Plan.
ARTICLE 5. TERM AND TERMINATION
- --------------------------------
1. The term of this Agreement will be four years (4) commencing on January
1/st/ 1997 and will thereafter by automatically renewed for successive
terms of one (1) year each.
2. In the event that a party materially breaches in the performance of any of
its requirements under this Agreement, the other party may, at its sole
discretion, provide notice to the breaching party of its intent to
terminate this Agreement.
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
3. The breaching party shall have thirty (30) days to cure the default and
avoid termination. If the default is not cured within thirty (30) days of
the notice, the other party may execute its termination notice to be
effective thirty (30) days after the end of the expiration of the default
cure period.
4. For the purposes of this Agreement and without limiting the foregoing
generally, a material breach shall include but not be limited to the
following:
a. Failure by NMS to substantially provide the services outlined in
Appendix A;
b. Failure by Company to reimburse NMS according to the terms of this
Agreement;
c. A Party's filing a petition in bankruptcy or for reorganization or for
the adoption of an arrangement under the Bankruptcy Act (or similar law
of the United States or any other jurisdiction, which law relates to the
liquidation or reorganization of companies or the modification or
alteration of the rights of creditors) or an answer or other pleading
admitting or failing to deny the material allegations of such a petition
or seeking, consenting to or acquiescing in the relief therein provided;
d. A party's making an assignment, or so called trust mortgage or the like,
for the benefit of its creditors or by its making a proposal to its
creditors under any bankruptcy act;
e. A party's consenting to the appointment of a receiver or a trustee (or
other person performing a similar function) for all or a substantial
part of its property;
f. A party's being adjudicated bankrupt;
g. The entry of a court order which has not been vacated, set aside or
stayed within thirty (30) days from the date of entry, either (i)
appointing a receiver or a trustee for all or a substantial part of its
property or (ii) approving a petition filed or application made against
it for, or effecting an arrangement in, bankruptcy or made against it
for, or effecting an arrangement in, bankruptcy or for a reorganization
or other relief pursuant to any bankruptcy act or for any other judicial
modification or alteration of the rights of creditors;
h. The assumption of custody or sequestration by a court of competent
jurisdiction of all or substantially all of a party's property, which
custody or sequestration has not been suspended or terminated within
thirty (30) days from its inception; and/or
i. A party's insolvency, as defined by law.
5. Obligations Upon Termination. Upon any termination or non-renewal of this
Agreement, either party shall deliver to the other party any and all data
or information (in whatever form or media) that is owned or developed by or
licensed to the other party and that is supplied hereunder. Furthermore,
NMS shall cooperate with PepsiCo in the transfer of NMS' obligations
hereunder to a replacement service provider.
ARTICLE 6. CONFIDENTIALITY AND PROPERTY RIGHTS
- -----------------------------------------------
Confidential Information. Confidential Information shall include all information
relating to the design and data storage components of the NMS BEN-NET(TM) system
and any additional information disclosed by one party (the "Discloser") to the
other (the "Recipient") in writing and marked "Confidential" or disclosed
visually or orally and subsequently confirmed in writing to be confidential
within 20 days after the first disclosure. Confidential Information shall not,
however, include the following:
<PAGE>
1. Information which is now or hereafter comes into the public domain
through no fault of the Recipient;
2. Information learned by the Recipient from third parties;
3. Information known to the Recipient or developed by the Recipient
independently of information disclosed by the Discloser; or
4. Information required to be disclosed by Recipient pursuant to requirements
of law.
Confidential Treatment. The Recipient shall treat the Confidential Information
as confidential, using the same standard of care that it uses to protect its own
proprietary or confidential information (but not less than a reasonable standard
of care), and shall use reasonable measure to prevent disclosure of the
Confidential Information to any third party without the Recipient's consent. The
Recipient shall disclose the Confidential Information only to those of its
Participants, agents or subcontractors who have a reasonable need for access
thereto for.
Return of Information. All Confidential Information shall remain the property of
the Discloser. Upon the Discloser's request, the Recipient shall promptly return
the Confidential Information, provided, however, that the Recipient may retain
copies solely for archival purposes only.
NMS Intellectual Property. Nothing contained in this Agreement shall confer to
PepsiCo any property rights, proprietary interest or licenses in the software,
written materials, techniques, or know how used by NMS and its BEN-NET(TM)
System.
Non-Solicitation. For the term of this Agreement and a period of two (2) years
thereafter, neither party shall, in any way, solicit or employee directly or
indirectly an employee of the other party without the written consent of the
other party.
ARTICLE 7. ARBITRATION OF DISPUTES
- -----------------------------------
Any dispute, controversy or claim that cannot be resolved by the parties arising
out of or relating to this engagement letter or the services covered by this
letter shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA"), and judgment
upon the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. The arbitration shall be held in Minneapolis, MN, or in
such other location as the parties may mutually agree upon. The arbitration will
be conducted before a panel of three arbitrators, with one arbitrator named by
each party and the third named by the two party-appointed arbitrators, or (if
they should fail to agree on the third) by the AAA. The arbitrators may not
award non-monetary or equitable relief of any sort. They shall have no power to
award punitive damages or any other damages not measured by the prevailing
party's actual damages. All aspects of the arbitration shall be treated as
confidential. Neither the parties nor the arbitrators may disclose the
existence, content or results of the arbitration, except as necessary to comply
with legal or regulatory requirements. Before making any such disclosure, a
party shall give written notice to all other parties and shall afford such
parties a reasonable opportunity to protect their interests.
ARTICLE 8. BOOKS AND RECORDS
- -----------------------------
1. PepsiCo shall have the right, but not the obligation, to audit the books
and records of NMS pertaining to NMS' services rendered hereunder no more
than once every twelve (12) months, upon reasonable notice to NMS. Such
right to audit shall survive the termination of this Agreement by six (6)
months. All audits shall be at PepsiCo's expense.
2. NMS will make available for audit by either PepsiCo or its designee
("Auditor") its files, books, procedures and records (including computer
terminal access to same) pertaining to the services provided by
<PAGE>
NMS under this Agreement during the hours of 8 a.m. to 6 p.m. Monday
through Friday, but excluding holidays. NMS shall fully cooperate with such
audit and shall make available for interview with the Auditor those
personnel with material involvement or responsibility with respect to the
services provided by NMS under this Agreement. PepsiCo will give NMS
reasonable notice of each audit prior to commencement of the audit. The
audit shall be conducted at NMS' offices.
3. Notwithstanding anything herein to the contrary, in the event that the
Auditor is to be a designee of PepsiCo, PepsiCo must first obtain the
consent of NMS with respect to such designee, which consent shall not be
unreasonably withheld.
4. NMS shall have the opportunity, prior to the release of the audit report,
to review the draft and to include in the report its responses to issues
raised by the report.
ARTICLE 9. NOTICES
- -------------------
General. All notices, requests, demands and other communications required to be
given hereunder shall be in writing and shall be deemed to have been duly given
one day after delivery by hand or via a nationally recognized overnight courier
or five days after mailing, certified or registered mail, return receipt
requested to the party for whom intended at the address specified in this
Article. Either party may designate an alternated address for notices by given
written notice thereof in accordance with the provisions of this Article.
Notices to Supplier. All notices to NMS shall be directed as follows:
Network Management Services
5500 Wayzata Blvd., Suite 1275
Minneapolis, MN 55416-1241
Attn.: Chief Financial Officer
Notices to PepsiCo. All notices to client shall be directed as follows:
PepsiCo
700 Anderson Hill Road
Purchase, NY 10577
Attn.: Burkett W. Huey
ARTICLE 10. GENERAL PROVISIONS
- ------------------------------
Control of Work. NMS shall be solely responsible for the conduct and control of
the work to be performed under this Agreement by NMS and its agents or
employees.
Applicable Law. This Agreement shall be governed and construed in accordance
with the laws of the State of Minnesota.
Publicity. Each party shall obtain the prior written consent of the other party
concerning the content and plan of distribution of any public announcement,
press release or advertisement concerning this Agreement, provided that NMS may
include references to PepsiCo in client lists, general press releases not
specifically pertaining to Company, proposals, and other non-public
communications concerning NMS or its services. No prior consent shall be
required regarding the inclusion of the other party's name in notices,
disclosure documents, or other filing or publications required by law or
regulations.
<PAGE>
Paragraph Headings. Section headings are for convenience only and shall not be
considered part of the terms and conditions of this Agreement.
Modification. No modification, waiver or amendment of any term or condition of
this Agreement shall be effective unless and until it shall be reduced to
writing and signed on behalf of NMS and PepsiCo.
Waiver. Failure by either party at any time to require full performance by the
other party or to claim a breach of any term of this Agreement will not (a) be
construed as a waiver of any right under this Agreement, (b) affect any
subsequent breach, or (c) affect the validity of this Agreement or any part
thereof.
Severability. If any term or provision of this Agreement should be declared
invalid by a court of competent jurisdiction, the remaining terms and conditions
of this Agreement shall be unimpaired.
Complete Agreement. The Agreement, including the Exhibits, constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes all prior proposals, negotiations, conversations, discussions and
agreements between the parties. This Agreement may be modified only by a written
instrument executed on behalf of both of the parties hereto.
Assignment. Neither party may assign any of its rights under this Agreement
without the prior written consent of the other party. Subject to the foregoing,
all of the terms and provisions of this Agreement shall be binding upon and
insure to the benefit of and be enforceable by the successors and permitted
assigns of PepsiCo and NMS.
Survival. The respective obligations of each party that would be their nature
continue after the termination or expiration of this Agreement, including
without limitation those contained in Confidentiality, Indemnification, and
Intellectual Property Indemnification, and shall survive the termination or
expiration of this Agreement.
Counterparts. This Agreement may be executed in one or more counterparts each of
which shall be deemed to be an original and all of which, taken together, shall
constitute a single instrument.
Benefit of the Parties. This Agreement is for the sole and exclusive benefit of
the parties hereto and is not intended to, nor does it, confer any benefit upon
any third party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
representatives, have executed this Agreement effective as of the day and year
first set forth above.
NETWORK MANAGEMENT SERVICES, INC.
BY: /s/ Scott P. Halstead
-------------------------
Name: Scott P. Halstead
Title: Chief Financial Officer
PEPSICO, INC
BY: /s/ Jacqui Demeter
-------------------------
Name: Jacqui Demeter
Title: Manager Health & Welfare Benefits Delivery
<PAGE>
PepsiCo Contract - Appendix A
- --------------------------------------------------------------------------------
Pricing Schedule
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
VIMIN/VIMOUT SETUP Fees
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
1. Set-Up Environmental analysis ***
Description: Project Planning, Management, and coordination with client divisions and
vendors to initialize consolidated administration services. plus travel expenses
- ---------------------------------------------------------------------------------------------------------------------
2 . VIMIN - Set-up 5 Imports
Description: Analysis of group reporting, rate and benefit structure required by
client. Data mapping imports from client's payroll/benefit system, database ***
enhancements for customized data capture. Pre-import edit logic and reports ***
development. ***
***
***
***
Note: pricing corresponds
to list in comments
Assumption: Current VIMIN specification requires minimal modifications.
Estimated Total
*** *
*Does not include VIM-Ins
from Vendors
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------
Comments
- ----------------------------------------------------------
<S>
Phase I completed prior to separation of divisions.
- ----------------------------------------------------------
*Assume Corporate will supply 1 file versus two
* Assume PVN Import specification
PepsiCo VIM-INS:
. KFC Stress Test
. Frito/Caremark Import
. Frito-Lay PVN Import
. Pepsi-Cola PVN Import
. PepsiCo Corporate PVN Import
. International
Any additional requested VIM-Ins will be priced
separately.
- ----------------------------------------------------------
</TABLE>
________________________________________________________________________________
J:\PepsiCo\PRICING\1997Pricing\pricing97.doc
Last Print Date: 11/09/98
Last Revision Date: 10/29/98
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
PepsiCo Contract - Appendix A
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
3.VIMOUT- Set-Up
Level I
Description: Interface with program vendors to deliver consolidated
electronic data feeds. Assumes comprehensive data, multiple Level I - Level I Vendors:
coverage's, translating into or converting from complex existing Assumes 14 . Aetna H&W (52)
group structures. charge range of . United/Met (52)
*** each *Assume PNP is included
. Mercer Pension Val (6)
. Merck/Medco (52)
Estimated Total . SSB (401k/CSPP/RDC) (52)
*** . John Hancock (52)
. Corporate Adhoc (52) - 4 files*
. PVN Export
Additional VIM-OUT . PVN Financials (2 files)
set up @ *** each . PVN Data Edits
* Note: Pricing is separate as
identified as 4 deliverables later in
the process instead of 1 deliverable.
. KPMG (52)
. Merrill Demo (52)
. Merrill Grant (4)
. Merrill Mini (52)
Level II . Benefacts Mini (12)
Description: Interface with program vendors to deliver consolidated Level II - Assume 5 . Benefacts SP (3)
electronic data feeds. Assumes fewer data elements, single line of @ *** each . Benefacts TCPS (6)
coverage, new data structure (no translation).
Estimated Total
***
Level II Vendors:
Additional VIM-OUT . MetLife Dental (52)
set up @ *** each . CIGNA Dental (26)
. Aetna FSA (52)
. UHC FSA (52)
. MHN (26)
. Health International (52)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Last Print Date: 11/09/98
Last Revision Date: 03/15/97
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
2
<PAGE>
PepsiCo Contract - Appendix A
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
VIMIN/VIMOUT SETUP Fees Comments
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Level III Level III - Assume Level III Vendors:
Description: Interface with program vendors to deliver 10 plus HMOs (137) . Lenscrafters (26)
consolidated electronic or hard copy paper data feeds. If @ *** each . Mercer 401k Discrim Test (4)
electronic, assumes minimal data elements, single line of . Hyatt Group Legal (26)
coverage, new data structure (no translation). . ECPA (12)
. Mercer Pension Info Line (12)
Estimated Total . Work Comp (52)
*** and . Work Comp Frito (12)
*** * . Dep care Connect (26)
Free & Clear (26)
* Assumes 110 * Assumes part of Merck/Medco
Pepsi-Cola HMOs *Assumes part of UHC feed
with no change . Human Affairs (26) - this was eliminated
Additional VIM-OUT . HMOs - 137 (1644)
set up @ *** each
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL SET-UP FEE (estimated) *** Due 2nd quarter 1997
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Last Print Date: 11/09/98
Last Revision Date: 03/15/97
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
3
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------- ----------------------------- ---------------------------------------------------------
VIMIN/VIMOUT ONGOING Fees Comments
- -------------------------------------------- ----------------------------- ---------------------------------------------------------
<S> <C> <C>
Global Fee of Assumptions:
***/month . Services for global fee are outlined below. All
Previous Pricing Schedule Fees: other services not in scope are subject to time &
VIM-IN Set Up: materials charge @ ***/hour.
- ------------- Phase 2 Interim Fee is . Fee does not include COBRA - see separate fees.
*** ***/month . Phase 2 interim fee is effective one month
prior to live date for Frito or Pepsi-Cola
VIM-IN Ongoing: . If there is a change in number of VIM In or Out
- -------------- feeds (regardless of frequency), fee will increase
*** per VIMIN per month incrementally based on old pricing schedule for
Assumes 65,000 employees both development and ongoing.
VIM-OUT Set Up: (This number includes . Current Pepsi-Cola revenue for HMOs included in
- -------------- Frito-Lay retirees who have fee.
Level 1: *** per VIMOUT H&W benefits) . Retiree Medical not included.
Level 2: *** per VIMOUT . Travel & Expense not included and billed
Level 3: *** per VIMOUT separately. Except; (4) account manager trips per
year are NMS expense.
VIM-OUT Ongoing: . Does not include development costs.
- --------------- . T1 connection & implementation not included
Level 1: *** per VIMOUT per month . Annual increase for 1/1/99 subject to CPI + 3%
Level 2: *** per VIMOUT per month if scope & effort are equal. Increase for Year
Level 3: *** per VIMOUT per month 2,000 will be waived assuming PVN is in
maintenance mode, and NMS IS-related salary
increases do not necessitate increasing fees in
order to adequately support PVN.
. Assumes 65,000 ee's; an adjustment of ***/year
will be applied with every increase/decrease of
5,000 ee's
- -------------------------------------------- ----------------------------- ---------------------------------------------------------
</TABLE>
Last Print Date: 11/09/98
Last Revision Date: 03/15/97
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VIMIN VIMOUT ONGOING Fees Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. VIMIN - On-Going Fee includes 4 ongoing Corporate PVN Import
Description: Receipt and processing of enrollment adds, changes, VIM-Ins Pepsi-Cola PVN Import
and termination records via electronic import from client's Frito PVN Import
payroll/benefit system. Additional VIM-Ins @ International PVN Import
***/mo.
- ------------------------------------------------------------------------------------------------------------------------------------
2. VIMOUT- On-Going Fee includes the following
Description: Distribution of enrollment adds, changes, and vendors outlined in set up Note: NMS will accept exchange for
termination records via electronic export or paper on a only. vendors in same level at no
weekly or as appropriate basis. additional cost to PepsiCo as long
as the net change equals zero.
This provision applies to ongoing
charge only - not the set up fees.
(14) Level 1
Level I additional VIMOUT
@ ***
(5) Level II
Level II additional VIMOUT
@ ***
(10) Level III
plus
Level III 137 HMOs
additional VIMOUT
@ ***
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
________________________________________________________________________________
Last Print Date: 11/09/98
Last Revision Date: 03/15/97
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
5
<PAGE>
PepsiCo Contract - Appendix A
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ADMINISTRATIVE SERVICES Fees COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. PCP Management No PEPM applied.
Description: Gather PCP elections, load into BEN-NET(TM) during Service included in the
open enrollment and fornew hires, validate against vendor global fee
directory in support of the enrollment process.
- ------------------------------------------------------------------------------------------------------------------------------------
2. Customer Service No PEPM applied.
Description: Receive and respond to inquiries from division Service included in the
HR/Benefits reps and Health Plans for inquiries regarding global fee
enrollment, eligibility, and reconciliation.
- ------------------------------------------------------------------------------------------------------------------------------------
3. Eligibility Verification No PEPM applied
Description: Application of edits against eligibility Service included in the
rules, student status verification, and file maintenance. global fee
- ------------------------------------------------------------------------------------------------------------------------------------
4. Premium Billing, Reconciliation No PEPM applied. Client will fund vendors
Description: Calculation and distribution of consolidated Service included in the direct using NMS-reported data,
monthly "self-bill" to client using NMS standard invoice global fee therefore, no collection effort
format, with fully adjudicated retroactive and no funds transfer and cash
adjustment processing and reconciliation. balancing required.
Assumes 13th month period billing, however not
at member level.
- ------------------------------------------------------------------------------------------------------------------------------------
5. BEN-NET(TM) Application Not Included.
Description: Internet access for inquiry Priced separately.
by division HR reps. NMS provides Help Desk
support and End-User training.
Description: Internet access for interactive web site
-----------
enrollment with personalized enrollment worksheets.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
________________________________________________________________________________
Last Print Date: 11/09/98
Last Revision Date: 03/15/97
6
<PAGE>
PepsiCo Contract - Appendix A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
OTHER ADMINISTRATIVE SERVICES Fees
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
6.COBRA Administration Ongoing
Description: Provide continuation notification to qualified beneficiary or retiree,
process enrollment and eligibility, bill and collect Cobra recipient premium, ***/month
provide enrollment data to health plans and enrollment/premium data to client. per
Cobra Participant*
If NMS retains responsibility for renewal/open enrollment solicitation and
notification. Price assumes; a) passive enrollment, b) Client responsible for
development & production of enrollment materials, c) NMS responsible for cobra cover
letter and updated rate information and mailing of packets.
* Refers to entire family
unit covered
If NMS provides initial notification to employee following qualifying event only
which is incorporate into the general cobra participant fee.
If NMS does not retain 2% premium surcharge for COBRA participants, an additional fee
per participant applies and this is incorporated in the fee.
- ----------------------------------------------------------------------------------------------------------------------
7. COBRA Implementation- Set Up ***
Description: Project Planning, Management, and coordination with client divisions and one time fee
vendors to initialize consolidated administration services. plus
travel expense
- ----------------------------------------------------------------------------------------------------------------------
8. HIPAA Certificate Production & Mailing *** per Certificate
Weekly production and mailing of HIPAA certificates for PepsiCo, Pepsi-Cola, Frito-Lay, Produced
and International employees who's medical coverage is terminated. HIPAA
certificates will not be produced for employees transferring from one division
to another where no lapse in coverage occurs.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ADMINISTRATIVE SERVICES COMMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
6.COBRA Administration Ongoing
Description: Provide continuation notification to qualified beneficiary or retiree, Note: CORBA administration was not
process enrollment and eligibility, bill and collect Cobra recipient premium, included in original proposal and has
provide enrollment data to health plans and enrollment/premium data to client. been added as a result of the completion
of environmental analysis
Estimates:
----------
QB's/month
1200 - PepsiCo
If NMS retains responsibility for renewal/open enrollment solicitation and 800 - Restaurants
notification. Price assumes; a) passive enrollment, b) Client responsible for
development & production of enrollment materials, c) NMS responsible for cobra cover
letter and updated rate information and mailing of packets. Participants/year
800 - PepsiCo
300 - Restaurants
If NMS provides initial notification to employee following qualifying event only . Assumes client retains responsibility
which is incorporate into the general cobra participant fee. for funding vendors for COBRA and
Retiree fees
. Assumption of enrollment materials to
be developed by client
If NMS does not retain 2% premium surcharge for COBRA participants, an additional fee . Assume Cobra benefits and process
per participant applies and this is incorporated in the fee. similar across divisions & benefits
- ------------------------------------------------------------------------------------------------------------------------------------
7. COBRA Implementation- Set Up Note: COBRA administration was not
Description: Project Planning, Management, and coordination with client divisions and included in original proposal and has
vendors to initialize consolidated administration services. been added as a result of the completion
of environmental analysis
Assumes transition of Individual
administration from multiple divisions
- ------------------------------------------------------------------------------------------------------------------------------------
8. HIPAA Certificate Production & Mailing
Weekly production and mailing of HIPAA certificates for PepsiCo, Pepsi-Cola, Frito-Lay,
and International employees who's medical coverage is terminated. HIPAA
certificates will not be produced for employees transferring from one division
to another where no lapse in coverage occurs.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Last Print Date: 11/09/99
Last Revision Date: 03/15/97
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
7
<PAGE>
PepsiCo Contract - Appendix A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Optional Services Fees
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
1. Ad Hoc Reporting No Charge - Standard
Description: Analysis and programming of custom reports to support data Report Package
management and decision making outside of the standard reporting package (Y-T-D
Enrollment, Monthly Enrollment and Payment summary). ***/hour
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Optional Services Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1. Ad Hoc Reporting "Standard" reporting package provided at
Description: Analysis and programming of custom reports to support data no charge includes monthly enrollment
management and decision making outside of the standard reporting package (Y-T-D detail and summary, monthly cash flow
Enrollment, Monthly Enrollment and Payment summary). report, consolidated self-bill and
consolidated transfer of funds request.
Monthly charge of *** a month will be
billed to PepsiCo, beginning 4/1/98, and
continuing until such time that PepsiCo
determines that the ad hoc reporting
allocation should be increased or
decreased. In 1998, the allocation for
reporting is 400 hours. NMS will provide
a quarterly reconciliation of actual
hours compared to allocated hours.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Last Print Date: 11/09/98
Last Revision Date: 03/15/97
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
8
<PAGE>
PepsiCo Contract - Appendix A
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
2. 13 Billing Reporting Export form primary
Description: NMS will provide PepsiCo a report which reflects database Cost and charges associated with the 13
payables on a 13 period accounting cycle. The report "13 *** set up fee period payable report are not included
Period Payable Report" will be produced from a separate in the base contract and are to Import
database used exclusively for this reporting purpose. Import to secondary to secondary be billed to PepsiCo on a
database time and materials basis.
*** set up fee
Development costs; One third of the 500 hours (@***/hr)
*** required to program for 13 period
process. NMS assumes the other two thirds
of development costs.
Ongoing Maintenance Costs; Assumes 65,000 employees
***/month An adjustment of *** will be applied to
any increase/decrease of 5,000 employees.
Annual increase for 1/1/99 subject to
CPI + 3% if scope & effort are equal.
Increase for Year 2,000 will be waived
assuming PVN is in maintenance mode, and
NMS IS-related salary increases do not
necessitate increasing fees in order to
adequately support PVN.
- ------------------------------------------------------------------------------------------------------------------------------------
3. Confirmation Statements Available, but not
Description: Generation and distribution of personalized requested
employee letters identifying enrollment election, No pricing offered
dependent information, and PCP selection.
- ------------------------------------------------------------------------------------------------------------------------------------
4. Customer Service: Level II
Description: Receive and respond to inquiries from division Service included in
HR/Benefits reps, Health Plans, and Continuants for Global Fee.
inquiries regarding enrollment, eligibility, billing and
payment.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Last Print Date: 11/09/97
Last Revision Date: 03/15/97
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
9
<PAGE>
PepsiCo Contract - Appendix A
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
5. Retiree Administration
. Level II Customer Service (Inactives are supplied with *** monthly fee plus ***
NMS phone number for a first point of contact. per non-billed retiree,
. Billing, collection and reconciliation (Periodic *** per billed retiree
billing and collection for those inactives where NMS
is notified that their pensions does not cover their
premiums)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Last Print Date: 11/09/99
Last Revision Date: 03/15/97
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.4 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
10
<PAGE>
PepsiCo Contract - Appendix C
- --------------------------------------------------------------------------------
PepsiCo Vendor Network 12 (PVN12) consolidated invoice is due to PepsiCo from
NMS on the 18/th/ of each coverage month (calendar month). If the 18/th/ falls
on a non-business day, the business date closest to the 18/th/ will be the due
date of the invoice (for example, if the 18/th/ is on a Saturday, the due date
is the 17/th/; if the 18/th/ is on a Sunday, the due date is the 19/th/).
PepsiCo will make payment by the 25/th/ of each month. If the 25/th/ falls on a
Saturday or Sunday, PepsiCo will make payment by the Friday preceeding the
25/th/. Payment should be made to the PepsiCo established account.
NMS will distribute payments to each vendor, including itself, within 2 business
days following receipt. The payments will be made via ACH, unless a PepsiCo
vendor does not accept ACH. This two day turn around results in actual vendor
receipt of the distribution on the 3/rd/ business day.
Note: Payment must be received by 3 p.m. central time to be considered received
on that specific business day. If received after 3 p.m. central time, the
payment will be considered received the following business day.
11
L:\PepsiCo\PRICING\1997 PRICING\Appendix C.doc
Last Print Date: 11/09/98
Last Revision Date: 10/29/98
<PAGE>
EXHIBIT 10.5
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement") is entered into as of July 1, 1998 by
and between Bell Atlantic Corporation, with an address of 240 East 38th Street,
New York, NY 10016, ("Bell Atlantic"), and Network Management Services, Inc.,
with an address of 5500 Wayzata Boulevard, Suite 1450, Minneapolis, MN 55416-
1241 ("NMS").
RECITALS
WHEREAS, Bell Atlantic desires to retain NMS to provide certain administrative
and other services for certain Participant benefit plans maintained by Bell
Atlantic; and
WHEREAS, NMS desires to provide such services on the terms and conditions set
forth in this Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual promises
contained herein, and subject to the terms and conditions set forth below, NMS
and Bell Atlantic hereby agree as follows:
ARTICLE 1. CERTAIN DEFINITIONS
- -------------------------------
As used in this Agreement, the following terms shall have the following
meanings:
"BEN-NET(TM)" shall mean NMS' proprietary technology services software program,
which provides certain benefit plan services and includes the following
features: group set-up, Vendor set-up, enrollment management, enrollment data
edits, eligibility distribution to Vendors, retroactive enrollment adjustments,
payments to Vendors, and COBRA and other direct individual billing
administration.
"Participant" shall mean an individual identified by Bell Atlantic as being
eligible to participate in one or more of Bell Atlantic's Plans. A Participant
includes both primary subscribers and their eligible dependents.
"Plan" or "Plans" shall mean any of the Participant benefit plans of Bell
Atlantic with respect to which NMS provides services, as described in Appendix A
to this Agreement or any amendment or supplement thereto.
"Vendor" shall mean a licensed organization authorized to provide or arrange for
health care or other welfare services for Participants that has contracted with
Bell Atlantic, including health maintenance organizations, preferred provider
organizations, pharmacy benefits managers, indemnity insurance organizations,
third-party administrators, mental health/substance abuse service
organizations, short- and long-term disability managers, life insurance
organizations, retiree plan administrators, flexible benefit administrators and
employee assistance program administrators.
ARTICLE 2. NMS RESPONSIBILITIES
- ---------------------------------
During the term of this Agreement:
2.1. NMS will be responsible for ensuring that all services are rendered as
described in Appendix A to this Agreement.
2.2. NMS will be responsible for the performance standards as described in
Appendix B to this Agreement.
2.3. NMS will maintain all appropriate regulatory approvals necessary to
provide the services specified in this Agreement. NMS will promptly
notify Bell Atlantic of the commencement of any disciplinary proceeding
against it or any of its principal officers relating to any state or
federal health care regulation.
2.4. NMS will be responsible for the overall management of Bell Atlantic's
Vendors relating to communicating eligibility, enrollment, financial and
performance data between Bell Atlantic and the Vendors.
<PAGE>
2.5. NMS will provide to the Vendors summaries and detailed enrollment and
premium payment information on an agreed upon basis, including full
retroactivity data according to Bell Atlantic and Vendor payment rules.
2.6. NMS will provide a customer service telephone number for use by Bell
Atlantic, the Vendors and Participants between 7:00 a.m. and 4:00 p.m.
(Central Time) each business day and between 7:00 a.m. and 7:00 p.m.
(Central Time) on Thursday during open enrollment. The number will be
staffed with personnel trained to answer eligibility, premium and
service fee payment, invoice and status questions relating to Plans.
2.7. NMS will promptly respond to all inquiries from Bell Atlantic and the
Vendors regarding eligibility, premium, service fees, invoice and status
questions. NMS will promptly refer inquiries not related to its duties
under this Agreement (e.g., coverage issues) to the appropriate Vendor
or to Bell Atlantic and Bell Atlantic will direct Participants to call
such Vendor or Bell Atlantic regarding all such inquiries.
2.8. NMS will be the primary contact for most Vendor issues and will promptly
respond to all inquiries from Vendors, whether directly from the Vendor
or Bell Atlantic, regarding the status of enrollees, billing, receipt
and disbursement of premiums, and reconciliation issues. NMS shall
promptly notify Bell Atlantic of any concerns or problems identified by
a Vendor.
2.9. NMS will send to Bell Atlantic (via facsimile or other means) an invoice
that provides a detailed account of the payments to be made to the
Vendors and NMS. Bell Atlantic shall review the invoice and contact NMS
to resolve questions with respect thereto. NMS will endeavor to respond
to such inquiries within one business day. Based on such invoice, Bell
Atlantic will then notify NMS of the amounts to be withdrawn from the
fiduciary account(s) for transmission to the following parties: (a) the
Vendors for premiums or ASO fees or claims payments due, and (b) NMS for
administrative fees due. Payments to Vendors and NMS shall be made via
electronic transfer to the account designated by each party. Premiums
and other service fees shall be billed monthly, while claims funding
requests submitted by Vendors shall be billed weekly.
2.10. NMS will utilize the BEN-NET(TM) system for performing its obligations
under this Agreement. NMS hereby represents that such system will be
fully capable of performing all systems functions necessary to fulfill
NMS' responsibilities under this Agreement. NMS shall be solely
responsible for the upkeep and maintenance of the BEN-NET(TM) system.
2.11 NMS will release system enhancements that can be used as a standard
feature of BEN-NET(TM) across clients at no charge. Bell Atlantic will
be fully responsible for the cost, if approved in advance by Bell
Atlantic, of enhancements that are made to accommodate the unique
requirements of Bell Atlantic operations and that are generally not to
be incorporated into BEN-NET(TM) as standard features to be used by
other clients of NMS
ARTICLE 3. BELL ATLANTIC RESPONSIBILITIES
- --------------------------------------------
During the term of this Agreement:
3.1. Bell Atlantic, or its designee, will supply to NMS, according to a
mutually agreed to schedule, regular updates relating to Participant's
selection of Vendors and other information required to perform services
as described in Appendix A. If Bell Atlantic does not transmit data in a
timely fashion or sends incomplete or inaccurate data, Bell Atlantic
agrees and acknowledges that NMS may not be able to administer its
services in complete conformity to the terms of this Agreement.
3.2. Bell Atlantic will respond to inquiries from NMS, relating to
administering the services described in this Agreement, in a timely and
complete fashion that will allow NMS to fulfill its obligations
contained herein.
3.3. Bell Atlantic shall reasonably communicate to Participants instructions
for completing enrollment forms and otherwise communicating with NMS.
Bell Atlantic shall comply with reasonable NMS requests to
2
<PAGE>
improve Bell Atlantic's communication with its Participants and its
general human resource policies that affect the administrative services
provided by NMS hereunder.
3.4. Bell Atlantic will execute all requests for fund transfers from NMS to
Vendors and NMS within 24 hours unless, in the Bell Atlantic's
reasonable opinion, the request is materially inaccurate or incomplete.
3.5. Bell Atlantic, not NMS, will pay any late payment or reinstatement fees
levied by Vendors against Bell Atlantic or NMS relating to improper or
late payment of premiums, service fees or claims funding requests.
3.6 Bell Atlantic shall reimburse NMS for services rendered hereunder
according to the fees set forth in Appendix A of this Agreement and also
subject to the following:
A. Fees and expenses for routine administrative services, including
Participant enrollment, distribution of enrollment data to
Vendors, payment of fees and reconciliation of payment to
Vendors, and customer service and general program management,
will be immediately and fully payable to NMS on a monthly basis
at the time Bell Atlantic reimburses Vendors.
B. Fees and expenses not reimbursed to NMS on a regular monthly
basis, including consulting services and special projects, are
due to NMS 30 days after the invoice date.
C. Bell Atlantic will reimburse NMS for all approved travel related
expense, including airfare, ground transportation and hotel and
meal expenses. Expense reimbursements are due to NMS 30 days
after the invoice date.
D. All bank charges imposed in connection with the establishment and
maintenance of bank accounts in connection with this Agreement
shall be paid by Bell Atlantic.
E. All costs for printing, mailing or overnight delivery relating to
the distribution of information to Bell Atlantic, Participants or
Vendors are the sole responsibility of Bell Atlantic unless
otherwise described in Appendix A.
ARTICLE 4. INDEMNIFICATION, INSURANCE AND FIDUCIARY STATUS
- -----------------------------------------------------------
4.1 Indemnification by NMS. NMS agrees to indemnify and hold harmless Bell
Atlantic and its officers, agents, directors and employees, against any
and all claims, actions, proceedings, penalties, expenses, damages,
liabilities and losses (including any governmental investigations,
complaints and actions) and reasonable attorneys' fees with respect
thereto, arising out of or in connection with (1) any breach of this
Agreement by NMS, including its representations, warranties and
covenants, (2) any claim or action involving product liability claims
arising from or relating to the design or use of BEN-NET(TM) or other
software or intellectual property provided by NMS to Participants, Plans
or Vendors, including any enhancements, upgrades or supplements to BEN-
NET(TM), such other software or such other intellectual property, (3)
any claim or action arising from or relating to the gross negligence or
wilful misconduct of NMS and (4) any use of NMS's software, written
material or other intellectual property by Bell Atlantic as permitted
herein.
3
<PAGE>
4.2 Indemnification by Bell Atlantic. Bell Atlantic agrees to indemnify and
hold harmless NMS, including its officers, agents, directors and
employees, against any and all claims, actions, proceedings, penalties,
expenses, damages, liabilities and losses (including any governmental
investigations, complaints and actions) and reasonable attorneys' fees
with respect thereto, resulting solely, directly and independent of all
other causes from (1) any material breach of this Agreement by Bell
Atlantic, including its representations, warranties and covenants, (2)
the improper payment or late payment of premiums, service fees or claims
funding requests, (3) the gross negligence or wilful misconduct of Bell
Atlantic and (4) any use of Bell Atlantic's software, written material
or other intellectual property by NMS as permitted herein.
4.3 Insurance. During the term of this Agreement, NMS shall maintain in
force the following insurance coverage:
A. Workers' Compensation insurance as required by the State(s) in
which the service is to be performed.
B. Employer's Liability insurance with limits of not less than ***
per occurrence.
C. Commercial General Liability Insurance, on an occurrence basis,
including but not limited to (premises-operations, broad form
property damage, contractual liability, independent contractors,
personal injury) with limits of at *** combined single limit for
each occurrence.
D. Commercial Automobile Liability, on an occurrence basis with
limits not less than ***
E. Crime and Fidelity Coverage on an occurrence basis, with limits of
at least *** per occurrence.
F. Professional Liability, Errors and Omissions, with limits of not
less than *** per occurrence.
Upon Bell Atlantic's request, NMS shall provide certificates of
insurance evidencing the aforementioned coverages.
4.4 Fiduciary Status. Bell Atlantic and NMS acknowledge and agree that NMS
shall not be a fiduciary within the meaning of the Employee Retirement
Income Security Act of 1974, as amended, or any state or federal law
with respect to any Plan. NMS shall not have any discretion with respect
to the management or administration of any Plan or with respect to
determining or changing the rules or policies pertaining to eligibility
or entitlement of any Participant in any Plan to benefits under such
Plan. NMS also shall not have any control or authority with respect to
any assets of any Plan, including the investment or disposition thereof.
All discretion and control with respect to the terms, administration or
assets of any Plan shall remain with Bell Atlantic or with the named
fiduciaries under such Plan.
NMS shall not be responsible or liable for any claims decisions made by
Vendors based on eligibility information provided to Vendors by NMS. The
determination as to whether claims shall be paid under the Plan shall be
the responsibility of Bell Atlantic and Vendor in accordance with each
applicable Plan.
ARTICLE 5. TERM AND TERMINATION
- --------------------------------
5.1. The term of this Agreement will be five years commencing on the
effective date hereof and thereafter Bell Atlantic may extend the term
for an additional twelve (12) month period by providing NMS with 120
days written notice of its intention to renew this Agreement.
5.2. In the event that NMS materially breaches the performance of any of its
obligations under this Agreement, Bell Atlantic shall provide notice to
NMS of such breach. NMS shall have 30 days to cure the breach. If the
breach is not cured within 30 days of the notice, Bell Atlantic may
immediately terminate this Agreement.
***Pursuant to Rule 406 of the Securities Act of 1933,as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
4
<PAGE>
5.3. In the event that Bell Atlantic fails to perform its payment obligations
hereunder, NMS shall provide notice to Bell Atlantic of such failure.
Bell Atlantic shall have 30 days to cure the failure. If the failure is
not cured within 30 days of the notice, NMS may immediately terminate
this Agreement.
5.4. Notwithstanding the foregoing, either party may terminate this Agreement
at any time by giving notice in writing to the other party, which notice
shall be effective upon dispatch, should the other party file a petition
of any type as to its bankruptcy, be declared bankrupt, become
insolvent, make an assignment for the benefit of creditors, go into
liquidation or receivership, or otherwise lose legal control of its
business.
5.5. Termination without Cause. Bell Atlantic may, at its convenience and
without cause, at any time, terminate all or part of this Agreement by
giving NMS 180 calendar days prior written notice. NMS may terminate
this Agreement without cause by giving Bell Atlantic 180 calendar days
prior written notice. RESERVED -- In the event of termination without
cause of this Agreement prior to its expiration by Bell Atlantic under
this provision, Bell Atlantic shall pay to NMS, in addition to all other
amounts currently due to NMS for services performed and accepted by Bell
Atlantic hereunder, the remaining balance of all set-up, conversion and
implementation fees set forth below.
The total amount for set-up, conversion, and implementation fees which
is being absorbed by NMS, as an investment in this business, as part of
this Agreement is fixed at ***. This amount will be amortized by NMS on
a monthly basis over the sixty (60) months of the Agreement. Each month,
or part thereof, during which NMS continues to perform services under
this Agreement, NMS will decrease by 1.67% for each month or *** for
each month the amount of the set-up, conversion, and implementation fees
owed by Bell Atlantic upon termination of this Agreement (without
cause). In the event Bell Atlantic requests to terminate without cause,
Bell Atlantic agrees to pay the remaining unamortized balance as
immediately due and payable.
In the event NMS gives notice of early termination without cause the
remaining unamortized balance will be forfeited by NMS and is not
payable by Bell Atlantic. Furthermore, no such set-up, conversion, and
implementation fees shall be owed by Bell Atlantic in the event Bell
Atlantic terminates this Agreement for cause.
5.6. Obligations Upon Termination. Upon any termination or non-renewal of
this Agreement, each party shall deliver to the other party all data or
information (in whatever form or media decided by the delivering party)
that is owned or licensed to or was developed by the other and that was
supplied hereunder. Each party shall reimburse the other party for its
reasonable costs associated with such transfer. Furthermore, NMS shall
provide reasonable assistance to Bell Atlantic in the transfer of NMS'
obligations hereunder to a replacement service provider.
ARTICLE 6. CONFIDENTIALTY AND PROPERTY RIGHTS
- ----------------------------------------------
6.1. Confidential Information.
A. Bell Atlantic Information
--------------------------
Confidential. Any Bell Atlantic information furnished to NMS under
------------
this Agreement or that NMS comes in contact with on Bell Atlantic
premises or under Bell Atlantic control shall remain Bell Atlantic
property. All copies of such information in written, graphic or
other tangible form, and all Work Product derived from or
reflecting such information, shall be returned to Bell Atlantic at
its request, and in any event within thirty (30) days after the
expiration or termination of this Agreement. No copies shall be
made of any documents or other media provided by Bell Atlantic
without the prior written consent of Bell Atlantic. Unless such
information was previously known to NMS free of any obligation to
keep it confidential, or has been or is subsequently made public
by Bell Atlantic or a third party without breach of any agreement,
it shall be kept strictly confidential and shall be used only in
performing services under this Agreement, and may not be used for
other purposes except upon such terms as may be agreed upon
between NMS and Bell Atlantic in writing. NMS shall require all
parties accessing Bell Atlantic information including its
employees, agents and representatives to sign a separate written
agreement protecting Bell Atlantic information substantially in
the form of this provision .
***Pursaunt to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchn Exchange Commission pursuant to a request for confidential
treatment
5
<PAGE>
B. NMS Information
Confidential. NMS Confidential Information shall include all
------------
information relating to the design and data storage components of BEN-
NET(TM) and any additional information disclosed by NMS (the
"Discloser") to Bell Atlantic (the "Recipient") in writing and marked
"Confidential" or disclosed visually or orally and confirmed in
writing to be confidential within 20 days after the first disclosure.
Confidential Information shall not, however, include the following:
i. Information which is now or hereafter comes into the public
domain through no fault of the Recipient;
ii. Information learned by the Recipient from third parties;
iii. Information previously known to the Recipient or developed by
the Recipient independently of information disclosed by the
Discloser; or
iv. Information required to be disclosed by Recipient pursuant to
requirements of law.
Confidential Treatment. The Recipient shall treat the NMS
----------------------
Confidential Information as confidential, using the same standard of
care that it uses to protect its own proprietary or confidential
information (but not less than a reasonable standard of care), and
shall use reasonable measures to prevent disclosure of the NMS
Confidential Information to any third party without the Discloser's
consent. The Recipient shall disclose the NMS Confidential
Information only to those of its Participants, agents or
subcontractors who have a reasonable need for access thereto.
Return of Information. All NMS Confidential Information shall remain
----------------------
the property of the Discloser. Upon the Discloser's request, the
Recipient shall promptly return the NMS Confidential Information,
provided, however, that the Recipient may retain copies solely for
archival purposes only.
6.2. NMS Intellectual Property. Nothing contained in this Agreement shall
confer to Bell Atlantic any property rights, proprietary interest or
licenses in the software, written materials, techniques or know-how used
by NMS and its BEN-NET(TM) system.
6.3. Non-Solicitation. For the term of this Agreement (including any renewal
term) and a period of one year thereafter, neither party shall in any way
solicit or employ directly or indirectly an employee of the other party
without the written consent of the other party.
ARTICLE 7. DISPUTE RESOLUTION
- -----------------------------
7.1. Informal Management Mediation. Should any disagreement, dispute or claim
-----------------------------
of breach, nonperformance, or repudiation arise from, or in connection
with, this Agreement or any of the terms and conditions hereof
("Dispute") between Bell Atlantic and NMS either during this Agreement or
after termination of this Agreement, either party may give to the other
notice of the Dispute, specifically referencing this provision and
request resolution of the Dispute. At the expiration of ten (10) business
days, unless it shall have been settled, such Dispute may be referred by
either party to the Bell Atlantic Sourcing Director and Supplier
[Supplier's Contact] for resolution. The parties agree to exchange
relevant information and cooperate in good faith to resolve the Dispute
under this provision. If within an additional ten (10) business days,
such dispute shall not have been settled the parties shall have the right
to proceed under provision 7.3 below. The parties may also seek
injunctive relief to preserve the status quo pending resolution under
this provision or provision 7.3.
7.1. Settlement Purposes. ALL DISCUSSIONS AND DOCUMENTS PREPARED PURSUANT TO
-------------------
ANY ATTEMPT TO RESOLVE A DISPUTE THROUGH INFROMAL MANAGEMENT ESCALATION
ARE CONFIDENTIAL AND FOR SETTLEMENT PURPOSES ONLY AND SHALL NOT BE
ADMITTED IN ANY COURT OR OTHER FORUM AS AN ADMISSION OR
6
<PAGE>
OTHERWISE AGAINST A PARTY FOR ANY PURPOSE INCLUDING THE APPLICABILITY OF
FEDERAL AND STATE COURT RULES.
7.3. Before either party may proceed under this provision 7.3, the parties
must in good faith attempt to resolve their dispute through Informal
Management Mediation described above. Any dispute that cannot be resolved
through Informal Management Mediation shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction
thereof. The arbitration shall be held in New York, NY. The arbitration
will be conducted before a panel of three arbitrators, with one
arbitrator named by each party and the third named by the two party-
appointed arbitrators, or (if they should fail to agree on the third) by
the AAA. The arbitrators may not award non-monetary or equitable relief
of any sort. They shall have no power to award punitive damages or any
other damages not measured by the prevailing party's actual damages. All
aspects of the arbitration shall be treated as confidential. Neither the
parties nor the arbitrators may disclose the existence, content or
results of the arbitration, except as necessary to comply with legal or
regulatory requirements. Before making any such disclosure, a party shall
give written notice to all other parties and shall afford such parties a
reasonable opportunity to protect their interests.
ARTICLE 8. BOOKS AND RECORDS
- -----------------------------
8.1. Bell Atlantic may audit the books and records of NMS pertaining to NMS'
services rendered hereunder no more than once every 18 months, upon
reasonable notice thereof to NMS. Such right to audit shall survive the
termination of this Agreement by six months. All audits shall be at Bell
Atlantic's expense.
8.2. NMS will make available for audit by either Bell Atlantic or its designee
("Auditor") its files, books, procedures and records (including computer
terminal access to same) pertaining to the services provided by NMS under
this Agreement during the hours of 9 a.m. to 5 p.m. (Central Time) ,
Monday through Friday, excluding holidays. NMS shall fully cooperate
with such audit and shall make available for interview with the Auditor
those personnel with material involvement or responsibility with respect
to the services provided by NMS under this Agreement. Bell Atlantic will
give NMS reasonable notice of each audit prior to commencement of the
audit. The audit shall be conducted at NMS' offices.
8.3. Notwithstanding anything herein to the contrary, in the event that the
Auditor is to be a designee of Bell Atlantic, Bell Atlantic must first
obtain the consent of NMS with respect to such designee, which consent
shall not be unreasonably withheld.
8.4. NMS shall have the opportunity, prior to the release of the audit report
resulting from the audit described above, to review the draft and to
include in the report its responses to issues raised by the report.
ARTICLE 9. NOTICES
- -------------------
9.1. General. All notices, requests, demands and other communications required
to be given hereunder shall be in writing and shall be deemed to have
been duly given one day after delivery by hand or via a nationally
recognized overnight courier or five days after mailing, certified or
registered mail, return receipt requested to the party for whom intended
at the address specified in this Article. Either party may designate an
alternate address for notices by given written notice thereof in
accordance with the provisions of this Article.
9.2. Notices to NMS. All notices to NMS shall be directed as follows:
Network Management Services
5500 Wayzata Blvd., Suite 1450
Minneapolis, MN 55416-1241
Attn: Chief Financial Officer
9.3. Notices to Bell Atlantic. All notices to client shall be directed as
follows:
7
<PAGE>
Bell Atlantic
240 East 38th Street
New York, NY 10016
Attn: Richard A. Fisher
ARTICLE 10. GENERAL PROVISIONS
- -------------------------------
10.1. Control of Work. NMS shall be solely responsible for the conduct and
control of the work to be performed under this Agreement by NMS and its
agents or employees.
10.2. Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York without giving effect
to such State's choice of law rules.
10.3. Publicity. Each party shall obtain the prior written consent of the
other party concerning the content and plan of distribution of any
public announcement, press release or advertisement concerning this
Agreement, provided that NMS may include references to Bell Atlantic in
client lists, general press releases not specifically pertaining to Bell
Atlantic, proposals, and other non-public communications concerning NMS
or its services. No prior consent shall be required regarding the
inclusion of the other party's name in notices, disclosure documents, or
other filing or publications required by law or regulations.
10.4. Headings. Article and section headings are for convenience only and
shall not be considered part of the terms and conditions of this
Agreement.
10.5. Modification. No modification, waiver or amendment of any term or
condition of this Agreement shall be effective unless and until it shall
be reduced to writing and signed on behalf of NMS and Bell Atlantic.
10.6. Waiver. Failure by either party at any time to require full performance
by the other party or to claim a breach of any term of this Agreement
will not (1) be construed as a waiver of any right under this Agreement,
(2) affect any subsequent breach, or (3) affect the validity of this
Agreement or any part thereof.
10.7. Severability. Whenever possible, each provision of this Agreement will
be interpreted in such a manner as to be effective and valid under
application law but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision as if such invalid,
illegal or unenforceable provision had never been contained herein.
10.8. Complete Agreement. The Agreement, including the appendices hereto,
constitutes the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior proposals, negotiations,
conversations, discussions and agreements between the parties. This
Agreement may be modified only by a written instrument executed on
behalf of both of the parties hereto.
10.9. Assignment. Neither party may assign any of its rights under this
Agreement without the prior written consent of the other party, however,
upon written notice to the other party, either party may assign this
Agreement to a successor in title to substantially all of its business
or assets. Subject to the foregoing, all of the terms and provisions of
this Agreement shall be binding upon and insure to the benefit of and be
enforceable by the successors and permitted assigns of Bell Atlantic and
NMS.
10.10 Survival. The respective obligations of each party that would by their
nature continue after the termination or expiration of this Agreement,
including without limitation those contained in Confidentiality,
Indemnification and Intellectual Property Indemnification sections and
shall survive the termination or expiration of this Agreement.
8
<PAGE>
10.11 Counterparts. This Agreement may be executed in one or more
counterparts each of which shall be deemed to be an original and all of
which, taken together, shall constitute a single instrument.
10.12 Benefit of the Parties. This Agreement is for the sole and exclusive
benefit of the parties hereto and is not intended to, nor does it,
confer any benefit upon any third party.
10.13 Jurisdiction and Venue. This Agreement may be enforced in any federal
court or New York state court sitting in the County of New York in the
State of New York, and each party hereto consents to the jurisdiction
and venue of any such court and waives any argument that venue in such
forums in not convenient. If any party hereto commences any action
arising from this Agreement in another jurisdiction or venue, any other
party to this Agreement shall have the option of transferring the case
to the above-described venue or jurisdiction or if such transfer cannot
be accomplished, to have such case dismissed without prejudice.
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
representatives, have executed this Agreement effective as of the day and year
first set forth above.
NETWORK MANAGEMENT SERVICES, INC.
BY: /s/ Scott P. Halstead
------------------------------
Name: Scott P. Halstead
------------------------
Title: Chief Financial Officer
-----------------------
BELL ATLANTIC CORPORATION
By: /s/ Richard A. Fisher
------------------------------
Name: Richard A. Fisher
------------------------
Title: SPL
-----------------------
9
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
ADMINISTRATION
CONVERSION SERVICES AND FEES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Conversion 1998 1999 2000 Comments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Data Import - Set-up *** Assumes 1 BEN-IN (import) from
Description: Analysis of group reporting, rate and benefit ***
structure required by client. Data mapping imports from
Kwasha's system, database enhancements for customized
data capture. Pre-import edit logic and reports
development.
- ---------------------------------------------------------------------------------------------------------------------------------
Data Export- Set-Up
Level I Level I Interfaces are *** per
Description: Interface with program vendors to deliver *** *** *** interface
consolidated electronic data feed where employee Assumed electronic interfaces
population is 1000+. Assumes comprehensive data (minimum)
elements, single line of coverage (medical), translating ***
into or converting from existing group structures.
Fee to set-up remaining,
Level II non-electronic interfaces in 1998.
Description: Interface with program vendors (with less Going forward, new Level II
than 1000 employees) to deliver hard copy "Smart" paper *** TBD TBD interfaces *** per interface
data feeds.
- ---------------------------------------------------------------------------------------------------------------------------------
MDElect Set-up NA for Not applicable for 1999 Plan Year,
1999 scope TBD for Plan Year 2000.
- ---------------------------------------------------------------------------------------------------------------------------------
PlanSelect Set-up *** This tool will mirror the
Description: Initialization of benefit communication tool information contained within the HMO
to be used by NMS Customer Service Call Center Fact Sheets provided to Bell
representatives Atlantic employees/retirees during
open enrollment.
- ---------------------------------------------------------------------------------------------------------------------------------
Fulfillment IVR Set-up *** This tool will offset the call
Description: Analysis, design and development of volumes to the Customer Service reps
Interactive Voice Response (IVR) system to handle Bell for routine fulfillment requests.
Atlantic retirees and actives requesting HMO Provider
Directories. System will off-load call volume from
Customer Service Call Center. Features include opt-out
to Customer Service. Will develop data file to send to
3rd party fulfillment provider.
- ---------------------------------------------------------------------------------------------------------------------------------
COBRA Administrative Services (CAS) Set-up ***
Description: Interface with CAS, Bell Atlantic's COBRA,
HIPAA and FSA Vendor.
- ---------------------------------------------------------------------------------------------------------------------------------
AIS Set-up (Kwasha's "Account Information System") *** Set-up includes the connections via
Description: Interface with Kwasha's system to enable NMS T1 line and necessary programming
customer service representatives to check enrollment and technical support to implement
options. set-up of AIS within NMS.
- ---------------------------------------------------------------------------------------------------------------------------------
Project Management *** ***
Description: Project Planning, Management, and
coordination with client and vendors to initialize
consolidated administration services, data Gathering,
Process Mapping, Implementation meetings, program
management, training.
- ---------------------------------------------------------------------------------------------------------------------------------
Total Implementation/Start-Up *** *** ***
- ---------------------------------------------------------------------------------------------------------------------------------
NMS Start-up Investment *** ***
- ---------------------------------------------------------------------------------------------------------------------------------
Bell Atlantic Start-up Investment ***
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and files separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
ADMINISTRATION
ONGOING SERVICES AND FEES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
On-Going Fee Basis Billing Projected Comments
Administration Basis Annual Fees
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Data Import - On-Going N/A N/A N/A Assumes 1 weekly import file from ***.
Description: Receipt and Included in other fees
processing of enrollment Includes access and maintenance of
adds, changes, and connection. Special technical support
terminations via electronic will be billed at *** per hour as
import from Kwasha. needed.
Receipt and processing of *** per month Billed *** Assumes 1 import file from *** on a
COBRA, HIPAA and FSA adds, monthly weekly basis.
changes and terminations
via electronic import from
CAS.
- ----------------------------------------------------------------------------------------------------------------------------------
Customer Service Call Center Center Operation Fee Billed COF Center Operation Fee is charged on a
Description: Receive and (COF) monthly - Ongoing fixed monthly basis to operate the Call
respond to inquiries from - ***/month in *** Center including management,
active employees, retirees, ongoing plus advance - Open Enroll recruiting , coaching, development and
Bell Atlantic HR additional *** reporting.
representatives, and - ***/month
vendors. Respond to during Open
inquiries regarding Enrollment
enrollment, eligibility,
and plan benefits.
Staff Station Rate (SSR) Billed SSR Fees Staff Station Rate (SSR) is a charge per
- ***/hour monthly - Ongoing hour per representative or "workstation"
based on *** to Bell Atlantic. This rate includes
hours - Open Enroll salary, benefits, standard desktop
*** technology and space at standard
non-overtime hours. Estimate *** ongoing
hours plus *** during Open Enrollment.
Productivity improvements will be
reflected in fewer dedicated
representatives. The SSR will be adjusted
each year in July/August by ECI (see
notes at end of Description of Services)
System Access Rate (SAR) is a charge per
System Access Rate Billed SAR Fees hour per representative dedicated to
(SAR) monthly - Ongoing Bell Atlantic for access to unique
- AIS ***/hour based on *** system modules. Access to Microsoft
- Mcare ***/hour hours - Open Enroll Office or similar desktop tools is
*** included in SSR. Includes access to Core
BEN-NETTM Enrollment Module. Estimate ***
ongoing hours plus *** during Open
Enrollment
*** per year Fees to 1998 Costs for telephone, printing, postage
be billed *** will be passed back.
Includes: PlanSelect 1/12 per
Description: On-line month or 1999-2003 This tool will mirror the information
communication tool to be *** per *** contained within the HMO Fact Sheets
used by NMS customer month provided to Bell Atlantic
service representatives to employees/retirees during open
support Bell Atlantic enrollment.
employees and retirees
throughout open enrollment
and ongoing.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and files separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
On-Going Admin Fee Basis Billing Annual Comments
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Source Center Center Operation Fee Billed COF ***
Description: Receive and *** per month Monthly - Enrollment
respond to inquiries from in ***
Medicare eligible retirees Advance
regarding enrollment,
eligibility, and plan Billed SSR Fees
benefits relating to Staff Station Rate (SSR) monthly - ***
Medicare HMO enrollment. ***/hour based on
Includes inbound and hours
outbound telemarketing System Access Rate SAR Fees
support. ***/hour for Meeting - ***
Management
- ----------------------------------------------------------------------------------------------------------------------------------
Fulfillment IVR *** per month when Monthly in Monthly Fee This tool will offset call volumes
Description: Ongoing Operational Advance *** to Customer Service reps for routine
support of Interactive fulfillment requests.
Voice Response (IVR) system plus
to handle Bell Atlantic Project that the application will be up
retirees and actives and running three months of the year
requesting HMO Provider ***/call Billed Call Charge
Directories. System will monthly ***
Customer Service. Features based on ***
include opt-out to customer hours
service and sending data
file to 3/rd/ party
fulfillment provider.
- -----------------------------------------------------------------------------------------------------------------------------------
Delivery of Enrollment Data Active Fees Billed Active Commercial ***
to HMOs Commercial monthly in 1998
Description: Distribution *** pepm conjunction *** Vendor Audit assumes ***% of vendors
and confirmation of with participate (to be jointly determined)
enrollment adds, changes, "self-bill." 1999-2003 Above ***% participation will be
and terminations via *** priced upon request on a per vendor per
electronic export or paper quarter basis with initial set-up fees
on a weekly or as Medicare Risk Medicare Risk per vendor. ***% membership. The
appropriate basis. *** pepm 1998 Copy Return component relies on vendor
*** cooperation in meeting the file
Includes Vendor Audit: specifications and returning the file
Confirmation of data on a quarterly basis. Copy Return is
integrity using NMS Vendor 1999-2003 an electronic audit of ***% plan
Audit: program in two parts *** membership on a quarterly basis.
Enrollment Audit and Copy
Return Audit. Quarterly
performance summaries
provided.
- ------------------------------------------------------------------------------------------------------------------------------------
Medicare HMO Enrollment *** per HCFA form sent Billed 1998 *** during open enrollment
Support monthly ***
Description: NMS will based on
receive Medicare HMO forms
enrollment designations
from Kwasha on a regular
basis which will trigger
the distribution of HMO
specific HCFA enrollment
forms to enrollees. NMS
will generate an enrollee
letter, maintain stock and
coordinate mailings.
====================================================================================================================================
On-Going Admin Fee Basis Billing Annual Comments
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated Premium Active Fees Active Assumes 79,500 Active Commercial
Remittance, Reconciliation, Commercial billed Commercial employees
and Distribution *** pepm monthly 1998
Description: Calculation and in *** Assumes 8,700 Medicare Risk retirees
distribution of conjunction
consolidated monthly with
"self-bill" to client using "self-bill." 1999-2003 Ongoing service to start in
NMS standard invoice *** December 1998.
format, with fully
adjudicated retroactive Assumes Bell Atlantic sets up and
adjustment processing and owns a bank account and gives NMS debit
reconciliation. Medicare Risk Medicare Risk authority and assumes NMS is not
Distribution of payments *** pepm 1998 responsible for bank account
with fully reconciled *** reconciliation or monthly service fees.
supporting backup via ACH
to vendors 1999-2003 NMS is responsible for initiating the
*** funding transaction on a monthly
basis.
- ----------------------------------------------------------------------------------------------------------------------------------
Claims Transfer of Funds Active and Medicare Risk Fees billed TBD based on Pricing based on assumption of
Request (CTFR) *** pepm monthly in volume and following breakdowns:
Definition: On a weekly for those enrolled in ASO conjunction number of Bell Atlantic North and South
basis, NMS coordinates all plan with self-funded 4 level group structure
claims funding requests and "self-bill." plans
provides a single Note that pepm applies only to those
consolidated invoice to employees/retirees in a Self-funded
Bell Atlantic. This (ASO) plan.
invoice identifies the
total funds that need to be
distributed to each
self-funded vendor.
- ------------------------------------------------------------------------------------------------------------------------------------
Consolidated Reporting Active Fees billed Active Assumes 79,500 Active Commercial
Standard Commercial monthly in Commercial employees
"Standard" reporting package *** pepm conjunction 1998 ***
includes monthly enrollment with Assumes 8,700 Medicare Risk retirees
detail and summary, monthly "self-bill." 1999-2003
cash flow report, *** Ongoing service to start in
consolidated self-bill, September 1998.
consolidated transfer of
funds request, and call Medicare Risk Medicare Risk
tracking reports. *** pepm 1998 ***
1999-2003
***
Ad Hoc
Description: Analysis and ***/hour Fees to be Ad Hoc Assumes 20 reports at 1.5 hours per
programming of custom billed 1/12 1998 *** report.
reports to support data per month or Requests beyond 30 hours annually to
management and decision *** per 1999-2003 be billed at ***/hour
making outside of the month ***
standard reporting package
(e.g. Y-T-D Enrollment,
Monthly Enrollment and
Payment summary).
- -----------------------------------------------------------------------------------------------------------------------------------
Routine Correspondence *** per year Fees to be 1998 Ongoing service to start in
Description: To include: billed 1/12 *** January 1, 1999.
direct member per month or
correspondence, electronic *** 1999-2003
mail, faxes and Bell ***
Atlantic Medicare HMO
Enrollment Forms (HCFA).
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
On-Going Admin Fee Basis Billing Annual Comments
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Produce Schedule As for Form *** per year Fees to be 1998 The following information will be
5500 billed 1/12 *** provided to Bell Atlantic within 60
Description: NMS shall per month or days after the completion of the
provide Bell Atlantic *** 1999-2003 contract year.
summary level data to ***
assist them in their . Vendor name
production of their Form . Vendor contract identifier
5500 Schedule A. . Contract year dates
. Type of benefit (i.e. medical)
. Enrollment at the end of the
contract for contract year
. Gross premiums paid for contract
year
. Total agent/broker commissions
paid act (including fees paid, if
any) for contract year, if
applicable
- -----------------------------------------------------------------------------------------------------------------------------------
Service Team Included in fees N/A N/A
Description: Client Team
Management, including
measuring and reporting of
performance standards, call
statistics, solving vendor
process issues,
recommending strategic
enhancements to system or
service, communication with
client and vendors.
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
5
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE ADDED SERVICES
- ---------------------------------------------------------------------------------------------------------------------------------
Value added Service Fee Basis Billing Projected Comments
Basis Annual Fees
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fulfillment General Management fees for 1998
Description: NMS to "General 10% of pass *** to be NMS *** assumed at *** given forecasted 3rd
Manage" third party fulfillment through 3rd billed during party fees.
services for HMO Provider party printing/ Open 3/rd/ party fees
Directories for the Medicare HMO fulfillment Enrollment estimated at *** General management fee does not
and Commercial HMO population. costs Process annually include additional systems and
Provider Directories to be + + operational resources required for
offered on-demand only except for Pass through of Pass through execution.
the "age-in" populations for CWA 3/rd/ party costs as incurred
over age 65 retirees. NMS will NMS to subcontract fulfillment with
provide fulfillment general 3rd party vendor
management on an as requested
basis. NMS will pass through 3rd party
costs to Bell Atlantic
- ---------------------------------------------------------------------------------------------------------------------------------
ScoreCard ***
Description *** /plan/ Fees billed TBD
. Quarterly and Annual data month per month
collection and validation of
self-reported data elements from
vendors and markets where
appropriate for selected measures.
. Provider Access phone calls and
evaluations for targeted provider
clinics within the appropriate
health plans.
. Member services evaluation of
vendor's customer service
department(s)
. Member Satisfaction survey
administration on a semi-annual
basis.
. Evaluation and scoring of plan
performance on a quarterly basis.
. Reporting of results back to
Bell Atlantic and it's vendors on
a Quarterly basis.
. Facilitation of quarterly
conference calls with Bell
Atlantic and individual vendors
to discuss results, engage plans
in action plan development and
process improvement initiatives.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
6
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
STRATEGY AND RATE SOLICITATION
COMMERCIAL HMOs
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rate Solicitation Fee Basis Billing Basis Projected Comments
Annual Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic planning and analysis of Per hour fees 1999 Assumed hours by year in original proposal
HMO offerings *** per hour to be billed *** . ***
Description: Collaborate with Bell monthly based Activities in 1998 are underway
Atlantic staff to develop Bell on previous 2000
Atlantic's 2002 strategic vision month's hours *** Fees for 2002 and 2003 to be increased by
including: CPI adjustment over previous year (e.g.
. 2002 vision statement that 2001 2002 vs. 2001, 2003 vs. 2002)
addresses landscape, marketplace ***
pricing, migration strategies and
corporate sign-off
. Market by market definition and
HMO consolidation strategy
. Finalize standard plan design
. Finalize vendor performance
standards for scorecard
. Evaluate MCBG participation in
select markets (price quotes and
participation fees are extra)
- ------------------------------------------------------------------------------------------------------------------------------------
Communication Strategy and *** per hour Initially part of Hewitt duties.
Execution for technical Billed monthly Transferred to NMS.
Description: Work with Bell writing as incurred
Atlantic staff and external
consultants to develop and *** per hour
execute employee and retiree for systems and
communication documents including operational
Open Enrollment materials and support
other projects as requested
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HMO rate solicitation and *** annually Fees to be 1999-2001 Monthly charges to start January 1999
negotiation billed 1/12 ***
Description: Customize and per month or Fees for 2002 and 2003 to be increased
implement selection and renewal *** per month by CPI adjustment over previous year
RFP packets. Services include (e.g. 2002 vs. 2001, 2003 vs. 2002)
. Coordinate renewals and
selections across multiple Key terms agreement refers to rates,
markets and vendors performance guarantees and services
. Conduct zip code, PCP and included in ASO arrangements.
facilities network matches
. Collect and analyze actuary and
underwriting data/assumptions for
rate negotiations
. Evaluate funding
appropriateness for claims targets
. Analyze and score HMO bids,
market by market
. Negotiate premiums and/or ASO
fees and claims targets
. Negotiate performance guarantees
. Conduct conference calls with
Bell Atlantic
. Finalize financial terms
. Secure key terms agreements
. Prepare final analysis binder
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rates Fee Basis Billing Annual Fees Comments
Commercial HMOs
- ------------------------------------------------------------------------------------------------------------------------------------
Financial analysis of Per market fees 1999-2001 ***
alternatively funded HMO *** per to be billed as ***
arrangements market percentage Fees for 2002 and 2003 to be increased
Description: NMS will conduct a completion per by CPI adjustment over previous year (e.g.
self-funding feasibility analysis market vs. 2002 2001, 2003 vs.2002)
to evaluate the relevant factors
and estimate a reasonable cost on
such factors. NMS will appraise
key factors like plan design,
stop-loss, group longevity and
predictability, employer's
financial condition, reserves,
plan administration, employee
communication, etc.
- ------------------------------------------------------------------------------------------------------------------------------------
Confirm benefit plan design for *** Fees to be 1999-2001 Bid for service was *** allocated 50% to
enrollment annually billed 1/12 *** Commercial HMOs and 50% to Medicare Risk
Description: NMS will collect and per month or HMOs
finalize all HMO benefit plan *** per month Monthly charges to start January 1999
design changes due to state
and/or federal mandates and/or Fees for 2002 and 2003 to be increased by
requested by Bell Atlantic. CPI adjustment over previous year (e.g.
2002 vs. 2001, 2003 vs. 2002)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provide data for HMO report cards *** Fees to be 1999-2001 Bid for service was *** allocated 50% to
Description: NMS to gather HMO annually billed 1/12 *** Commercial HMOs and 50% to Medicare Risk HMOs
benefit plan detail annually, to per month or
assist in the completion of the *** per Monthly charges to start January 1999
HMO Report Card ("What You Told month
Us About Your HMO"). Fees for 2002 and 2003 to be increased by CPI
adjustment over previous year (e.g. 2002 vs.
2001, 2003 vs. 2002)
- ------------------------------------------------------------------------------------------------------------------------------------
Analysis, confirmation and *** Fees to be 1999-2003 Bid for service was *** allocated 50% to
clean-up of zip code data/service annually billed 1/12 *** Commercial HMOs and 50% to Medicare Risk HMOs
areas per month or
Description: NMS will collect and *** per Monthly charges to start January 1999
confirm health plan service area month
zip code ranges, annually. NMS
will confirm and document all
changes, with explanations. NMS
will feed updated zip code files
to Bell Atlantic and/or Kwasha.
- ------------------------------------------------------------------------------------------------------------------------------------
Coordination of Commercial *** per FTE Fees to be TBD 1998 Resources estimates for Commercial and
Enrollment Seminars for billed per Medicare HMOs
Description: NMS will manage and Management/ month at . ***
coordinate Commercial HMO Coordination *** per FTE
meetings including: per month Resources beyond 1998 to be determined during
. Meeting set-up Additional planning process
. Health Plan and Ambassador resources at
Training and Coordination for *** per hour
meeting attendance Number of Onsite meetings TBD
. "On the ground" meeting presence Onsite mtg
management
. Billing activities related to ***/day/ Fees to be increased each year by CPI
meeting management person (plus adjustment
. Collect refunds from HMOs T&E)
. Reporting and documentation
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rates Fee Basis Billing Annual Fees Comments
Commercial HMOs
- ------------------------------------------------------------------------------------------------------------------------------------
Manage contracts between HMO and Per hour fees 1999-2001 1998 activity: NMS is proposing Hewitt, on
Bell Atlantic *** per hour to be billed *** behalf of Bell Atlantic put in place contracts
Description: NMS will incorporate monthly based 1999 activity: NMS will assume
HMO contracting into the renewal on previous responsibility for contract development and
and selection process. NMS will month's hours negotiation
negotiate and prepare a legal
document that defines the terms ***
and conditions of Bell Atlantic's
relationship with its HMO Fees for 2002 and 2003 to be increased by CPI
vendors. NMS will facilitate adjustment over previous year (e.g. 2002 vs.
securing principle signatures 2001, 2003 vs. 2002)
from Bell Atlantic and its vendor
representatives.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed seperately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
STRATEGY AND RATE SOLICITATION
MEDICARE HMOs
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Strategy and Rate Solicitation Fee Basis Billing Projected Comments
Basis Annual Fees
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic planning and analysis of Per hour fees 1999 Assumed hours by year
HMO offerings ***per hour to be billed *** . ***
Description: Collaborate with Bell monthly based
Atlantic staff to develop Bell on previous 2000 Fees for 2002 and 2003 to be increased
Atlantic's 2002 strategic vision month's hours *** by CPI adjustment over previous year
including: (e.g. 2002 vs.2001, 2003 vs. 2002)
. 2002 vision statement that 2001
addresses landscape, marketplace ***
pricing, migration strategies and
corporate sign-off
. Market by market definition and
HMO consolidation strategy
. Finalize standard plan design
. Finalize vendor performance
standards for scorecard
. Evaluate MCBG participation in
select markets (price quotes and
participation fees are extra)
- ------------------------------------------------------------------------------------------------------------------------------------
Communication Strategy and *** per hour for Initially part of Hewitt duties.
Execution technical Billed monthly Transferred to NMS.
Description: Work with Bell writing as incurred
Atlantic staff and external *** per hour for
consultants to develop and systems and
execute employee and retiree operational
communication documents including support
Open Enrollment materials and
other projects as requested
- ------------------------------------------------------------------------------------------------------------------------------------
HMO rate solicitation and *** annually Fees to be 1999-2001 Monthly charges to start January 1999
negotiation billed 1/12 ***
Description: Customize and per month or Fees for 2002 and 2003 to be increased
implement selection and renewal *** per by CPI adjustment over previous year
RFP packets. Services include month (e.g. 2002 vs. 2001, 2003 vs. 2002)
. Coordinate renewals and
selections across multiple Key terms agreement refers to rates,
markets and vendors performance guarantees and services
. Conduct zip code, PCP and included in ASO arrangements.
facilities network matches
. Collect and analyze actuary and
underwriting data/assumptions for
rate negotiations
. Evaluate funding
appropriateness for claims targets
. Analyze and score HMO bids,
market by market
. Negotiate premiums and/or ASO
fees and claims targets
. Negotiate performance guarantees
. Conduct conference calls with
Bell Atlantic
. Finalize financial terms
. Secure key terms agreements
. Prepare final analysis binder
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed seperately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
<PAGE>
[LOGO OF NETWORK MANAGEMENT SERVICES]
APPENDIX A
Description of Services
Bell Atlantic
Notes:
. NMS has included up to *** per calendar year without charge back to Bell
Atlantic. Additional travel expenses will be passed back to Bell Atlantic for
reimbursement.
. Set-Up fees may be billed throughout the contract period, with initial
invoicing commencing with implementation kick-off.
. On-Going fees are invoiced and collected on a monthly basis as a component of
the HMO premium distribution process.
. NMS reserves the right to charge client for expenses incurred relating to
overnight or express delivery if the method of delivery requested varies from
NMS standard distribution protocol.
. NMS reserves the right to charge client's vendors for expenses incurred
relating to failure to return 9 track tapes should this media be the vendor's
preferred transmission method.
. Ad Hoc consulting projects will be charged at an hourly rate of *** (i.e.
vendor performance guarantee review and analysis for 1999 open enrollment.
. NMS supports a five-year contract with Bell Atlantic for Administrative
Services commencing on 7/1/98. Certain rates escalated by CPI are identified
in the comments. Pricing for Administration is "protected" for 1999, 2000,
and 2001.
. Pepm is defined as "per employee per month" or per subscriber (either retiree
or employee) per month.
. The Staff Station Rate (SSR) will be adjusted each year in July/August when
the 2/nd/ quarter changes to the U.S. Bureau of Labor Statistics Employment
Cost Index (ECI) for all Workers in Private Industry Region IV - Chicago
(which includes Minneapolis) is published. As a reference point, the 1998
2/nd/ quarter versus 1997 2/nd/ quarter change was 4.0% [(134.9-
129.7)/129.7].
12
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.5 have been deleted and filed seperately with the
Securities Exchange Commission pursuant to a request for confidential treatment.
<PAGE>
EXHIBIT 10.6
ADMINISTRATIVE SERVICES AGREEMENT
---------------------------------
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement") is made and
entered into as of this 6th day of May, 1999 (the "Effective Date"), by and
between the Blue Cross Blue Shield Association ("THE ASSOCIATION"), an Illinois
not-for-profit organization, and Network Management Services, Inc. ("NMS"), a
Minnesota corporation.
RECITALS:
--------
A. THE ASSOCIATION provides certain centralized enrollment, financial and
other administrative services in connection with certain programs (currently
designated under the names HMO Blue USA; Medicare Blue USA and BluesCONNECT)
through which Blue Cross and/or Blue Shield Plans provide and/or administer
health benefits coverage for employees of accounts;
B. THE ASSOCIATION and NMS are parties to an Administrative Services
Agreement dated August 29, 1997 (the "BluesCONNECT Agreement"), pursuant to
which THE ASSOCIATION has outsourced to NMS certain enrollment, financial and
other administrative services that are provided through THE ASSOCIATION in
connection with the BluesCONNECT program; and
C. NMS is in the business of providing administrative services to health
plans, insurance carriers and to purchasers of health care coverage, and
possesses the expertise necessary to assist THE ASSOCIATION in administering the
HMO Blue USA, Medicare Blue USA and other centralized programs; and to continue
to assist in the administration of the BluesCONNECT program.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth in this Agreement, the parties agree as follows:
<PAGE>
SECTION 1
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 Account. "Account" means an employer or other entity which has
-------
employees for whom the Account provides any type of health coverage products,
including indemnity, health maintenance organization, point of service, or
preferred provider organization products.
1.2 Administrative Services. "Administrative Services" means certain
-----------------------
centralized enrollment, eligibility, billing and disbursement, financial and
reporting, client issue resolution and related administrative services and
products which have been delegated by the Participating Plans to THE ASSOCIATION
in connection with the Program(s) and are provided to Participating Accounts
through THE ASSOCIATION.
1.3 Bank. "Bank" means the First National Bank of Chicago and/or any
----
other financial institution selected from time to time by THE ASSOCIATION in
which the Bank Account will be maintained.
1.4 Bank Account. "Bank Account" means a fiduciary bank deposit account
------------
established by THE ASSOCIATION and used for the receipt and disbursement of
monies in connection with the Program(s) in accordance with Section 4 below.
1.5 BEN-NET(TM). "BEN-NET(TM)" means NMS's proprietary eligibility
-----------
management tools, software and services which provides the capability for group
set-ups, vendor set-ups, enrollment and eligibility management, enrollment and
eligibility data edits, eligibility distribution to vendors, retroactive
enrollment adjustments, consolidated billing, customer services and payment to
Health Plans.
1.6 Blue Plan. "Blue Plan" means any Blue Cross and/or Blue Shield
---------
Health Plan or its licensed affiliates.
1.7 BluesCONNECT. "BluesCONNECT" refers to the national account program
------------
through which Blue Plans provide health maintenance organization ("HMO") and
HMO-based insurance products to Accounts, supported by certain enhanced
centralized Administrative Services provided by THE ASSOCIATION through NMS
pursuant to the BluesCONNECT Agreement.
2
<PAGE>
1.8 BluesNET. "BluesNET" means the private wide-area computer network
--------
through which THE ASSOCIATION maintains communications with selected Health
Plans and other entities.
1.9 Business Day. "Business Day" means any day other than Saturday,
------------
Sunday or a United States National holiday.
1.10 Consolidated Bill. "Consolidated Bill" means a detailed monthly
-----------------
billing invoice based upon the Participating Plan's premium and rate data in
BEN-NET(TM) and the entry of Subscriber information received from Participating
Plans or Participating Accounts.
1.11 Core Services. "Core Services" means all of the services NMS agrees
-------------
to perform under this Agreement, including but not limited to the services
referenced under Section 2 of this Agreement; except those services identified
as non-Core Services on Schedule I hereto.
1.12 Coverage Month. "Coverage Month" means a month during the term of
--------------
this Agreement in which a Member receives health care coverage from a
Participating Plan.
1.13 Eligible Employee. "Eligible Employee" means a bona-fide employee
-----------------
of a Participating Account.
1.14 Enrollment Form. "Enrollment Form" means a form completed by an
---------------
Eligible Employee or other Member to enroll in benefits coverage offered by a
Participating Plan or to terminate from or make changes to his/her enrollment in
benefits coverage offered by a Participating Plan.
1.15 Environmental Analysis. "Environmental Analysis" means an interview
----------------------
and analysis conducted by NMS with representatives of a Participating Account to
determine current enrollment, financial, and customer service processes for
applicable coverage benefits sponsored by such Participating Account, as
described in Section 2.1 below.
1.16 Health Plan. "Health Plan" means a health care service plan or
-----------
affiliated entity, insurance carrier, health maintenance organization or other
provider of health care benefits or benefits administration.
1.17 HMO Blue USA. "HMO Blue USA" refers to the national account program
------------
through which Blue Plans provide HMO and HMO-based insurance products to
Accounts, supported by centralized Administrative Services.
3
<PAGE>
1.18 Lock Box. "Lock Box" means a lock box to be established at the
--------
Bank for the receipt and distribution of monies in connection with the
Program(s) in accordance with Section 4 below.
1.19 Medicare Blue USA. "Medicare Blue USA" refers to the national
-----------------
account program through which Blue Plans provide HMO and HMO-based insurance to
Medicare enrollees of Participating Accounts supported by centralized
Administrative Services in a manner substantially similar to that for HMO Blue
USA.
1.20 Member. "Member" means a person enrolled for benefits coverage
------
as a result of such Member's relationship with a Subscriber maintained in BEN-
NET(TM) including but not limited to Eligible Employees and dependents of
Eligible Employees, retirees, dependents of retirees, COBRA continuees,
dependents of COBRA continuees, persons on leaves of absence and other
continuations of coverage.
1.21 Participants. "Participants" means collectively, THE ASSOCIATION,
------------
NMS, the Participating Accounts, the Participating Plans and all Members.
1.22 Participating Account. "Participating Account" means an Account
---------------------
which participates in the Program(s) (current list on Schedule II hereto) and
for which NMS receives fees as described in Schedule I for providing Core
Services to the Account hereunder.
1.23 Participating Plan. "Participating Plan" means a Blue Plan which
------------------
participates in the Program(s), or any Blue Plan affiliate which has been
permitted to participate in the Program(s).
1.24 Program(s). "Program(s)" means the HMO Blue USA, Medicare Blue USA,
----------
BluesCONNECT (as such names may change from time to time) and other programs
which may be identified and/or developed from time to time through which Blue
Plans provide any type of health insurance products, including indemnity, health
maintenance organization, point of service or preferred provider organization
products to Accounts, and in connection with which THE ASSOCIATION provides
centralized Administrative Services.
1.25 Program Rules. "Program Rules" means the administrative rules for
-------------
Program participation by Accounts and Health Plans, as promulgated from time to
time and implemented by THE ASSOCIATION in its sole discretion as set forth in
Section 10.3 below.
4
<PAGE>
1.26 Self-Bill. "Self-Bill" means the billing method by which a
---------
Participating Account or third party administrator maintains its own membership
files and calculates monthly premiums owed under the Program(s).
1.27 Subscriber. "Subscriber" means an individual who is enrolled in
----------
benefits coverage through the Program(s) and is the certificate holder,
including Eligible Employees, retirees, COBRA continuees, persons on leaves of
absence and other continuations of coverage. "Subscriber" does not include any
dependents of such individual.
SECTION 2
DUTIES OF NMS
During the term of this Agreement, NMS shall provide the following Core
Services in accordance with the standards set forth below:
2.1 Participating Account and Participating Plan Setup.
--------------------------------------------------
a. (i) NMS will perform an Environmental Analysis with each
Participating Account that has an enrollment of *** or more Subscribers. Each
such Environmental Analysis will include an on-site interview conducted by NMS
with representatives of the Participating Account to determine current
enrollment, financial and customer service processes for applicable benefits
sponsored by such Participating Account to determine group reporting, rate and
benefit structure requirements, and Participating Plan contract setup.
(ii) At THE ASSOCIATION's request, NMS will also perform an
Environmental Analysis for a Participating Account that has an enrollment of
less than *** subscribers for the fees described in Schedule I.
(iii) At THE ASSOCIATION's request, NMS will also perform an
expanded Environmental Analysis that will involve additional site visits and
further analysis for any Participating Accounts that do not have the capacity to
provide a single electronic enrollment file (e.g., as a result of maintaining
multiple payroll systems). The terms and conditions for that expanded
Environmental Analysis shall be mutually agreed upon by THE ASSOCIATION and NMS.
b. NMS staff shall actively participate in the implementation
process of new Participating Accounts into the Program(s) in accordance with the
requirements of this
5
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Agreement. NMS staff shall be responsible for ensuring that a new Participating
Account is set-up correctly in BEN-NET(TM), based on information provided by THE
ASSOCIATION, and that the implementation is well-defined and documented. NMS
staff shall develop and manage an implementation project plan for each new
Participating Account's implementation. Provided that NMS shall not be required
to convert any Participating Account which, prior to October 31, 1999, has given
notice to the Participating Plans of its termination of participation in the
Program(s) to be effective prior to December 31, 1999, and THE ASSOCIATION has
notified NMS of such termination.
c. For each Participating Plan, NMS shall complete implementation of
the electronic connectivity for such Participating Plan by a date mutually
agreed to by THE ASSOCIATION, NMS and the Participating Plan.
2.2 Collection and Distribution of Enrollment and Eligibility Data.
--------------------------------------------------------------
a. (i) For all Participating Accounts which have the
capability to send enrollment and eligibility data electronically, NMS shall
have the capability and shall receive and process enrollment information
regarding additions, changes and terminations of enrollment of Members from
those Participating Accounts in the manner described in Schedule III hereto as
modified from time to time by THE ASSOCIATION (except for new Participating
Accounts with less than *** subscribers, in which case NMS shall only be
obligated to accept electronic data if the Participating Account uses a standard
industry import);
(ii) For all Participating Accounts which do not have the
capability to send electronic enrollment and eligibility data or for those
accounts with less than *** subscribers that do not use a standard industry
import, NMS shall receive and process Enrollment Forms and materials regarding
additions, changes and terminations of enrollment from those Participating
Accounts.
b. NMS shall follow the eligibility rules established for each
Participating Account in processing enrollment and eligibility information.
c. NMS shall establish and maintain ongoing electronic
connectivity for enrollment information between NMS and each Participating
Plans' membership systems, in accordance with THE ASSOCIATION's specifications
described in Schedule III, and as modified by THE ASSOCIATION from time to time.
6
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
d. NMS shall distribute enrollment information electronically
to Participating Plans for all Participating Accounts where the enrollment data
is submitted directly to NMS, either electronically or on paper Enrollment
Forms, within time frames to be determined by mutual agreement.
e. NMS shall at all times maintain the capability to
disseminate enrollment data to Participating Plans via paper where the
Participating Plan does not have the capability to receive electronic enrollment
data from NMS.
f. NMS will forward paper copies of Enrollment Forms to
Participating Plans for all Participating Accounts relying upon centralized
"paper form flow" to communicate enrollment information to the Participating
Plans. THE ASSOCIATION will make reasonable efforts to improve the efficiency of
this process.
g. NMS shall maintain and make available to THE ASSOCIATION a
log of electronic connectivity, which identifies the current status of
electronic connectivity for each Participating Plan. The log will identify in
detail any issues or problems with establishing and maintaining such
connectivity for any Participating Plan and the action plan devised by the
Participating Plan for resolving such issues or problems and the timetable for
that resolution.
h. NMS shall process and distribute enrollment and eligibility
information in the manner and within the time frames described in this Agreement
and Schedule IV hereto.
2.3 Billing and Reconciliation.
--------------------------
(a) Except as provided in Section 2.3(b) below with respect to Self-
Bill Accounts, NMS shall accurately calculate the correct amount of premiums and
other payments due from each Participating Account, including but not limited to
all premiums, broker's and administrative fees, late payments and other charges
based on the applicable rates, administrative fees and other charges to each
Participating Account and Participating Plan provided by THE ASSOCIATION (which
have been obtained from the Participating Plans, as applicable). The amounts due
from the Participating Account and any changes to the rates or other charges
applicable to such amounts shall be included by NMS in a Consolidated Bill. The
Consolidated Bill for each month shall be transmitted to the applicable
Participating Account no later than the
7
<PAGE>
twenty-first day of the month prior to the Coverage Month represented by that
invoice or by such other date as established from time to time by THE
ASSOCIATION.
(b) NMS shall receive, review for accuracy and process invoices from
Participating Accounts which Self-Bill. Self-Bill invoices shall be transmitted
to NMS either electronically or by paper.
(c) NMS shall direct each Participating Account to remit all amounts
due under its Consolidated Bill or Self-Bill invoice directly to the Lock Box at
the Bank Account by electronic funds transfer or other means acceptable to THE
ASSOCIATION. Upon request by THE ASSOCIATION, NMS shall provide copies of any or
all Consolidated Bills and Self-Bill invoices to THE ASSOCIATION. In the event
that THE ASSOCATION's request requires substantial time and effort on NMS's
behalf, THE ASSOCATION shall reimburse NMS for its reasonable expenses related
to the request.
(d) For self funded Participating Accounts, NMS shall receive and
consolidate claims expenses from vendors on a weekly basis, analyze expense
reporting, perform high-level audits, collect funds from the Participating
Accounts and direct the distribution of those funds to the applicable Health
Plan.
(e) NMS's BEN-NET(TM) system shall be able to support a variety of
billing rates, including composite and coverage-tier driven rates.
2.4 Delinquency Process. NMS shall promptly notify all Participating
-------------------
Accounts of any past due amounts owed and shall make reasonable efforts to
collect such amounts in accordance with the delinquency process described in
Schedule V. NMS shall not commence legal action to collect past due amounts.
The Participating Plans shall have the sole authority to terminate the
participation of any Participating Account in the Program(s) and may do so
without NMS's consent. If one or more Participating Plans elect to waive or
postpone compliance with payment requirements, THE ASSOCIATION shall so advise
NMS and shall be responsible for facilitating any necessary arrangements among
Participating Plans. The delinquency process described in this Section 2.4
shall be carried out in accordance with procedures that have been approved in
advance by THE ASSOCIATION and such procedures must comply with all applicable
state and federal laws.
8
<PAGE>
2.5 No Liability for Unpaid Amounts. Neither THE ASSOCIATION nor NMS
-------------------------------
shall have any obligation to remit or guaranty collection of any unpaid amounts
owed by a Participating Account for any services provided hereunder.
2.6 Reconciliation Services.
-----------------------
2.6.1 Reconciliation of Premiums and Membership. Commencing from the
-----------------------------------------
effective date of the transfer of a Participating Account to NMS hereunder, NMS
shall be responsible for resolving all discrepancies in premiums and enrollment
and eligibility for the Participating Account arising on or after the effective
date of transfer of a Participating Account to NMS hereunder, including
discrepancies resulting from differences in the timing for processing of
enrollment and eligibility data, data entry inaccuracies and retroactive
enrollment and eligibility changes. THE ASSOCIATION shall cooperate with NMS in
performing these reconciliations. Notwithstanding the above, THE ASSOCIATION
shall, within 60 days commencing from the effective date of the transfer of a
Participating Account to NMS hereunder, be responsible for resolving all
discrepancies in premiums and enrollment for that Participating Account which
occurred prior to the date of the transfer, including discrepancies resulting
from differences in the timing for processing of enrollment and eligibility
data, data entry inaccuracies and retroactive enrollment and eligibility
changes. NMS shall cooperate with THE ASSOCIATION in performing these
reconciliations.
2.6.2 5500 and 1099 Reporting. Each calendar year and only one time
-----------------------
each calendar year, NMS will provide to each Participating Account and/or broker
or representative for each Participating Account the information related to the
Program(s) to be used for preparation of a premium summary report reflecting
annual premiums paid by each Participating Account for Schedule A production of
IRS Forms 5500 and 1099. NMS will be responsible for providing premium summary
data for the period during which NMS performed Administrative Services for the
Participating Account.
2.7 Customer Service.
----------------
2.7.1 Toll-Free Number. NMS shall make telephone support available
----------------
to THE ASSOCIATION, Participating Accounts and Participating Plans, via a
dedicated toll-free (800) telephone number available from 7:00 a.m. to 7:00 p.m.
(Central Time) each Business Day. The toll-free number shall be staffed with
NMS personnel trained to answer eligibility, enrollment,
9
<PAGE>
premium, billing and payment status and other questions related to the
Program(s) and NMS's performance hereunder.
2.7.2 NMS Response. NMS shall promptly respond to all inquiries from
------------
Participating Plans and Participating Accounts regarding the eligibility,
enrollment, premium, billing and payment status and other issues related to the
Program(s) and NMS's performance hereunder. NMS shall promptly notify THE
ASSOCIATION of any unresolved concerns or problems identified by a Participating
Plan or Participating Account. THE ASSOCIATION shall direct to NMS all inquiries
and concerns regarding the foregoing issues that THE ASSOCIATION receives. THE
ASSOCIATION shall support, and shall use its reasonable efforts to enforce, the
agreed upon resolution of customer service issues.
2.7.3 Issue Tracking System. NMS shall maintain an automated record
---------------------
of each issue or problem communicated to NMS's customer service department by a
Participating Account or Participating Plan relating to the Program(s) or to
NMS's services hereunder, including but not limited to telephone calls, e-mail
messages, facsimile or paper communications. The record shall also reflect the
disposition of each such contact. All records created pursuant to this Section
2.7.3 shall be available to THE ASSOCIATION on a confidential basis.
2.8 Implementation Plan.
-------------------
2.8.1 Implementation Plan. Attached hereto as Schedule VI is a
-------------------
summary of the critical tasks, dates and project resources set forth in the
Implementation Plan mutually developed by the NMS and THE ASSOCIATION which is
intended to produce a prompt and efficient transition to NMS of Program
operations and Administration Services delegated to NMS hereunder. NMS shall be
primarily responsible for implementing the Implementation Plan in a prompt
manner and in accordance with the time schedule set forth in the Implementation
Plan with minimal disruption to the provision of Core and Non-Core Services to
the Participating Accounts and the Participating Plans. NMS shall provide the
project management and issue resolution staff identified in the Implementation
Plan and such other support and resources as are required to fulfill its
responsibilities under the Implementation Plan. For each Participating Account
being transferred hereunder, NMS shall incorporate into BEN-NET(TM) limited
historical Member level and Participating Account enrollment and eligibility
information in THE
10
<PAGE>
ASSOCIATION's billing system from the initial import from (i) the most recent
anniversary date of that Account's participation in the Program(s) or (ii) 90
days from the Effective Date of this Agreement, whichever historical period is
greater. The process of incorporating the foregoing information into BEN-NET(TM)
shall be completed by the date such Participating Account is transferred
hereunder.
2.8.2 Reimbursement of Association Costs. In the event that all
----------------------------------
Participating Accounts are not fully transitioned to NMS in accordance with the
Implementation Plan by October 31, 1999 and that delay is not attributable to
THE ASSOCIATION's failure to meet its obligations under this Agreement or the
Implementation Plan, NMS shall pay to THE ASSOCIATION all costs incurred by THE
ASSOCIATION to continue to provide Core Services to those untransitioned
Participating Accounts after October 31, 1999, including the salary, benefits,
assigns and overhead for THE ASSOCIATION employees and any compensation for
ASSOCIATION contractors providing those Core Services. THE ASSOCIATION shall
provide to NMS a written accounting of such reimbursable costs, which NMS will
have the opportunity to review. At THE ASSOCIATION's election, such costs shall
be withheld from amounts otherwise payable to NMS hereunder or shall be paid
directly by NMS to THE ASSOCIATION. At no time will these costs include any
consequential costs resulting from NMS not meeting its obligations.
2.9 Rollover of BluesCONNECT Program.
--------------------------------
2.9.1 Termination of BluesCONNECT Agreement. The parties hereby
-------------------------------------
agree that the BluesCONNECT Agreement shall terminate as of the close of
business on December 31, 1999. Except as expressly provided in this Agreement,
termination of the BluesCONNECT Agreement shall not relieve the parties of their
respective obligations that are intended to survive termination of the Blues
CONNECT Agreement, including under Section 6.7 thereof, nor shall such
termination constitute a waiver or release of any breach of the BluesCONNECT
Agreement by either party.
2.9.2 Rollover of BluesCONNECT Accounts. Effective as of January 1,
---------------------------------
2000, (i) all BluesCONNECT Accounts under the BluesCONNECT Agreement shall
become Participating Accounts under this Agreement and (ii) NMS shall provide
Core and non-Core Services to those former BluesCONNECT Accounts in accordance
with all of the terms and
11
<PAGE>
conditions of this Agreement, including the compensation terms set forth in
Schedule I hereto. The foregoing shall not apply to the IKON Account and other
Participating Accounts which receive a limited number of Core and/or Non-Core
Services. Those limited service Accounts shall continue to be handled under the
pricing in place as of the Effective Date of this Agreement.
2.10 Reports and Records.
-------------------
2.10.1 Provision of Reports. NMS shall provide the following
--------------------
accurate and complete reports to THE ASSOCIATION in the manner set forth herein:
(i) The Standard Reports referenced on Schedule VII hereto
shall be provided in accordance with the requirements set forth therein.
(ii) Upon request by THE ASSOCIATION, a record of all
significant transactions and communications with each Participating Account and
such Account's Members;
(iii) Such additional reports relating to the Program(s)
and/or the services provided by NMS hereunder as are specified from time to time
by THE ASSOCIATION, provided that the parties mutually agree on additional
compensation payable to NMS to generate such reports.
Except as provided in Section 2.10.1(iii) above, NMS shall bear all costs
incurred to create and provide the foregoing reports. All such reports shall be
provided to THE ASSOCIATION electronically and/or by hard copy as directed by
THE ASSOCIATION.
2.10.2 Maintenance of Records and Files. NMS shall create and
--------------------------------
maintain complete records of each Participating Account, including copies of all
payment distributions, Consolidated Bill and Self Bill invoices, paper
enrollment reports and/or forms, significant correspondence with Participating
Accounts, Participating Plans and/or brokers, and records of all other
significant transactions relating to the Program(s). Such records shall be
maintained for at least seven years from the date of the termination of this
Agreement. Such records may be maintained in an electronic format and/or paper
and shall be preserved in NMS's custody. Such records shall be available for
examination and copying upon request by THE ASSOCIATION. In the event that THE
ASSOCATION'S copying request requires substantial time and effort on NMS's
behalf, THE ASSOCATION shall reimburse NMS for its reasonable expenses related
to the request.
12
<PAGE>
2.11 Data Information Systems.
------------------------
2.11.1 Maintenance of Systems, Personnel. NMS shall maintain
---------------------------------
adequate hardware, software, operating systems and personnel to deliver the Core
Services and Non-Core Services required hereunder, including electronic
connectivity with Participating Plans in the manner and to the extent set forth
in this Agreement. NMS shall ensure that NMS personnel are fully trained in the
hardware, software and operating systems necessary to provide the Core Services
and Non-Core Services in the manner and to the extent set forth in this
Agreement.
2.11.2 Enhancement to BEN-NET(TM). From time to time, THE
--------------------------
ASSOCIATION may request NMS to make enhancements or modifications to BEN-NET(TM)
to accommodate the unique requirements of THE ASSOCIATION and the Program(s).
The parties shall agree in advance on the terms and conditions of such changes
to BEN-NET(TM), including the price to be charged to THE ASSOCIATION for such
changes and the parties' respective rights and licenses to such changes.
2.11.3 BEN-NET(TM) Training for ASSOCIATION Staff. At THE
------------------------------------------
ASSOCIATION's request, NMS shall train designated staff from THE ASSOCIATION
and/or the Participating Plan(s) on the capabilities of BEN-NET(TM) and on other
aspects of the Program(s). The travel and out-of-pocket expenses incurred by NMS
in providing that training following the completion of the implementation of the
Implementation Plan shall be paid by THE ASSOCIATION in accordance with the
procedures set forth in Schedule I hereto.
2.11.4 Backup and Disaster Recovery. NMS shall maintain a business
----------------------------
resumption plan (the "Business Resumption Plan") attached hereto as Schedule
VIII. NMS represents and warrants that the Business Resumption Plan shall ensure
that computer and telephone systems essential to the performance by NMS of its
duties under this Agreement shall not be inoperational for more than 24 hours,
other than as a result of natural disasters or other causes not within the
reasonable control of NMS. NMS will give written notice in advance of any
substantial changes NMS intends to make to the Business Resumption Plan.
2.11.5 Y2K Compliance. NMS shall assist THE ASSOCIATION and Accounts
--------------
to enable electronic data files from Participating Accounts that transmit
electronically to be Year 2000 Compliant (as defined in Section 9.2 below).
13
<PAGE>
2.12 Performance Standards.
---------------------
2.12.1 Performance Standards. Commencing on the Effective Date, NMS
---------------------
shall use reasonable efforts to meet or exceed the Target Performance Threshold
percentages set forth in Schedule IV hereto. Commencing November 1, 1999, the
Penalty Percentage for failure to meet such Target Performance Thresholds
described in Schedule IV shall go into effect and be applied to NMS's
performance of its duties hereunder commencing on that date. If NMI fails to
achieve the Schedule IV Target Performance Threshold for a standard during a
given quarter, NMI will pay a percentage penalty as indicated in the Schedule IV
Penalty Percentage column. The penalty percentage represents that percentage by
which the corresponding quarter's billed fees will be penalized. Upon receipt of
such bill, NMS shall immediately remit the amount of such penalties to THE
ASSOCIATION.
2.12.2 Minimum Performance Threshold. Commencing on the Effective
-----------------------------
Date, NMS shall satisfy the Minimum Performance Threshold referenced in Schedule
IV hereto which reflects the minimum level of acceptable performance by NMS of
its duties hereunder. Commencing November 1, 1999, the penalty points for
failure to achieve the Minimum Performance Threshold described in Schedule IV
shall go into effect and be applied to NMS's performance of its duties hereunder
commencing on that date. If NMI fails to achieve the Minimum Performance
Threshold for a standard during a given quarter, NMI will be assessed penalty
points equal to the number set forth in the Schedule IV Penalty Points column.
If for any given quarter, the total penalty points assessed is equal to or
greater than 20, NMI will pay a penalty equal in amount to that corresponding
quarter's total billed fees. The Penalty Percentage shall be assessed and billed
to NMS on a quarterly basis, in arrears. Upon receipt of such bill, NMS shall
immediately remit the amount of such penalties to THE ASSOCIATION.
2.12.3 Modification. The terms and conditions set forth in Schedule
-------------
IV may be modified from time to time by THE ASSOCIATION'S board or any
ASSOCIATION committee to which the board delegates such functions. Requested
modifications will be mutually agreed upon by THE ASSOCIATION and NMS.
2.13 Capabilities Support. At the request and direction of THE
--------------------
ASSOCIATION, NMS will assist THE ASSOCIATION to provide information to Accounts
and Participating Plans about NMS's capabilities to perform Core Services and
non-Core Services. NMS's assistance
14
<PAGE>
may include, but shall not be limited to, site visits, system demonstrations and
participation in proposal responses and presentations, as THE ASSOCIATION may
reasonably request.
2.14 Non-Blue Health Plans. Both parties agree that certain Participating
---------------------
Accounts may desire NMS to provide services similar to those listed herein to
non-Blue Cross, Blue Shield or Blue Cross Blue Shield Health Plans. In such
situations, NMS may, upon THE ASSOCIATION's request, develop and implement the
necessary interfaces to accommodate such requests. Fees charged in conjunction
with such services provided by NMS shall be outlined in a separate agreement
acceptable to NMS and THE ASSOCIATION.
2.15 Modification to Services. The parties recognize and agree that from
------------------------
time to time it may be appropriate to modify the scope and manner that NMS
provides Core and non-Core Services hereunder to better and more efficiently
serve the needs of the Participating Accounts and Participating Plans, including
modifications made to take advantage of technology enhancements available to
NMS, to address the changing needs and expectations of Accounts and Health Plans
and to adopt improvements to the delivery of services resulting from the
experience of the parties hereunder. A party who wishes to request a
Modification to this Agreement shall advise the other party in writing of the
requested Modification and the rationale for making that Modification. The
parties agree to thereafter negotiate in good faith to attempt to reach
agreement on the terms and conditions for incorporating that Modification as a
written amendment to this Agreement.
SECTION 3
DUTIES OF THE ASSOCIATION
During the term of this Agreement, THE ASSOCIATION shall provide the
following services hereunder:
3.1 Information. THE ASSOCIATION and/or the Participating Plans shall
-----------
retain responsibility for informing potential new Accounts and Health Plans
about the Program(s). All costs incurred associated with providing such
information, including the cost of issuing proposals, will be borne by the party
providing the information. The level, manner, effort and scope of efforts under
this Section 3.1, including the choice of Accounts and Health Plans to which
such information is provided, shall be determined by THE ASSOCIATION and/or the
Participating Plans in their sole discretion.
15
<PAGE>
3.2 Relationships with Health Plans. THE ASSOCIATION shall retain
-------------------------------
responsibility for managing relationships with Participating Plans. THE
ASSOCIATION shall use its reasonable efforts to resolve any Participating Plan
issues, and to enforce the Participating Plans' compliance with the Program
Rules. All agreements with Participating Plans relating to the Program(s) shall
be entered into directly with THE ASSOCIATION, on terms and conditions
acceptable to THE ASSOCIATION.
3.3 Account Relationships. THE ASSOCIATION and/or Participating Plans
---------------------
shall retain responsibility for managing business relationships with the
Participating Accounts and shall act as national account manager for all
Participating Accounts. THE ASSOCIATION shall make reasonable efforts to request
all Self-Bill Accounts to convert to a Consolidated Bill methodology on or
before the Participating Account's initial and subsequent renewal dates.
3.4 Program Rules. THE ASSOCIATION shall be responsible for development
-------------
and maintenance of Program Rules.
3.5 Electronic Connectivity. THE ASSOCIATION will provide the
-----------------------
specifications for NMS to establish electronic interfaces between BEN-NET and
the eligibility systems of the Participating Plans, as set forth in Section 2.1
above. This connectivity will support data flows between BEN-NET and the
Participating Plans, in accordance with THE ASSOCIATION'S specifications
described in Schedule III, and as modified by THE ASSOCIATION from time to time.
Modifications to existing file formats or file transmission methods will be
mutually agreed upon by THE ASSOCIATION and NMS.
3.6 Account Set-up. THE ASSOCIATION shall provide to NMS accurately,
--------------
completely, in writing and in a timely manner the necessary Participating
Account, Participating Plan and other information in order for NMS to provide
the Administrative Services hereunder. This includes, but is not limited to,
group structure, premium amounts, other administrator fees, Participating
Plan(s) contact information, and Participating Account contact information.
3.7 Unsupported Functions. THE ASSOCIATION will continue to provide
---------------------
Administrative Services related to the Program(s) that are not designated as NMS
responsibilities under this Agreement.
16
<PAGE>
3.8 Payment to NMS. THE ASSOCIATION shall reimburse NMS according to
---------------
Section 5 and Schedule I and any other fees pursuant to this Agreement. Any fees
payable to NMS shall ultimately be the responsibility of THE ASSOCIATION.
SECTION 4
MAINTENANCE OF BANK ACCOUNT AND DISTRIBUTION OF FUNDS
4.1 Bank Account. THE ASSOCIATION shall maintain one or more Bank
------------
Accounts at a Bank of THE ASSOCIATION's choice dedicated to the receipt of
moneys from Participating Accounts in connection with Core Services and Non-Core
Services provided under the Program(s). All monies in the Bank Account shall be
held in a fiduciary capacity by THE ASSOCIATION on behalf of the Participating
Plans, and NMS shall be entitled to direct the application of such moneys only
in strict accordance with the provisions of this Agreement. NMS shall not have
the power to assign, transfer, securitize or pledge the monies in the Bank
Account in any fashion, or to use the funds in the Accounts for any purpose
other than as expressly authorized hereunder.
4.2 Records of Bank Account. THE ASSOCIATION shall maintain complete and
-----------------------
accurate records of all deposits to and disbursements from the Bank Account.
4.3 NMS Payment Reconciliation. NMS shall verify that each Participating
--------------------------
Account's payment matches the corresponding invoice, noting any payment
adjustments. When a Participating Account's payment does not match the relevant
invoice, NMS shall contact the Participating Account to attempt to resolve the
discrepancy. If possible, NMS shall apply the Participating Account's payment to
the amount then due. NMS shall also maintain clear and accurate accounting
records of amounts due to Participating Plans, THE ASSOCIATION, NMS and other
administrators.
4.4 Disbursement of Funds.
---------------------
4.4.1 Reporting. On each Business Day, NMS shall notify THE
---------
ASSOCIATION of the amounts to be disbursed from the Bank Account to the
following parties: (i) Participating Plans for premium and other moneys due;
(ii) THE ASSOCIATION for authorized administrative fees; (iii) NMS for
authorized fees due; (iv) other administrative, brokers and service providers
for applicable fees, if any, and (v) any other disbursements authorized by this
Agreement. The notice given to THE ASSOCIATION by NMS shall be
17
<PAGE>
accurate and complete and shall include all data required for the generation of
a check or wire transfer of such disbursements and shall provide such
information in a format in accordance with Schedule IX to enable THE ASSOCIATION
to make a single consolidated disbursement to each Participating Plan and will
also be compatible with THE ASSOCIATION's accounting system.
4.4.2 Approval of Disbursements. THE ASSOCIATION shall authorize the
-------------------------
Bank to make the disbursements referenced in Section 4.4.1 in accordance with
the requirements of this Agreement. THE ASSOCIATION shall be entitled to rely on
the information provided by NMS under Section 4.4.1 above in making those
disbursements.
SECTION 5
COMPENSATION
5.1 Payment of Compensation.
-----------------------
5.1.1 Fixed Fees. For all Core Services required to be provided by
----------
NMS for the period from the Effective Date through December 31, 1999, NMS shall
be entitled to the compensation set forth in part 1 of Schedule I hereto and on
the terms and conditions and subject to the limitations set forth therein.
5.1.2 Per Subscriber Per Month Charges. Effective January 1, 2000,
--------------------------------
NMS shall be compensated for Core Services provided on and after that date on a
per subscriber per month basis in accordance with Schedule I hereto and on the
terms and conditions and subject to the limitations set forth therein. The per
subscriber per month fees shall be disbursed to NMS when distributions are made
of premiums for that month to the Participating Plans.
5.1.3 Payment for Non-Core Services. Except for the daily export and
-----------------------------
student status generation services which shall be paid in accordance with
Section 5.1.2 hereto, for all non-Core Services provided by NMS, NMS shall
receive such compensation as is agreed upon in writing by the parties.
5.1.4 Cost and Expenses. Except as specifically provided in Schedule
-----------------
I NMS shall be responsible for all out-of-pocket costs and expenses it incurs in
performing its duties hereunder.
5.1.5 Comparable Services to Blue Plans. In the event that NMS
---------------------------------
agrees to provide Core Services or other services substantially equivalent in
substance to the Core Services provided hereunder to any Blue Plan or subsidiary
or affiliate of such Blue Plan at a per
18
<PAGE>
subscriber per month rate or other price or rate that is less than the then
current per subscriber per month rate then in effect under this Agreement, the
per subscriber per month rate then in effect under this Agreement and any
subsequent rates hereunder shall retroactively be reduced to that lower rate as
of the date that lower rate was in effect at the other Blue Plan. For purposes
of enforcing the obligations of this Section 5.1.5, NMS shall promptly inform
THE ASSOCIATION of the basic terms of any agreements it enters into with any
Blue Plans. In the event the parties disagree as to whether the foregoing
adjustments are required to be made in a particular case, they will engage a
mutually agreeable third party expert to determine what, if any, such adjustment
in the rates hereunder shall be required. The final determination of such expert
shall be binding upon the parties. The parties shall bear the expenses of such
expert equally.
5.1.6 Comparable Services to Non-Blue Plans. The parties agree to
-------------------------------------
engage in good faith negotiations with the intent and goal of reaching agreement
on reductions in the rates charged by NMS hereunder and/or expansion in the
scope of Core Services provided by NMS hereunder to reasonably assure that the
rates charged to THE ASSOCIATION for the scope of Core Services under this
Agreement are competitive with those NMS charges to any Non-Blue Plans.
SECTION 6
TERM AND TERMINATION
6.1 Initial Term and Renewal. The initial term of this Agreement (the
------------------------
"Initial Term") shall commence on the Effective Date and will expire at 11:59
p.m. on December 31, 2002. This Agreement may be extended or renewed with the
written consent of both parties.
6.2 Termination for Breach. This Agreement may be terminated by either
----------------------
party at any time in the event of a material breach of this Agreement by the
other party and the failure of the breaching party to fully cure or correct such
breach, within 60 days after its receipt of written notice of such breach. Upon
receipt of such written notice, the breaching party shall promptly advise the
other party in writing of its specific plan to cure such breach.
6.3 Plan, Participating Account and Member Noncompliance Not a Breach.
-----------------------------------------------------------------
Notwithstanding anything to the contrary in this Agreement, THE ASSOCIATION
shall not be deemed to be in breach of this Agreement as a result of the failure
by any Participating Plan, Participating Account or Member's failure to comply
with the Program Rules or its obligation or
19
<PAGE>
failure to pay the fees it owes under the Program(s). Under the Program(s), if a
Participating Plan, Participating Account or Member fails materially to comply
with the Program Rules, or commits any other material breach of its obligations
with respect to the Program(s), then NMS's remedy for such material failure or
breach shall be to request THE ASSOCIATION to disqualify and remove such
Participating Plan, Participating Account or Member from the Program(s) and/or
to request additional compensation if such noncompliance following that request
results in extra costs to NMS.
6.4 Performance Below Termination Standards. THE ASSOCIATION may
---------------------------------------
terminate the Agreement immediately upon written notice to NMS if NMS fails to
meet the Minimum Performance Threshold for any two consecutive calendar months
or for any three months of any calendar year.
6.5 Insolvency. This Agreement may be terminated by either party if the
----------
other party (i) applies for or consents to the appointment of a receiver,
trustee, or liquidator of all or a substantial portion of its assets; (ii) files
a voluntary petition in bankruptcy or admits in writing its inability to pay its
debts as they become due; (iii) makes a general assignment for the benefit of
creditors; or (iv) files a petition or an answer seeking reorganization or
arrangement with creditors or to take advantage of any insolvency law; or if an
order, judgment, or decree will be entered by a court of competent jurisdiction,
on the application of the creditor, adjudicating the party bankrupt or insolvent
or approving a petition seeking reorganization of the party or appointment of a
receiver, trustee, or liquidator of all or a substantial portion of the party's
assets.
6.6 Termination Due to Changes in Law. The contract may be terminated in
----------------------------------
accordance with paragraph 10.20.
NMS 6.7 Post Notice of-Termination Duties. Upon termination of this
---------------------------------
Agreement, the responsibilities of the parties shall be as follows:
(a) Group Application Review. Review of group applications and group
------------------------
set-ups in the BEN-NET(TM) system by NMS shall cease on a date to be determined
by THE ASSOCIATION not later than the effective date of the termination of the
Agreement. Any group applications received by NMS subsequent to such date shall
be sent to THE ASSOCIATION via facsimile and first-class mail within two (2)
Business Days of receipt.
20
<PAGE>
(b) Enrollment Processing. New enrollment of Participating Accounts
---------------------
and Eligible Employees by NMS shall cease on a date to be determined by THE
ASSOCIATION but in no event later than the effective date of the termination.
Any Enrollment Forms received by NMS subsequent to such date shall be sent to
THE ASSOCIATION via facsimile and first-class mail within two (2) Business Days
of receipt.
(c) Payments. THE ASSOCIATION shall pay for any services performed by
--------
NMS after the effective date of termination of the Agreement, at rates mutually
agreed to by the parties, subject to any rights of offset or credit authorized
under the Agreement.
(d) Transition. NMS shall provide commercially reasonable cooperation
----------
to THE ASSOCIATION or any third party retained by THE ASSOCIATION to assume the
performance of the Core Services. Such cooperation shall include providing THE
ASSOCIATION and such third party access electronically and/or by paper to all
records and data in NMS's possession pertaining to this Agreement. Any such
third party will be required to abide by any confidentiality provisions as
agreed to hereunder.
6.8 Effect of Termination. Termination of this Agreement shall have no
---------------------
effect upon the rights and obligations of the parties arising out of any
transactions or events (including the processing of all pre-termination claims)
occurring prior to the effective date of final termination, including but not
limited to, the obligations under "Post Notice of Termination Duties" (Section
6.7), "Indemnification" (Section 7.2), "Compliance with Government Mandate"
(Section 8.2), "Representations and Warranties of NMS" (Section 9),
"Confidentiality" (Section 10.7), "Dispute Resolution" (Section 10.9), and
"Quality and Financial Audits" (Section 10.11).
SECTION 7
INSURANCE, INDEMNIFICATION AND FIDUCIARY STATUS
7.1 Insurance. NMS shall procure and maintain, at its own sole expense,
---------
errors and omission and general liability insurance and other insurance and
surety or fidelity bonds as may be necessary to protect itself and its
employees, agents, or representatives against any claims, liabilities, damages
or judgments and costs of defense that arise out of services provided by or to
be provided by NMS or its employees, agents or representatives in the discharge
of NMS's responsibilities under this Agreement. NMS shall provide proof of such
insurance to THE
21
<PAGE>
ASSOCIATION upon request and shall notify THE ASSOCIATION if such insurance
coverage is terminated or materially altered.
7.2 Indemnification.
---------------
7.2.1 By NMS. NMS shall defend, hold harmless and indemnify THE
------
ASSOCIATION and the Participating Plans from any claims, liabilities, damages or
judgments asserted against, imposed upon or incurred by THE ASSOCIATION and/or
the Participating Plans or that arise out of NMS's negligence, intentional
wrongdoing, breach of its responsibilities under this Agreement or in failure to
obtain or maintain "Applicable Licenses" as set forth in Section 8.1.2 below.
The indemnification granted under this Section 7.2.1 expressly includes
indemnification with respect to expense costs, legal fees, defense costs, fines,
penalties, court costs, or amounts paid in settlement or in satisfaction of any
judgment or award.
7.2.2 By The Association. THE ASSOCIATION agrees to defend, hold
------------------
harmless, and indemnify NMS from any claims, liabilities, damages or judgments
asserted against, imposed upon or incurred by NMS that arise out of THE
ASSOCIATION's negligence, intentional wrongdoing, or breach of its
responsibilities under this Agreement. The indemnification granted under this
Section 7.2.2 expressly includes indemnification with respect to expense costs,
legal fees, defense costs, fines, penalties, court costs, or amounts paid in
settlement or in satisfaction of any judgment or award.
7.2.3 Procedure for Asserting Indemnification Claims. If any claim
----------------------------------------------
or liability is asserted in writing against a party entitled to indemnification
under this Section 7 (the "Indemnified Party") which would give rise to a claim
under this Section 7, the Indemnified Party shall notify the agent of the person
providing the indemnity ("Indemnifying Party") in writing of the same within
fifteen (15) days of receipt of such written assertion of a claim or liability.
The Indemnifying Party shall have the right to defend a claim and control the
defense, settlement and prosecution of any litigation. If the Indemnifying
Party, within thirty (30) days after notice of such claim, fails to defend such
claim, the Indemnified Party will (upon further notice to the Indemnifying
Party) have the right to undertake the defense, compromise or settlement of such
claim on behalf of and for the account and risk of the Indemnifying Party,
subject to the right of the Indemnifying Party, through its agent, to assume the
defense of such claim at any time prior to settlement, compromise or final
determination thereof. Anything in
22
<PAGE>
this Section 7.2.3 notwithstanding, (i) if there is a reasonable probability
that a claim may materially and adversely affect the Indemnified Party other
than as a result of money damages or other money payments, the Indemnified Party
shall have the right, at its own cost and expense, to defend, compromise and
settle such claim, and (ii) the Indemnifying Party shall not, without the
written consent of the Indemnified Party, settle or compromise any claim or
consent to the entry of any judgment which does not include as an unconditional
term thereof the giving by the claimant to the Indemnified Party a release from
all liability in respect to such claim. All parties agree to cooperate as
necessary in the defense of such matters.
7.3 Fiduciary Status. THE ASSOCIATION and NMS acknowledge and agree that
-----------------
NMS shall not be a fiduciary within the meaning of the Employee Retirement
Income Security Act of 1974, as amended, or any state or federal law with
respect to any Plan. NMS shall not have any discretion with respect to the
management or administration of any Health Plan or with respect to determining
or changing the rules or policies pertaining to eligibility or entitlement of
any Member or Subscriber in any Health Plan to benefits under such Health Plan.
NMS also shall not have any control or authority with respect to any assets of
any Health Plan, including the investment or disposition thereof. All discretion
and control with respect to the terms, administration or assets of any Health
Plan shall remain with the named fiduciaries under such Health Plan.
23
<PAGE>
SECTION 8
REGULATORY AND CONTRACTING COMPLIANCE
8.1 Regulatory Compliance.
---------------------
8.1.1 Applicable License. NMS shall be solely responsible for
------------------
ensuring that it complies with all applicable federal, state or local laws and
regulations, including all applicable requirements under state insurance laws,
federal and state privacy laws, government procurement and contracting laws, the
Health Insurance Portability and Accountability Act of 1996 and for obtaining
and maintaining all federal, state and local licenses, permits, registrations,
certifications and approvals required for it to perform all of its duties
hereunder, and as may be required under applicable state insurance laws and
regulations governing the subject matter of this Agreement (the "Applicable
Licenses").
8.1.2 Necessity Determination. In the event the parties disagree as
-----------------------
to the necessity for and/or type of state license(s) required to be obtained by
NMS under state insurance laws or regulations, the parties may agree to jointly
contact the relevant state insurance department(s) to obtain a written opinion
from such state insurance department(s) as to whether NMS is required to obtain
such licenses in order to fulfill its obligations hereunder. The parties agree
to abide by the terms and conditions of any such written opinion. In the event
the parties disagree as to the necessity for and/or type of state insurance
license(s) required to be obtained by NMS under state insurance laws or
regulations, and the parties choose not to contact the relevant state insurance
department(s) for a written opinion as to the necessity for licensure or any
state department of insurance refuses to provide such opinion, NMS shall
indemnify THE ASSOCIATION and/or any of the Participating Plans, in accordance
with the indemnification provisions set forth in Section 7.2 above herein, for
any fines, penalties or other monetary damages or judgments levied against THE
ASSOCIATION and/or any of the Plans by any state insurance department arising
out of and as a result of NMS's failure to have obtained such Applicable
License. In such an event NMS shall immediately commence the appropriate license
process under state insurance laws and regulations.
8.1.3 Information Regarding Pending License Applications. In the
--------------------------------------------------
event NMS has commenced the license process under state insurance laws prior to
or after the Effective Date of this Agreement, NMS shall ensure that THE
ASSOCIATION is kept apprised of the status and process of all such license
activities.
24
<PAGE>
8.2 Compliance with Government Mandate. NMS acknowledges and agrees that,
----------------------------------
as a contractor with the U.S. Federal Government, THE ASSOCIATION and its
subcontractors are required to comply fully with the terms and conditions of the
Federal Government's "Addendum to Subcontract Under the Health Insurance for the
Aged and Disabled Act (42 U.S.C., chapter 7, Supp., as Amended)" the terms of
which are attached hereto and incorporated herein as Schedule X, and NMS agrees
that it shall so comply.
8.3 Compliance with Code of Business Conduct. THE ASSOCIATION has adopted
----------------------------------------
a Code of Business Conduct ("Code") which governs the conduct of every
ASSOCIATION employee and establishes specific ethical standards for its
employees. Certain significant provisions of the Code include conflict of
interest, gifts or gratuities, kickbacks, entertainment, improper payments, and
protecting information. A copy of the Code has previously been made available
to NMS. NMS agrees that neither it nor any of its employees, representatives or
agents will engage in any conduct that will cause any ASSOCIATION employee to
act contrary to or in contravention of the Code.
8.4 Excluded Vendors. NMS warrants that it is not, as of the Effective
----------------
Date of this Agreement, (i) excluded in any fashion for any reason from
participation in the Medicare, Medicaid or any other federally-funded health
programs, nor (ii) controlled by a person or entity that is so excluded. NMS
shall notify THE ASSOCIATION within twenty-four (24) hours if it receives
written notice from a federal agency with proper authority, or otherwise becomes
aware, that it or a controlling person or entity is so excluded regardless
whether such a determination is appealable by NMS or controlling person or
entity. Such exclusion shall be grounds for termination of this Agreement by THE
ASSOCIATION in a manner and in a timeframe deemed appropriate by THE ASSOCIATION
in its sole discretion, notwithstanding any other provisions of this Agreement.
25
<PAGE>
SECTION 9
REPRESENTATIONS AND WARRANTIES OF NMS
9.1 General Representations and Warranties. NMS hereby represents and
--------------------------------------
warrants to THE ASSOCIATION that the following statements are true, complete and
correct.
(a) NMS is a duly formed corporation, and is validly existing and is
duly qualified to carry on its business as a foreign corporation in each
jurisdiction where such qualification is legally required.
(b) The execution and performance of this Agreement by NMS has been
duly authorized by NMS and has been validly executed by an appropriate officer
of NMS.
(c) As referenced in Section 8.1 above, NMS has all Applicable
Licenses required to perform all of the duties required under this Agreement and
all such Applicable Licenses are in good standing and are not subject to nor
threatened with any suspension, termination or non-renewal or other adverse
action.
(d) NMS is not in violation of and has complied with all applicable
laws and there are no suits, investigations, or legal, administrative or other
proceedings pending or threatened against NMS that would have a material effect
on NMS's ability to perform under this Agreement. NMS shall notify THE
ASSOCIATION promptly on becoming aware of any such threatened or ongoing
proceedings.
(e) The BEN-NET system and the use of and participation in the
Program(s) by THE ASSOCIATION, the Participating Plans, the Participating
Accounts and the Members do not and will not infringe or misappropriate any
patent, copyright, trademark, trade secret or other proprietary right of any
third party.
9.2 Year 2000 Representation and Warranty. NMS represents and warrants
-------------------------------------
that the products and services provided by NMS to THE ASSOCIATION and the
Participating Accounts and Participating Plans will accurately process date/time
data (including, but not limited to, calculating, comparing, and sequencing)
from, into and between the twentieth and twenty-first centuries, and will
correctly handle leap year calculations (the foregoing hereafter "Year 2000
Compliant"). NMS shall provide reasonable assistance as requested by THE
ASSOCIATION to demonstrate that such products and services are Year 2000
Compliant. Such cooperation may include testing with simulated data configured
to represent dates from, into and between the twentieth and twenty-first
centuries.
26
<PAGE>
9.3 Survival of Representations and Warranty; No Limitation of Remedy.
-----------------------------------------------------------------
Notwithstanding any provision of the Agreement to the contrary, the
representations and warranties set forth in this Section 9 shall not be limited
by any limitation of remedy, limitation of damages or waiver set forth in the
Agreement.
SECTION 10
GENERAL PROVISIONS
10.1 Location of Operations. Except for the site visits referenced in
----------------------
Section 2.1, NMS will provide Core and Non-Core Services from its office(s) in
Minnesota. At the request of THE ASSOCIATION and upon reasonable notice, NMS
shall make available a representative in Chicago or at any other location
specified by THE ASSOCIATION, to address issues arising under this Agreement or
the general administration of the Program(s).
10.2 Time of Performance. Time is of the essence for any provision in this
-------------------
Agreement in which time is a factor. For purposes of this Agreement. if an
obligation is required to be performed on or by a specific date or a specific
day of the month, and such date or day of the month falls on a day other than a
Business Day, then such obligation shall be performed on or by the next
succeeding Business Day.
10.3 Program Rules. THE ASSOCIATION, in consultation with NMS, has adopted
-------------
and implemented Program Rules to govern the administration of the Program(s).
THE ASSOCIATION may, in consultation with NMS, add to or modify current Program
Rules from time to time, and shall notify NMS promptly of any changes in the
Program Rules. Notwithstanding any consultation with NMS, the development,
implementation and modification of the Program Rules shall be in the sole
discretion of THE ASSOCIATION. If there are changes in the Program Rules that
substantially affect the cost to NMS of performing its duties hereunder, the
terms and payments for any resulting changes in cost shall be mutually agreed
upon by THE ASSOCIATION and NMS.
10.4 Designated Representatives. In order to avoid unreasonable delay in
--------------------------
the provision of the services to be rendered pursuant to this Agreement, NMS and
THE ASSOCIATION shall each designate a specific representative to perform the
day-to-day administration of the Program(s) and to serve as the primary contact
for communications between the parties. Each party shall provide reasonable and
prompt assistance to the other party to address any concerns or
27
<PAGE>
problems relating to the Program(s) and/or this Agreement identified by NMS, THE
ASSOCIATION, a Participating Plan or Participating Account. THE ASSOCIATION
shall provide reasonable effort and support in assisting NMS to cause the
Participating Plans and/or Participating Accounts to promptly respond to all
inquiries from NMS.
10.5 Waiver. Failure to insist upon strict compliance with any terms,
-------
covenants or conditions of this Agreement at any one time shall not be deemed a
waiver of such term, covenant or condition at any time nor shall any waiver or
relinquishment of any right or power herein at any time be deemed a waiver or
relinquishment of the same or any other right or power at any other time.
10.6 Non-Solicitation.
----------------
10.6.1 Employees. Each party agrees that unless mutually agreed to
---------
otherwise, it shall not solicit for employment or employ any person who is then
employed by the other party in any capacity, including without limitation, as an
employee or consultant, during the term of this Agreement and for two years
thereafter.
10.6.2 Accounts.
---------
a. During the period that a Participating Account is in the
Program(s) and for 6 months thereafter (the "Restricted Period"), NMS and its
subsidiaries and affiliates shall not, directly or through any agent or
representative, knowingly target market, solicit or offer to provide or contract
to provide Comparable Services (as defined below) to that Participating Account,
except that NMS and its subsidiaries and affiliates can offer to provide or
contract to provide such Comparable Services to that Participating Account if it
has followed 10.6.2b below. Notwithstanding the foregoing, NMS and its
subsidiaries and affiliates shall be able to solicit, offer to provide and/or
contract to provide Comparable Services to any Participating Account that by
reason of merger, acquisition or other business combination becomes an affiliate
or subsidiary of an Account for which NMS is providing Comparable Services or to
any Account that NMS is already providing Comparable Services at the time that
Account becomes a Participating Account.
b. If NMS or its subsidiary or affiliate directly or
indirectly receives an unsolicited request to provide Comparable Services to an
Account (the "Request") during the Restricted Period for that Participating
Account, NMS shall notify THE ASSOCIATION of that Request and the details
thereof and request a response from THE ASSOCIATION. THE ASSOCIATION shall
promptly respond to NMS by specifying the conditions and terms on which NMS may
respond to that Request, which conditions and terms shall not be commercially
unreasonable. THE ASSOCIATION may withhold its consent for NMS to respond if in
its reasonable judgement the response to the Request would result in the current
participation in the Program(s) by that Participating Account to be adversely
affected.
28
<PAGE>
c. Comparable Services shall mean administrative services
that are the same or substantially similar to the Core Services under this
Agreement.
10.7 Confidentiality. The parties have executed the confidentiality
---------------
agreement dated as of March 16, 1999 and the parties agree that the terms of
that confidentiality agreement are incorporated and are a part of this Agreement
as if such terms were restated herein.
10.8 Intellectual Property. Nothing contained in this Agreement shall
---------------------
confer to THE ASSOCIATION any property rights, proprietary interest or licenses
in the software, written materials, techniques or know-how used by NMS and its
BEN-NET/TM/ system.
10.9 Dispute Resolution.
------------------
a. Negotiation. Except as provided in Section 10.8(d) below, any
-----------
dispute, controversy or claim between THE ASSOCIATION and NMS arising out of or
related to the existence, interpretation, performance or breach of this
Agreement, whether in tort, contract or otherwise (a "Dispute"), will be
referred to the parties' designated representatives, who will attempt to resolve
the Dispute by good faith negotiation. If the designated representatives are
unable to resolve the Dispute within fifteen (15) business days, either party
may submit the Dispute for binding arbitration in accordance with Section
10.9(b).
b. Arbitration Procedure. If any Dispute cannot be resolved by
---------------------
negotiation as set forth in Section 10.9(a), either party may submit the Dispute
to be resolved by binding arbitration. The arbitration shall be in accordance
with the rules of the American Arbitration Association or such alternative
dispute resolution service as agreed by the parties. The arbitration shall be
conducted in Chicago, Illinois. Arbitration shall be conducted by three (3)
arbitrators reasonably acceptable to the parties, each of NMS and THE
ASSOCIATION designating one (1) arbitrator and such arbitrators selecting the
third arbitrator. The arbitrators shall be bound by applicable state and federal
law and shall issue a written opinion setting forth findings of fact and
conclusions of law. The arbitrators shall have the power to grant all legal and
equitable remedies provided by law except that the arbitrators shall not award
punitive damages. The parties expressly agree and covenant to be bound by the
decision of the arbitrators
29
<PAGE>
as a final determination of the matter in dispute. Judgment upon the
arbitrators' decision may be entered and enforced in any court of competent
jurisdiction.
c. Arbitration Fee. The parties agree to share equally the
---------------
administrative fee as well as the arbitrators' fees, if any, unless otherwise
assessed by the arbitrator. The administrative fee shall be advanced by the
party who submits the Dispute to arbitration, subject to final apportionment by
the Arbitrators in the award.
d. Equitable Remedies. Nothing in this Agreement shall prevent
------------------
either party from seeking emergency equitable relief, such as temporary
injunctive relief, from a court of proper jurisdiction, including for breach of
Section 10.6.
10.10 Binding Effect. This Agreement and the rights, covenants,
--------------
conditions and obligations of the respective parties and any instrument or
agreement executed pursuant to this Agreement shall be binding upon the parties
and upon the successors, assignees and legal representatives of the respective
parties.
10.11 Quality and Financial Audits.
----------------------------
a. Financial Audits. NMS shall maintain adequate books, accounts
----------------
and records, and prepare all financial statements in compliance with the rules
of any governmental or regulatory authority having jurisdiction over NMS, and
permit employees or agents of THE ASSOCIATION at such reasonable times to
inspect NMS's facilities, and to examine, audit and make copies and memoranda of
NMS's books, accounts and records which are related to this Agreement.
b. Quality Audits. THE ASSOCIATION may audit and examine records
--------------
and accounts which pertain, directly or indirectly, to any services provided by
NMS hereunder. NMS shall cooperate with THE ASSOCIATION or its auditors;
however, such audit shall not unduly interfere with the NMS conduct of its
business. NMS shall be reimbursed for its out-of-pocket expenses incurred in
support of the audit.
c. Audit Participants. Any audit review may be undertaken directly
------------------
by THE ASSOCIATION or by third parties engaged by THE ASSOCIATION, including
accountants and consultants. NMS shall cooperate fully with THE ASSOCIATION or
any such third party in connection with the audit review. Any third party
auditor shall not be involved in or be subsidiary to a business engaged in
activities competitive to NMS.
30
<PAGE>
d. NMS Review of Audits. NMS shall have the opportunity, prior to
--------------------
the release of any audit report, to review a draft of such report and to include
in the report its responses to issues raised by the report.
10.12 Right to Contract. Nothing in this Agreement shall preclude THE
------------------
ASSOCIATION from contracting with third parties to provide Administrative
Services that are the same or substantially similar to the Core Services in
connection with Program(s) other than the "HMO stitcher Program(s)" as that term
is defined below. THE ASSOCIATION will not contract with other third parties to
provide Administrative Services that are the same or substantially similar to
the Core Services in connection with "HMO stitcher Program(s)," except in the
event THE ASSOCIATION (1) gives notice of termination for failure to perform in
accordance with Section 6.4, then this restriction shall no longer apply as of
the date such notice of termination is given or, (2) THE ASSOCIATION gives
notice of termination for breach in accordance with Section 6.2, then this
restriction shall no longer apply as of 30 days after such notice of breach is
given. For purposes of this paragraph, "HMO stitcher Program(s)" shall mean
Program(s) through which Blue Plans separately underwrite any HMO or HMO-based
type of health insurance products which they provide to Accounts and in
connection with THE ASSOCIATION provides centralized Administrative Services
(i.e. the current HMO Blue USA, BluesCONNECT and Medicare Blue USA Programs).
10.13 Headings. All headings are for convenience of reference only.
--------
10.14 Assignment. Neither party may assign, subcontract or delegate any
----------
of its rights, duties or obligations hereunder without the prior written consent
of the other party, which consent may be withheld in its sole discretion,
however, upon written notice to the other party, either party may assign this
Agreement to a successor in title to substantially all of its business or
assets.
10.15 Entire Agreement; Amendments and Modifications. This Agreement and
----------------------------------------------
any documents expressly included by reference and the BluesCONNECT Agreement are
the full and complete expression of the understandings between NMS and THE
ASSOCIATION and supersede and replace any prior agreements between the parties.
No amendment or modification to this Agreement shall be binding upon the parties
unless it is in writing and signed by both parties.
31
<PAGE>
10.16 Applicable Law. This Agreement shall be governed and construed in
--------------
accordance with the laws of the State of Illinois, without regard to principles
of conflict of law.
10.17 Notices. Any notice required under this Agreement shall be sent to
-------
the parties at the following addresses, or at such other address as such party
may specify in writing from time to time via US Mail Certified Mail return
receipt requested or via Federal Express:
To THE ASSOCIATION:
Blue Cross Blue Shield Association
225 North Michigan Avenue
Chicago, IL 60601
Attn: President and Chief Executive Officer, Patrick G. Hayes
With copies to: Executive Director, National Managed Care
Services, Kathe Hamen; and General Counsel, Roger
G. Wilson, Esq.
To NMS:
Network Management Services, Inc.
5500 Wayzata Blvd.
Suite 1275
Minneapolis, MN 55416
Attn: Mark Tierney
With copies to: Chief Financial Officer, Scott P. Halstead
Any notice under this Agreement shall be deemed received when the receiving
party actually receives the notice.
10.18 Relationship of Parties. NMS is an independent, licensed contractor
-----------------------
to THE ASSOCIATION and neither party is a partner, agent or joint venturer of
the other party. Each party is solely responsible for the acts and omissions,
control and direction of its own employees.
10.19 Counterparts. This Agreement may be executed in counterparts.
------------
10.20 Changes in Law. In the event that any provision of this Agreement
---------------
is not deemed to be in compliance with any state or federal law, regulation,
bulletin, regulatory agency policy, or the like, governing the subject matter
hereof, this Agreement shall be automatically amended to so conform with such
law, regulation, bulletin or regulatory agency policy. To the extent that the
automatic amendment described in this Section 10.20 is the result of a change in
any state or federal law, regulation, bulletin, regulatory agency policy, or the
like, that occurred after the
32
<PAGE>
Effective Date of this Agreement and creates a material adverse change of either
party's duty hereunder, the parties agree to negotiate in good faith to attempt
to reach agreement on the terms and conditions for incorporating such change in
law as a written amendment to this Agreement. In the event the parties cannot
reach agreement on changes to the Agreement to fairly address the change in law
prior to the effective date of the change in law, either party may terminate
this Agreement upon 60 days prior written notice or the effective date of the
change in law, whichever occurs first.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the Effective Date.
BLUE CROSS AND BLUE NETWORK MANAGEMENT
SHIELD ASSOCIATION SERVICES, INC.
/s/ Patrick G. Hayes /s/ Mark Tierney
- ------------------------------- --------------------------
Patrick G. Hayes Mark Tierney
President and Chief Executive Chairman
Officer
33
<PAGE>
Schedule I
Part 1 - Core Services
- -----------------------
Fixed Fee for Calendar year 1999
In 1999, THE ASSOCIATION shall pay to NMS a fixed fee not to exceed *** for Core
Services provided in connection with Participating Accounts existing as of the
effective date of the Administrative Services Agreement (the "Fixed Fee").
This Fixed Fee will be paid to NMS according to the following schedule:
On or Before Amount Due
- -------------------------------
6/1/99 ***
9/1/99 ***
12/1/99 ***
The Fixed Fee shall be reduced as follows. If at the end of calendar 1999, 100%
of the Participating Accounts existing as of the effective date of the
Administrative Services Agreement have not been transferred to NMS (the "Non-
Transferred Members"), for each Non-Transferred Member, the Fixed Fee shall be
reduced by an amount equal to the 1999 Per Subscriber Per Month ("PSPM") rate
(listed below) applicable to the Participating Account for that Non-Transferred
Member multiplied by the number of full and partial calendar months that the
transition of that Participating Account has been delayed beyond the date for
that transition set forth in the implementation plan referenced in Section 2.8
of the Administrative Services Agreement providing NMS causes the delay. The
foregoing adjustment shall be made no later than January 31, 2000 and shall be
paid by credit or offset against other amounts due to NMS under the
Administrative Services Agreement.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
1999 PSPM Fee Schedule for Adjustments
Participating Account Size PSPM Fee
0-499 Members *** PSPM
500-999 Members *** PSPM
1000-1499 Members *** PSPM
1500-1999 Members *** PSPM
2000-2499 Members *** PSPM
2500-4999 Members *** PSPM
greater than 5000 Members *** PSPM
The Participating Account Size for purposes of determining the above referenced
1999 PSPM Fee Schedule Adjustments shall be based on the number of Members
enrolled in the Participating Account as of December 31, 1999.
The Fixed Fee shall be increased as follows:
In the event that NMS is required to transfer more than *** Participating
Accounts who enroll in the Program after the Effective Date of the Agreement and
prior to January 1, 2000, NMS shall receive an additional PSPM fee in accordance
with the 1999 PSPM Fee Schedule Adjustments for each such new Participating
Account in excess of ***. There shall be an additional electronic discount
of *** PSPM applied to the adjustment. This electronic discount applies to
Participating Accounts with *** or more enrolled subscribers and those
Participating Accounts with less than *** enrolled subscribers if such
Participating Accounts use a standard industry import.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Fees shall be as set forth below for calendar years after 1999:
Year Core Service Pricing
PSPM
2000 Core PSPM - ***
Electronic Discount - ***
Self Bill Surcharge- ***
2001 Core PSPM - ***
Electronic Discount - ***
Self Bill Surcharge - ***
2002 Core PSPM - ***
Electronic Discount - ***
Self Bill Surcharge- ***
Part 2 - Non-Core Services
- --------------------------
. Daily Exports - Send enrollment exports to Participating Plans on a daily
basis rather than semi-weekly basis. Price = *** PSPM
. Student status letter generation - Generate a standard letter prior to the
members maximum age and run a report for Participating Accounts indicating
which members have been terminated due to no response. Price = *** PSPM
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Part 3 - Other Costs/Fees
- -------------------------
. THE ASSOCIATION shall reimburse travel expenses incurred by NMS in accordance
with THE ASSOCIATION travel policy guidelines and as approved in advance by
THE ASSOCIATION.
. THE ASSOCIATION shall reimburse NMS for the toll-free customer service
telephone line costs including, but not limited to set-up, ongoing
maintenance, and cost of calls.
. THE ASSOCIATION shall reimburse NMS for 5500 and 1099 reporting at *** per
Participating Account and per agent per year for Schedule A production
. THE ASSOCIATION shall pay NMS for (i) initial import programming costs for
Participating Accounts with less than *** enrolled subscribers; (ii)
requested significant modifications to existing imports; and (iii) initial
import programming costs for Participating Accounts with less than ***
enrolled subscribers that convert from paper to electronic submission after
the Effective Date of this Agreement. Such payments shall be made at a rate
of *** per hour. NMS shall be responsible for all costs associated with
initial import programming for Participating Accounts currently sending
electronic imports under the HMO Blue USA program prior to the Effective Date
of this Agreement.
. THE ASSOCIATION assumes all Bank Account fees.
. THE ASSOCIATION shall pay NMS for export programming costs at a rate of ***
per hour for new export formats or significant alterations to the format
standards identified in Schedule III.
. THE ASSOCIATION shall pay NMS training fees at a rate of *** per hour. The
term training does not include that time during which NMS is marketing NMS's
capabilities. Such training must be pre-approved as training by THE
ASSOCIATION.
. THE ASSOCIATION shall pay for the Environmental Analysis described in Section
2.1.a.(ii) and (iii) of the Agreement at a rate of *** per hour.
. THE ASSOCIATION shall reimburse NMS for costs associated with overnight or
expedited packages.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule II
OSC Accounts
***
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule III(A)
Program
Electronic Connectivity for Enrollment
Purpose
The purpose of this document is to describe the current process for
communicating enrollment and eligibility information, in an electronic format,
between a Participating Account, NMI and the Participating Plans. Once received
from the Participating Account, NMI uses the enrollment data file to load a
central membership database in order to perform centralized premium billing,
collection and disbursement functions on behalf of the network products. Once
the data file is received at the Participating Plans, the enrollment data is
loaded into their membership systems in order to enroll the Participating
Account's subscribers, issue ID cards and provide ongoing health care coverage.
Program Electronic Connectivity For Enrollment Diagram
The overall approach to electronic connectivity for enrollment supporting both
BluesCONNECT and HMO Blue USA is shown in the diagram contained as Attachment
#1. The diagram shows the electronic data imports coming from the Participating
Accounts to NMI and the electronic data exports going from NMI to Participating
Plans. With both imports and exports, the diagram also shows the data format
options, transmission options, file options and frequency supported by the
Programs.
Electronic Enrollment Imports
In the typical Program arrangement involving electronic imports of enrollment
information, the Participating Account is responsible for producing a single
electronic data file and sending the file to NMI. In some cases the electronic
file is created by the Participating Account from their payroll or human
resource/benefits administration system. In other cases, the electronic file is
created by a third party benefit administrator and sent to multiple network
administrators, including NMI.
A key feature of BluesCONNECT/HMO Blue USA approach to electronic connectivity
is that the Participating Account can submit the data in any reasonable client-
defined data format. The data format, however, must provide all of the necessary
data elements required to establish and maintain the enrollment data at NMI and
the Participating Plans.
The data file can be sent to NMI in a variety of ways, either via electronic
transmission or via US Mail. At the Participating Accounts' option, NMI can
receive electronic data via internet FTP, modem to modem or even via internet
<PAGE>
BluesCONNECT and HMO Blue USA
Electronic Connectivity for Enrollment
Page 2
e-mail. Electronic files can also be sent through the US Mail on media such as
diskette, reel tape and tape cartridge. And, finally, the enrollment data can be
sent to NMI on paper enrollment application forms.
The Programs will support receiving electronic enrollment data in either a full
file or a change file format. A full file is a file which contains a record for
each member enrolled from the Participating Account, usually with a transaction
code identifying adds, changes and terminations included in the appropriate
records. In those cases where the transaction codes are not present, the
challenge in receiving and processing a full file is determining the
transactions that need to be processed against the membership file. In this
case, the transactions are identified through a "file compare" process which
identifies the changes since the last update. On the other hand, a change file
usually only includes one record for each add, change or termination
transactions transmitted on the file.
The Programs recommend that each Participating Account provide enrollment
updates at least once each week in order to enable NMI to maintain accurate, up-
to-date files. In addition, weekly files enables NMI to send enrollment data
to the Participating Plans and enables the Participating Plans to process the
transactions and issue ID cards on a timely basis. The Programs will, however,
accommodate other frequencies requested by the Participating Account.
Electronic Enrollment Exports
Once enrollment data is received and processed by NMI, NMI is responsible for
sending the enrollment data on to Participating Plans for processing on
Participating Plan membership systems. The Programs currently support four file
format options for sending electronic enrollment data to the Participating
Plans: ASC X12 834 v4010, ASC X12 834 v3040, ASC X12 834 v3051, and the ITS
Membership Exchange Format (MEF). ASC X12 834 v4010 is the insurance industry
standard for transmitting enrollment data between trading partners and is fully
Y2K and HIPAA compliant. This standard will be replacing ASC X12 834 v3040 and
ASC X12 V3051 during 1999. The ITS MEF is a proprietary Blue Cross and Blue
Shield Association data exchange format developed for use with the BlueCard
Point-of-Service (POS) initiative. Each Participating Plan must elect to
receive all of their enrollment data from NMI in one of these two supported
formats.
NMI will send electronic data to Participating Plans via either BluesNet or the
BluesNet Advantis networks with the choice at the Participating Plan's option.
Data transmitted over BluesNet to Participating Plans uses a software product
called Network Data Mover (NDM) (also known as Direct:Connect), sold and
supported by Sterling Software, to transmit the data. The Participating Plans
electing to receive the data via the BluesNet Advantis network usually use the
<PAGE>
BluesCONNECT and HMO Blue USA
Electronic Connectivity for Enrollment
Page 3
EDI-Kit, a software product developed by TSI International, to receive and
download the data.
The Participating Plans that receive data via BluesNet NDM usually "map" the
data directly into legacy application systems that automatically process the
enrollment transactions against the Participating Plan membership system. Once
the enrollment data is received, the Participating Plan is responsible for
sending ASC X12 997 functional acknowledgements back to NMI.
The Participating Plans that receive enrollment data via BluesNet Advantis
usually use the EDI-Kit to download and process the file. The EDI-Kit enables
the Participating Plan to print "smart" paper (electronically printed)
enrollment forms that are then data entered and processed against the membership
system. The EDI-Kit automatically creates and transmits the ASC X12 997
functional acknowledgements to NMI to confirm receipt of the enrollment file.
In some cases, the Participating Plan processes the EDI-Kit transaction files
directly into legacy application systems that apply the transactions to the
membership system.
The Program enrollment data files sent to Participating Plans on a routine,
ongoing basis are change files, which contain one record for each add, change or
termination transactions transmitted on the file. Periodically, but not more
than on a quarterly basis, NMI may elect to send a full file to Participating
Plans to enable the Participating Plans to conduct a full-file audit of their
membership system.
NMI is expected to transmit or send enrollment data to Participating Plans
within 2 business days of the receipt of the data from the Participating
Account.
Participating Plans Without Electronic Connectivity
The process described above is used for Participating Accounts which send
electronic enrollment data to NMI and for NMI to send to Participating Plans
which are currently capable of receiving electronic enrollment data. There are
currently *** BluesCONNECT products capable of receiving electronic data.
For those Participating Plans that have not yet established and tested
electronic connectivity, NMI will send "smart" paper enrollment reports to the
Participating Plan within 2 business days of receiving the electronic enrollment
file.
Over the next 2 years, it is expected that the vast majority of HMO Blue USA
products, numbering approximately ***, will establish electronic connectivity
for enrollment with NMI in one of the two primary methods described above.
[CHART]
*** Pursant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and files seperately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule IV
Performance Standards for NMS
05/06/99
Penalty Assessment Methodology
As provided in Section 2.12.1 of the Agreement, if NMS fails to achieve the
Target Performance Threshold for a standard during a given quarter, NMS will pay
a penalty equal in amount to a percentage of the corresponding quarter's billed
fees, as indicated in the Penalty Percentage column.
As provided in Section 2.12.2 of the Agreement, if NMS fails to achieve the
Minimum Performance Threshold for a standard during a given month, NMS will be
assessed penalty points equal to the number set forth in the Penalty Points
column. If for any given month, the total penalty points assessed is equal to or
greater than 20, NMS will pay a penalty equal in amount to that corresponding
month's billed fees. In addition, in accordance with Section 6.4 of the
Agreement, THE ASSOCIATION may terminate the Agreement immediately upon written
notice to NMS if NMS fails to meet the Minimum Performance Threshold for any two
consecutive calendar months or for any three months of any calendar year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
STANDARD LANGUAGE STANDARD TARGET PENALTY MINIMUM
PERFORMANCE PERCENTAGE PERFORMANCE
THRESHOLD THRESHOLD
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Enrollment (defined as any membership
change)
- --------------------------------------------------------------------------------------------------------------------------------
1. Enrollment Distribution Time: The *** *** *** ***
time it takes to send enrollments
received from national accounts, both *** *** ***
paper and electronic, to HMOs.
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
2. Enrollment data entry: Time it takes *** *** *** ***
to load enrollment information into
the enrollment/billing system. *** *** ***
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
STANDARD LANGUAGE PENALTY NETWORK MANAGEMENT COMMENTS/Proposed COMMENTS
POINTS Measurements 4/6/99
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Enrollment (defined as any membership
change)
- ---------------------------------------------------------------------------------------------------------------------------------
1. Enrollment Distribution Time: The *** ***
time it takes to send enrollments
received from national accounts, both *** ***
paper and electronic, to HMOs.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
2. Enrollment data entry: Time it takes *** ***
to load enrollment information into
the enrollment/billing system. *** ***
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule IV
Performance Standards for NMS
05/06/99
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
3. Paper Enrollment Accuracy: The accuracy of *** *** *** *** ***
paper enrollment information entered into the
billing system.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
4. Electronic Enrollment Accuracy: Accuracy of *** *** *** *** ***
electronic enrollment information transmitted to
Plans.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
5. Enrollment and Eligibility Reporting: The time *** *** *** *** ***
it takes to send the enrollment and eligibility
tracking reports to national accounts and Control
Plans.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Billing
- ---------------------------------------------------------------------------------------------------------------------------------
6. Premium disbursement time: The time it takes *** *** *** ***
to disburse premiums received from national
accounts to HMOs. *** *** *** ***
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
3. Paper Enrollment Accuracy: The accuracy of ***
paper enrollment information entered into the
billing system.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
4. Electronic Enrollment Accuracy: Accuracy of ***
electronic enrollment information transmitted to
Plans.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
5. Enrollment and Eligibility Reporting: The time ***
it takes to send the enrollment and eligibility
tracking reports to national accounts and Control
Plans.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Billing
- ---------------------------------------------------------------------------------------------------------------------------------
6. Premium disbursement time: The time it takes ***
to disburse premiums received from national
accounts to HMOs.
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------
<S> <C>
4. Electronic Enrollment Accuracy: Accuracy of ***
electronic enrollment information transmitted to
Plans.
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
5. Enrollment and Eligibility Reporting: The time ***
it takes to send the enrollment and eligibility
tracking reports to national accounts and Control
Plans.
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Billing
- ----------------------------------------------------------------------------------
6. Premium disbursement time: The time it takes ***
to disburse premiums received from national
accounts to HMOs.
- ----------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
SCHEDULE IV
<TABLE>
<CAPTION>
Performance Standards for NMS
05/06/99
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
7. Bill Production Time: The time it takes to *** *** *** *** ***
produce and send consolidated bills.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
8. Billing Information Accuracy: The *** *** *** ***
accuracy of rates, fee structure and
contractual eligibility requirements.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
9. Outstanding premium: The amount of *** *** *** *** ***
time total monthly premium is outstanding.
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
10. Reconciliation Report Processing Time: The *** *** *** *** ***
time it takes to process reconciliation
reports received from HMOs.
<CAPTION>
- ------------------------------------------------------------------------------------------------------
***
- ------------------------------------------------------------------------------------------------------
<S> <C>
***
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
*** ***
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
*** ***
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
*** ***
- ------------------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule IV
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Overall Performance - Billing and Enrollment
- -------------------------------------------------------------------------------------------------------------------------------
11. Plan Satisfaction with billing and *** *** *** ***
enrollment services: Results from NMCS
annual Plan Satisfaction Surveys.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
12. Account Satisfaction with billing and *** *** *** ***
enrollment: Results from NMCS annual Account
Satisfaction Surveys.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Client Services
- -------------------------------------------------------------------------------------------------------------------------------
13. Client Issue Turnaround Time: The time it *** *** *** ***
takes to resolve client issues. *** *** *** ***
------- *** *** *** ***
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
14. Call Response Time: Time it takes to *** *** *** ***
respond to incoming calls.
- -------------------------------------------------------------------------------------------------------------------------------
15. Call Abandon Rate: Percentage of total *** *** *** ***
calls abandoned.
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
***
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Overall Performance - Billing and Enrollment
- ----------------------------------------------------------------------------------------------------------------------------------
11. Plan Satisfaction with billing and *** ***
enrollment services: Results from NMCS
annual Plan Satisfaction Surveys.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
12. Account Satisfaction with billing and *** ***
enrollment: Results from NMCS annual
Account Satisfaction Surveys.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Client Services
- ----------------------------------------------------------------------------------------------------------------------------------
13. Client Issue Turnaround Time: The time it *** ***
takes to resolve client issues. *** ***
*** ***
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
14. Call Response Time: Time it takes to *** ***
respond to incoming calls.
- -----------------------------------------------------------------------------------------------------------------------------------
15. Call Abandon Rate: Percentage of total *** ***
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Overall Performance - Billing and Enrollment
- ------------------------------------------------------------------------------------------
11. Plan Satisfaction with billing and ***
enrollment services: Results from NMCS
annual Plan Satisfaction Surveys.
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
12. Account Satisfaction with billing and ***
enrollment: Results from NMCS annual Account
Satisfaction Surveys.
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Client Services
- ------------------------------------------------------------------------------------------
13. Client Issue Turnaround Time: The time it ***
takes to resolve client issues.
- ------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
***
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule IV
Performance Standards for NMS
05/06/99
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
16. Call blockage rate: Percentage of *** *** *** ***
total calls that are blocked.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Overall Performance - Customer Service
- ----------------------------------------------------------------------------------------------------------------------------------
17. Plan Satisfaction with Customer *** *** *** ***
Service: Results from NMCS annual
Plan Satisfaction Surveys.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
18. Account Satisfaction with Customer *** *** *** ***
Service: Results from NMCS annual
Plan Satisfaction Surveys.
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
16. Call blockage rate: Percentage of *** ***
total calls that are blocked.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Overall Performance - Customer Service
- ----------------------------------------------------------------------------------------------------------------------------------
17. Plan Satisfaction with Customer *** *** ***
Service: Results from NMCS annual
Plan Satisfaction Surveys.
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
18. Account Satisfaction with Customer *** *** ***
Service: Results from NMCS annual
Plan Satisfaction Surveys.
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/
__________________________
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
SCHEDULE V
HMO Blue USA
Premium Delinquency Procedure
* * *
*** Pursuant to Rule 406 of the securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
1
<PAGE>
Schedule VI - A: HBU Conversion Staffing Plan
* * *
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibti 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule VII BluesCONNECT and HMO Blue USA - Standard Reports and Other
Information Requirements
Page 1
Financial Reports
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Title Description Purpose Frequency Priority
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1) Summary of Premium *** *** *** ***
Disbursements By Month
- ------------------------------------------------------------------------------------------------------------------------------------
2) Monthly Premium *** *** *** ***
Disbursement Summary
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Premium Collection/Disbursement Reports
- ------------------------------------------------------------------------------------------------------------------------------------
Title Description Purpose Frequency Priority
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1) Outstanding Accounts *** *** *** ***
Receivable Via Internet
- ------------------------------------------------------------------------------------------------------------------------------------
2) Premium Receipts and *** *** *** ***
Disbursements Summary
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Enrollment/Eligibility Disbursement Reports
- ------------------------------------------------------------------------------------------------------------------------------------
Title Description Purpose Frequency Priority
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1) Electronic Enrollment *** *** *** ***
Log Via Internet
- ------------------------------------------------------------------------------------------------------------------------------------
2) Electronic Connectivity *** *** *** ***
Log Via Internet
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule VII BluesCONNECT and HMO Blue USA - Standard Reports and Other
Information Requirements
Page 2
Other
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Title Description Purpose Frequency Priority
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1) OSC Monthly Volume Report *** *** *** ***
- ------------------------------------------------------------------------------------------------------------------------------------
2) OSC Monthly APS Performance *** *** *** ***
Report
- ------------------------------------------------------------------------------------------------------------------------------------
3) BluesCONNECT Monthly Volume *** *** *** ***
Report
- ------------------------------------------------------------------------------------------------------------------------------------
4) BluesCONNECT Monthly APS *** *** *** ***
Performance Report
- ------------------------------------------------------------------------------------------------------------------------------------
5) BluesCONNECT Enrollment Report *** *** *** ***
- ------------------------------------------------------------------------------------------------------------------------------------
6) HMO Blue USA Enrollment Report *** *** *** ***
- ------------------------------------------------------------------------------------------------------------------------------------
7) BluesCONNECT Enrollment Report *** *** *** ***
by Tier
- ------------------------------------------------------------------------------------------------------------------------------------
8) HMO Blue USA Enrollment Report *** *** *** ***
By Tier
- ------------------------------------------------------------------------------------------------------------------------------------
9) BluesCONNECT Enrollment Report; *** *** *** ***
Showing Revised Enrollment Counts
- ------------------------------------------------------------------------------------------------------------------------------------
10) HMO Blue USA Enrollment Report; *** *** *** ***
Showing Revised Enrollment Counts
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* All monthly reports by the tenth business day of each month.
** Any references to specific software applications may be changed upon mutual
agreement of the parties.
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Schedule IX
This file contains the record layout for the data file to upload to the
PeopleSoft Disbursement system to generate payments to HMO Blue USA Operation
Service Center participating HMO's.
Record Layout for PeopleSoft Upload
***
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.6 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
SCHEDULE X
Addendum to Subcontract Under the
Health Insurance for the Aged and Disabled Act
(42 U.S.C., Chapter 7, Supp., as Amended)
The clauses of this Addendum are a part of and are applicable, as indicated, to
the subcontract by and between ______________________________________
________________________, hereinafter referred to as the "Contractor" and
____________________________________________________________________________,
hereinafter referred to as the "Subcontractor." The term "Secretary" as used
herein, means the Secretary of Health and Human Services or his delegate unless
specified otherwise.
TABLE OF CONTENTS
Clause Title Page
No. No.
- ------ ----
Section I
I Facilities Nondiscrimination Clause 03
II Disclosure of Information 04
III Automatic Termination of Subcontract Clause 04
IV Liquidated Damages in Subcontracts 04
V Privacy Act 05
VI Cost or Pricing Data 05
Section II
VII Subcontracting of Responsibilities 06
VIII Inspection 06
IX Rights in Data 06
X Subcontractor as Common Subcontractor 08
XI Modification of Subcontract 08
XII Regulations and General Instructions 09
XIII Prohibition Against Billing Services 09
Section III
Federal Acquisition Regulation Clauses (FAR)
52.203-7 Anti-Kickback Procedures 10
52.203-10 Price or Fee Adjustment for Illegal or Improper Activity 10
52.203-11 Certification and Disclosure Regarding Payments 10
to Influence Certain Federal Transactions
52.203-12 Limitation on Payments to Influence Certain 10
Federal Transactions
52.215-2 Audit and Records - Negotiation 10
October 1996
<PAGE>
Page 2 of 11
52.219-8 Utilization of Small, Small Disadvantaged and Women-
Owned Business Concerns 10
52.219-9 Small, Small Disadvantaged and Women-Owned 10
Business
Subcontracting Plan 10
52.219-16 Liquidated Damages - Subcontracting Plan 11
52.222-21 Certification of Nonsegregated Facilities 11
52.222-26 Equal Opportunity 11
52.222-35 Affirmative Action for Special Disabled and 11
Vietnam Era Veterans
52.222-36 Affirmative Action for Handicapped Workers 11
52.222-37 Employment Reports on Special Disabled Veterans 11
and Veterans of the Vietnam Era
52.223-6 Drug-Free Workplace 11
(Note - If there are any questions by the Subcontractor as to the applicability
of the above clauses to this subcontract or whether the Subcontractor will be
performing under this subcontract one of the Medicare "functions" or other
responsibilities requiring prior approval of the Secretary as provided in the
Medicare agreement between the Contractor and the Secretary, clarification
should be requested from the Contractor in writing prior to execution hereof.)
<PAGE>
Page 3 of 11
Section I
The clauses in Section I are applicable to this subcontract (and to lower tier
subcontracts hereunder) unless excluded by the virtue of the lead-in language or
other provisions contained in the body of the individual clauses.
Clause I
FACILITIES NONDISCRIMINATION CLAUSE
The following provisions are applicable if this subcontract is for the lease of
real estate:
"As used in this clause, the term `Facility' means stores, shops, restaurants,
cafeterias, restrooms, and any other facility of a public nature in the building
in which the space covered by this lease is located.
"The lessor agrees that he will not discriminate by segregation or otherwise
against any person or persons because of race, color, religion, sex, or national
origin in furnishing or by refusing to furnish, to such person or persons, the
use of any facility, including any or all services, privileges, accommodations,
and activities provided thereby. Nothing herein shall require the furnishing to
the general public of the use of any facility customarily furnished by the
lessor solely to tenants, their employees, customers, patients, clients, guests
and invitees.
"It is agreed that the lessor's noncompliance with the provisions of this clause
shall constitute a material breach of this lease. In the event of such
noncompliance, the lessee may take appropriate action to enforce compliance, may
terminate this lease, or may pursue such other remedies as may be provided by
law. In the event of termination, the lessor shall be liable for all excess
costs of the lessee in acquiring substitute space. Substitute space shall be
obtained in as close proximity to the lessor's building as is feasible and
moving costs will be limited to the actual expenses thereof as incurred.
"The lessor agrees to include, or to require the inclusion of the foregoing
provisions of this clause (with the terms "lessor" and "lessee" appropriately
modified) in every agreement or concession pursuant to which any person other
than the lessor operates or has the right to operate any facility. Nothing
herein contained, however, shall be deemed to require the lessor to include or
require the inclusion of the foregoing provisions of this clause in any existing
agreement or concession arrangement or one in which the contracting party other
than the lessor has the unilateral right to renew or extend the agreement or
arrangement, until the expiration of the existing agreement or arrangement and
the unilateral right to renew or extend. The lessor also agrees that it will
take any and all lawful actions as expeditiously as possible with respect to any
such agreement as the contracting agency may direct to enforce this clause,
including but not limited to termination of the agreement or concessions and
institution of court action.
<PAGE>
Page 4 of 11
Clause II
DISCLOSURE OF INFORMATION
This clause is applicable to this subcontract and to any lower tier subcontract
hereunder if it provides for the performance of any of the functions required
for the administration of the Medicare agreement between the Contractor and the
Secretary, and to any other subcontract where the Subcontractor, its agents,
officers, or employees might reasonably be expected to have access to
information within the purview of section 1106 of the Social Security Act, as
amended, and regulations prescribed pursuant thereto.
"The Subcontractor agrees to establish and maintain procedures and controls so
that no information contained in its records or obtained from the Contractor
and/or the Secretary or from others in carrying out terms of its subcontract
shall be used by or disclosed by it, its agents, officers, or employees except
as provided in section 1106 of the Social Security Act, as amended, and
Regulations prescribed thereunder."
Clause III
AUTOMATIC TERMINATION OF SUBCONTRACT CLAUSE
This clause is applicable to this subcontract if its term exceeds the term of
the agreement between the Secretary and the Subcontractor, except where the
Secretary agrees to its omission or if this subcontract is solely for the
purchase of supplies and equipment.
Notwithstanding the following, if the Contractor wishes to continue the
subcontract relative to its own business after the contract between the
Secretary and the contractor has been terminated or nonrenewed, it may do so
provided it assures the Secretary in writing that the Secretary's obligations
will terminate at the time the Medicare contract terminates or is nonrenewed
subject to the termination cost provisions provided for in the contract.
The clause is as follows:
"In the event the Medicare contract between the Secretary and the Contractor is
terminated, the subcontract between the Contractor and the Subcontractor will be
terminated unless the Secretary and the Contractor agree to the contrary. Such
termination shall be accomplished by delivery of written notice to the
Subcontractor of the date upon which said termination will become effective."
<PAGE>
Page 5 of 11
Clause IV
LIQUIDATED DAMAGES IN SUBCONTRACTS
The following provisions are applicable to this subcontract if it contains
liquidated damages provisions which relate solely to Medicare:
"The Secretary, after consultation with the Contractor, shall have the right to
determine that the specified levels of performance have not been attained by the
Subcontractor. In such event, the Secretary may direct the Contractor to notify
the Subcontractor of the Secretary's determination that liquidated damages apply
and to set-off the liquidated damages against the Subcontractor."
Clause V
PRIVACY ACT
The Privacy Act of 1974, Public Law 93-579, and the Regulations and General
instructions issued by the Secretary pursuant thereto, are applicable to this
subcontract, and to all subcontracts hereunder to the extent that the design,
development, operation, or maintenance of a system of records as defined in the
Privacy Act is involved.
Clause VI
COST OR PRICING DATA
This clause is applicable to this subcontract and to any modification thereof,
(1) where the estimated cost to Medicare exceeds or will exceed ***, and (2) the
estimated cost was not based on adequate price competition, established catalog
or market prices of commercial items sold in substantial quantities to the
general public, or prices set by law or regulation.
"The Subcontractor is required to submit written cost or pricing data and
certify that the data submitted was accurate, complete and current at the time
of entry into this subcontract or modification in accordance with Subpart 15.804
of the Federal Acquisition Regulation and to maintain full and complete
accounting records to support cost or pricing data submitted. The Subcontractor
must provide for full access by the Contractor, the Secretary, and the
Comptroller General of the United States for the purpose of examining the
accuracy of cost or pricing data submitted as aforesaid, and in accordance with
Subpart 15.804 of the Federal Acquisition Regulation, agrees to a reduction in
price if the cost or pricing data submitted is found to be defective."
***Pursuant to Rule 406 of the Securites Act of 1933, as amended, confidential
portions of Exhibit 10(_) have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE>
Page 6 of 11
Section II
In addition to the clauses n Section I, the clauses contained in Section II are
also applicable to this subcontract regardless of amount if the subcontract (a)
provides for the performance of any of the functions required for the
administration of the Medicare agreement between the Contractor and the
Secretary, or (b) involves subcontracting for automated data processing systems
or facilities management services which required the Secretary's prior approval.
Clause VII
SUBCONTRACTING OF RESPONSIBILITIES
The Subcontractor agrees that it shall not enter into any lower tier subcontract
with any other party to carry out the primary responsibilities of this
subcontract without the prior written approval of the Secretary. In the event
such approval is given, the Subcontractor further agrees that the substance of
these clauses shall be inserted in each lower tier subcontract.
Clause VIII
INSPECTION
The Secretary shall have the right, at all reasonable times and upon reasonable
notice, to inspect or to otherwise evaluate the work performed or being
performed under this subcontract, and the premises in which it is being
performed. If an inspection or evaluation is made, the Subcontractor shall
provide all reasonable facilities and assistance for the safety and convenience
of the Secretary's representatives in the performance of their duties. All
inspections and evaluations by the Secretary's representatives shall be
performed in such a manner as will not unduly delay the work.
Clause IX
RIGHTS IN DATA
A. The Subcontractor agrees that the Secretary shall at such time and in such
manner as he may prescribe, have access to any data acquired or utilized by it
in the development and processing of claims or in carrying out its other
functions under this subcontract, and further, shall have use of such data
obtained solely from private business of the Subcontractor). The Subcontractor
shall also, at such times and in such manner as the Secretary may prescribe,
furnish to other organizations for use in administering health care or health
care financing programs under the Act, data acquired or utilized by it in the
development and processing of claims or other data (other than discrete data
such as trade secrets, commercial or financial data obtained solely from private
business of the Subcontractor) acquired by it in carrying out its functions
under this subcontract. This does not apply to the proprietary data of
subcontractors which is utilized by the Contractor for program purposes.
<PAGE>
Page 7 of 11
B. As used in this clause, the term "Subject Data" means writings, sound
recordings, pictorial reproductions, drawings, designs, or other graphic
representations, all systems documentation, program logic, operational manuals,
forms, diagrams, workflow charts, equipment descriptions, data files, data
processing or computer programs, all other operational methods and procedures
involved in the performance of functions under the subcontract and works of any
similar nature (whether copyrighted or copyrightable) which are acquired or
utilized by the Subcontractor in carrying out its functions under this
subcontract, for which more than 50 percent of the cost of development has been
paid out of Government funds. The term does not include financial reports, cost
analyses, and similar information incidental to contract administration.
C. Government rights. Subject only to provisions of (D) below, the Government
may use, duplicate or disclose in any manner, and for any purpose whatsoever,
and have or permit others to do so, all Subject Data.
D. License to copyright data. In addition to the Government rights as provided
in (C) above with respect to any Subject Data which may be copyrighted, the
Subcontractor agrees to and does hereby grant to the Government a royalty-free,
nonexclusive, and irrevocable license throughout the world to use, duplicate or
dispose of such data in any manner and for any purpose whatsoever, and to have
or permit others to do so; provided, however, that such licenses shall be only
to the extent that the Subcontractor now has, or prior to completion or final
settlement of this subcontract may require, the right to grant such license
without becoming liable to pay compensation to others solely because such grant.
E. Relation to patents. Nothing contained in this clause shall imply a license
to the Government under any patent or be construed as affecting the scope of any
license or other right otherwise granted to the Government under any patent.
F. Marking and identification. The Subcontractor shall not affix any restrictive
markings upon any Subject Data, and if such markings are affixed, the Government
shall have the right at any time to modify, remove, obliterate, or ignore such
markings.
G. Deferred ordering and delivery of data. The Government shall have the right
to order, at any time during the performance of this subcontract, or within two
years from either acceptance of all items to be delivered under this subcontract
or termination of this subcontract, whichever is later, any Subject Data, or
data generated in performance of the subcontract developed with Government
funds, and the Subcontractor shall promptly prepare and deliver such Subject
Data or data as may be required. When Subject Data is delivered pursuant to this
paragraph G, payment shall be made for converting the Subject Data or data into
the prescribed form, reproducing it or preparing it for delivery. The
Government's right to use data delivered pursuant to this paragraph G shall be
the same as the rights in Subject Data as provided in (C) above. The
Subcontractor shall be relieved of the obligation to furnish Subject Data or
data upon the expiration of two years from the date it accepts such items.
<PAGE>
Page 8 of 11
H. The Subcontractor shall retain such data or Subject Data subject to the time
limit imposed by the Examination of Records clause of this Addendum and the
right to examine such records by the Comptroller General of the United States
and the Secretary (including their duly authorized representatives).
Clause X
SUBCONTRACTOR AS COMMON SUBCONTRACTOR
In the event a systems change, as designated by the Secretary, is required as
the result of an act of Congress, Regulation, or General Instruction, and it
applies to more than one Medicare contractor for which the Subcontractor
("Common Subcontractor") provides similar services, each contractor shall
individually arrange for the Common Subcontractor to implement such change to
its system. If an increase in cost is sought by the Common Subcontractor for the
modification, the Contractor shall pay a reasonable price, based upon certified
cost or pricing data submitted by the Common Subcontractor. As soon as possible
thereafter, the Contractor shall submit the supporting data, along with all
other pertinent documentation, to the Secretary. On a basis to be determined by
the Secretary, a reasonable price shall then be established for the common
systems change as implemented by all affected contractors and such price shall
be divided among those contractors. The cost of any additional modifications
needed to meet the specific requirements of a particular contractor shall be
borne only by that contractor. Should the Secretary determine that the increase
in price for the common change or other modification is not adequately
supported, the Common Subcontractor agrees to refund such amount to the
Contractor. In the event the Common Subcontractor refuses to refund the above
amount, the Secretary may request that the Contractor take action to recover
from the Common Subcontractor that portion of the price which the Secretary
finds to be unsupported. The Secretary shall reimburse the Contractor for all
reasonable costs relating to such action. The Secretary shall from time-to-time
notify the Contractor of the identity of other Medicare contractors with common
subcontracts.
Clause XI
MODIFICATION OF SUBCONTRACT
(A) Neither this subcontract nor any lower tier subcontract under this
subcontract shall be modified or amended, regardless of amount, without
obtaining prior written approval of the Secretary if it provides for the
performance of any of the functions contained in the Medicare agreement between
the Contractor and the Secretary.
(B) If this subcontract does not fall within the purview of paragraph (A) of
this clause, the Secretary's prior approval shall be obtained for any
modification or amendment thereof where the estimated cost of such change or
changes would result in an increase of the costs to Medicare in excess of fifty
percent of the Contractor's threshold amount as provided in its agreement.
(C) Before this subcontract is renewed or any option herein is exercised, the
Secretary's approval shall be obtained, unless the Secretary has previously
stipulated otherwise in writing.
<PAGE>
Page 9 of 11
Clause XII
REGULATIONS AND GENERAL INSTRUCTIONS
The Contractor is obliged under its agreement with the Secretary to comply with
all Regulations and General Instructions as the Secretary may from time-to-time
prescribe for the administration of its agreement. To the extend that such
Regulations and General Instructions affects this subcontract, the Subcontractor
shall also comply with such Regulations and General instructions.
Clause XIII
PROHIBITION AGAINST BILLING SERVICES
The provisions of this clause are applicable to this subcontract if it provides
for facilities management services or any electronic data processing which
contemplates performance of an integral part of the Medicare claims process.
However, such provisions do not apply if this subcontract is for the lease or
purchase of equipment or supplies.
The Subcontractor (or a parent, subsidiary, or affiliated organization) shall
not perform services for providers which involve (1) the preparation or
completion of preliminary or initial cost reports, or (2) the allocation of
expenses to provider cost centers and apportionment of such costs between
Medicare beneficiary patients and other patients of the provider where such data
may be used in the preparation of cost reports subsequently submitted to the
Subcontractor for desk review and audit and which serve as the basis for
determination of Medicare program payments by the Subcontractor. The
Subcontractor (or a parent, subsidiary or affiliated organization) shall not
perform, in any jurisdiction in which it is serving as a Subcontractor to a
Medicare Contractor, billing services for a provider where billings by such
providers are to be subsequently processed by the Subcontractor for Medicare
payments. This does not preclude the subcontractor from offering and operating
an automated billing service (software and equipment) for a provider as long as
operating such a billing service does not require the Subcontractor to describe
or code the health-care services being billed.
<PAGE>
Page 10 of 11
SECTION III
This subcontract incorporates the following clauses by reference with the same
force and effect as if they were given in full text. Upon request, the Secretary
will make their full text available to the Subcontractor.
The clauses are applicable to this subcontract and to lower tier subcontractors
if the cost of the subcontract or lower tier subcontract to Medicare is equal to
or greater than the amount in brackets located to the right of the listed
clause, unless specifically exempted by applicable rules, regulations, or
Executive Orders. The term "Contractor" as used therein shall mean the
"Subcontractor".
FEDERAL ACQUISITION REGULATION
(48 CFR, CHAPTER 1) CLAUSES
52.203-7 Anti-Kickback Procedures ($100,000)
(July 1995)
52.203-10 Price or Fee Adjustment for Illegal or ($100,000)
Improper Activity
(September 1990)
52.203-11 Certification and Disclosure Regarding ($100,000)
Payments to Influence Certain Federal
Transactions
(April 1991)
52.203-12 Limitation on Payments to Influence ($100,000)
Certain Federal Transactions
(January 1990)
52.215-2 Audit and Records - Negotiation ($100,000)
(October 1995)
52.219-8 Utilization of Small, Small ($100,000)
Disadvantaged and Women-Owned
Business Concerns
(October 1995)
52.219-9 Small, Small Disadvantaged and (Subcontracts that
Women-Owned Subcontracting offer
Plan subcontracting
(October 1995) possibilities and
any subcontract
exceeding $500,000,
$1,000,000
for construction
of any public
facility)
<PAGE>
Page 11 of 11
52.219-16 Liquidated Damages - Subcontracting (Subcontracts that
(October 1995) offer
subcontracting
possibilities and
any subcontract
exceeding
$500,000
$1,000,000 for
construction of
any public
facility)
52.222-21 Certification of Nonsegregated ($10,000)
(April 1984)
52.222-26 Equal Opportunity ($10,000)
(April 1984)
52.222-35 Affirmative Action for Special ($10,000)
Disabled and Vietnam Era Veterans
(April 1984)
52.222-36 Affirmative Action for Handicapped ($2,250)
Workers
(April 1984)
52.222-37 Employment Reports on Special Disabled ($10,000)
Veterans and Veterans of the Vietnam
Era
(January 1988)
52.223-6 Drug-Free Workplace (No Minimum)
(July 1990)
<PAGE>
EXHIBIT 10.7
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement") is entered into as of
January 1, 1996 (the "Effective Date") by and between GE Capital Services
Corporation, with an address of 260 Long Ridge Road, Stamford, CT 06927, ("GECS"
or "Company"), and Network Management Services, Inc., with an address of 5500
Wayzata Boulevard, Suite 1450, Minneapolis, MN 55416-1241 ("NMS").
RECITALS
WHEREAS, GECS desires to retain NMS to provide certain administrative Services
for certain employee benefit plans maintained by GECS; and
WHEREAS, NMS desires to provide such services on the terms and conditions set
forth in this agreement,
NOW THEREFORE, in consideration of the foregoing and the mutual promises
contained herein, and subject to the terms and conditions set forth below, NMS
and GECS hereby agree as follows:
ARTICLE 1. CERTAIN DEFINITIONS
- -------------------------------
As used in the Agreement, the following terms shall have the following meanings:
1. "BEN-NET"(TM) shall mean NMS' proprietary technology services software
program providing services including but not limited to group set-up,
Vendor set-up, enrollment management, enrollment data edits, eligibility
distribution to Vendors, retroactive enrollment adjustments, payments to
Vendors, and other direct individual billing administration.
2. "Company" or "GECS" shall mean GE Capital Services Corporation and those
subsidiary companies which participate in the Plan.
3. "Employee" shall mean an individual employee or retiree of GECS
participating in or who may by eligible to participate in one of more of
GECS's Plans.
4. "Enrollment Form" shall mean the application an Employee completes to
participate in a Vendor sponsored by GECS.
5. "Vendor" shall mean a licensed organization chartered to provide or arrange
for health care or other employee welfare services and shall include but
not be limited to health maintenance organizations, preferred provider
organizations, pharmacy benefits managers, indemnity insurance
organizations, third party administrators, mental health/substance abuse
service organizations, short and long term disability managers, life
insurance organizations, retiree plan administrators, flexible benefit
administrators,
<PAGE>
COBRA/HIPAA (as those terms are hereinafter defined) administrator, and
employee assistance program administrators.
6. "Plan" or "Plans" shall mean any of the employee benefit plans of GECS with
respect to which NMS provides services, as defined in Appendix A to this
Agreement, which is attached hereto and made a part hereof or any amendment
or supplement thereto.
ARTICLE 2. NMS RESPONSIBILITIES
- --------------------------------
1. NMS shall be responsible for ensuring that all services, reports, program
and information are rendered according to the highest industry standards.
2. Wherever possible, and when indicated by size, NMS will interact with GECS
and Vendors on a fully electronic basis for the transmission of
eligibility, enrollment and financial data.
3. NMS shall maintain all appropriate regulatory approval necessary to provide
the services specified in this Agreement. NMS will promptly notify GECS of
the institution of any disciplinary proceeding against it or any of its
principal persons or employees relating to any state or federal regulatory
issue.
4. Vendor Management. To the extent directed by GECS, NMS shall provide
overall management of Company's Vendors relating to matters of enrollment,
eligibility distributions, payment, reconciliation, customer service and
general communications.
5. Enrollment Processing.
a) Processing: NMS shall process completed Enrollment Forms within three
(3) business days of receipt. NMS will contact the GECS business for
clarification of all forms that are not properly completed and NMS
cannot determine the correct information. The GECS business unit will
provide NMS with corrected information within three business days. NMS
win process all corrections within one (1) business day of receipt.
b) Electronic Files: NMS shall process GECS's electronic eligibility
files within two (2) business days of receipt. NMS and Company shall
develop a mutually agreed to process for managing records identified
by the BEN-NET(TM) System's edit processing routines. NMS will provide
GECS or the appropriate business unit with an enrollment edit within
three (3) business days of original receipt. This edit will be
communicated to GECS or the appropriate business unit either via
facsimile or e-mail.
c) Notice to Vendors: NMS shall notify each Vendor servicing GECS of new
enrollments and of the date on which coverage will be effective via
electronic file
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<PAGE>
transfer if possible. If a Vendor is unable to accept an electronic
file or a smaller number of Company's Employees are enrolled, new
enrollment information will be sent via a paper enrollment report. NMS
shall use its best efforts to assure that the Vendors receive
notification of such enrollment as soon as possible. NMS shall provide
notice, in the first weekly transmission of eligibility information
after NMS' receipt of information, to the appropriate Vendor when new
enrollments occur.
6. Changes in Enrollment.
a) Records of Changes: NMS shall receive, administer and record any
changes in enrollment status within two (2) business days of receipt.
b) Notice to Vendors: NMS shall provide notice, in the first weekly
transmission of eligibility information after NMS' receipt of
information, to the appropriate Vendor when enrollment changes occur.
The parties shall mutually agree on increasing the frequency of
eligibility information transmissions.
c) HIPAA/COBRA: Based on the eligibility information supplied by Company,
NMS shall provide to Company's Vendor, ABR CobraServ, Inc. ("ABR"),
data feeds required by ABR to generate (1) notices for new hires
regarding their rights under the Consolidated Omnibus Reconciliation
Act of 1985 ("COBRA"); (2) qualifying event notice letters for
participants as required by COBRA; and (3) certificates of creditable
coverage as required by the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). NMS shall comply with the
reasonable requirements of ABR in providing such services. In
addition, NMS shall provide notice to Vendor benefits administrators
of participant COBRA elections in the same manner as other records of
changes required to be provided pursuant to this section.
7. Enrollment Edits. NMS shall apply Company specific and general edits to
incoming enrollment data. Edit protocols and corrections will either be
made by NMS or NMS and Company will jointly determine how corrections
should be made. Enrollment edits NMS will provide shall include but not be
limited to "Enrollment Tape Fall Offs", "Duplicates within Family",
"Missing Birth dates", "Missing SSNs", "Questionable Relationship", "Non-
Qualifying Event People", and "Coverage Tier Discrepancies".
8. Primary Care Physician Management. NMS will either receive primary care
physician selection from Company electronically or receive and load
selections via paper applications completed by employees. In cases where
Vendor procedures allow, NMS will validate primary care physician selection
against a file supplied to NMS by Vendors.
9. Disenrollment. NMS shall provide notice, in the first weekly transmission
of eligibility information after NMS' receipt of information, to the
appropriate Vendor when a member terminates coverage. The parties shall
mutually agree on increasing the frequency of
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<PAGE>
eligibility information transmissions.
10. Electronic Transfer. NMS shall have the capability to accept Company's
payments by automated clearinghouse, and to transmit premium payments to
Vendors by electronic fund transfer.
11. Distribution Reports. NMS shall provide to the Vendors distribution reports
containing summary and detailed enrollment and premium payment information
on a monthly basis. These distribution reports shall contain full
retroactivity data according to Company and Vendor payment rules.
12. (Intentionally omitted.)
13. Customer Service Phone Lines. NMS shall provide a toll free customer
service telephone number for use by GECS benefits staff between 8:00 a.m.
and 6:00 p.m. (Central Time) each business day. The toll free number shall
be staffed with personnel trained to answer eligibility, premium and
service fee payment, invoice and status questions. This customer service
phone line shall not be published of communicated in any way to Company's
Employees who will be directed to contact Company or Vendors as their
primary source of problem resolution. Telephone use reports that detail the
types of calls NMS' customer service unit receives relating to Company,
shall be available to Company on a quarterly basis.
14. Company and Vendor Inquiries. NMS shall promptly respond to all inquiries
from Company and Vendors regarding eligibility, premium, service fees,
invoice and status questions. NMS will promptly refer inquiries not related
to its duties under this Agreement (e.g., coverage issues) to the
appropriate Vendor. Employees will be directed by Company to call their
selected Vendor or Company for service issues whereas NMS is not considered
the first point of contact for Employees.
15. Vendor Inquiries. NMS shall be the primary source of contact for most
Vendor issues with respect to day-to-day administration of the Plan but not
concerning Plan interpretations, appeals or other fiduciary issues and
shall promptly respond to all inquiries from Vendors, whether directly from
the Vendor or Company, regarding the status of enrollees, billing and/or
receipt and disbursement of premium, and reconciliation issues. NMS shall
promptly notify Company of any unresolved concerns or problems identified
by a Vendor.
16. Funds Transfers. NMS shall send to Company via facsimile an invoice that
provides a detailed accounting of the payments to be made to the Vendors
and NMS. Company shall review the invoice and contact NMS to resolve
questions. NMS shall use best efforts to respond to such inquiries within
one (1) business day. Company shall then notify NMS of the amounts to be
withdrawn from the fiduciary account(s) for transmission to the
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<PAGE>
following parties: (a) the Vendors for premiums, ASO fees or claims
payments due, and (b) NMS for administrative fees due. Payments to Vendors
and NMS shall be made to the extent possible via electronic transfer to the
accounts designated by each party. Premiums and other service fees shall be
billed monthly while claims funding requests submitted by Vendors shall be
billed weekly, unless otherwise agreed by the parties.
17. Financial Reporting. NMS shall report to Company, with each invoice,
current and annual cumulative premium, service fee and claims expenditures
according to Company's specific division and group structure reporting
needs as instructed by Company.
18. Materials Fulfillment. NMS shall store, collate and mail to Company
locations enrollment materials relating to the Plan. NMS shall maintain an
adequate supply of such materials to meet anticipated demand and shall
contact the appropriate Vendor or Company to replenish its supply. These
materials shall include but not be limited to medical provider directories,
enrollment forms, summary plan descriptions and other information relating
to the Plan.
19. Performance Reporting. NMS shall report to Company, on a quarterly basis,
its standard information package relating to the performance of Vendors.
This report shall include measures of cost, quality, access and service and
shall compare Vendor performance to industry averages for normal and
exception- performance. Each quarterly report shall contain data pertaining
to the most recent quarter along with year to date data. As a part of the
fourth quarter report, NMS shall also perform a summary of each Vendor's
performance for the entire year. This summary will be used by NMS to
calculate and adjudicate the financial risk arrangements with each Vendor.
Quarterly reports shall be provided to GECS within fifteen (15) days of
receipt of relevant data from Vendors. NMS shall provide to Company an
annual comparison of each Vendor's HEDIS data. This report will be provided
thirty (30) days following receipt of data from Vendors.
20. BEN-NET System. NMS shall utilize the BEN-NET system for performing its
obligations under this Agreement. NMS hereby represents that such system
will be fully capable of performing all systems functions necessary to
fulfill NMS' responsibilities under this Agreement. NMS shall be solely
responsible for the upkeep and maintenance of the BEN-NET system.
21. Enhancements to BEN-NET System. NMS will release system enhancements which
can be used as a standard feature of BEN-NET across clients at no charge.
Company will be fully responsible for the cost, if approved in advance, of
enhancements which are made to accommodate the unique requirements of its
operations and which are generally not to be incorporated into BEN-NET as
standard features to be used by other clients.
22. Specific Services and Vendors. NMS shall provide the services, reports,
programs and
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<PAGE>
information as outlined herein subject to the number and types of Vendors
and other vendors as outlined in Appendix B which is attached hereto and
made a part hereof
23. GECS Service Team. The parties shall agree on the staffing level and
credentials of personnel providing or coordinating NMS's services pursuant
to this Agreement (the "GECS Service Team"). GECS shall have the right to
interview and approve all members of the GECS Service Team. NMS will
provide GECS access to 7 day, 24-hour voice mail systems, which shall
include direct dial telephone numbers for GECS Service Team members. The
GECS service team shall include, but not be limited to, an executive lead,
account manager, business analyst, and data integrator.
24. Representations and Warranties of NMS. NMS warrants and represents that:
a) it has and will continue to conduct its activities in accordance and
compliance with all applicable laws, regulations, ordinances,
Executive Orders, codes, standards, permits and liens;
b) to the best of its knowledge, all information it has submitted
heretofore and contemporaneously is true and accurate in every
material respect;
c) it has requisite personnel, competence, skill and physical resources
necessary to perform the services herein set forth. NMS further
warrants that services performed by or delivered through NMS shall be
in accordance with the highest generally accepted standards of the
profession at the time services are performed;
d) it will comply with the stated standards, policies and practices of
GECS, including but not limited to GECS's standards, policies and
practices relating to integrity, and to require the same stringent
standards, policies and practices for its employees or other workers
in regard to its services hereunder;
e) it will require each member of the GECS service team to execute the
acknowledgment form referenced on Appendix C, attached hereto and made
a part hereof, acknowledging such person's agreement to comply with
certain policies of GECS designated therein. NMS shall solicit the
execution of such acknowledgment by each such person, and NMS shall
not permit any member of the GECS service team that does not execute
such acknowledgment to perform any services hereunder. NMS shall
furnish GECS with a copy of such acknowledgment that has been executed
by each member of the GECS service team prior to the start of such
performance by such person; and
f) it shall promptly provide any information or materials relating to
services provided hereunder to GECS at its request.
ARTICLE 3. COMPANY RESPONSIBILITIES
- ------------------------------------
-6-
<PAGE>
1. Company shall supply to NMS, according to a mutually agreed to schedule,
regular electronic files or paper reports relating to Employee's selection
of Vendors. If Company does not transmit data in a timely fashion or sends
incomplete or inaccurate data, Company shall recognize that NMS may not be
able to administer its services in complete conformity to the standards and
content contained in this Agreement.
2. Company shall respond to inquiries, including enrollment edits referenced
in section 5b of Article 2, from NMS, relating to administering the
services contained in this Agreement, in a manner sufficient to allow NMS
to fulfill its obligations herein.
3. Company shall reasonably communicate to Employees instructions for
completing enrollment information and otherwise communicating with NMS.
Company shall consider NMS requests to improve Company's communication and
general human resource policies relating to administrative services
provided by NMS.
4. Company shall execute all requests for fund transfers from NMS to Vendors
and NMS by the end of the following business day unless, in Company's
opinion, the request is inaccurate, incomplete or otherwise does not meet
reasonable standards for completeness and documentation.
5. Company, not NMS, shall be responsible for any late payment or
reinstatement fees levied by Vendors relating to improper or late payment
of premiums, service fees of claims funding requests if such improper or
late payments are not the fault or error of NMS. If such improper or late
payments are due to the fault or error of NMS, NMS shall be responsible for
such fees.
6. Company shall reimburse NMS according to Appendix D of this Agreement and
also subject to the following:
a) Fees for routine administrative services, including but not limited to
Employees Enrollment, distribution of enrollment data to Vendors,
payment of fees and reconciliation of payment to Vendors, Customer
Service and general program management shall be immediately and fully
payable to NMS on a monthly basis at the time GECS reimburses Vendors
(unless alternative schedule(s) are mutual agreed upon by the
applicable parties).
b) NMS will be responsible for providing services to GECS in relation to
only those Vendors specifically listed in Appendix D. Services and
fees relating to Vendors not listed in Appendix D must be jointly
agreed to in writing by both parties.
c) Fees services and expenses not reimbursed to NMS on a regular monthly
basis, including but not limited to special projects, are due to NMS
forty five (45) days after the invoice date.
-7-
<PAGE>
d) GECS shall reimburse NMS for all approved and reasonable travel
related expenses including but not limited to airfare, ground
transportation, and hotel and meal expenses. Expense reimbursements
are due to NMS forty five (45) days after the invoice date.
e) All bank charges imposed in connection with the establishment and
maintenance of banking accounts shall be paid by GECS
f) Any costs for printing, mailing and overnight delivery charges
relating to the distribution of information to Company, Employees or
Vendors are the sole responsibility of Company unless otherwise
described in Appendix D.
ARTICLE 4. INDEMNIFICATION, INSURANCE AND FIDUCIARY STATUS
- -----------------------------------------------------------
1. Indemnity. Each party (the "Indemnifying Party") shall indemnify and hold
harmless the other party (the "Indemnified Party") from and against any
costs, claims, damages, liabilities, or losses (including costs and
expenses and attorney fees incurred in connection therewith) ("Claims")
arising from injuries, including death, or damage to property resulting
from the negligence or willful misconduct of the indemnifying Party, its
employees, contractors or agents. The Indemnified Party shall notify the
Indemnifying Party promptly of any Claim. The Indemnifying Party may, but
shall not be required to, assume the defenses of any such Claims. The
Indemnified Party shall cooperate with the Indemnifying Party in the
defense of any such claim, and shall not settle or compromise such Claim
without the prior written consent of the Indemnifying Party.
2. Insurance. During the term of this Agreement, NMS shall maintain in force
the following insurance coverage:
a) Workers' Compensation and related insurance as prescribed by the law
of the state(s) in which the work is to be performed
b) General comprehensive liability coverage, with limits of *** per
occurrence and *** in the aggregate
c) Property damage coverage in the amount of *** per occurrence
d) E&O insurance with limits of ***
e) Upon GECS's request, NMS shall provide certificates of insurance
evidencing the aforementioned coverages.
3. Intellectual Property Indemnification. NMS shall indemnify and hold GECS
harmless
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.7 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
-8-
<PAGE>
from any award of costs and damages in any action against GECS
based on a claim that any of the services or materials delivered to GECS in
connection- therewith, including without limitation any computer software,
infringe upon any United States patent right or copyright of any third
party, provided that (i) NMS is promptly notified in writing of any such
suit or claim; and (ii) GECS permits NMS to defend, compromise or settle
any such suit or claim, and gives NMS all available information, reasonable
assistance, and authority necessary to do so. Notwithstanding the
foregoing, NMS shall have no obligation to indemnify GECS with respect to
any claim of infringement pertaining solely to any portion of services or
material prepared in connection therewith modified or prepared by NMS to
conform to specific instructions or directions provided by GECS.
4. Fiduciary Status. GECS and NMS understand and intend that NMS shall not be
a fiduciary within the meaning of the Employee Retirement Income Security
Act of 1974 as amended, or any state law with respect to any Plan. NMS
shall not have any discretion with respect to the management or
administration of any Plan or with respect to determining or changing the
rules or policies pertaining to eligibility or entitlement of any
participant in any Plan to benefits under such Plan. NMS also shall not
have any control or authority with respect to any assets of any Plan,
including the investment or disposition thereof All discretion and control
with respect to the terms, administration or assets of any Plan shall
remain with GECS or with the named fiduciaries under such Plan.
ARTICLE 5. TERM AND TERMINATION
- --------------------------------
1. The term of this Agreement will be two years (2) commencing on the
Effective Date hereof and will thereafter by automatically renewed for
successive terms of one (1) year each.
2. This Agreement may be terminated by either party without cause at any time
after first anniversary of the Effective Date upon one hundred twenty (120)
calendar days advance written notice to the other party.
3. In the event that a party materially breaches in the performance, of any of
its requirements under this Agreement, the other party may, at its sole
discretion, provide notice to the breaching party of its intent to
terminate this Agreement.
4. The breaching party shall have thirty (30) days to cure the default and
avoid termination. If the default is not cured within thirty (30) days of
the notice, the other party may execute its termination notice to be
effective thirty (30) days after the end of the expiration of the default
cure period.
5. For the purposes of this Agreement and without limiting the foregoing
generally, a material breach shall include but not be limited to the
following:
a) Failure by NMS to substantially provide the services outlined herein;
-9-
<PAGE>
b) Failure by Company to reimburse NMS according to the terms of this
Agreement;
c) A party's filing a petition in bankruptcy or for reorganization or for
the adoption of an arrangement under the Bankruptcy Act (or similar
law of the United States or any other jurisdiction, which law relates
to the liquidation or reorganization of companies or the modification
or alteration of the rights of creditors) or an answer or other
pleading admitting or failing to deny the material allegations of such
a petition or seeking, consenting to or acquiescing in the relief
therein provided;
d) A party's making an assignment, or so called trust mortgage or the
like, for the benefit of its creditors or by its making a proposal to
its creditors under any bankruptcy act;
e) A party's consenting to the appointment of a receiver or a trustee (or
other person performing a similar function) for all or a substantial
part of its property;
f) A party's being adjudicated bankrupt;
g) The entry of a court order which has not been vacated, set aside or
stayed within thirty (30) days from the date of entry, either (i)
appointing a receiver or a trustee for all or a substantial part of
its property or (ii) approving a petition filed or application made
against it for, or effecting an arrangement in, bankruptcy or made
against it for, or effecting an arrangement in, bankruptcy or for a
reorganization or other relief pursuant to any bankruptcy act or for
any other judicial modification or alteration of the rights of
creditors;
h) The assumption of custody or sequestration by a court of competent
jurisdiction of all or substantially all of a party's property, which
custody or sequestration has not been suspended or terminated within
thirty (30) days from its inception; and/or
i) A party's insolvency, as defined by law.
6. Obligations Upon Termination. Upon any termination or non-renewal of this
Agreement, either party shall deliver to the other party any and all data
or information (in whatever form or media) that is owned or developed by or
licensed to the other party and that is supplied hereunder. Furthermore,
NMS shall cooperate with GECS in the transfer of NMS' obligations hereunder
to a replacement service provider.
ARTICLE 6. CONFIDENTIALITY AND PROPERTY RIGHTS
- -----------------------------------------------
1. Confidential Information. Confidential Information shall include all
information disclosed by one party (the "Discloser") to the other (the
"Recipient") in writing and marked "Confidential" or disclosed visually or
orally and subsequently confirmed writing to be confidential within 20 days
after the first disclosure. Confidential Information shall
-10-
<PAGE>
not, however, include the following:
a) Information which is now or hereafter comes into the public domain
b) Information learned by the Recipient from third parties
c) Information known to the Recipient or developed by the Recipient
independently of information disclosed by the Discloser or
d) Information required to be disclosed by Recipient pursuant to
requirements of law.
2. Confidential Treatment. The Recipient shall treat the Confidential
Information as confidential, using the same standard of care that it uses
to protect its own proprietary or confidential information (but not less
that a reasonable standard of care), and shall use reasonable measure to
prevent disclosure of the Confidential Information to any third party
without the Recipient's consent. The Recipient shall disclose the
Confidential Information only to those of its employees, agents or
subcontractors who have a reasonable need for access thereto for.
3. Return of Information. All Confidential Information shall remain the
property of the Discloser. Upon the Discloser's request, the Recipient
shall promptly return the Confidential Information, provided, however, that
the Recipient may retain copies solely for archival purposes only.
4. NMS Intellectual Property. Nothing contained in this Agreement shall confer
to GECS any property rights, proprietary interest or licenses in the
software, written materials, techniques, or know how used by NMS and its
BEN-NET System.
5. Employee Data. All of the Employee-specific data and any other materials
pertaining to the GECS's requirements or the Plans and provided to NMS by
GECS pursuant to this Agreement shall at all times remain the property of
GECS. NMS shall return all such data to GECS upon GECS's request.
6. Warranty of Title. NMS warrants that it has, or will have as of the date of
delivery to GECS of each item deliverable hereunder, free and clear title
to, and the right to possess, use, sell, transfer, license, lease, and
assign any and all of such deliverable items.
7. Non-Solicitation. For the term of this Agreement and a period of one (1)
year thereafter, neither party shall, in any way, solicit an employee of
the other party to seek employment without the written consent of the other
party.
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<PAGE>
ARTICLE 7. ARBITRATION OF DISPUTES
- -----------------------------------
Any dispute, controversy or claim that cannot be resolved by the parties arising
out of or relating to this engagement letter or the services covered by this
letter shall be settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA"), and judgment
upon the award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof The arbitration shall be held in New York, NY, or in such
other location as the parties may mutually agree upon. The arbitration will be
conducted before a panel of three arbitrators, with one arbitrator named by each
party and the third named by the two party-appointed arbitrators, or (if they
should fail to agree on the third) by the AAA. The arbitrators may not award
non-monetary or equitable relief of any sort. They shall have no power to award
punitive damages or any other damages not measured by the prevailing party's
actual damages. All aspects of the arbitration shall be treated as confidential.
Neither the parties nor the arbitrators may disclose the existence, content or
results of the arbitration, except as necessary to comply with legal or
regulatory requirements. Before making any such disclosure, a party shall give
written notice to all other parties and shall afford such parties a reasonable
opportunity to protect their interests.
ARTICLE 8. BOOKS AND RECORDS
- -----------------------------
1. GECS shall have the right, but not the obligation, to audit the books and
records of NMS pertaining to NMS' services rendered hereunder no more than
once every 12 months, upon reasonable notice to NMS. Such right to audit
shall survive the termination of this Agreement for two (2) years. All
audits shall be at GECS's expense.
2. NMS will make available for audit by either GECS or its designee
("Auditor") its files, books, procedures and records (including computer
terminal access to same) pertaining to the services provided by NMS under
this Agreement during the hours of 8 a.m. to 6 p.m. Monday through Friday,
but excluding holidays. NMS shall fully cooperate with such audit and shall
make available for interview with the Auditor those personnel with material
involvement or responsibility with respect to the services provided by NMS
under this Agreement. GECS will give NMS reasonable notice of each audit
prior to commencement of the audit. The audit shall be conducted at NMS'
offices.
3. NMS shall have the opportunity, prior to the release of the audit report,
to review the draft and to include in the report its responses to issues
raised by the report.
ARTICLE 9. NOTICES
- -------------------
1. General. All notices, requests, demands and other communications required
to be given hereunder shall be in writing and shall be deemed to have been
duly given one day after delivery by hand or via a nationally recognized
overnight courier or five days after mailing, certified or registered mail,
return receipt requested to the party for whom intended at the address
specified in this Article. Either party may designate an alternated
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<PAGE>
address for notices by given written notice thereof in accordance with the
provisions of this Article.
2. Notices to NMS. All notices to NMS shall be directed as follows:
Network Management Services
5500 Wayzata Blvd., Suite 1450
Minneapolis, MN 55416-1241
Attn: Chief Financial Officer
3. Notices to GECS. All notices to client shall be directed as follows:
GE Capital Corporation
260 Long Ridge Road
Stamford, CT 06927
Attn: Wendy N. Fuess, Manager, Health Care
ARTICLE 10. QUALITY
- --------------------
NMS shall devote appropriate personnel and resources to participate in the
GECS's "Six Sigma" quality improvement efforts as required by GECS, including
but not limited to identifying and measuring critical-to-quality ("CTQ")
characteristics, developing projects designed to improve process and outcomes
quality and measuring and reporting such efforts.
ARTICLE 11. GENERAL PROVISIONS
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1. Control of Work. NMS shall be solely responsible for the conduct and
control of the work to be performed under this Agreement by NMS and its
agents or employees.
2. NMS Employees. It is expressly understood and agreed that for all purposes,
including but not limited to workers' compensation insurance, unemployment
insurance, FICA, and federal and state tax withholding, NMS and any of its
agents, contractors or employees performing services under this Agreement
shall not be deemed employees of GECS. NMS shall indemnify GECS from and
against any, taxes imposed on GECS as a result of any determination of any
taxing authority that the agents of NMS performing services hereunder are
employees of GECS. NMS and its employees shall not be entitled to any of
the benefits that GECS provides to its employees and NMS shall provide all
legally required insurance coverage for NMS's employees.
3. No Agency. NMS shall perform its services hereunder as an independent
contractor. This Agreement shall not be deemed or construed to create any
association, partnership, joint venture, or relationship of principal and
agent or master and servant between the parties hereto or any affiliates or
subsidiaries thereof, or to provide either party with the right, power, or
authority, whether express or implies, to create any such duty or
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<PAGE>
obligation on behalf of the other party.
4. Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York.
5. Publicity. Each party shall obtain the prior written consent of the other
party concerning the content and plan of distribution of any public
announcement, press release or advertisement concerning this Agreement,
provided that NMS may include references to GECS in client lists,
proposals, and other non-public communications concerning NMS or its
services. No prior consent shall be required regarding the inclusion of the
other party's name in notices, disclosure documents, or other filing or
publications required by law or regulations.
6. Paragraph Headings. Section headings are for convenience only and shall not
be considered part of the terms and conditions of this Agreement.
7. Modification. No modification, waiver or amendment of any term or condition
of this Agreement shall be effective unless and until it shall be reduced
to writing and signed on behalf of NMS and GECS
8. Waiver. Failure by either party at any time to require full performance by
the other party or to claim a breach of any term of this Agreement will not
(a) be construed as a waiver of any right under this Agreement, (b) affect
any subsequent breach, or (c) affect the validity of this Agreement or any
part thereof
9. Severability. If any term or provision of this Agreement should be declared
invalid by a court of competent jurisdiction, the remaining terms and
conditions of this Agreement shall be unimpaired.
10. Complete Agreement. The Agreement, including the Appendices, constitutes
the entire agreement between the parties with respect to the subject matter
hereof and j supersedes all prior proposals, negotiations, conversations,
discussions and agreements between the parties. This Agreement may be
modified only by a written instrument executed on behalf of both of the
parties hereto.
11. Assignment. Neither party may assign any of its rights under this Agreement
without the prior written consent of the other party. Subject to the
foregoing, all of the terms and provisions of this Agreement shall be
binding upon and insure to the benefit of and be enforceable by the
successors and permitted assigns of GECS and NMS.
12. Survival. The respective obligations of each party that would be their
nature continue after the termination or expiration of this Agreement,
including without limitation those contained in Confidentiality,
Indemnification, and Intellectual Property Indemnification,
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<PAGE>
and shall survive the termination or expiration of this Agreement.
13. Counterparts. This Agreement may be executed in one or more counterparts
each of which shall be deemed to be an original and all of which, taken
together, shall constitute a single instrument.
14. Benefit of the Parties. This Agreement is for the sole and exclusive
benefit of the parties hereto and is not intended to, nor does it, confer
any benefit upon any third party.
15. Contract Benefits Extensions. From time to time, GECS may identify
opportunities for NMS to lower its costs by taking advantage of terms GECS
has negotiated with GECS's suppliers of goods and services. NMS agrees to
cooperate with GECS in identifying such opportunities, and to use its best
efforts to obtain such cost savings when they are available. NMS and GECS
agree that any mutually determined cost savings realized by NMS will be
shared equally between GECS and NMS. NMS also agrees to consider making the
terms of this Agreement available to GECS's customers and suppliers, when
identified by GECS, and to cooperate with GECS to identify opportunities
for GECS's customers and suppliers to reduce their benefit plan
administration costs.
16. Competitiveness Efforts. GECS and NMS shall meet no less than annually to
specifically review the pricing and productivity improvements NMS has
implemented to both ensure NMS's competitive position in the marketplace
and that GECS's agreement with NMS reflects NMS's competitiveness.
IN WITNESS WHEREOF, the parties hereto, by their duly authorized
representatives, have executed this Agreement effective as of the day and year
first set forth above.
NETWORK MANAGEMENT SERVICES, INC.
By: /s/ Michael C. Bingham
---------------------------------
Name: Michael C. Bingham
Title: President
GE CAPITAL CORPORATION
By: /s/ Wendy N. Fuess
---------------------------------
Wendy N. Fuess
Manager, Health Care
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<PAGE>
APPENDIX A-GECC PLANS
GE Capital Services Medical Plan-Traditional and Point-of-Service
GE Capital Services Dental Plan
A-1
<PAGE>
APPENDIX B- REPORTS AND OTHER SERVICES
Health Care Vendors Consolidated Report - Quarterly/Annually
Consolidated Claims, Service Fee and Enrollment Report - Monthly
Monthly Cash Flow Report - Monthly
Employee Count by Health Plan - Monthly *
Employee Count with Medical Coverage - Monthly *
Employee Count with Dental Coverage - Monthly *
Employees with Medical Coverage Only - Monthly *
Employees with Dental Coverage Only - Monthly *
Coordination of Benefits Report - Quarterly
Over Age Dependent Report - Monthly
* These reports will be consolidated into one (1) report in 1998.
B-1
<PAGE>
APPENDIX C-GE INTEGRITY FORM
ACKNOWLEDGEMENT
Date: ________________
Reference: Agreement entered into as of January 1, 1996, between GENERAL-
ELECTRIC CAPITAL SERVICES COMPANY ("GECC") and Network Management
Services, Inc.
I, ____________________, will be performing services pursuant to the above-
referenced Agreement. I have received previously or concurrently with this
Acknowledgment a copy of General Electric Company ("GE") policies 20.4, 20.5,
20.7, 20.10, 30.5, and 30.10. I have read these policies, understand them, and
agree to comply with them. Further, I am familiar with and agree to comply with
the Office of Federal Procurement Policy Act Amendments of 1988 (the Act), its
applicable implementing regulations, and GE guidelines regarding the Act, and I
will report immediately to my contact in the GE any information concerning a
violation or possible violation of the Act or its implementing regulations.
____________________________________
Signature
____________________________________
Printed or Typed Name of Signer
C-1
<PAGE>
APPENDIX D
1. NMS shall provide the services contained herein for the following Vendors:
Met Life Dental
ABR CobraServ, Inc.
MetraHealth/United HealthCare
USHealthCare
HealthPartners
ComPsych
2. Services for other Vendors shall be subject to a mutually agreeable fee.
3. Company shall reimburse NMS in accordance with the table below for services
rendered by NMS hereunder.
January 1996 through December 1996 *** per employee per month
January 1997 through May 1997 *** per employee per month
June 1997 through December 1997 *** per employee per month
Pricing for future periods of the Agreement shall be mutually agreed to by the
parties. All other fees must be approved in writing by Company.
4. Expenses, to the extent billable hereunder, will be invoiced at cost. NMS
shall adhere to GE travel policy and shall utilize, when made available to NMS,
the GE Travel Center for all travel arrangements pursuant to this Agreement.
Notwithstanding anything to the contrary in the foregoing, automobile travel win
be invoiced at the applicable Internal Revenue Service limit.
*** Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.7 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
D-1
<PAGE>
EXHIBIT 10.8
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement") is entered into as of January 1,
1997, by and between General Electric Company, with an address of 3135 Easton
Tpk., Fairfield, CT 06431 ("GE"), and Network Management Services, Inc., with an
address of 5500 Wayzata Blvd., Suite 1275, Minneapolis, MN 55416-1241
("Supplier").
RECITALS
WHEREAS, GE desires to retain Supplier to provide certain consulting
services for certain employee benefit plans maintained by GE; and
WHEREAS, Supplier is willing to provide such services on the terms and
conditions set forth in this Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual promises
contained herein, and subject to the terms and conditions set forth below,
Supplier and GE hereby agree as follows:
ARTICLE 1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"Participant" shall mean an individual participating in or who may be
eligible to participate in one or more of the Plans.
"Plan" or "Plans" shall mean any of the employee benefit, state-mandated or
compensation plans or programs of GE with respect to which Supplier
provides consulting services, as defined in Exhibit A to this Agreement or
any amendment or supplement thereto.
ARTICLE 2. CONSULTING SERVICES
2.1 General. Supplier shall perform the services as described in the attached
Exhibit B to this Agreement, which Exhibit is attached hereto and made a
part hereof, as directed and with respect to locations and/or health plan
suppliers designated by GE. Supplier may also perform additional services
for GE subject to such terms as the parties may mutually agree to in
writing. Supplier shall perform the services with due care and in
accordance with the requirements of this Agreement. In cases where this
Agreement does not specify a standard of performance, Supplier shall
perform the services in accordance with prevailing industry or professional
standards, Supplier will endeavor to perform all of the services to GE's
satisfaction.
2.2 Change Orders. The parties may change any aspect to this Agreement by
mutual agreement in accordance with the procedures set forth in this
section. Either party may
<PAGE>
request a change by submitting to the other a change request. If the
parties decide to implement a requested change, they shall execute an
appropriate memorandum of such change, including any financial terms
thereby affected. Execution of such memorandum by both parties shall
constitute a modification of the Agreement and shall be binding on both of
the parties.
2.3. Status Reports. Upon GE's reasonable request Supplier shall provide written
status reports describing its performance under this Agreement.
2.4 GE Service Team. The parties shall agree on the staffing level and
credentials of personnel providing or coordinating Supplier's services
pursuant to this Agreement (the "GE Service Team"). GE shall have the right
to interview and approve all members of the GE Service Team. Supplier will
provide GE access to 7-day, 24-hour voice mail systems, which shall include
direct dial telephone numbers for GE Service Team members.
2.5 Technical/Clinical Consultants. Supplier represents and warrants that any
consultants responsible for technical or clinical analysis on the GE
Service Team are and shall remain duly licensed or certified with respect
to such technical or clinical proficiency in accordance with prevailing
professional standards and shall maintain a policy of professional
liability insurance with a licensed insurance company.
2.6 Records. Supplier shall maintain complete and accurate records of all
amounts billable to and payment made by GE in accordance with generally
accepted accounting practices. Supplier shall retain such records for a
period of two years after the date of final payment. GE and its authorized
agents may inspect such records at GE's expense during normal business
hours upon reasonable prior notice to Supplier.
2.7 Representations and Warranties of Supplier. Supplier warrants and
represents that:
(a) it has and will continue to conduct its activities in accordance and
compliance with all applicable laws, regulations, ordinances,
Executive Orders, codes, standards, permits and liens;
(b) all information it has submitted heretofore and contemporaneously is
true and accurate in every material respect;
(c) it has requisite personnel, competence, skill and physical resources
necessary to perform the services herein set forth. Supplier further
warrants that services performed by or delivered through Supplier
shall be in accordance with the highest generally accepted standards
of the profession at the time services are performed;
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<PAGE>
(d) it will comply with the stated standards, policies and practices of
GE, including but not limited to GE's standards, policies and
practices relating to integrity, and to require the same stringent
standards, policies and practices for its employees or other workers
in regard to its services hereunder;
(e) it will require each person who will or does perform services
hereunder to execute Exhibit C, attached hereto and made a part
hereof, acknowledging such person's agreement to comply with certain
policies of GE designated therein. Supplier shall solicit the
execution of such Exhibit C by each such person, and Supplier shall
not permit any person that does not execute such Exhibit C to perform
any services hereunder. Supplier shall furnish GE with a copy of such
Supplement that has been executed by each person that Supplier engages
for performance of services hereunder prior to the start of such
performance by such person; and
(f) it shall promptly provide any information or materials relating to
services provided hereunder to GE at its request.
ARTICLE 3. COMPENSATION FOR SERVICES
3.1 Fees. GE shall pay Supplier for its services hereunder in accordance with
the amounts specified in Exhibit D, which is attached hereto and made a
part hereof. Except as herein stated, Supplier shall not impose any other
charges on GE for its services pursuant to this Agreement.
3.2 Expenses. Subject to the terms of Exhibit D hereto, GE shall reimburse
Supplier for any out-of-pocket expenses reasonably incurred by Supplier in
connection with the performance of the its services hereunder. Supplier
will submit such documentation for reimbursable expenses as may be
reasonably required by GE. Supplier shall not incur any unusual or
extraordinary expenses without GE's specific prior approval.
3.3 Invoicing and Payment. Supplier shall invoice GE on a monthly basis. GE
shall pay Supplier's invoices within 45 days of receipt of such invoice.
Supplier's federal tax identification number is 41-1758843.
ARTICLE 4. TERM AND TERMINATION
4.1 Term. The Agreement shall become effective on April 21, 1997 (the
"Commencement Date") and shall continue in effect through December 31,
1999, unless earlier terminated pursuant to this Article 4, or extended by
mutual written agreement of the parties.
4.2 Termination on Notice. Either party may terminate this Agreement at any
time by giving written notice to the other 120 days before the effective
date of termination.
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<PAGE>
4.3 Termination for Other Defaults.
(a) In the event that a party materially breaches in the performance of
any of its requirements under this Agreement, the other party may, at
its sole discretion, provide notice to the breaching party of its
intent to terminate this Agreement. The breaching party shall have
thirty (30) days to cure the default and avoid termination. If the
default is not cured within thirty (30) days of the notice, the other
party may execute its termination notice to be effective thirty (30)
days after the end of the expiration of the default cure period.
(b) For, the purposes of this Agreement and without limiting the foregoing
generally, a material breach shall include but not be limited to the
following:
(i) A party's filing a petition in bankruptcy or for reorganization
or for the adoption of an arrangement under the Bankruptcy Act
(or similar law of the United States or any other jurisdiction,
which law relates to the liquidation or reorganization of
companies or to the modification or alteration of the rights of
creditors) or an answer or other pleading admitting or failing
to deny the material allegations of such a petition or seeking,
consenting to or acquiescing in the relief therein provided;
(ii) A party's making an assignment, or so called trust mortgage or
the like, for the benefit of its creditors or by its making a
proposal to its creditors under any bankruptcy act;
(iii) A party's consenting to the appointment of a receiver or a
trustee (or other person performing a similar function) for all
or a substantial part of its property;
(iv) A party's being adjudicated bankrupt;
(v) The entry of a court order which has not been vacated, set
aside or stayed within thirty (30) days from the date of entry,
either (i) appointing a receiver or a trustee for all or a
substantial part of its property or (ii) approving a petition
filed or application made against it for, or effecting an
arrangement in, bankruptcy or made against it for, or effecting
an arrangement in, bankruptcy or for a reorganization or other
relief pursuant to any bankruptcy act or for any other judicial
modification or alteration of the rights of creditors;
(vi) The assumption of custody or sequestration by a court of
competent jurisdiction of all or substantially all of a party's
property, which custody
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<PAGE>
or sequestration has not been suspended or terminated within
thirty (30) days from its inception; and/or
(vii) A party's insolvency, as defined by law.
With respect to this section and (S)4.2, termination of this Agreement
will riot terminate the rights or obligations of either party arising
out of the period during which this Agreement was in effect.
4.4 Obligations Upon Termination. Upon any termination or non-renewal of this
Agreement, Supplier shall deliver to GE any and all data or information (in
whatever form or media) that is owned or developed by or licensed to GE and
that is supplied to Supplier by GE hereunder. Furthermore, Supplier shall
cooperate with GE in the transfer of Supplier's obligations hereunder to a
replacement service provider.
ARTICLE 5. INDEPENDENT CONTRACTOR
5.1 Control of Work. Supplier shall be solely responsible for the conduct and
control of the work to be performed under this Agreement by Supplier and
its agents or employees.
5.2 Supplier's Employees. It is expressly understood and agreed that for all
purposes, including but not limited to workers' compensation insurance,
unemployment insurance, FICA, and federal and state tax withholding,
Supplier and any of its agents, contractors or employees performing
services under this Agreement shall not be deemed employees of GE. Supplier
shall indemnify GE from and against any taxes imposed on GE as a result of
any determination of any taxing authority that the agents of Supplier
performing services hereunder are employees of GE. Supplier and its
employees shall not be entitled to any of the benefits that GE provides to
its employees and Supplier shall provide all legally required insurance
coverage for Supplier's employees.
5.3 No Agency. Supplier shall perform its services hereunder as an independent
contractor. This Agreement shall not be deemed or construed to create any
association, partnership, joint venture, or relationship of principal and
agent or master and servant between the parties hereto or any affiliates or
subsidiaries thereof, or to provide either party with the right, power, or
authority, whether express or implies, to create any such duty or
obligation on behalf of the other party.
5.4 Fiduciary Status. GE and Supplier understand and intend that Supplier shall
not be a fiduciary within the meaning of the Employee Retirement Income
Security Act of 1974 as amended, or any state law with respect to any Plan.
Supplier shall not have any discretion with respect to the management or
administration of any Plan or with respect to determining or changing the
rules or policies pertaining to eligibility or entitlement of any
participant in any Plan to benefits under such Plan. Supplier also shall
not have any
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<PAGE>
control or authority with respect to any assets of any Plan, Including the
investment or disposition thereof. All discretion and control with respect
to the terms, administration or assets of any Plan shall remain with GE or
with the named fiduciaries under such Plan.
ARTICLE 6. RIGHTS IN DELIVERABLES AND DATA
6.1 Deliverables. Subject to the provisions of Article 7 hereof entitled
Confidentiality, the parties shall, from and after the date of this
amendment and prior to the initiation of any product development or project
effort (collectively, the "GE Project"), discuss in good faith the
treatment of intellectual property rights with respect to any system,
process, invention or tool which may be developed pursuant to the services
rendered by Supplier pursuant to this Agreement. If the parties cannot
agree as to such treatment, GE may, at its sole option, discontinue use of
Supplier for such New Project and shall retain all intellectual property
rights to any system, process, invention or tool owned by GE prior to the
initiation of such development effort. In such event, Supplier shall return
all any notes, reports, or memoranda provided to Supplier by GE in
connection with such New Project. Notwithstanding anything to the contrary
in the foregoing, the parties agree that (1) the GE Disability Policy Guide
and the GE Disability Policies and Procedures Manual (collectively, the "GE
Products") shall be owned by GE and (2) Supplier may perform services for
other parties involving projects and products that may be similar to a New
Project or a GE Product, and the provisions of this section shall not
preclude Supplier from providing such services. GE may obtain and hold in
its own name any copyrights, registrations and other protection that may be
available in the GE Products, and Supplier shall provide reasonable
assistance to perfect such protection.
6.2 Intellectual Property. Except as provided in (S)6.1, nothing contained in
this Agreement shall confer to either party any property rights,
proprietary interest or license in the software, written materials,
techniques, system, process, invention or tool, or know how used by the
other party.
6.3 Participant Data. All of the Participant data and any other materials
pertaining to the GE's requirements or the Plans and provided to Supplier
by GE pursuant to this Agreement is Confidential Information (as that term
is hereinafter defined) and shall at all times remain the property of GE.
Supplier shall return all such data to GE upon GE's request.
ARTICLE 7. CONFIDENTIALITY
7.1 Confidential Information. Confidential information shall include all
information disclosed by one party (the "Discloser") to the other (the
"Recipient") in writing and marked "Confidential" or "Proprietary" or
disclosed visually or orally and subsequently confirmed in writing within
20 days after the first disclosure ("Confidential Information"). The terms
and conditions of this Agreement shall be deemed Confidential
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<PAGE>
Information with respect to both parties. Confidential Information shall
not, however, include the following:
(a) Information which is now or hereafter comes into the public
domain;
(b) Information learned by the Recipient from third parties;
(c) Information known to the Recipient or developed by the Recipient
independently of information disclosed by the Discloser; or
(d) Information required to be disclosed by Recipient pursuant to
requirements of law.
7.2 Confidential Treatment. The Recipient shall treat the Confidential
Information as confidential, using the same standard of care that it uses
to protect its own proprietary or confidential information (but not less
than a reasonable standard of care), and shall use reasonable measure to
prevent disclosure of the Confidential Information to any third party
without the Recipient's consent. The Recipient shall disclose the
Confidential Information only to those of its employees, agents or
subcontractors who have a reasonable need for access therefor.
7.3 Return of Information. All Confidential Information shall remain the
property of the Discloser. Upon the Discloser's request, the Recipient
shall promptly return the Confidential Information, provided, however, that
the Recipient may retain copies solely for archival purposes only.
7.4 Trademarks and Copyrights. The parties reserve the right to the control and
use of their names and all copyrights, symbols, trademarks, or service
marks presently existing or later established. Neither party shall use the
other party's copyrights, symbols, trademarks, or service marks in
advertising or promotional materials or otherwise without the prior written
consent of such other party.
ARTICLE 8. INDEMNIFICATION AND INSURANCE
8.1 Insurance. During the term of this Agreement, Supplier shall maintain in
force the following insurance coverage; (a) Workers' Compensation and
related insurance as prescribed by the law of the state(s) in which the
work is to be performed; (b) general comprehensive liability coverage, with
limits of *** per occurrence and *** in the aggregate; (c) property damage
coverage in the amount of *** per occurrence; and
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.8 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
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<PAGE>
(d) E&O insurance with limits of ***. Upon GE's request, Supplier shall
provide certificates of insurance evidencing the aforementioned coverages.
8.2 Indemnity. Each party (the "Indemnifying Party") shall indemnify and hold
harmless the other party (the "Indemnified Party") from and against any
costs, claims, damages, liabilities, or losses (including costs and
expenses and attorney fees incurred in connection therewith) ("Claims")
arising from injuries, including death, or damage to property resulting
from the negligence or willful misconduct of the indemnifying Party. The
Indemnified Party shall notify the Indemnifying Party promptly of any
Claim. The Indemnifying Party may, but shall not be required to, assume the
defenses of any such Claims. The Indemnified Party shall cooperate with the
Indemnifying Party in the defense of any such Claim, and shall not settle
or compromise such Claim without the prior written consent of the
Indemnifying Party.
8.3 Intellectual Property Indemnification. Supplier shall indemnify and hold GE
harmless from any award of costs and damages in any action against GE based
on a claim that any of the services or materials delivered to GE in
connection therewith, including without limitation any computer software,
infringe upon any United States patent right or copyright of any third
party, provided that (i) Supplier is promptly notified in writing of any
such suit or claim; and (ii) GE permits Supplier to defend, compromise or
settle any such suit or claim, and gives Supplier all available
information, reasonable assistance, and authority necessary to do so.
Notwithstanding the foregoing, Supplier shall have no obligation to
indemnify GE with respect to any claim of infringement pertaining solely to
any portion of services or material prepared in connection therewith
modified or prepared by Supplier to conform to specific instructions or
directions provided by GE.
ARTICLE 9. NOTICES
9.1 General. All notices, requests, demands and other communications required
to be given hereunder shall be in writing and shall be deemed to have been
duly given one day after delivery by hand or via a nationally recognized
overnight courier or five days after mailing, certified or registered mail,
return receipt requested to the party for whom intended at the address
specified in this Article. Either party may designate an alternate address
for notices by given written notice thereof in accordance with the
provisions of this Article.
9.2 Notices to Supplier. All notices to Supplier shall be directed as follows:
Network Management Services
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.8 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
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<PAGE>
5500 Wayzata Blvd., Suite 1275
Minneapolis, MN 55416-1241
Attn: Michael C. Bingham, President
9.3 Notices to GE. All notices to client shall be directed as follows:
General Electric Company
3135 Easton Turnpike, E2B
Fairfield, Connecticut 06431
Attn: Shelly C. Wolff, Program Leader, Disability Programs
with a copy to:
General Electric Company
3135 Easton Turnpike, W3C
Fairfield, Connecticut 06431
Attn: Kevin J. F. Fitzgerald, Health Care Counsel
ARTICLE 10. GENERAL PROVISIONS
10.1 Applicable Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York.
10.2 Publicity. Supplier shall obtain the prior written consent of GE
concerning the content and plan of distribution of any public announcement,
press release, advertisement or other public communication concerning this
Agreement, the services provided by Supplier under this Agreement, and the
Deliverables or any descriptions thereof. Notwithstanding anything to the
contrary in the foregoing, provided that Supplier may include references to
GE as a client in client lists, proposals, and other non-public
communications concerning Supplier or its services. No prior consent shall
be required regarding the inclusion of the other party's name in notices,
disclosure documents, or other filing or publications required by law or
regulations. For the purposes of this section, "public communication"
shall include the participation by Supplier personnel in any trade
association, educational or promotional event (e.g., a disability
----
management seminar).
10.3 Arbitration. Any dispute, controversy or claim that cannot be resolved by
the parties arising out of or relating to this engagement letter of the
services covered by this letter shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American
Arbitration Association ("AAA"), and judgment upon the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction thereof.
The arbitration shall be held in New York, New York, or in such other
location as the parties may mutually agree upon. The arbitration will be
conducted before a panel of three arbitrators, with one arbitrator named by
each party and the third named by the two party-
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<PAGE>
appointed arbitrators, or (if they should fail to agree on the third) by
the AAA. The arbitrators may not award non-monetary or equitable relief of
any sort. They shall have no power to award punitive damages or any other
damages not measured by the prevailing party's actual damages. All aspects
of the arbitration shall be treated as confidential. Neither the parties
nor the arbitrators may disclose the existence, content or results of the
arbitration, except as necessary to comply with legal or regulatory
requirements. Before making any such disclosure, a party shall give written
notice to all other parties and shall afford such parties a reasonable
opportunity to protect their interests.
10.4 Books and Records.
(a) GE shall have the right, but not the obligation, to audit the books
and records of Supplier pertaining to Supplier's services rendered
hereunder, upon reasonable notice to Supplier. Such right to audit
shall survive the termination of this Agreement.
(b) Supplier will make available for audit by either GE or its designee
("Auditor") its files, books, procedures and records (including
computer terminal access to same) pertaining to the services provided
by Supplier under this Agreement during the hours of 7 a.m. to 7 p.m.
Monday through Friday, but excluding holidays. Supplier shall fully
cooperate with such audit and shall make available for interview with
the Auditor those personnel with material involvement or
responsibility with respect to the services provided by Supplier under
this Agreement. GE will give Supplier reasonable notice of each audit
prior to commencement of the audit. The audit shall be conducted at
Supplier's offices.
10.5 Paragraph Headings. Section headings are for convenience only and shall
not be considered part of the terms and conditions of this Agreement.
10.6 Modification. No modification, waiver or amendment of any term or
condition of this Agreement shall be effective unless and until it shall be
reduced to writing and signed on behalf of Supplier and GE.
10.7 Waiver. Failure by either party at any time to require full performance by
the other party or to claim a breach of any term of this Agreement will not
(a) be construed as a waiver of any right under this Agreement, (b) affect
any subsequent breach, or (c) affect the validity of this Agreement or any
part thereof.
10.8 Severability. If any term or provision of this Agreement should be
declared invalid by a court of competent jurisdiction, the remaining terms
and conditions of this Agreement shall be unimpaired.
-10-
<PAGE>
10.9 Complete Agreement. The Agreement, including the Exhibits, constitutes
the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior proposals, negotiations,
conversations, discussions and agreements between the parties. This
Agreement may be modified only by a written instrument executed on behalf
of both of the parties hereto.
10.10 Assignment. Neither party may assign any of its rights under this
Agreement without the prior written consent of the other party. Subject
to the foregoing, all of the terms and provisions of this Agreement shall
be binding upon and insure to the benefit of and be enforceable by the
successors and permitted assigns of GE and Supplier.
10.11 Survival. The respective obligations of each party that would by their
nature continue after the termination or expiration of this Agreement,
including without limitation those contained in Article 7
(Confidentiality), (S)(S)8.2 and 8.3, ("Indemnification" and
"Intellectual Property indemnification" respectively), and (S)10.2
("Publicity") shall survive the termination or expiration of this
Agreement, provided, however, that the restrictions contained in (S)10.2
shall expire one year after termination of this Agreement.
10.12 Counterparts. This Agreement may be executed in one or more counterparts
each of which shall be deemed to be an original and all of which, taken
together, shall constitute a single instrument.
10.13 Contract Benefits Extensions. From time to time, GE may identify
opportunities for Supplier to lower its costs by taking advantage of
terms GE has negotiated with GE's suppliers of goods and services.
Supplier agrees to cooperate with GE in identifying such opportunities,
and to use its best efforts to obtain such cost savings when they are
available. Supplier and GE agree that any mutually determined cost
savings realized by Supplier will be shared equally between GE and
Supplier. Supplier also agrees to consider making the terms of this
Agreement available to GE's customers and suppliers, when identified by
GE, and to cooperate with GE to identify opportunities for GE's customers
and suppliers to reduce their benefit plan administration costs.
10.14 Competitiveness Efforts. GE and Supplier shall meet no less than annually
to specifically review the pricing and productivity improvements Supplier
has implemented to both ensure Supplier's competitive position in the
marketplace and that GE's agreement with Supplier reflects Supplier's
competitiveness.
10.15 Benefit of the Parties. This Agreement is for the sole and exclusive
benefit of the parties hereto and is not intended to, nor does it, confer
any benefit upon any third party.
10.16 Changes in Law or the Plans. In the event of Federal or State
governmental action or a change in the Plans that materially affects in a
negative manner Administrator's ability to meet the obligations provided
for in this Agreement, Company and Administrator agree
-11-
<PAGE>
to negotiate in good faith to revise Administrator's obligations under
this Agreement on an equitable basis. If the parties are unable to agree
on a mutually acceptable revision, either party may terminate this
Agreement on 60 days prior written notice to the other party.
IN WITNESS WHEREOF, the parties hereto, through their duly authorized
representatives, have executed this Agreement effective as of the day and year
first set forth above.
SUPPLIER GENERAL ELECTRIC COMPANY
By: /s/ Scott Halstead By: /s/ Shelly Wolff
---------------------------------- --------------------------------
Name: Scott P. Halstead Shelly C. Wolff
Title: Chief Financial Officer Program Leader, Disability Programs
-12-
<PAGE>
EXHIBIT A - PLANS
GE Life, Disability and Medical Plan (Continued Life Insurance
Protection/Disability Extension and Short-Term Disability Benefits)
GE Long Term Disability Income Plan for Hourly Employees
GE Long Term Disability Income Plan for Salaried Employees
GE Pension Plan (Disability Pension)
Salary Continuance (pursuant to GE compensation policy and practice)
Worker's Compensation (pursuant to State law)
A-1
<PAGE>
EXHIBIT B - SERVICES TO BE PROVIDED BY SUPPLIER
I. Consulting Services
Contribute to GE's competitiveness by providing cost management services to
further develop GE's integrated disability management practices. The services
will advance and improve GE's disability objectives to assure maximum value with
a focus on quality and cost control.
. Develop cost savings opportunities across all programs and locations.
. Identify internal and external best practices.
. Evaluate and select specialty programs.
. Provide policy interface between businesses and the Health and Disability,
Benefits Center.
. Deliver and assist in implementation of on-site disability management
"best value" strategies.
. Support in the development and execution of key performance indicators and
analytics, including but not limited to a supplier scorecard and other
quality measurement tools and processes implementing the GE as quality
initiative.
. Assist in planning and project management to identify synergy's across
various benefits.
. Explore contract opportunities for risk/reward aspects of supplier partner
services.
. Develop network to link HCP and Workers' Compensation as identified.
. Support new programs and development for GE core businesses.
. Provide education/training to GE stakeholders for effective new program
implementation.
In providing its services hereunder, Supplier shall establish and maintain
coordination with the following parties:
. GE Disability Leads
. GE Health Care Managers
. GE Health Care Team Leaders
. GE Business Finance
. GE Sourcing
. GE Corporate Legal
. GE On-site Medical Staff- GE Medical Doctors/CARE
B-1
<PAGE>
. GE Environmental Health & Safety
. GE Health & Disability Benefits Center
. Electric Insurance Company
. Third Party Administrators (e.g., Sedgwick James for disability, various
----
medical plan MBAs)
II. Sourcing/Performance Management Services
A. Selection and Contracting Process
1. Draft and update key documents relating to the selection and
contracting process, including but not limited to RFI, RFP and
selection criteria
2. Coordinate entire RFP process and teams
3. Research and identify potential disability suppliers
4. Prepare and send RFP, coordinate response and scoring processes
and prepare and send appropriate follow-up communications
5. Coordinate and participate in site visits
6. Coordinate and attend final negotiations
B. Performance Management
1. Identify opportunities to enhance performance with existing
suppliers
2. Conduct site visits
3. Perform data analysis functions, including but not limited to
CORE, EIC Medstat data reports
4. Designing and implementing targeted improvement programs (e.g.,
----
supplier scorecard)
5. Budgeting and financial reviews
B-2
<PAGE>
EXHIBIT C
GE INTEGRITY FORM
ACKNOWLEDGEMENT
Date: _________________________
Reference: Agreement entered into as of April 21, 1997, between GENERAL
ELECTRIC COMPANY ("GE") and Network Management Services, Inc.
("SUPPLIER").
I, ___________________________________, will be performing services pursuant to
the above-referenced Agreement. I have received previously or concurrently with
this Acknowledgment a copy of GE policies 20.4, 20.5, 20.7, 20.10, 30.5, and
30.10. I have read these policies, understand them, and agree to comply with
them. Further, I am familiar with and agree to comply with the Office of
Federal Procurement Policy Act Amendments of 1988 (the Act), its applicable
implementing regulations, and GE guidelines regarding the Act, and I will report
immediately to my contact in the GE any information concerning a violation or
possible violation of the Act or its implementing regulations.
_______________________________
Signature
_______________________________
Printed or Typed Name of Signer
C-1
<PAGE>
EXHIBIT D
FEES
A. Base Fees
GE shall establish an annual budget, based on full-time equivalents (FTEs)
utilized, for all consulting services of the type provided by Supplier pursuant
to this Agreement and other entities performing similar services. Supplier shall
be compensated based on its pro rata share of such FTEs in relation to the total
number of FTEs budgeted by GE. For each calendar year under this Agreement, the
GE budget is *** based on 1 FTEs. Supplier is scheduled to provide such *** with
respect to such calendar year; provided, however, that in any calendar year
under this Agreement in which Supplier provides less than *** on an annualized
basis (including but not limited to 1997) the budget will be reduced pro rata in
accordance with the hiring date of the resource. In addition, GE shall allocate
up to an additional *** for performance-based compensation and Supplier shall
put up to *** of its base fees at risk as set forth in Section C below, both
such figures to be prorated, if applicable, consistent with the foregoing
sentence.
B. Expenses
Expenses will be invoiced at cost. Supplier shall adhere to GE travel policy
and shall utilize, when made available to Supplier, the GE Travel Center for all
travel arrangements pursuant to this Agreement. Notwithstanding anything to the
contrary in the foregoing, automobile travel will be invoiced at the applicable
Internal Revenue Service limit. In addition, Supplier shall be reimbursed up to
*** for recruiter fees actually incurred in hiring personnel as required
pursuant to Section A above; provided, however that such sums shall be refunded
if the personnel hired does not provide services under this Agreement for at
least one year from the Commencement Date. In addition, if the personnel hired
to provide services is retained on a less than *** basis, such reimbursement for
recruiter fees shall be prorated accordingly (unless the recruiter fee payment
is based on a customary percentage basis multiplied by the actual, not
annualized, salary of the retained personnel.)
C. Incentive Arrangement
In addition to the base fee above described, Supplier will be eligible to
receive incentive payments of up to *** for each calendar year of this
Agreement, and, with respect to calendar years 1998 and 1999, Supplier shall
put *** of its base fees at risk as herein described, provided, however, that
with respect to first year of this Agreement, there shall be no incentive
compensation payable if Supplier is reimbursed for any recruiting fees pursuant
to Section B above. Incentive bonuses or penalties shall be prorated (in
addition to the proration, if
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.8 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
D-1
<PAGE>
applicable, set forth in Section A hereof) in the case of termination of this
Agreement that does not encompass a complete calendar year, except with respect
to calendar year 1997. In all cases of partial year-calculation, trend
calculations shall be annualized.
1. Calendar Year 1997 (partial from the Commencement Date)
-------------------------------------------------------
Supplier shall be eligible to earn incentive compensation as described
below:
a. One-half of the total incentive compensation payable will be based
on customer satisfaction. The customer satisfaction will be
determined based on a survey of GE Corporate and business health
care team members and such other persons as designated by GE (e.g.,
----
other GE health care suppliers). The parties shall mutually develop
a survey using a five-point scale (5 = very satisfied to 1 = very
dissatisfied). Based on the results of such survey, and overall
score shall be tabulated by GE. Scores and resulting payouts shall
be as follows:
<TABLE>
<CAPTION>
Score Bonus
----- -----
<S> <C>
above 4 ***
above 3.5 but below 4 ***
below 3 ***
</TABLE>
b. One-half of the total incentive compensation shall be based on
reductions in GE's combined overall STD and WC Program Costs
measured on costs per eligible employee per year basis versus the
prior year as calculated by GE. The chart below sets forth the
incentive arrangement. With respect to any given calendar year
under this Agreement, "STD and WC Program Costs" will be determined
on a paid basis for such year.
<TABLE>
<CAPTION>
Trend Bonus
---- -----
<S> <C>
Meet or exceed GE SII Trend Budget ***
Any other result ***
</TABLE>
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.8 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
D-2
<PAGE>
2. Calendar Years 1998 and 1999
----------------------------
The incentive arrangement for calendar years 1998 and 1999 shall be
structured as described below:
a. One-half of the total incentive compensation payable will be based
on customer satisfaction. The customer satisfaction will be
determined based on a survey of GE Corporate and business health
care team members and such other persons as designated by GE
(e.g., other GE health care suppliers). The parties shall mutually
-----
develop a survey using a five-point scale (5 = very satisfied to 1
= very dissatisfied). Based on the results of such survey, and
overall score shall be tabulated by GE. Scores and resulting
payouts shall be as follows:
<TABLE>
<CAPTION>
Score Bonus/Penalty
----- -------------
<S> <C> <C>
above 4 ***
above 3.5 but below 4 ***
below 3 ***
</TABLE>
b. One-half of the total incentive compensation shall be based on
reductions in GE's combined overall STD and WC Program Costs
measured on costs per eligible employee per year basis versus the
prior year as calculated by GE. The chart below sets forth the
incentive arrangement. "STD and WC Program Costs" shall be defined
to include all medical, income replacement, and other program
costs as set forth in the H&DBC monthly cost report. With respect
to any given calendar year under this Agreement, "STD and WC
Program Costs" will be determined on a paid basis for such year.
<TABLE>
<CAPTION>
Trend Bonus/Penalty
----- -------------
<S> <C>
Meet or exceed GE SII Trend Budget target ***
Miss GE SII Trend Budget by more than 2.5% ***
Any other result ***
</TABLE>
3. Incentive arrangements for any other period not herein provided for
shall be subject to mutual agreement of the parties.
***Pursuant to Rule 406 of the Securities Act of 1933, as amended, confidential
portions of Exhibit 10.8 have been deleted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
D-3
<PAGE>
D. Payment of Incentives
With respect to any given calendar year under this Agreement, incentive payments
shall be calculated and paid on or before February 28 of the succeeding calendar
year.
D-4
<PAGE>
EXHIBIT 10.12
STANDARD OFFICE LEASE
---------------------
LEASE AGREEMENT (Lease") made as of 12/31/93, between MINNESOTA CC
PROPERTIES, INC. ("Landlord") and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
("Tenant").
SCHEDULE
--------
Each reference in this Lease to any of the terms set forth on the
following Schedule ("Schedule") shall be construed to incorporate the following:
1. Premises: The Premises consisting of approximately 29,903 square
feet of net rentable area as shown on Exhibit A, on the fourteenth (14th) and
twelfth (12th) floor(s) of the building commonly known as 5500 Wayzata
Boulevard, Golden Valley, Minnesota (the "Building").
2. Project: The land described in Exhibit B (the "Land"), together with
the buildings, improvements and appurtenances now or hereafter located on or
used in connection with the Land.
3. Term: The Term shall be seventy-two (72) months commencing on May 1,
1994 (the "Commencement Date"), and ending on April 30, 2000 (the "Termination
Date"), subject to adjustment as provided in Section 3 of this Lease.
4. Base Rent: The annual Base Rent shall be $8.50 per rentable square
foot in the Premises, payable in monthly installments of $21,181.29. See Exhibit
E, Section 27.
5. Operating Cost Rent: Landlord's estimate of the annual Operating
Cost Rent for 1993 is $9.95 per rentable square foot in the Premises, payable in
monthly installments of $24,794.57. See Exhibit E, Section 27.
6. Security Deposit: None.
7. Advance Payment: $24,794.57, payable on or before March 1, 1994, to
be applied to the first monthly installment of Operating Cost Rent due under the
Lease. See Exhibit E, Section 27.
8. Tenant's Permitted Use: General office purposes only.
9. Landlord's Address: Minnesota CC Properties, Inc., c/o The Shelard
Group, Inc., 5500 Wayzata Boulevard, Suite 315, Golden Valley, MN 55416.
10. Tenant's Capacity and Address: Tenant, a corporation under the laws
of New Jersey, has the following address for notices before the Commencement
Date: The Prudential Insurance Company of America, Central Group Office, 250
Gibraltar Road, Horsham, PA 19044-2323, Attn: Rich Jacobus, Building Operations,
Services and Support Division, and the Premises for notices after the
Commencement Date, or such other address as Tenant may from time to time
designate by notice to Landlord.
11. Real Estate Brokers: The Shelard Group, Inc., representing
Landlord; and Welsh Companies, Inc., representing Tenant.
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<PAGE>
FOR VALUABLE CONSIDERATION, the parties agree as follows:
1. LEASING AGREEMENT. Landlord leases to Tenant, and Tenant accepts from
Landlord, the Premises as set forth on the Schedule. The Term shall begin on the
Commencement Date and continue until the Termination Date as set forth on the
Schedule, unless sooner terminated under the terms of this Lease.
Tenant and its agents, employees and invitees have the non-exclusive right with
others designated by Landlord to use the common area in the Project for their
intended and normal purposes. Common areas include elevators, sidewalks,
unrestricted parking areas, driveways, hallways, stairways, public bathrooms,
common entrances, lobbies and other areas designated by Landlord for common use.
Landlord may change the common areas at any time, provided the changes do not
materially and unreasonably interfere with Tenant's access to or use of the
Premises. Tenant's use of the common areas shall be subject to the terms and
conditions of this Lease and to the rules and regulations prescribed from time
to time by Landlord as provided in Section 7.
2. RENT.
A. Kinds. Tenant agrees to pay to Landlord, without setoff, deduction
or demand, at Landlord's Address as set forth on the Schedule, or to such other
person or at such other place as Landlord designates by written notice to
Tenant, in lawful money of the United States, the aggregate of the following,
all of which are rent reserved under this Lease (collectively, "Rent"):
(1) Base Rent to be paid in monthly installments in advance on
or before the first day of each month of the Term of this Lease in the amount
set forth on the Schedule.
(2) Operating Cost Rent in an amount equal to Tenant's
Proportionate Share of the Operating Costs for the applicable fiscal year of
this Lease. Operating Cost Rent shall be paid monthly in advance in an estimated
amount, as adjusted by Landlord from time to time as provided in Section 2B.
Definitions of Operating Costs, Tenant's Proportionate Share and the method for
billing and payment of Operating Cost Rent are set forth in Sections 2B and 2C.
(3) Additional Rent consisting of all of the sums,
liabilities, obligations and other amounts (excepting Base Rent and Operating
Cost Rent) which Tenant is required to pay or discharge pursuant to this Lease
(including, without limitation, any amounts which this Lease provides shall be
Tenant's cost or expense), together with any late charge or interest, all as
hereafter provided.
B. Payment of Operating Cost Rent.
(1) Payment of Estimated Operating Cost Rent. Landlord shall
reasonably estimate the Operating Costs of the Project from time to time each
year. Such estimates may be revised by Landlord whenever(but not more than twice
per fiscal year) it obtains information relevant to making such estimates more
accurate. With thirty (30) days after notice from Landlord setting forth an
estimate of Operating Costs for a particular fiscal year. Tenant shall pay
Landlord an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share
of such estimate multiplied by the number of months during the Term that have
elapsed in such fiscal year to the date of such payment, minus payments of
estimated Operating Cost Rent previously paid for said period. Thereafter on the
first day of each month, Tenant shall pay monthly until a new estimate is
applicable, one-twelfth (1/12th) of Tenant's Proportionate Share of the
estimated Operating Costs.
(2) Correction of Operating Cost Rent. As soon as reasonably
possible after the end of each fiscal year, Landlord shall deliver to Tenant a
notice (the "Operating Cost Report") setting forth (a) the actual Operating
Costs for the preceding fiscal year, (b) the amount of Operating Cost Rent due
to Landlord for such fiscal year, and (c) the amount of Operating Cost Rent paid
by the Tenant for such fiscal year. Within thirty (30) days
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<PAGE>
after such report, Tenant shall pay to Landlord the amount of any additional
Operating Cost Rent due for the preceding fiscal year (or a prorated portion
thereof if this Lease was not in effect for the entire fiscal year). If Tenant's
payments of Operating Costs Rent exceed the amount due Landlord for the fiscal
year in question, Landlord shall promptly either refund any such amount to
Tenant or apply any such amount as a credit against Tenant's other obligations
under this Lease. Unless Tenant takes written exception to any item within sixty
(60) days after the furnishing of the Operating Cost Report, such report shall
be considered as final and accepted by Tenant.
C. Definitions.
(1) Operating Costs. "Operating Costs" shall mean the sum of
the Taxes and Expenses for the Project, determined in accordance with sound
accounting and management practices as follows:
(a) Taxes. "Taxes" shall mean all taxes, assessments and other
governmental charges, general and special, ordinary and
extraordinary, of any kind and nature whatsoever, including,
without limitation, assessments for public improvements or
benefits, imposed by any lawful authority upon the Project or
payable by Landlord in connection with the ownership, leasing,
renting, management, control or operation of the Project.
Taxes shall include, without limitation, real estate taxes,
personal property taxes (to the extent imposed on any
equipment, fixtures or personal property constituting a part
of or used in connection with the Project), sewer rents,
assessments (special or otherwise), transit taxes, ad valorem
taxes, and any new or increased taxes, assessments or charges
which are in place of or arise out of any changes in current
Taxes. Taxes shall also include all reasonable fees and
expenses incurred to contest, determine or reduce any Taxes;
and if a refund is obtained, Landlord shall promptly either
pay to Tenant or apply as a credit against Tenant's other
obligations under this Lease portion of the refund based on
the percentage of the original Taxes paid by Tenant from which
the refund was derived. If at any time during the Term, a
federal, state or local tax, excise or surcharge on rents or
income or other tax however described (herein called "Rent
Tax") is levied or assessed on account of the rents hereunder
or the interest of Landlord under this Lease, such Rent Tax
shall be included in Taxes. Taxes shall not include any net
income capital stock, succession, transfer, franchise, gift,
estate or inheritance taxes, unless the same shall be imposed
in place of all or any portion of Taxes.
The Taxes for any given fiscal year shall be the amount of
Taxes payable during such fiscal year, even though levied or assessed
for a different fiscal year; provided, that in the case of special
assessments which may be paid installments, only the installment, plus
any interest, payable during the fiscal year shall be included in
Taxes. Tenant shall be solely responsible for any taxes on its personal
property and trade fixtures used in connection with the Premises.
(b) Expenses. "Expenses" shall mean all expenses, costs and
disbursements (other than Taxes) of every kind and nature, paid or
incurred by or on behalf of Landlord in connection with the ownership,
management, maintenance, operation and repair of all or any part of the
Project. Expenses shall not include (1) costs of alterations of tenant
premises: (2) costs of capital improvements, except for a reasonable
amortization plus interest expense for any capital improvements which
are made to reduce Expenses or which are required to comply with all
governmental laws, ordinances, regulations or orders applicable from
time to time to the Project; (3) depreciation, except as permitted in
the preceding Subsection; (4) interest and principal payments on
mortgages, any rental payments on any ground or other underlying leases
and other debt costs, if any; (5) real estate brokers' leasing
commissions; and (6) any cost or expenditure for which Landlord is
reimbursed, whether by tenants, insurance proceeds or otherwise
(excluding Operating Cost Rent).
If the Project is not fully occupied at any time during any
fiscal year, Landlord may reasonably adjust the Expenses which vary
with occupancy in the Project for such fiscal year, employing sound
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<PAGE>
accounting and management principles, to the amount of Expenses that
would have been incurred had the Project been fully occupied for the
entire fiscal year. If during any fiscal year's tenant performs any
service (the cost of which would constitute an Expense) in lieu of
Landlord furnishing the service, Landlord may reasonably adjust the
Expenses for such fiscal year to the amount which would have been
incurred if Landlord had furnished such service.
(2) Fiscal Year. "Fiscal year" shall mean any twelve 912)
month period (including, without limitation, the calendar year) which Landlord
may from time to time select as the fiscal year of the Project; provided, that
in case Landlord changes such fiscal year, the fiscal years before and after the
change may contain less than twelve (12) months. See Exhibit E, Section 32.
(3) Tenant's Proportionate Share. "Tenant's Proportionate
Share" shall mean the percentage obtained by dividing the net rentable area of
the Premises by the net rentable area of the Project, each as reasonably
determined by Landlord.
D. Rules of Interpretation and Computation of Base Rent and Rent
Adjustments.
(1) If the Term commences or terminates on other than the
first or last day of a month, the Base Rent and Operating Cost Rent for such
month shall be prorated based upon the number of days of the Term falling within
such month and shall be paid in advance. If the Term of this Lease commences on
any day other than the first day of the designated fiscal year, or if the Term
of this Lease ends on any day other than the last day of the designated fiscal
year, any Operating Cost Rent due to Landlord with respect to such fiscal year
shall be prorated based on the number of days in the Term falling within such
fiscal year.
(2) If Tenant fails to pay any Base Rent, Operating Cost Rent
or Additional Rent within ten (10) days from the date due, Tenant shall pay to
Landlord on demand a late charge in the amount of five percent (5%) of such sum
to help defray Landlord's additional administrative costs. In addition, any sum
due from Tenant to Landlord not paid within ten (10) days from the date due
shall bear interest from the date due until the date paid at an annual rate
equal to the lesser of: (a) the highest lawful rate, or (b) eighteen percent
(18%) per annum. The payment of such late charge or interest shall not excuse or
cure any default of Tenant under this Lease, or limit any right or remedy of
Landlord. See Exhibit E, Section 33.
(3) If changes are made to the number of square feet of net
rentable area in the Premises or in the Project, Tenant's Proportionate Share
shall be appropriately adjusted and the computations of rent shall be
appropriately adjusted upon written notice to Tenant so as to take into account
the different Tenant's Proportionate Share figures applicable during each
portion of the applicable fiscal year.
(4) Landlord shall, in its reasonable discretion and
consistent with the provisions of this Lease, determine from time to time the
method of computing Operating Costs, the allocation of Operating Costs among the
various parts and types of space within the Project and the allocation of
Operating Costs relating to more than one fiscal year.
(5) Landlord's and Tenant's obligations under this Section 2
shall survive the expiration or termination of this Lease.
3. CONDITION POSSESSION AND SURRENDER OF PREMISES.
A. Landlord shall make the improvements to the Premises, if any, as
provided in Exhibit C and shall maintain the Project as provided in Section 5.
Except as otherwise provided in this Lease, Landlord is leasing the Premises to
Tenant "as is," without any representations or warranties of any kind
(including, without limitation, any express or implied warranties of fitness or
habitability) and without any obligation on the part of the Landlord to alter,
remodel, improve, repaid, decorate or clean the Premises, the Project or any
part thereof.
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<PAGE>
B. If Landlord is unable to deliver possession of the Premises by the
Commencement Date set forth on the Schedule because construction has not been
substantially completed, or due to a holding over by a prior tenant, or for any
other reason beyond Landlord's control (except Tenant's default hereunder or
Tenant Delay as provided in Exhibit C), then: the Commencement Date and Tenant's
obligation for payment of Rent shall be postponed until the date on which
Landlord delivers possession of the Premises: Landlord shall not be liable for
any loss, damage or expense arising in any manner from any such delay; this
Lease shall remain in effect during the period of any delay; and the Term shall
be automatically extended to include the same number of months set forth on the
Schedule, plus, if the Commencement Date is not the first day of a calendar
month, the partial month in which the commencement Date occurs, and the
Termination Date shall be appropriately adjusted.
C. Except as otherwise provided in this Lease, Tenant's taking
possession of the Premises or any portion thereof shall be conclusive evidence
that the Premises or such portion were then in good order, repair and
satisfactory condition. See Exhibit E, Section 34. If Landlord permits Tenant to
take possession of all or any part of the Premises prior to the Commencement
Date, all of the terms of this Lease, except where clearly inappropriate, shall
apply to and shall control such pre-term occupancy. See Exhibit E, Section 28.
D. During the Term of this Lease, Tenant shall maintain the Premises in
as good condition as when Tenant took possession (or as completed after
possession, if applicable), except for ordinary wear, casualty and as otherwise
provided in this Lease. At the expiration or termination of this Lease, Tenant
shall, subject to Sections 3E and 3F below, return the Premises to Landlord
broom clean and in good condition as described in the immediately preceding
sentence.
E. Unless otherwise agreed in a writing signed by Landlord, all Work
(as defined in Section 5A, including, without limitation, partitions, hardware,
floor coverings, ceilings, wiring, light fixtures and other fixtures, but
excluding trade fixtures, movable partitions and personal property belonging to
Tenant) in or upon the Premises, whether placed there by Landlord or Tenant,
shall be surrendered with the Premises at the expiration or termination of this
Lease and shall become Landlord's property without compensation to Tenant;
provided, that if prior to any such expiration or termination of this Lease, or
within ten (10) days thereafter, Landlord so directs by written notice, Tenant
shall promptly remove any Work placed in or upon the Premises by Tenant and
designated in such notice, and repair any damage to the Premises caused by such
removal.
F. Tenant shall also remove its trade fixtures and personal property
from the Premises at the end of the Term, or within ten (10) days following the
early termination of this Lease or Tenant's right of possession; and if Tenant
does not remove such property, at Landlord's election: (1) Tenant shall be
conclusively deemed to have conveyed the same to Landlord as by a bill of sale
without further payment or credit by Landlord to Tenant, or (2) Tenant shall be
conclusively deemed to have forever abandoned such property, and without
accepting title thereto, Landlord may, at Tenant's expense, remove and store
such property.
G. Tenant's obligations under this Section 3 shall survive the
expiration or termination of this Lease.
4. PROJECT SERVICES.
A. Services. So long as Tenant is not in default hereunder, Landlord
shall furnish the following services to the Tenant without charge except for
Operating Cost Rent and as otherwise specifically provided herein:
(1) Heat and air conditioning to provide a temperature
required, in Landlord's reasonable judgment, for comfortable occupancy of the
Premises under normal business operations from 7:00 a.m. to 6:00 p.m. Monday
through Friday and from 8:00 a.m. to 1:00 p.m. Saturdays, holidays. See Exhibit
E, Section 35.
(2) Non-exclusive passenger elevator service at all times
(provided Landlord may limit the elevators in operation during non-business
hours), and non-exclusive freight elevator service as scheduled by Landlord.
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(3) Electrical facilities to provide sufficient power for
normal lighting and small business office equipment (but not equipment using
amounts of power disproportionate to that used by other tenants int he Project).
If the installation of any equipment requires additional electrical or air
conditioning capacity above the building standard system, then the additional
installation, metering and operating costs shall be paid by Tenant to Landlord
as Additional Rent. Landlord shall replace building standard lamps, bulbs,
ballasts or starters in the Premises as required by normal usage.
(4) Hot and cold municipal water at those points of supply
provided for the general use of tenants in the Project.
(5) Janitorial and customary cleaning services nightly in the
Premises, except Saturdays, Sundays and holidays; and window washing for
exterior windows at intervals reasonably determined by Landlord.
B. Additional Services. Except as specifically provided in this Lease,
Landlord shall not be obligated to furnish any additional services or to furnish
services at other times. If Landlord provides additional services at Tenant's
request, Tenant shall pay for such additional services at Landlord's then
prevailing rates as Additional Rent. If Landlord from time to time reasonably
determines that the use of any utility or service in the Premises is
disproportionate to the use of other tenants, Landlord may separately charge
Tenant for the excess costs attributable to such disproportionate use and may
install metering devices at Tenant's expense, which amounts shall be due from
Tenant as Additional Rent.
C. Interruption of Service. Landlord does not warrant that any service
will be free from interruption caused by labor controversies, accidents,
inability to obtain utilities, fuel, steam, water or supplies, governmental
regulations or other causes beyond the reasonable diligence to remedy any
interruption of its services after notice from Tenant, but no such interruption
of service shall be deemed an eviction or disturbance of Tenant's use and
possession of the Premises or any part thereof, or render Landlord liable to
Tenant for damages, by statement of Rent or otherwise, or relive Tenant from
performance of Tenant's obligations under this Lease. See Exhibit E, Section 36.
D. Keys and Locks. Landlord shall furnish Tenant with two (2) keys for
each corridor door entering the Premises, and additional keys ordered by Tenant
will be furnished by Landlord at Tenant's expense. All such keys shall remain
the property of Landlord; provided, that Tenant shall be solely responsible for
monitoring distribution and use of keys furnished to Tenant. No additional locks
shall be allowed on any door of the Premises without Landlord's written consent.
Upon termination of hits Lease, Tenant shall surrender to Landlord all keys to
any locks on doors entering or within the Premises, and shall give to Landlord
the combination for all locks for safes and vaults, if any, left in the
Premises.
5. ALTERATIONS AND REPAIRS.
A. Tenant shall not make or permit any interior or exterior
alterations, additions, improvements or changes, structural or otherwise, to the
Premises or the Project, nor make any installations which may require any change
to the heating, ventilating, air conditioning, electrical or plumbing systems of
the Project (collectively, "Work") without obtaining the prior written consent
of Landlord in each instance which will not be unreasonably withheld. As a
condition to granting its consent, Landlord may impose reasonable requirements,
including, without limitation, requirements as to the manner and time for the
performance of any Work, the type and amount of insurance, bonds and security
for payment Tenant must provide, the plans and specifications relating to the
Work, the contractors performing the Work, the contracts and building permits
relating to the Work, the activities being undertaken within the Project
relating to the Work, and the removal of the Work at the expiration or
termination of this Lease. Landlord shall be reimbursed by Tenant for all
reasonable costs incurred in connection with its review and supervision of the
Work. In no event will such supervision or right to supervise by Landlord, nor
any approvals given by Landlord under this Lease, constitute any warranty by
Landlord to Tenant of the adequacy of the design, workmanship or quality of any
Work or materials for Tenant's intended use or otherwise, or impose any
liability
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upon Landlord in connection with the performance of such Work. All Work shall be
performed in a good and workmanlike manner and in full compliance with
applicable laws, ordinances and regulations, and all insurance requirements.
B. Tenant shall promptly pay all contractors and materialmen for the
Work and furnish Landlord with sworn construction statements and lien waivers
upon request of Landlord. Any mechanic's lien filed against the Premises or the
Project for Work or materials furnished or claimed to have been furnished in
connection with the Work or to Tenant shall be released and discharged by
Tenant, by bond or otherwise, within ten (10) days after the filing of such lien
at Tenant's sole expense. Tenant agrees to indemnify, hold harmless and defend
Landlord, its agents and employees, the Premises, the Building and the Project
from any loss, damage or expense, including reasonable attorney's fees, arising
out of any lien claim or other claim relating to any Work. Nothing contained in
this Lease shall be construed as a consent by Landlord so as to subject the
Landlord's interest in the Premises to any lien or liability under applicable
mechanic's lien laws.
C. Landlord shall maintain and repair the foundations, exterior walls,
structural portions, roof and common areas of the Project, and the heating, air
conditioning, ventilating, electrical, elevator and plumbing systems serving the
Project (except improvements or fixtures in or primarily serving the Premises)
in good condition, ordinary wear except; provided that: (1) Landlord's
obligations shall be subject to the provisions of this Lease concerning casualty
loss and condemnation, and the cost of such repairs shall be included in
Operating Costs subject to the terms and conditions of Section 2; (2) Tenant
shall promptly at its expense repair all damage to the Premises or the Project
caused by Tenant or any of its employees, agents or invitees, by Tenant's
failure to comply with or perform any of Tenant's obligations under this Lease,
or by the installation, operation or removal of Tenant's improvements or
fixtures; and (3) Landlord shall use reasonable diligence in carrying out its
obligations under this Section, but shall not be liable under any circumstances
for any consequential damage to any person or property for any failure to do so,
nor shall the same constitute an eviction of Tenant or relieve Tenant from
performance of Tenant's obligations under this Lease except as expressly
provided in Section 36 or otherwise in this Lease.
D. Except for ordinary wear and as otherwise provided in this Lease,
Tenant shall at its expense maintain and repair the Premises, all improvements
and fixtures in or primarily serving the Premises, and all of Tenant's trade
fixtures and personal property at the Premises in good condition. If due to
Tenant's use of the Premises, alterations or improvements to the Premises or the
Project are necessary to comply with any present or future governmental laws,
ordinances or regulations or requirements of insurance carriers, Tenant shall at
its expense promptly perform such alterations or improvements in compliance with
this Section 5. If Tenant fails to perform any obligation under this Section 5,
then on not less than ten (10) days notice to Tenant (or immediately if an
emergency), Landlord may enter the Premises and perform such obligations, and
Tenant shall pay Landlord, upon demand, the cost thereof as Additional Rent.
6. USE OF PREMISES.
A. The Premises shall be occupied and used by Tenant only for Tenant's
Permitted Use as set forth on the Schedule, and for no other purpose. Without
limiting the generality of the foregoing, no use shall be made of the Premises
nor acts done which are unlawful, unsafe, create a nuisance, unreasonably
interfere with the operation of the Project, or may cause a cancellation of any
insurance policy covering the Project or any part thereof. Tenant shall not
permit to be kept, used or sold in or about the Premises any article which may
be extra-hazardous or prohibited by Landlord's insurance policies. If Tenant's
particular use of the Premises causes the rate of fire or other insurance on the
Premises to be increased beyond the rate otherwise applicable to the Premises,
Tenant shall pay the reasonable amount of any increase.
B. Tenant shall not install, use, generate, store, release or dispose
of in or about the Premises or the Project any hazardous substance, toxic
chemical, radioactive material, explosive, pollutant or contaminant (including,
without limitation, any hazardous substances as defined under applicable
federal, state and local statutes,
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ordinances and regulations, and petroleum, asbestos or PC3's), nor allow others
to engage in such activities, without Landlord's prior written approval of each
such substance, except that Landlord's approval shall not be required for use by
Tenant of immaterial quantities of such substances customarily used in office
business operations so long as Tenant uses such substances in accordance with
applicable laws and the highest prevailing industry standards. Tenant shall
indemnify, defend and hold Landlord harmless from and against any claim, damage
or expense, including, without limitation, all testing, enforcement, cleanup and
remedial costs and reasonable attorney's fees, arising out of the installation,
use, generation, storage, release or disposal of any such substance, regardless
of whether Landlord has approved the activity. Tenant's obligations under this
Section 6B shall survive the expiration or termination of this Lease.
7. PROJECT RULES AND GOVERNMENTAL REGULATIONS. Tenant shall comply with all
applicable governmental laws, ordinances and regulations concerning its use of
the Premises. Tenant shall also comply with all reasonable rules and regulations
adopted from time to time by Landlord pertaining to the operation and management
of the Project. If any rules and regulations are contrary to the terms of this
Lease, the terms of this Lease shall prevail. The present rules are contained in
Exhibit D. The violation of the Project rules or the laws or regulations
governing Tenant's use of the Premises shall be a default under this Lease
allowing Landlord all remedies for default set forth under Section 11 of this
Lease. Landlord shall not be responsible to Tenant for violation of the rules or
regulations, or the terms of this Lease or any other lease in the Project, by
another tenant, nor shall failure to obey the same by others relieve Tenant from
its obligations to comply therewith.
8. CLAIMS; INSURANCE; LIABILITY.
A. To the fullest extent permitted by law, Tenant waives all claims it
may have against Landlord, its officers, directors, agents or employees for
damage to person or property sustained by Tenant or by any occupant of the
Premises or the Project, or any other person, occurring in or about the Premises
or the Project, resulting from the Premises or the Project or any part of said
Premises or Project becoming out of repair or resulting from any existing or
future condition, defect, matter or thing in the Premises, the Project or any
part of it, or from equipment or appurtenances therein, or from the action of
the elements, or from any security or lack thereof, or any accident within or
adjacent to the Premises or Project, or resulting directly or indirectly from
any act or omission of Landlord or any occupant of the Premises or Project or
any other person while on the Premises or the Project. This Section 8A shall
include, without limitation, damage caused by water, snow, frost, steam,
excessive or inadequate hat or cooling, sewers, gas, odors or nosie, the
bursting or leaking of pipes or plumbing fixtures, broken glass, sprinkling or
air conditioning devices or equipment, or flooding. All property on the Project
or int he Premises belonging to the Tenant, its agents, employees, contractors
or invitees or to any occupant of the Premises shall be there at the risk of the
Tenant or such other person only, and Landlord shall not be liable for damage
thereon or theft, misappropriation or loss thereof. Notwithstanding anything
contained in this Section 8 to the contrary, no agreement of Tenant in this
Section 8 shall be deemed to exempt Landlord from liability for injury to
persons or damage to property caused by or resulting from the negligence or
willful misconduct of Landlord, its agents or employees in the operation or
maintenance of the Premises or the Project or to any extent prohibited by law.
B. Landlord and Tenant each hereby waive all claims of recovery from
the other party for loss or damage to any of its property to the extent the loss
or damage is covered by valid and collectable fire and extended coverage
insurance policies or would be covered by the insurance required under Section
8C(2), and each party agrees to have its insurance policies endorsed to provide
for a waiver of subrogation by the insurance carrier, if necessary to prevent
the invalidation of such insurance coverage.
C. At all times during the term of this Lease, Tenant shall at its
expense maintain in effect insurance protecting Tenant and Landlord and their
respective agents and employees, and any other parties designated by Landlord
from time to time, with terms, coverages and in companies at all times
reasonably satisfactory to Landlord and with such increases in limits as
Landlord may, from time to time, request. Initially, such coverage shall be in
the following amounts:
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(1) Comprehensive Commercial General Liability Insurance,
including Contractual Liability insuring the indemnification provisions
contained in this Lease, with limits of not less than Two Million Dollars
($2,000,000) combined single limit per occurrence for Bodily Injury, Death and
Property Damage, and umbrella coverage of not less than Two Million Dollars
($2,000,000), naming Landlord and its management company as additional insureds,
with a severability of interest endorsement.
(2) Insurance against "All Risks" of physical loss for full
replacement cost of all tenant improvements and Work, if any, made by Tenant or
at Tenant's expense, and all equipment, furniture, trade fixtures, merchandise
and other items of Tenant's property on the Premises. At Tenant's sole option
and risk, Tenant may self-insure any of its property; provided, that Sections 8A
and B shall remain in effect as if Tenant maintained such insurance. See also
Exhibit E, Section 40.
D. Tenant shall, prior to the commencement of the Term hereof and prior
to the expiration of any policy, furnish Landlord certificates evidencing that
all required insurance is in force and providing that such insurance may not be
cancelled or changed without at least thirty (30) days' prior written notice to
Landlord and Tenant (unless such cancellation is due to nonpayment of premiums,
in which event ten (10) days' prior written notice shall be provided).
E. Except to the extent caused by the gross negligence or willful
misconduct of Landlord, Tenant hereby agrees to indemnify, defend and hold
harmless Landlord and its officers, directors, agents and employees against any
claims or liability for damage to person or property (or for loss or
misappropriation of property) occurring in or about the premises, arising from
Tenant's occupancy of the Premises, from any breach or default on the part of
Tenant during the Term of this Lease or from any act or omission of Tenant or of
any employee, agent, invitee or contractor of Tenant, and from any costs
relating thereto (including, without limitation, reasonable attorneys' fees).
Tenant's obligations under this Section 8A shall survive the termination or
expiration of this Lease.
9. FIRE AND OTHER CASUALTY.
A. In the event that (1) the Premises are made substantially
untenantable by fire or other casualty, and Landlord shall decide not to restore
or repair the same, or (2) the Building or the Project is so damaged by fire or
other casualty that Landlord shall decide to demolish or not rebuild the
Building, then, in either of such events, either Landlord or Tenant shall have
the Right to terminate this Lease by notice to the other within ninety (90) days
after the date of such fire or other casualty.
B. If the Premises or the Building are made untenantable by fire or
other casualty, and this Lease is not terminated pursuant to Section 9A above,
Landlord shall, to the extent permitted by any mortgages or ground leases with
respect to the Project, immediately take such action as is necessary to make
applicable insurance proceeds available and to use the same to reconstruct,
repair and restore the Building and the Premises, subject to zoning laws and
building codes then in effect, and including only tenant improvements
constructed at Landlord's expense, or, if any portion of the Premises has been
leased on an "as is" basis, including only improvements similar to those located
in such portion of the Premises on the Commencement Date or the date on which
such portion was added to the Premises, if later than the Commencement Date
(herein, the improvements Landlord is required to make are called the "Required
Improvements"). At Landlord's option, Tenant may be permitted or required to
devote the proceeds of its insurance described in Section 8C(2) to cause
restoration of tenant improvements and the Premises over and above the Required
Improvements, and pay for the same to Landlord or through Landlord as if newly
done pursuant to Section 5 of this Lease. In the event a fire or other casualty
occurs and both Landlord and Tenant are insured, it is agreed that the coverage
of the Landlord shall be primary and that Landlord's recovery in no event shall
be reduced by any insurance recovery to Tenant. In no event shall Landlord have
any liability to Tenant by reason of any damage to or interference with the
Premises, the Project, or Tenant's business, improvements or property arising
from fire or other casualty, however caused, or any resulting repairs.
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C. Notwithstanding anything in this Section 9 to the contrary, if all
or any portion of the Premises shall be made untenantable by a fire or other
casualty, Landlord shall with reasonable promptness, cause an architect selected
by Landlord to estimate the amount of time required to substantially complete
repair and restoration of the Premises and make the Premises tenantable again,
using standard working methods. If the estimate indicates that the Premises
cannot be made tenantable with one hundred eight (180) days from the date the
fire or casualty occurred, either party shall have the right to terminate this
Lease by giving to the other notice of such election within ten (10) days after
its receipt of the architect's certificate. If the estimate of the architect
indicates that the Premises can be made tenantable within such one hundred eight
(180) days, or if neither party terminates this Lease pursuant to this Section
9C, Landlord shall proceed with reasonable promptness to repair and restore the
Premises, provided that if the estimate of the architect indicates that the
Premises can be made tenantable within such one hundred eight (180) days, and if
Landlord does not repair and restore the Premises within such one hundred eight
(180) day period, which period shall be extended to the extent of any
Reconstruction Delays, then, unless the Premises are repaired and restored
before Tenant gives such notice, Tenant may terminate this Lease upon fifteen
(15) days prior written notice to Landlord. For purposes of this Lease, the term
"Reconstruction Delays" shall mean any delays caused by Tenant, and any delays
caused by events beyond Landlord's reasonable control.
D. In the event that this Lease is terminated pursuant to Section 9A or
Section 9C above, Base Rent and Operating Cost Rent shall be apportioned on a
per diem basis and paid to the date of the fire or other casualty. In the event
that such fire or casualty renders all or any portion of the Premises
untenantable and this Lease is not terminated pursuant to Section 9A or Section
9C, then subject to the last sentence of this Section 9D, the Base Rent and
Operating Cost Rent provided for in this Lease shall abate on a per diem basis
during the period of repair and restoration until the Premises are tenantable
again, and the abatement shall be in an amount bearing the same ratio to the
total amount of such Rent due for such period as the untenantable portion of the
Premises from time to time bears to the entire Premises. Any provision hereof
notwithstanding. Tenant's Rent shall not abate if the willful misconduct or
gross negligence of Tenant, or its agents or employees, was the cause of the
fire or other casualty.
10. RIGHTS RESERVED TO THE LANDLORD. Landlord reserves the following rights,
exercisable without notice to Tenant except as otherwise expressly provided
herein, and without liability to tenant for damage or injury to property, person
or business (all such claims being hereby released, except to the extent they
are caused by Landlord's gross negligence or willful misconduct), and without
effecting an eviction or disturbance of Tenant's use or possession or giving
rise to any claim for offsets, or abatements of Rent or affecting any of
Tenant's obligations under this Lease:
A. Name. To change the Project's name or street address. See Exhibit E,
Section 37.
B. Signs: To install, affix and maintain any and all signs on the
exterior and interior of the Building and to prescribe the location and style of
all signs visible from the exterior of the Building or from within its lobbies
or common corridors.
C. Windows/Design: To designate and approve, prior to installation, all
types of window shades, blinds, drapes, awnings, window ventilators and other
similar equipment; to control all the internal lighting that may be visible from
the exterior of the Building; and to approve the design, arrangement, style,
color and general appearance of any portion of the Premises (including, without
limitation, furniture, fixtures, art work, wall coverings, carpet and
decorations) which is visible from the common areas or from the exterior of the
Building, and all changes or additions thereof, which consent shall not be
unreasonably withheld.
D. Service Contracts: To designate all sources furnishing sign painting
and lettering, ice and drinking water, towels, toilet supplies, beverages, food
service, or other services on the Premises, provided that the rates for such
services as are designated by Landlord are reasonably competitive with rates
charged therefor in the Minneapolis-St. Paul metropolitan area. No vending or
dispensing machines of any kind shall be placed in or about the Premises without
the prior written consent of Landlord which consent shall not be unreasonably
withheld.
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E. Keys. To retain at all times, and to use for purposes authorized in
this Lease, passkeys to the Premises and keys to all locks for doors within and
into the Premises.
F. Access for Repairs, etc.: Upon reasonable prior notice to Tenant
(except in an emergency), to have access to the Premises to perform its duties
and obligations under this Lease and to inspect the Premises, make repairs,
alterations, additions or improvements, whether structural or otherwise, in and
about the Premises, the Project or any part thereof as set forth in various
Sections of this Lease including, without limitation, Section 5 and Section 10M.
H. Rights to Conduct Businesses: To grant to anyone the exclusive right
to conduct any business or render any service in the Project provided such
exclusive right shall not operate to exclude Tenant's Permitted Use as set forth
on the Schedule.
I. Heavy Equipment: To approve the weight, size or location of safes
and other heavy equipment and articles in and about the Premises and the Project
and to require all such items and furniture to be moved into and out of the
Building or anywhere else in the Project and the Premises only at such times and
in such manner as Landlord shall direct in writing. Movement of Tenant's
property into or out of the Project and within the Project is entirely at the
risk and responsibility of Tenant.
J. Show Premises: To show the Premises to prospective tenants or
brokers during the last six (6) months of the Term of this Lease or of any
extension thereof or to show the Premises to prospective purchasers at all
reasonable times, provided prior reasonable notice is given to Tenant in each
cash and Tenant's use and occupancy of the Premises shall not materially be
inconvenienced by any such action of Landlord.
K. Close Project: To restrict access to the Project during such hours
as Landlord shall from time to time reasonably determine and on holidays,
subject, however, to Tenant's right to admittance at all times under such
regulations as Landlord may prescribe from time to time which may include, by
way of example but not of limitation, that persons entering or leaving the
Project identify themselves to a security guard by registration or otherwise and
that said persons establish their right to enter or leave the Project. In case
of an emergency, Landlord may restrict or prevent access to the Project, or
otherwise take such actions as deemed necessary by Landlord for the safety of
tenants or other occupants of the Building or the protection of the Project.
M. Repairs and Alterations: At any time Landlord may make repairs,
alterations, additions, decorations or improvements, structural or otherwise, in
or to the Project or any part thereof, including the Premises, and perform any
acts required or permitted hereunder, or related to the safety, protection,
preservation or improvement of the Project or the Premises, and during such
operations Landlord shall have the right to take into and through the Premises
or any part of the Project, all material and equipment required and to close and
temporarily suspend operation of entrances, doors, corridors, elevators and
other facilities, and to have access to and open all ceilings, without liability
to Tenant by reason of interference, inconvenience, annoyance or loss of
business; provided, that Landlord shall not interfere with Tenant's use of the
Premises any more than is reasonably necessary under the circumstances, and
shall not do any act which would permanently reduce the size of the Premises.
Landlord shall do any such work during ordinary business hours (unless the work
materially and unreasonably interferes with Tenant's use of the Premises) and
Tenant shall pay Landlord for overtime and for any other expenses incurred if
such work is done during other hours at Tenant's request (unless the Work
materially and unreasonably interferes with Tenant's use of the Premises).
Landlord shall use reasonable diligence to protect Tenant's personal property.
Landlord may do or permit any work to be done upon or along, and any use of, any
adjacent or nearby building, land, street, alley or way.
N. Lock Box Agent: Landlord may from time to time designate a bank or
other lock box agent for the collection of amounts due Landlord. The date of any
payment to such agent shall be the date of such agent's receipt of the payment
(or the date of actual collection of any check not cleared by Landlord's bank
within three (3) business days after deposit); provided, that for purposes of
this Lease, no such payment or collection shall be
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deemed "accepted" by Landlord if Landlord mails a check in such amount to Tenant
at the address set forth on the Schedule within a reasonable period after such
receipt or collection. The mailing of such payment to Tenant shall be deemed to
be a rejection of Tenant's tender of such payment for all purposes as of the
date of the lock box agent's receipt or collection of such payment, without
thereby waiving any default or any right or remedy of Landlord.
O. Other Rights: All other rights accruing to Landlord by operation of
law or reserved specifically or by inference by the Landlord pursuant to the
provisions of this Lease.
11. DEFAULT AND LANDLORD'S REMEDIES.
A. Defaults. The occurrence of any of the following shall constitute a
default hereunder:
(1) If Tenant fails to pay any Base Rent or Operating Cost
Rent within ten (10) days of the due date (see Exhibit E, Section 39), or fails
to pay any Additional Rent or other sum required to be paid by this Lease or to
deliver any instrument or certificate as provided in Section 13 or Section 16
within ten (10) days after written notice;
(2) If Tenant fails to perform or comply with any of Tenant's
obligations or agreements as provided in this Lease or in any other agreement
between Landlord and Tenant (except those specified in Subsections (1), (3) and
(4) of this Section 11A); provided, that Tenant shall not be deemed in default
(a) if such failure is cured within thirty (30) days (forthwith, if the failure
involves a hazardous condition) after written notice to Tenant, or (b) with
respect to a non-hazardous failure which is curable but cannot reasonably be
cured within thirty (30) days, if Tenant immediately commences to cure and
diligently proceeds to complete the cure of such failure within a reasonable
time period which shall in no event extend beyond ninety (90) days after written
notice to Tenant;
(3) If Tenant abandons or vacates the Premises during the
Term. See Exhibit E, Section 38;
(4) If the leasehold interest of Tenant is levied upon under
execution or is attached under process of law, which levy or attachment
continues for a period of thirty (30) days; or if Tenant becomes insolvent or
bankrupt or shall generally not pay its debts as they become due or shall admit
in writing its inability to pay its debts or shall make an assignment for the
benefit of creditors; or if any proceeding or other action shall be filed by or
against Tenant seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of Tenant or its debts under any law relating to
bankruptcy, insolvency or relief of debtors, or seeking appointment of a
receiver, trustee, custodian or other similar official for it or any substantial
part of its property (provided, that no such proceeding or action shall
constitute a default under this Lease if Tenant shall vigorously contest the
same by appropriate proceedings and the same shall be vacated or dismissed
within thirty (30) days after the date of filing); or if Tenant is a
corporation, partnership or other entity, Tenant shall be dissolved, liquidated
or otherwise cease to exist.
B. Landlord's Remedies.
(1) Upon the occurrence of any one or more defaults by Tenant,
Landlord may elect, at any time thereafter by written notice to Tenant, to
terminate this Lease and Tenant's right to the Premises as of the date set forth
in the notice or, without terminating this Lease, to terminate Tenant's right to
possession of the Premises as of the date set forth in the notice. Upon any
termination of this Lease, wether by lapse of time or otherwise, or upon any
termination of Tenant's right to possession without termination of the Lease,
Tenant shall surrender possession and vacate the Premises and deliver possession
thereof to Landlord, and Tenant hereby authorizes Landlord to lawfully enter
into and upon the Premises, and to repossess the Premises and to remove Tenant
and all occupants and property therefrom without being deemed in any manner
guilty of trespass, eviction or forcible entry or detainer, and without
relinquishing Landlord's rights to Rent or any other right given to Landlord
hereunder or by law or in
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equity. Except as otherwise provided in this Section 11, Tenant expressly waives
all present or future redemption rights between the parties. Landlord and Tenant
each hereby waive trial by jury in any action, proceeding or counterclaim.
(2) If Landlord elects to terminate Tenant's right to
possession only without terminating the Lease, Landlord may at Landlord's option
enter into the Premises and take and hold possession thereof as set forth in
Section 11B(1) without such entry and possession terminating the Lease or
releasing Tenant, in whole or in part, from Tenant's obligation to pay the Rent
hereunder for the full Term. In addition, Landlord shall have the right from
time to time, to recover from Tenant, and Tenant shall remain liable for, all
Rent and any other sums thereafter accruing as they become due under this Lease
during the period from the date stated in the notice terminating possession to
the stated end of the Term. Upon and after entry into possession without
termination of the Lease, subject to Landlord's right to first rent other vacant
areas in the Project, Landlord may relet the Premises or any part thereof for
such Rent, for such time (which may be a period extending beyond the stated Term
of this Lease) and upon such terms as Landlord in Landlord's sole discretion
shall determine. In any such case, Landlord may reasonably make repairs,
alterations and additions in or to the Premises and reasonably redecorate the
same and in connection therewith landlord may change the locks to the Premises,
and Tenant shall upon written demand pay the cost thereof, together with
Landlord's expenses of reletting. Any proceeds from the reletting of the
Premises by Landlord shall be collected by Landlord and shall first be applied
against the costs and expenses of reentry and of reletting the Premises
including, without limitation, all brokerage, advertising, legal, alteration,
redecoration, repaid and other reasonably necessary costs and expenses incurred
to secure a new tenant for the Premises, and second to the payment of Rent
herein provided to be paid by the Tenant. If the consideration collected by
Landlord upon any such reletting, after payment of the expenses of reletting the
Premises, is not sufficient to pay any accelerated amounts of Rent due and owing
and to pay monthly the full amount of the Rent reserved in this Lease and not
theretofore accelerated, Tenant shall pay to Landlord the accelerated amounts
upon demand, and the amount of each monthly deficiency as it becomes due (as the
case may be). If the consideration collected by Landlord upon any such reletting
for Tenant's account after payment of the expenses of reletting the Premises is
greater than the amount necessary to pay accelerated amounts of Rent due and
owing and to pay the full amount of Rent reserved in this Lease and not
theretofore accelerated, the full amount of such excess shall be retained by
Landlord and in no event shall be payable to Tenant. No such reentry,
repossession, repairs, alterations, additions or reletting shall be construed as
an eviction of Tenant or as an election on Landlord's part to terminate this
Lease, unless written notice of such intention is given to Tenant, or shall
operate to release Tenant in whole or in part from any of Tenant's obligations
hereunder. Notwithstanding any reentry or reletting by Landlord, Landlord may at
any time thereafter elect to terminate this Lease for such previous default.
(3) If Landlord elects to terminate this Lease, Landlord shall
be entitled to recover from Tenant all of the amounts of Rent accrued and unpaid
for the period up to and including the date of the termination, as well as all
other additional sums for which Tenant is liable, or in respect of which Tenant
has agreed to indemnify Landlord under any of the provisions of this Lease,
which may then be owing and unpaid, and all costs and expenses including,
without limitation, court costs and reasonable attorneys' fees incurred by
Landlord in the enforcement of its rights and remedies hereunder, and in
addition, Landlord, at its sole option, shall be entitled to recover from Tenant
and Tenant shall pay to Landlord, on demand, as final and liquidated damages
(and not as a penalty), a sum equal to the amount of Landlord's reasonable
estimate of the aggregate amount of Base Rent. Operating Cost Rend and
Additional Rent that would be payable for the period from the date of such
termination through the Termination Date, reduced by the then reasonable rental
value of the Premises for the same period (as such reasonable rental value may
be decreased for Landlord's reasonably anticipated costs, expenses and delays in
reletting the Premises). If, before presentation of proof of such liquidated
damages to any court, all or any part of the Premises shall have been relet by
Landlord for all or any part of such period, the amount of Rent payable upon
such reletting shall be prima facie evidence of the reasonable rentable value
for the part or the whole of the Premises relet during the term of the
reletting.
(4) Upon any default by Tenant under this Lease (beyond any
applicable cure period), Landlord may, but shall not be obligated to, take any
action to cure the default without waiving or releasing any
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obligation of Tenant or preventing Landlord from pursuing any available remedy.
All reasonable amounts paid or incurred by Landlord in curing any default of
Tenant or performing any of Tenant's obligations under this Lease, and
reasonable attorneys' fees in connection therewith, shall be paid by Tenant to
Landlord as Additional Rent on demand.
(5) Notwithstanding anything in this Lease to the contrary,
any and all remedies set forth in this Lease (a) shall be in addition to any and
all other remedies Landlord and Tenant may have at law or in equity, and (b)
shall be cumulative. The waiver by either party of any breach of any term,
covenant or condition herein contained shall only be effective if it is in
writing and shall not be deemed to be a waiver of a continuing or subsequent
breach of the same, or of any other term, covenant or condition herein
contained. The acceptance of Rent or any other amounts due hereunder shall not
be construed to be a waiver of any breach of any term, covenant or condition of
this Lease, and if the same shall be accepted after the termination of this
Lease, by lapse of time or otherwise, or of the Tenant's right of possession
hereunder, or after the giving of any notice, such acceptance shall not
reinstate, continue or extend the Term of this Lease or affect any notice given
prior to the receipt of such amounts, it being agreed that after the service of
notice or the commencement of a suit or after final judgment for possession of
the Premises, Landlord may receive and collect any Rent and other sums due, and
the payment of the same shall not waive or affect said notice, suit or judgment.
No payment by Tenant or receipt by Landlord of a lesser amount that the amount
due hereunder shall be deemed to be other than on account of the earliest
portion thereof due, nor shall any endorsement or statement on any check or
letter accompanying a check for payment of Rent be deemed an accord and
satisfaction; and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or to pursue any other
remedy provided in this Lease.
(6) Notwithstanding any provision in this Lease prohibiting
Landlord from exercising its rights if Tenant cures a default within a specified
period of time, if Tenant shall default (a) in the timely payment of Rent
(whether any or all of Base Rent. Operating Cost Rent or Additional Rent) two
(2) or more times in any calendar year, or (b) in the performance of any
particular term, condition or covenant of this Lease two (2) or more times in
any calendar year, then, notwithstanding that such defaults shall have each been
cured within any applicable cure period after notice, if any, as provided in
this Lease, in connection with any further similar default during such calendar
year (including, without limitation, with respect to non-payment of Rent, the
further non-payment of any kind of Rent payable under this Lease) Tenant shall
not be entitled to any further cure period or notice, and Landlord shall have
the right to exercise all of the remedies provided in this Lease immediately
after the occurrence of such similar default.
(7) In the event that Tenant shall file for protection under
the Bankruptcy Code now or hereafter in effect, or a trustee in bankruptcy shall
be appointed for Tenant, Landlord and Tenant agree to the extent permitted by
law, to request that the debtor-in-possession or trustee in bankruptcy, if one
shall have been appointed, assume or reject this Lease within sixty (60) days
thereafter.
12. HOLDOVER. If Tenant holds over after the termination or expiration of the
Term without the written consent of Landlord (which may be withheld in
Landlord's sole discretion), Tenant shall pay Base Rent and Operating Cost Rent
at twice the rate payable for the fiscal year immediately preceding the holding
over, computed on a daily basis for each day Tenant thus remains in possession,
and, in addition, Tenant shall pay Landlord all damages, consequential as well
as direct, sustained by reason of Tenant's holding over. Neither the acceptance
of Rent by the Landlord after termination, nor the provisions of this Section:
(a) shall be construed as, or operate as, a renewal or as a waiver of Landlord's
right of reentry or right to regain possession by actions at law or in equity or
by any other right or remedy hereunder, or (b) shall be construed as, or operate
as, a waiver of any other right or remedy of Landlord.
13. SUBORDINATION.
A. Subordination. This Lease shall be subordinated to each mortgage or
trust deed ("Mortgage") and each ground lease or other underlying lease ("Ground
Lease") now or hereafter in force with respect to the Project
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at the election of the mortgages under any Mortgage or the lessor under any
Ground Lease, including, without limitation, any amendment, renewal,
modification, consolidation, replacement or extension thereof and all interest
thereon and advances thereunder; provided, that the mortgagee under any Mortgage
or the lessor under any Ground Lease hereafter placed upon or affecting the
Project shall not disturb the tenancy of Tenant under this Lease and shall
recognize all of the rights of Tenant hereunder so long as Tenant is not in
default in the payment of any Rent or the performance of any other term of this
Lease. Any subordination at the election of any such mortgagee or ground lessor
shall be self-operative and no further instrument of subordination shall be
required; provided, that within ten (10) days after written request by Landlord.
Tenant shall execute and deliver any necessary or useful instruments
acknowledging the subordination of this Lease as provided herein. In the event
of the enforcement by any mortgagee or ground lessor of the remedies provided
for by law or by such Mortgage or Ground Lease, Tenant shall, upon request of
any person succeeding to the interest of such mortgagee or ground lessor as a
result of such enforcement, automatically become the tenant of said successor in
interest, without change in the terms of this Lease; provided, that such
successor recognizes the rights and interest of Tenant under this Lease, and
provided further that said successor in interest shall not (1) be bound by any
payment of Rent for more than one month in advance except prepayments in the
nature of security for the performance by Tenant of its obligations under this
Lease, or (2) be bound by any amendment or modification of this Lease made
without the consent of such mortgagee or successor in interest, or (3) be
subject to any offsets or defenses Tenant might have against any prior landlord,
or (4) be liable for any act or omission of any prior landlord, or (5) be liable
for any security deposit except to the extent held by such successor in
interest. Upon request by such successor in interest, Tenant shall execute and
deliver any instruments necessary or useful to confirm the attornment.
B. Notice and Right to Cure. Tenant agrees to give the mortgagee under
any Mortgage or lessor under any Ground Lease a copy of any notice of default
served upon the Landlord, provided that prior to such notice Tenant has been
notified in writing of the address of such mortgagee or ground lessor. Tenant
further agrees that if Landlord shall have failed to cure such default within
the time provided for in this Lease, then such mortgagee or ground lessor shall
have an additional thirty (30) days within which to cure such default, or if
such default cannot be cured within that time, such mortgagee or ground lessor
shall have such additional time as may be necessary to cure such default;
provided, that within such thirty (30) days, any mortgagee or ground lessor, as
the case may be, has commenced and is diligently pursuing the cure of such
default (including, without limitation, commencement of foreclosure or lease
forfeiture proceedings, if necessary to effect such cure), and Tenant shall not
pursue any of the remedies it may have for such default and this Lease shall not
be terminated, while such cure is being diligently pursued, so long as the
default is cured within a reasonable time thereafter. During the period between
the giving of such notice and the remedying of Landlord's default, the Rent
herein recited shall be abated and apportioned to the extent that any part of
the Premises shall be untenantable.
14. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not, without the prior written consent of Landlord in
each instance, (1) assign, transfer, mortgage or encumber, or create or permit
any lien upon, this Lease or any interest under it, (2) allow to exist or occur
any transfer of or lien upon this Lease or the Tenant's interest herein by
operation of law, (3) sublet the Premises or any part thereof, or 94) permit the
use or occupancy of the Premises or any part thereof for any purpose not
provided for under Section 6 or by anyone other than the Tenant and Tenant's
employees. In no event shall this Lease or any interest herein be assigned or
assignable by voluntary or involuntary bankruptcy proceedings or by operation of
law or otherwise, and in no event shall this Lease or any rights or privileges
hereunder be an asset of Tenant under any bankruptcy, insolvency or
reorganization proceedings, except to the extent provided by law.
B. Consent by Landlord to any assignment, subletting, use, occupancy,
transfer or encumbrances shall not operate to relieve Tenant from any covenant,
liability or obligation hereunder (whether past, present or future), including,
without limitation, the obligation to pay Rent, except to the extent, if any,
expressly provided for in such consent, nor shall such consent be deemed to be a
consent to any subsequent assignment, subletting, use, occupancy, transfer or
encumbrance. Tenant shall pay all of Landlord's reasonable costs, charges and
expenses
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(including, without limitation, reasonable attorney's fees) incurred in
connection with any assignment, subletting, use, occupancy, transfer or
encumbrance made or requested by Tenant.
C. Tenant shall, by notice in writing, advise Landlord of its intention
from, on and after a stated date (which shall not be less than sixty (60) days
after the date of Tenant's notice) to assign this Lease or sublet any part or
all of the Premises for the balance or any part of the Term. Tenant's notice
shall include the name and address of the proposed assignee or subtenant, a true
and complete copy of the proposed assignment or sublease and sufficient
information as Landlord deems reasonably necessary concerning the financial
responsibility and character of the proposed assignee or subtenant. Within
thirty (30) days following receipt of Tenant's notice (and any additional
information reasonably requested by Landlord), Landlord shall notify Tenant if
Landlord consents to the proposed assignment or sublease, which consent shall
not be unreasonably withheld, provided Landlord shall not be required to consent
to any assignment or sublease (1) to an existing tenant in the Project, (2)
which may violate any restrictions contained in any mortgage, lease or agreement
affecting the Project or Landlord, or (3) which is not in compliance with all of
the terms of this Section and this Lease.
D. Upon any assignment or sublease, fifty percent (50%) of the rent or
other consideration ("Excess Consideration") received by Tenant in excess of the
amount of Base Rent and Operating Cost Rent payable to Landlord under this
Lease, which amount is to be prorated where a part of the Premises is assigned
or subleased, shall be payable by Tenant to Landlord as Additional Rent within
tent (10) days after receipt thereof by Tenant from time to time.
E. If Tenant shall assign this Lease as permitted herein, the assignee
shall expressly assume all of the obligations of Tenant hereunder and agree to
comply with and be bound by all of the terms, provisions and conditions of this
Lease, in a written instrument satisfaction to Landlord and furnished to
Landlord not later than fifteen (15) days prior to the effective date of the
assignment. If Tenant shall sublease the Premises as permitted herein, Tenant
shall obtain and furnish to Landlord, not later than fifteen (15) days prior to
the effective date of such sublease and in form satisfactory to Landlord, the
written agreement of such subtenant that it shall comply with and be bound by
all of the terms, provisions and conditions of this Lease and that it will
attorn to Landlord, at Landlord's option and written request, in the event this
Lease terminates before the expiration of the sublease.
F. If Tenant is a corporation whose stock is not publicly traded, any
transaction or series of transactions (including, without limitation, any
dissolution, merger, consolidation or other reorganization of Tenant, or any
issuance, sale, gift, transfer or redemption of any capital stock of Tenant,
whether voluntary, involuntary or by operation of law, or any combination of any
of the foregoing transactions) resulting in the transfer of control of Tenant,
other than by reason of death, shall be deemed to be a voluntary assignment of
this Lease by Tenant subject to the provisions of this Section 14. If Tenant is
a partnership, any transaction or series of transactions (including without
limitation, any withdrawal or admittance of a partner or any change in any
partner's interest in Tenant, whether voluntary, involuntary or by operation of
law, or any combination of any of the foregoing transactions) resulting in the
transfer of control of Tenant, other than by reason of death, shall be deemed to
be a foregoing transactions) resulting in the transfer of control of Tenant,
other than by reason of death, shall be deemed to be a voluntary assignment of
this Lease by Tenant subject to the provisions of this Section 14. The term
"control" as used in this Section 14F means the power to directly or indirectly
direct or cause the direction of the management or policies of Tenant. If Tenant
is a corporation, a change or series of changes in ownership of stock which
would result in direct or indirect change in ownership of less than fifty
percent (50%) of the outstanding stock of Tenant as of the date of the execution
and delivery of this Lease shall not be considered a change of control.
G. Any assignment, subletting, use, occupancy, transfer or encumbrance
of this Lease or the Premises without Landlord's prior written consent shall be
of no effect and shall, at the option of Landlord, constitute a default under
this Lease.
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15. SALE BY LANDLORD. In the event of sale or conveyance or transfer by Landlord
of its interest in the Project or in the Building or in this Lease, the same
shall operate to release Landlord (subject to the last sentence of Section 17
hereof) from any future obligations and any future liability for or under any of
the covenants or conditions, express or implied, herein contained in favor of
Tenant, and in such event, and with respect to such obligations, covenants and
conditions, Tenant agrees to look solely to the successor in interest of
Landlord in and to this Lease. This Lease shall not be affected by any such
sale, conveyance or transfer.
16. ESTOPPEL CERTIFICATE. Tenant shall, at the request of Landlord at any time
and from time to time upon not less than ten (10) days' prior written notice,
execute, acknowledge in recordable form, and deliver to Landlord (or to
Landlord's mortgagee, ground lessor, auditors or a prospective purchaser of the
Project or any part thereof) a certificate stating 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 dates to which the Rent and other charges are paid, and
that Tenant is paying Rent on a current basis with no offsets or claims, and
there are not, to Tenant's knowledge, any uncured defaults on the part of
Landlord (or specifying such offsets, claims or defaults, if any are claimed).
Such certificate may require Tenant to specify the date of commencement of Rent,
the Commencement Date, the Termination Date, the Base Rent, current Operating
Cost Rent estimates, the net rentable area of the Premises, the date to which
Rent has been paid, whether or not Landlord has completed any improvements
required to be made to the Premises and such other matters as may be reasonably
required. Any such certificate may be relied upon by any prospective purchaser
or encumbrancer of all or any portion of the Project, any mortgagee or ground
lessor, auditors or any other person to whom it is delivered. The failure to
deliver such statement within the time required hereunder shall, at the option
of Landlord, be a default under this Lease.
18. FORCE MAJEURE. Except as specifically provided to the contrary in this
Lease, this Lease and the obligation of Tenant to pay Rent hereunder and perform
all of Tenant's covenants and agreements hereunder shall not be impaired nor
shall Landlord be in default hereunder because Landlord is unable to fulfill any
of its obligations under this Lease, if Landlord is prevented or delayed from so
doing by any of the following (which shall be referred to herein as a "Force
Majeure"): any accident, breakage, repairs, alterations, improvements, strike or
labor troubles, shortages of labor or materials, or any other cause whatsoever
beyond the reasonable control of Landlord including, without limitation, energy
shortages, governmental preemption in connection with a national emergency, or
by reason of governmental laws or any rule, order, regulation or directive of
any department, subdivision, agency or personnel thereof, or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency. Further, Landlord shall not be deemed in default for failure to
perform its obligations under this Lease, (a) unless such failure is safety or
security related, which failure shall be cured promptly (subject to Force
Majeure), if such failure is cured within thirty (30) days after Tenant gives
written notice to Landlord of such alleged failure, or (b) with respect to a
failure which reasonably requires more than thirty (30) days to cure, if
Landlord immediately commences to cure and diligently proceeds to complete the
cure of such failure within a reasonable time period, which shall in no event,
subject to Force Majeure, extend beyond ninety (90) days after written notice to
Landlord.
20. NOTICES. All notices and approvals to be given by one party to the other
party under this Lease shall be given in writing, mailed or delivered as
follows: to Landlord at the address set forth on the Schedule, or to such other
person or at such other address designated by notice to Tenant; and to Tenant at
the address set forth on the Schedule, or to such other person or at such other
address designated by notice to Landlord. Mailed notices shall be sent by United
States Certified or Registered Mail, postage prepaid. Mailed notices shall be
deemed to have been given upon posting in the United States mails, and notices
delivered personally shall be deemed to have been given upon delivery.
21. Quiet Possession. So long as Tenant shall observe and perform the covenants
and agreements binding on it hereunder, Tenant shall at all times during the
Term and subject to the provisions of this Lease peacefully and quietly have and
enjoy the possession of the Premises without any encumbrances or hindrance by,
from or through Landlord, its successors or assigns.
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22. REAL ESTATE BROKERS. Landlord and Tenant each represent that it has not
dealt with any real estate broker with respect to this Lease, except for any
broker set forth on the Schedule (whose commission, if any, shall be paid by
Landlord pursuant to separate written agreement), and, to its knowledge, no
other broker initiated or participated in the negotiation of this Lease,
submitted or showed the Premises to Tenant or is entitled to any commission in
connection with this Lease. Tenant agrees to indemnify and hold Landlord
harmless from all claims, liability or expense (including, without limitation,
reasonable attorney's fees) for brokerage commissions or finder's fees as a
result of Tenant's actions or alleged actions.
23. Condemnation. If during the Term all or any part of the Premises shall be
taken by eminent domain, the Lease shall terminate as to the part so taken on
the date Tenant is required to deliver possession to the condemning authority.
If this lease is not terminated as provided below, Landlord shall make such
repairs and alterations as may be necessary in order to restore the part not
taken to useful condition (excluding Tenant's property and improvements made by
Tenant); and, effective upon the date of taking, the Base Rent and Operating
Cost Rent shall be reduced proportionately and equitably based on the portion
taken. If all or any portion of the Project or Premises are taken by eminent
domain so that the Premises cannot be reasonably used for Tenant's Permitted
Use, then at the option of either party this Lease may be terminated effective
as of the date of the taking and all rent reserved hereunder shall be paid to
the date of such taking. If any condemnation proceeding shall be instituted in
which it is sought to take or damage any part of the Project, of if the grade of
any street or alley adjacent to the Project is changed by any competent
authority and such taking, damage or change of grade in Landlord's opinion
substantially impairs the use or operation of the Building or the Project, or
makes it necessary or desirable to remodel the Building or the Project. Landlord
shall have the right to terminate this Lease upon not less than ninety (90)
days' notice prior to the date of termination designated in the notice provided
Landlord also terminates all other tenant leases in the Project for similarly
affected premises. All compensation awarded for any taking of the fee and the
leasehold shall belong to and be the property of Landlord; provided, that so
long as the same does not diminish the amount of the award or consideration to
Landlord for taking of real property interests, Tenant shall be entitled to
recover from the condemning authority any separate award for relocation or
moving expenses, trade fixtures and personal property Tenant is entitled to
remove from the Premises, or loss of business. The term "eminent domain" shall
include the exercise of any similar governmental power and any purchase or other
acquisition in lieu of condemnation.
24. UNRELATED BUSINESS INCOME. Landlord shall have the right at any time and
from time to time to unilaterally amend the provisions of this Lease, if
Landlord is advised by its counsel that all or any portion of the monies paid by
Tenant to Landlord hereunder are, or may be deemed to be, unrelated business
income within the meaning of the United States Internal Revenue Code or
regulations issued thereunder, and Tenant agrees that it will execute all
documents or instruments necessary to effect any such amendment; provided, that
no such amendment shall result in Tenant having to pay in the aggregate more
money on account of its occupancy of the Premises under the terms of this Lease,
as so amended, and provided further, that no such amendment shall result in
Tenant receiving fewer services or services of a lesser quality than it is
presently entitled to receive under this Lease. Any services which Landlord ir
required to furnish pursuant to the provisions of this Lease may, at Landlord's
option, be furnished from time to time, in whole or in part, by employees of
Landlord or any managing agent of the Project or its employees or by one or more
third persons approved by Landlord.
25. LIMITATION OF LIABILITY. Tenant specifically agrees to look solely to
Landlord's interest in the Project for the recovery of any judgment against
Landlord; it being agreed that Landlord (and if Landlord is a partnership, its
partners whether general or limited; of if Landlord is a corporation, its
directors, officers or shareholders; or if Landlord is a trust, its trustees or
beneficiaries) shall never be personally liable for any such judgment. All such
personal liability for any representation, warranty, covenant, undertaking or
agreement under this Lease is hereby waived and released by Tenant and by all
persons claiming by, through or under Tenant. The provisions of this Section are
not intended to, and shall not, limit any right that Tenant might otherwise have
to obtain injunctive relief against Landlord or Landlord's successor in interest
or any suit or action in connection with enforcement or collection of amounts
which may become owing or payable under or on account of insurance maintained by
Landlord.
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26. MISCELLANEOUS.
A. Consents. Except as otherwise expressly set forth herein, wherever
the consent or approval of either Landlord or Tenant is required by the
provisions of this Lease, such party shall not unreasonably withhold or delay
such consent or approval.
B. Date Payments Are Due. All amounts owed to Landlord hereunder, for
which the date of payment is not expressly fixed herein, shall be paid as
Additional Rent within thirty (30) days after Landlord's statement and shall
bear interest as provided in Section 2D(2) until paid.
C. Meaning of "Re-entry" and "Landlord". The words "re-enter" and
"reentry" as used in this Lease are not restricted to their technical legal
meaning. The term "Landlord," as used in this Lease, means only the landlord
from time to time, and upon conveying or transferring its interest, such
conveying or transferring landlord shall be relieved from any further obligation
or liability pursuant to Section 13, 15 and 17 of this Lease.
D. Time is of the Essence. Time is of the essence of this Lease and
each and all of its provisions.
E. No Option. Submission of this instrument for examination or
signature by Tenant or by Landlord does not constitute a reservation of or
option for lease, and its is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant.
F. Severability. The invalidity or unenforceability of any provision
hereof shall not affect or impair any other provisions.
G. Governing Laws. This Lease shall be governed by and construed
pursuant to the laws of the State of Minnesota.
H. Lease Modification. Should any mortgagee require a modification of
this Lease, which modification will not bring about any increased cost or
expense to Tenant or in any other way substantially change the rights and
obligations of Tenant hereunder, Tenant agrees that this Lease may be so
modified.
I. No Oral Modification. No subsequent alteration, amendment, change or
addition to this Lease shall be binding upon Landlord or Tenant unless in
writing signed by both parties.
J. Litigation and Arbitration Costs. Tenant shall pay all Landlord's
costs, charges and expenses, including the reasonable fees of attorneys, agents
and others retained by Landlord, incurred in enforcing Tenant's obligations
hereunder or incurred by Landlord in any litigation, arbitration, negotiation or
transaction in which Tenant causes Landlord, without Landlord's fault, to become
involved or concerned. Provided, that in any litigation between Landlord and
Tenant regarding this Lease, the prevailing party shall be entitled to recover
reasonable costs and attorney's fees in addition to any other relief granted by
the court.
K. Captions. The marginal headings and titles to the paragraphs of this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part hereof.
L. Remedies and Rights May Be Exercised by Landlord In Its Own Name;
Authority to Execute This Lease. All rights and remedies of Landlord under this
Lease, or that may be provided by law, may be exercised by Landlord in its own
name individually, or in its name by any agent thereof, and all legal
proceedings for the enforcement of any such rights or remedies, may be commenced
and prosecuted to final judgment and executed by Landlord in its own name
individually or in its name by any agent thereof. Landlord and Tenant each
represents to the other that each has full power and authority to execute this
Lease and to make and perform the agreements herein contained.
-19-
<PAGE>
M. Payments to Affiliates. Nothing in this Lease shall be construed to
prevent Landlord from paying for services rendered or materials delivered with
respect to the Project or to the Premises (including, without limitation,
management services and contracting out capital improvements or other capital
repairs or construction items) by affiliates of Landlord provided that the fees
or costs of such services and materials are at market rates in the
Minneapolis-St. Paul metropolitan area. All such fees or costs paid by Landlord
to such affiliates shall be deemed to constitute Operating Costs on the same
terms and conditions as if such fees and costs were paid to non-affiliates of
Landlord.
N. Entire Agreement. This Lease (including, without limitation, all
exhibits and riders attached hereto, all of which are hereby made a part of this
Lease and incorporated by this reference) constitutes the entire agreement
between the Landlord and the Tenant. If any deletions are made from this Lease
form, the Lease shall be interpreted as if the deleted portion had never been
part of the Lease. Tenant acknowledges that it has not been induced to enter
this Lease by any promises, assurances, agreements, statements or
representations (collectively, "Representations") which are not set forth in
this Lease (including, without limitation, any Representations concerning
Operating Costs; the Premises; the Project; the suitability of the Premises,
proper zoning or availability of necessary permits and authorizations for
Tenant's Permitted Use; exclusive rights; or any other matter). Tenant
acknowledges that it has not relied on any such Representations, agrees that no
such Representations shall be used in the construction or interpretation of this
Lease and agrees that Landlord shall have no liability for any consequences
arising as a result of any such Representation.
O. Landlord's Title. Landlord's title is and always shall be paramount
to the interest of Tenant, and nothing herein contained shall empower Tenant to
do any act which can, shall or may encumber Landlord's title.
P. Light and Air Rights. This Lease does not grant any rights to light
or air over or about the Project. Landlord specifically excepts and reserves to
itself the use of any roofs, the exterior portions of the Premises, all rights
to and the land and improvements below the improved floor level of the Premises,
the improvements and air rights above the Premises and the improvements and air
rights located outside the demising walls of the Premises, and such areas within
the Premises as are required for installation of utility lines and other
installations required to serve any occupants of the Project and the right to
maintain and repair the same, and no rights with respect thereto are conferred
upon Tenant unless otherwise specifically provided herein.
Q. Covenants Binding on Successors. Subject to the terms of Section 14,
each provision of this Lease shall extend to an shall, as the case may require,
bind and inure to the benefit of Landlord and Tenant and their respective heirs,
legal representatives and successors and assigns.
R. Terms "Landlord" and "Tenant." The terms "Landlord" and "Tenant"
whenever used in this Lease shall be construed to mean the plural where
necessary, and the necessary grammatical changes required to make the provisions
hereby apply either to entities or individuals, or men or women, shall in all
cases be assumed as though in each case fully expressed. If more than one person
or entity signs this Lease as Tenant, each signer will be jointly and severally
liable for all of the obligations of Tenant as provided in this Lease.
5. Rent Not Based on Income. No rental or other payment of the use or
occupancy of the Premises shall be, or is, based in whole or in part on the net
income or profits derived by any person from the Building or the Premises, and
Tenant agrees that it will not enter into any sublease, license, concession or
other agreements for any use or occupancy of the Premises which provides for a
rental or other payment for such use or occupancy based in whole or in part on
the net income or profits derived by any person from the Premises.
-20-
<PAGE>
T. No Recording by Tenant. Tenant shall not record or file in any
public records this Lease or any portion thereof.
IN WITNESS WHEREOF, the parties have executed this Lease as of the above date.
LANDLORD: TENANT:
MINNESOTA CC PROPERTIES, INC. THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ S. Marc Flannery By: /s/ George Becker
-------------------------------- ---------------------------
S. Marc Flannery George Becker
Assistant Secretary VP, RFO
-21-
<PAGE>
[CHART]
-22-
<PAGE>
EXHIBIT "B"
-----------
LEGAL DESCRIPTION
-----------------
Lots 1, 2 and 3, Block 1
The Colonnade P.U.D. No. 53
Hennepin County, Minnesota.
-23-
<PAGE>
EXHIBIT 10.13
SUBLEASE AGREEMENT
------------------
AGREEMENT made as of the 19 day of March, 1997, between THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA, a New Jersey corporation, having an office at 751
Broad Street, Newark, New Jersey, 07102, hereinafter referred to as "Sublessor",
and NETWORK MANAGEMENT SERVICES, INC., a Minnesota corporation, hereinafter
referred to as "Sublessee",
WITNESSETH, WHEREAS:
Sublessor, as Tenant, entered into a lease with Minnesota CC
Properties, Inc., as Landlord, dated December 31, 1993, leasing certain space
containing approximately 29,422 square feet of space in the building at 5500
Wayzata Boulevard, Golden Valley, Minnesota (the "Building"), to which lease
(hereinafter, the "Prime Lease") reference is hereby made, and which is
incorporated by reference as if the same were herein set forth at length; and
The parties hereto have agreed that Sublessor shall sublet
approximately 7,698 square feet of such space to Sublessee;
NOW, THEREFORE, the parties hereto hereby covenant and agree as
follows:
1. Sublessor hereby subleases to Sublessee said 7,698 square feet, more
or less, of the space in said Building, as depicted on Exhibit "A" attached
hereto and made a part hereof, (the "Subleased Premises") for a term beginning
May 1, 1997, and ending April 30, 2000, unless sooner terminated in accordance
herewith, yielding and paying to Sublessor base rent at the rate of $13,638.29
per month, plus the additional rent set forth in paragraph 4 hereof. Sublessee
shall pay said base rent and additional rent provided for hereunder in equal
monthly installments in advance on the first day of each and every month during
the term hereof. All Alteration Costs to the Subleased area shall be done by the
Sublessee, except we will pro-rata share the lobby door costs (for elevator
bays), we will split 50% - 50% the demising wall on the north end of the space.
The Sublessor will be responsible for all the costs related to the corridor
leading to the LAN room. Both Parties will use their best efforts to keep those
costs to a minimum, subject to code and Landlord requirements.
2. The Subleased Premises shall be used for the purposes set forth in
the Prime Lease and for no other purpose.
3. Sublessee shall not assign its interest in this Sublease nor further
sublet the Subleased Premises in whole or in part without the written consent of
Sublessor; and shall not permit its interest in this Sublease to be vested in
any third party by operation of law or otherwise without the written consent of
Sublessor.
4. Except if the reason for such additional sums is due to the acts of
Sublessor or its other Sublessees, if Sublessor shall be charged for additional
rent or other sums pursuant to the provisions of the Prime Lease, including
without limitation Article 2 thereof concerning rent
<PAGE>
escalations, Sublessee shall be liable for 2 % of such additional rent or sums.
If any such rent, or sums shall be due to additional use by Sublessee of
electrical current in excess of Sublessor's proportionate part of space in the
premises demised under the Prime Lease, such excess shall be paid in entirety by
Sublessee within 30 days of receipt. If Sublessee shall procure any additional
services from the Building, such as after hours air conditioning, Sublessee
shall pay for same at the rates charged therefor by the Prime Landlord and shall
make such payment to the Prime Landlord or Sublessor as Sublessor shall direct.
Any rent or other sums payable by Sublessee under this Article 4 shall be
additional rent and collectable as such. If Sublessor shall receive any refund
under the Prime Lease, Sublessee shall be entitled to the return of so much
thereof from Sublessor as shall be attributable to prior payments by Sublessee.
5. This Sublease is subject and subordinate to the Prime Lease. Except
as may be consistent with the terms hereof, all the terms, covenants and
conditions contained in the Prime Lease shall be applicable to this Sublease
with the same force and effect as if Sublessor were the lessor under the Prime
Lease and Sublessee were the lessee thereunder, and in case of any breach hereof
by Sublessee, Sublessor shall have all the rights against Sublessee as would be
available to the lessor against the lessee under the Prime Lease if such breach
were by the lessee thereunder.
6. Notwithstanding anything to the contrary herein set forth, the only
services or rights to which Sublessee may be entitled hereunder are those to
which Sublessor may be entitled under the Prime Lease.
7. Sublessee shall neither do nor permit anything to be done which
would cause the Prime Lease to be terminated or forfeited by reason of any right
of termination or forfeiture reserved or vested in the lessor under the Prime
Lease, and Sublessee shall indemnify and hold Sublessor harmless from and
against all claims of any kind whatsoever by reason of which the Prime Lease may
be terminated or forfeited.
8. Sublessee has paid Sublessor on the execution and delivery of this
Sublease the sum of $16,638.29 as security for the full and faithful performance
of the terms, covenants and conditions of this sublease on Sublessee's part to
be performed or observed, including but not limited to payment of base rent and
additional rent in default or for any other sum which Sublessor may expend or be
required to expend by reason of Sublessee's default, including any damages or
deficiency in reletting the Subleased Premises, in whole or in part, whether
such damages shall accrue before or after summary proceedings or other re-entry
by Sublessor or the Prime Landlord. If Sublessee shall fully and faithfully
comply with all the terms, covenants and conditions of this sublease on
Sublessee's part to be performed or observed, the security, or any unapplied
balance thereof, shall be returned to Sublessee after the time fixed as the
expiration of the demised term and after the removal of Sublessee and surrender
of possession of the Subleased Premises to Sublessor.
9. Sublessee represents that it has read and is familiar with the terms
of the Prime Lease.
-2-
<PAGE>
10. All prior understandings and agreements between the parties are
merged within this Agreement, which alone fully and completely sets forth the
understanding of the parties; and this Sublease may not be changed or terminated
orally or in any manner other than by an agreement in writing to which the
written consent of the lessor under the Prime Lease shall have been obtained.
11. Any not ice or demand which either party may or must give to the
other hereunder shall be in writing and delivered personally or sent by
overnight courier or by certified mail, return receipt requested, addressed if
to Sublessor as follows:
The Prudential Insurance Company
of America and SCRIBCOR, INC.
One Prudential Circle --- Lease Administration Department
Sugar Land, Texas 77478 400 N. Michigan Ave.,, Suite 415
Attn: Corporate Real Estate Chicago, IL 60611
with a copy thereof to the Landlord under the Prime Lease in the manner and at
the place designated in the Prime Lease, and if to Sublessee, as follows:
Network Management Services, Inc. and Francis V. Vargas III
5500 Wayzata Boulevard --- Doherty Rumble & Butler
Suite 1275 3500 Fifth Street Towers
Golden Valley, MN 55416 150 S. 5th Street
Attn: Mark Tierney, President Minneapolis, MN 55402
with a copy thereof to the Landlord under the Prime Lease in the manner and at
the place designated in the Prime Lease. Either party may, by notice in writing,
direct that future notices or demands be sent to a different address.
12. This Sublease is expressly conditioned upon the written consent of
the Prime Lessor, Minnesota CC Properties, Inc.
13. The covenants and agreements herein contained shall bind and inure
to the benefit of Sublessor, Sublessee, and their respective heirs, executors,
administrators, successors and assigns.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused these
presents to be executed the date and year first above written.
SUBLESSEE: SUBLESSOR:
NETWORK MANAGEMENT THE PRUDENTIAL INSURANCE
SERVICES, INC. COMPANY OF AMERICA
By: /s/ Scott Halstead By: /s/ Joanne Brown Lee
---------------------------- -------------------------------
Name: Scott Halstead Name: Joanne Brown Lee
------------------------------
Title: CFO Title: Vice President
-----------------------------
-4-
<PAGE>
EXHIBIT 10.14
FIRST AMENDMENT OF SUBLEASE
AGREEMENT, made as of August 10, 1999, between THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, a New Jersey corporation, having an office at Two Gateway
Center - 17th Floor, Newark, New Jersey 07102 (hereinafter "Sublessor") and
NETWORK MANAGEMENT SERVICES, INC., a Minnesota corporation, having its offices
at 5500 Wayzata Boulevard, Golden Valley, Minnesota (hereinafter "Sublessee").
W I T N E S S E T H
WHEREAS:
A. Sublessor, as Tenant, and Minnesota CC Properties, Inc. (to whose
interest N.D. Properties, Inc. has succeeded) , as Landlord, entered into a
written lease dated December 31, 1993, covering approximately 29,422 rentable
square feet in the building located at 5500 Wayzata Boulevard, Golden Valley,
Minnesota (" Building" ).
B. Sublessor and Sublessee entered into a written sublease dated March
19, 1997 (hereinafter "Sublease"), covering approximately 7,698 rentable square
feet (hereinafter "Subleased Premises") in the Building.
C. Sublessor and Sublessee desire to amend the Sublease to add to the
Subleased Premises approximately 13,694 rentable square feet (hereinafter
"Additional Space") in the Building, shown outlined and hatched in black on the
Floor Plan annexed hereto as Exhibit A.
NOW, THEREFORE, in consideration of the following mutual terms and
conditions, the Sublease is hereby amended as follows:
FIRST: Effective September 1, 1999 and for the balance of the term of
this Sublease to April 30, 2000:
(i) the Subleased Premises shall be enlarged to include
the Additional Space and the rentable square footage
of the Subleased Premises shall be increased by
13,694 rentable square feet from 7,698 rentable
square feet to 21,392 rentable square feet;
(ii) Sublessee's Percentage under Article 4 of the
Sublease, with respect to the Additional Space only,
shall be 100% of Landlord's additional rent billing
allocable to the Additional Space.
Sublessee's Percentage of 2% under Article 4 with
respect to the original Subleased Premises shall
continue; and
<PAGE>
(iii) the annual Base Rent shall be $245,138.78 per annum,
payable in equal monthly installments of $20,428.23
per month, in advance on the 1st day of each month.
SECOND: Sublessee agrees to accept the Additional Space in "as is"
condition as of the date of this First Amendment. Sublessor shall have no
obligation to renovate or otherwise prepare the Additional Space for Sublessee's
occupancy, except to deliver the Additional Space in broom-clean condition.
THIRD: Except for the provisions of the First Amendment of Sublease.,
all the terms, covenants and conditions contained in the Sublease shall remain
in full force and effect.
FOURTH: Prudential agrees to pay the Keewaydin Group, Inc., $5,000 upon
signing of the sublease agreement as a brokerage commission for participation in
this transaction.
IN WITNESS WHEREOF, this First Amendment of Sublease has been executed
as of the day and year first above written.
SUBLESSOR:
WITNESS: THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Michael J. Hughes By: /s/ Michael H. Baumann
------------------------------- -----------------------------------
Name: Michael H. Baumann
Title: V.P., Corporate Real Estate
SUBLESSEE:
WITNESS: NETWORK MANAGEMENT SERVICES, INC.
By: /s/ Audrey Moy By: /s/ Scott P. Halstead
------------------------------- -----------------------------------
Name: Scott P. Halstead
Title: CFO
-2-
<PAGE>
Exhibit 10.15
CONSENT OF LANDLORD
(SUBLEASE)
TEACHERS INSURANCE & ANNUITY ASSOCIATION, successor to N.D. PROPERTIES,
INC., successor to MINNESOTA CC PROPERTIES, INC. ("Landlord"), as landlord, and
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ("Sublessor"), as tenant, currently
are parties to a written Lease dated December 31, 1993 ("Lease") relating to
certain premises ("Premises") in the building commonly described as 5500 Wayzata
Boulevard, Golden Valley, Minnesota. Sublessor desires to sublease a portion of
the Premises ("Subleased Premises") to NETWORK MANAGEMENT SERVICES, INC.
("Sublessee") as provided in the First Amendment of Sublease ("Sublease") dated
August 10, 1999, attached hereto as Exhibit A.
Landlord hereby consents to the subletting of the Subleased Premises as
provided in the Sublease, subject to the following:
1. This Consent does not amend or modify any provision of the Lease or
release Sublessor or any guarantor(s) from any obligation, whether past,
present or future, under the Lease. Sublessor and my guarantor(s) shall
remain liable for the payment of all rent (including, without limitation,
Base Rent and Operating Costs) and other sums and the performance of all
other obligations of Sublessor as provided in the Lease. The Sublease is,
and shall be, subject and subordinate to the terms and conditions of the
Lease. Insofar as any terms of the Sublease are in conflict with the terms
of the Lease, the Lease shall govern and control.
2. Without the prior written consent of Landlord (except as otherwise
expressly provided in the Lease), neither Sublessor nor Sublessee shall
sublet all or any portion of the Premises, assign the Lease or Sublease, or
amend or modify the Sublease. No alterations or improvements may be made to
the Premises without the prior written consent of Landlord in accordance
with the Lease.
3. If any default occurs under the Lease, Landlord may, at its option and
in addition to any other available rights and remedies: (a) collect
directly from Sublessee all rents due under the Sublease, and no such
collection shall constitute an acceptance of Sublessee as tenant or a
novation or release of Sublessor from its obligation sunder the Lease; or
(b) by written notice to Sublessee, elect to have Sublessee directly bound
to Landlord for the payment of rent and the performance of its other
obligation sunder the Sublease, in which case Sublessee will attorn to
Landlord. Landlord shall have a right of entry to the Subleased Premises
int he event of a default by Sublessee in its performance under the
Sublease. Such rights may be exercised without liability for any act or
omission of Sublessor and without waiving any default or any of Landlord's
rights and remedies under the Lease.
4. Notwithstanding anything to the contrary contained in the Sublease,
Landlord shall have no obligation to deliver any notices called for under
the Sublease or the Lease to Sublessee. Landlord shall continue to deliver
notices to Sublessor as provided in the
<PAGE>
Lease. Landlord shall have no obligation to accept, consider or respond to
any notice, request or other communication from Sublessee, whether of a
type described in the Sublease or otherwise. Neither this Consent nor the
Sublease shall give Sublessee any rights under the Lease, and Sublessee
shall have no rights being personal to Sublessor. No representations
respecting the Premises, the Building, the Project, the Lease or any other
matter have been made by Landlord to Sublessee.
5. Sublessee agrees at its expense to comply with all insurance requirements
under the Lease and provide certificates of such insurance before taking
possession of the Subleased Premises naming Landlord as an additional
insured, and shall agree to and adopt the provisions of Section 8 of the
Lease with respect to the Subleased Premises as if Sublessee were the
Tenant thereunder.
6. Sublessor hereby confirms to Landlord that there are no existing defenses
or offsets which Sublessor has against enforcement of the Lease; and
Landlord is not currently in default under the Lease.
7. This consent is subject to the condition that Sublessor and Sublessee shall
acknowledge and agree to the above terms and conditions by signing in the
space provided below.
IN WITNESS WHEREOF, the undersigned has executed this Consent as of August
30, 1999.
LANDLORD:
Teachers Insurance & Annuity Association
By: /s/ Mark J. Wood
-------------------------------------
Name: Mark J. Wood
-----------------------------------
Title: Asst. Sec.
----------------------------------
ACKNOWLEDGED AND AGREED TO:
SUBLESSOR:
The Prudential Insurance Company of America
By: /s/ Gregory M. Gauthier
------------------------
Name: Gregory M. Gauthier
------------------------
Title: DIRECTOR, OPERATIONS
CORPORATE REAL ESTATE
------------------------
<PAGE>
SUBLESSEE:
Network Management Services, Inc.
By: /s/ Michael C. Bingham
-------------------------
Name: Michael C. Bingham
-------------------------
Title: President
-------------------------
<PAGE>
EXHIBIT C
LEASEHOLD IMPROVEMENTS
1. Building Shell. The following Building Standard items are deemed to be
part of the Building Shell and are provided at Landlord's expense for unimproved
space in accordance with Landlord's Building Shell specifications:
Parabolic Light Fixtures Not Installed
Ceiling Grid Installed
Ceiling Tile Not Installed
Interior VAV Boxes Not Installed
Exterior VAV Boxes Installed
Exterior VAV Trunk System Installed
Exterior Window Mini-Blinds Installed
Building Shell Sprinkler System Installed
HVAC Diffusers Not Installed
The above Building Shell items are not charged against the Tenant Finish
Allowance, except for the cost of any adjustments or modifications and the cost
of installing items listed as "not installed."
2. Tenant Finish Allowance and Costs. Landlord shall provide an allowance
("Tenant Finish Allowance") not to exceed $14.62 per rentable square foot in the
Premises (total $437,181.86) or the actual cost of such improvements, whichever
is less, to be applied to the total cost of constructing Tenant's leasehold
improvements in the Premises ("Tenant Finish Costs"), including, without
limitation: space planning and design fees; architectural and engineering fees;
required building permits; actual cost of labor, materials, equipment and
services; actual cost of tenant signage; for any unimproved portion of the
Premises, the costs of installing and modifying those Building Shell items
labeled above as "not installed" as well as the costs of modifying those
Building Shell items labeled above as "installed" to accommodate Tenant's space
plan; and the costs of removing, modifying relocating or making additions to any
existing improvements in the Premises to accommodate Tenant's space plan. Tenant
Finish Costs shall exclude expenses in connection with services provided by
Tenant or Tenant's employees; telephone, communications, and computer equipment
and wiring; and personal property items such as decorations, art work,
furniture, equipment, or trade fixtures not permanently attached to the
Premises. Any Tenant Finish Costs in excess of the Tenant Finish Allowance shall
be payable by Tenant to Landlord as Additional Rent within thirty (30) days of
Landlord's invoice for such costs.
3. Landlord's Work. As Landlord's Work, Landlord shall (a) provide any
previously unimproved portion of the Premises in Building Shell condition; and
(b) construct leasehold improvements in the Premises, substantially in
accordance with plans and specifications approved by Tenant and Landlord as
provided in Exhibit C-1, in a total amount not to exceed the Tenant Finish
Allowance. In all other respects, Tenant agrees to accept the Premises in its
present condition, "as is," with no obligation for Landlord to do or pay for any
improvements or plans. Additional Work, if any, required by Tenant shall be
constructed by Landlord at Tenant's expense as provided in Exhibit C-1.
4. Telephones/Wiring. Tenant shall at its expense (a) install and maintain
all telephone and communications wiring and equipment from the service access
point in the Building to and within the Premises; and (b) arrange directly with
Fairchild Communications Services Company or another provider for all service
and connections. Landlord will cooperate with Tenant to permit the installation
of such wiring and equipment at Tenant's expense; provided that all such work
shall be subject to Landlord's prior approval.
5. Space Planning Allowance. In addition to the Tenant Finish Allowance,
Landlord shall provide an allowance ("Space Planning Allowance") not to exceed
$.10 per rentable square foot in the Premises (total
C-1
<PAGE>
$2,990.30) or the actual cost of such Services, whichever is less, to be applied
to Tenant's space planning costs. Such allowance shall be paid within thirty
(30) days after Tenant provides an itemized statement of such costs.
C-2
<PAGE>
EXHIBIT C-1
TENANT IMPROVEMENT WORK AGREEMENT
1. Landlord's Work. Tenant agrees to promptly devote such time in
consultation with Landlord and Landlord's architect ("Architect") as reasonably
necessary to finalize a space plan for the Premises, and to furnish such
information relative to the Premises as reasonably necessary to enable the
Architect to commence final architectural plans and specifications (the
"Architectural Plans") for improving the Premises with the items described on
Exhibit C attached hereto as "Landlord's work." The information to be furnished
by Tenant to the Architect shall include, without limitation:
(a) Any requirements of the Tenant for the Premises which are in
excess of, or otherwise vary in any respect from, Building standard items.
(b) Special loading, such as the location of and requirements for file
cabinets or special equipment.
(c) Openings in the walls or floors.
(d) Special heating, ventilating, air conditioning, electrical,
sprinkler, lighting, security system, or plumbing work.
(e) Location and dimensions of telephone equipment areas, and location
of telephone and electrical outlets, switches and lights.
(f) Partitions - locations and type, including doors and hardware,
windows, glass partitions and special framing or support.
(g) Special cabinet work and other millwork items.
(h) Variations to standard ceiling heights.
(i) Location and color selection of painted areas.
(j) Location and selection of floor covering and wall coverings.
(k) Location and type of any kitchen equipment.
(l) Such additional information as reasonably specified by Landlord.
Within five (5) business days after the completed Architectural Plans have been
submitted to Tenant, Tenant agrees to provide the Architect with Tenant's
written approval (or disapproval with a written explanation of any changes
required in the Plans) of such Architectural Plans and to redeliver the
Architectural Plans to the Architect for submission to Landlord for Landlord's
final approval. Should Tenant fail to promptly furnish the Architect with all
necessary information so that Architect can commence with the Architectural
Plans or should Tenant fail to redeliver the Architectural Plans with Tenant's
approval or disapproval to the Architect within said five (5) day period, Tenant
shall indemnify Landlord against any additional cost in completing Landlord's
work and other damages to Landlord caused thereby.
After final approval of the Architectural Plans by Landlord and
Tenant, Landlord shall cause such Architectural Plans to be reviewed for
final mechanical and electrical plans and specifications (the "Engineering
Plans") for Landlord's Work. Promptly after completion of the Engineering
Plans, Landlord shall obtain a building
C-1-1
<PAGE>
permit and, subject to the other terms and conditions of this Exhibit C-1 and
the Lease, shall proceed diligently to cause Landlord's Work to be substantially
completed before the Commencement Date of the Lease, it being expressly
understood that all work to be done in the Premises shall be subject to approval
of Landlord and that no work shall be undertaken in the Premises until such
approval is given in writing. Except as otherwise provided in Exhibit C, all
costs and expenses relating to the preparation and completion of any space plan
or the Architectural and Engineering Plans for the Premises shall be borne by
Tenant.
For purposes of this Exhibit C-1, "substantial completion" means: (i)
completion of Landlord's Work except for minor finishing and punchlist activity
which does not materially interfere with Tenant's use and occupancy of the
Premises; (ii) issuance of any necessary municipal certificate of occupancy; and
(iii) Tenant, its employees, agents, and invitees have ready and safe access to
the Building and the Premises through the lobby, entrances, elevators, and
hallways. Within thirty (30) days after the Commencement Date of the Lease, the
parties shall inspect the Premises, have all systems demonstrated, and prepare a
punchlist of incomplete or defective details of construction. Landlord will
complete the punchlist items within sixty (60) days after Tenant provides the
punchlist to Landlord. Upon notice from Landlord that Landlord's Work is
complete, Tenant agrees to confirm acceptance of the Premises in written form
reasonably acceptable to Landlord, unless the completion of Landlord's Work is
disputed. If Tenant disputes Landlord's notice that Landlord's work is complete
and such dispute cannot be resolved by Tenant and Landlord within thirty (30)
days after Landlord has furnished such notice, then such dispute shall be
resolved by a Minnesota licensed architect approved by both Landlord and Tenant,
and the determination of such architect shall be binding upon the parties; and
the fees of such architect shall be shared equally by Landlord and Tenant.
2. Additional Work. Except to the extent described herein, in Exhibit C or
in the Lease, Landlord has no obligation to do or pay for any work to the
Premises (or any plans or specifications relating thereto). If Tenant shall
require other work or materials ("Additional Work") in the Premises in addition
to or in substitution for Landlord's Work, Tenant shall deliver to Landlord for
its approval final Architectural Plans for such Additional Work at or before the
time Tenant is required pursuant to Section 1 hereof to deliver Tenant's written
approval of the Architectural Plans for Landlord's Work. If Landlord does not
approve of the Architectural Plans for the Additional Work, as delivered by
Tenant, Landlord shall advise Tenant generally of the changes required in such
Plans so that they will meet with Landlord's approval. Tenant shall cause the
Architectural Plans for the Additional Work to be revised and delivered to
Landlord for its final review and approval within five (5) business days after
Tenant's receipt of such advice or Tenant shall be deemed to have abandoned its
request for such Additional Work. After final approval of the Architectural
Plans for the Additional Work by Landlord, Landlord shall cause the preparation
of final Engineering Plans relating thereto. All Architectural and Engineering
Plans for the Additional Work (together with any changes to the Architectural or
Engineering Plans for the Landlord's Work which may be required as a result
thereof) shall be prepared and completed at Tenant's sole cost and expense.
Landlord shall furnish Tenant with written estimates of the cost of the
Additional Work within fifteen (15) business days after receipt by Landlord of
the Engineering Plans for the Additional Work. If Tenant shall fail to approve
in writing such estimates within seven (7) business days from receipt thereof,
the estimates shall be deemed disapproved in all respects by Tenant; Landlord
shall not be authorized or required to proceed with any Additional Work; and
Tenant shall be deemed to have abandoned its request therefor. If, however,
Tenant approves in writing such estimate as furnished by Landlord within said
seven (7) day period, Tenant shall pay Landlord the actual cost of such
Additional Work, as follows:
(a) Unless otherwise agreed by Landlord, an amount equal to fifty
percent (50%) of the estimated total cost of such Additional Work shall be
paid to Landlord upon receipt and written approval of the estimate, and
(b) An amount equal to the unpaid balance of the total actual cost of
the Additional Work shall be paid to Landlord within thirty (30) days of
Landlord's statement following substantial completion of such Additional
Work;
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and, provided Tenant makes all payments when required herein and furnishes
reasonable security for the balance of such costs, Landlord agrees to cause the
Additional Work to be performed by Landlord's contractors.
If Landlord is not required to perform Additional Work as provided in this
Section 2, the alterations and improvements to be made to the Premises prior to
the commencement of the Term of the Lease shall be limited to Landlord's Work
and any additional alterations and improvements to the Premises desired by
Tenant shall be made after the commencement of the Term of the Lease as provided
in Section 5 of the Lease.
3. Commencement of Rent. The Commencement Date of the Lease shall not occur
and Tenant's obligation to pay rent under the Lease shall not commence until
Landlord has substantially completed all of Landlord's work; provided, however,
that if landlord is delayed in substantially completing Landlord's Work as a
result of any one or more of the following ("Tenant Delay"):
(a) Tenant's failure to devote the time or furnish the information or
approvals required under Section 1 hereof in connection with the space plan
or the Architectural Plans for Landlord's Work; or
(b) Tenant's failure to furnish Architectural Plans for any Additional
Work, or revisions thereto, as required hereby, or Tenant's failure to
approve cost estimates for the Additional Work within the time period
specified in Section 2 hereof; or
(c) Tenant's request for materials, finishes or installations other
than Building standard items; or
(d) Tenant's changes in the Landlord's Work, in the Architectural or
Engineering Plans relating thereto, or in the Architectural or Engineering
Plans for the Additional Work (notwithstanding Landlord's approval of any
such changes); or
(e) Any other act or omission by Tenant or its employees, contractors,
or agents:
then and in any such event, Landlord shall cause the Architect to certify the
date on which Landlord's Work would have been completed but for any Tenant
Delay, and the Commencement Date and Tenant's obligation to pay rent under the
Lease shall occur and commence as of such date, and shall not otherwise be
affected or deferred on account of such delay.
4. Access By Tenant Prior To Commencement Of Term. Landlord, at Landlord's
discretion, may permit Tenant and Tenant's agents to enter the Premises prior to
the Commencement Date of the Lease upon reasonable notice during business hours
in order that Tenant may make the Premises ready for Tenant's use and occupancy.
Any such permission shall constitute a license only and not a lease and such
license shall be conditioned upon: (a) Tenant working in harmony and not
interfering with Landlord and Landlord's agents, contractors, workmen, mechanics
and suppliers in doing Landlord's Work or Additional Work, if any, or other work
in the Building or with other tenants and occupants of the Building; (b) Tenant
obtaining in advance Landlord's approval of the contractors proposed to be used
by Tenant and depositing with Landlord in advance of any work (i) security
reasonably satisfactory to Landlord for the completion thereof, and (ii) general
contractor's affidavit for the proposed work; and (c) Tenant furnishing Landlord
with such insurance and other security as Landlord may reasonably require
against liabilities which may arise out of such entry. Landlord shall have the
right to withdraw such license upon twenty-four (24) hours' written notice to
Tenant for reasonable cause. Tenant agrees that landlord shall not be liable in
any way for any injury, los or damage which may occur to any of Tenant's
property placed or installations made in the Premises prior to the commencement
of the Term of the Lease, the same being at Tenant's sole risk and Tenant agrees
to protect, defend, indemnify and save harmless Landlord from all liabilities,
costs, damages, fees and expenses arising out of or connected with the
activities of Tenant or its agents, contractors, suppliers or workmen in or
about the Premises or the Building. Tenant further agrees that any entry, work
and
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occupation permitted under this Section shall be governed by Section 5 of the
Lease and all other terms of the Lease.
5. Miscellaneous.
(a) This Exhibit C-1 shall be incorporated in and considered as a part
of Exhibit C to the Lease. Except to the extent otherwise indicated herein,
the initially capitalized terms used in this Exhibit shall have the
meanings assigned to them in the Lease.
(b) The terms and conditions of this Exhibit are intended to
supplement and are specifically subject to all the terms and provisions of
the Lease. This Exhibit may not be amended or modified except in a writing
signed by Landlord and Tenant.
(c) All sums due hereunder from Tenant shall be deemed Additional Rent
for purposes of the Lease. All designs for public areas must conform to
Building standard and be approved by the Landlord.
(d) Whenever the approval or consent of either Landlord or Tenant is
provided for in this Exhibit, the same shall not be unreasonably withheld
or delayed.
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EXHIBIT D
RULES AND REGULATIONS
1. The sidewalks, halls, passages, elevators and stairways shall not be
obstructed by Tenant or used for any purpose other than for ingress to and
egress from the Premises. The halls, passages, entrances, elevators, stairways,
balconies and roof are not for the use of the general public, and Landlord shall
in all cases retain the right to control and prevent access thereto of all
persons whose presence in the judgment of Landlord shall be prejudicial to the
safety, character, reputation and interest of the Building and its tenants,
provided, that nothing herein contained shall be construed to prevent such
access to persons with whom Tenant normally deals in the ordinary course of its
business unless such persons are engaged in illegal activities. Tenant and its
employees shall not go upon the roof of the Building without the written consent
of the Landlord.
2. The sashes, sash doors, windows, glass lights, and any lights or
skylights that reflect or admit light into the halls or other places of the
Buildings shall not be covered or obstructed. The toilet rooms, water and wash
closets and other water apparatus shall not be used for any purpose other than
that for which they were constructed, and no foreign substances 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 tenant
who, or whose agents, employees, or visitors, shall have caused it.
3. If Landlord, by a notice in writing to Tenant, shall object to any
curtain, blind, shade or screen attached to, or hung in, or used in connection
with, any window or door of the Premises, such use of such curtain, blind, shade
or screen shall be discontinued forthwith by Tenant. No awnings shall be
permitted on any part of the Premises.
4. No safes or other objects heavier than the lift capacity of the freight
elevators of the Building shall be brought into or installed on the Premises.
Tenant shall not place a load upon any floor of the Premises which exceeds the
load per square foot which such floor was designed to carry and which is allowed
by law. The moving of safes shall occur only between such hours as may be
designated by, and only upon previous notice to, the manager of the Building,
and the persons employed to move safes in or out of the Building must be
acceptable to Landlord. No freight, furniture or bulky matter of any description
shall be received into the Building or carried into the elevators except during
hours and in a manner approved by Landlord.
5. Tenant 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 objectionable to Landlord or other
occupants of the Building by reason of noise, odors, and/or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds (except Seeing Eye Dogs) be brought into or kept in
or about the Building. Tenant shall not place or install any antennae or aerials
or similar devices outside of the Premises.
6. Tenant shall not use or keep in the Building any inflammables, including
but not limited to kerosene, gasoline, naphths and benzine (except cleaning
fluids in small quantities and when in containers approved by the Board of
Underwriters), or explosives or any other articles of intrinsically dangerous
nature, or use any method of heating other than that supplied by Landlord.
7. If Tenant desires telephone or telegraph connections or alarm systems,
Landlord will direct electricians as to where and how the wires are to be
introduced. No boring or cutting for wires or otherwise shall be made without
specific directions from Landlord.
8. Tenant, upon the termination of the tenancy, shall deliver to the
Landlord all the keys of offices, rooms and toilet rooms which shall have been
furnished Tenant or which Tenant shall have had made, and in the event of loss
of any keys to furnished shall pay the Landlord therefor.
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9. Tenant shall not put down any floor covering in the Premises without the
Landlord's prior approval of the manner and method of applying such floor
covering.
10. On Sundays and legal holidays, and on other days between the hours of 6
p.m. and 8 a.m., access to the Building, or to the halls, corridors, elevators
or stairways in the Building, or to the Premises may be refused unless the
persons seeking access is known to the watchman of the Building in charge and
has a pass or is properly identified. Landlord shall in no case be liable for
damages for the admission to or exclusion from the Building of any person whom
the Landlord has the right to exclude under Rule 1 above. In case of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing the
doors or otherwise, for the safety of the tenants or Landlord and protection of
property in the Building.
11. Tenant assumes full responsibility for protecting its space from theft,
robbery and pilferage which includes keeping doors locked and windows and other
means of entry to the Premises closed.
12. Tenant shall not alter any lock or install a new or additional lock or
any bolt on any door of the Premises without prior written consent of Landlord.
If Landlord shall give its consent, Tenant shall in each case furnish Landlord
with a key for any such lock.
13. In advertising or other publicity, without Landlord's prior written
consent, Tenant shall not use the name of the Building except as the address of
its business and shall not use pictures of the Building.
14. Tenant shall not make any room to room canvass to solicit business from
other tenants in the Building; and shall not exhibit, sell or offer to sell,
use, rent or exchange in or from the Premises unless ordinarily embraced within
the Tenant's use of the Premises specified herein.
15. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to assure the most effective operation
of the Building's heating and air conditioning, and shall not allow the
adjustment (except by Landlord's authorized building personnel) of any controls
other than room thermostats installed for Tenant's use. Tenant shall keep
corridor doors closed and shall not open any windows except that if the air
circulation shall not be in operation, windows which are openable may opened
with Landlord's consent.
16. Tenant shall not do any cooking in the Premises or engage any coffee
cart service.
17. Any wallpaper or vinyl fabric materials which Tenant may install on
painted walls shall be applied with a strippable adhesive. The use of
nonstrippable adhesives will cause damage to the walls when materials are
removed, and repairs made necessary thereby shall be made by Landlord at
Tenant's expense.
18. Tenant shall provide and maintain hard surface protective mats under
all desk chairs which are equipped with casters to avoid excessive wear and tear
to carpeting. If Tenant fails to provide such mats, the cost of carpet repair or
replacement made necessary by such excessive wear and tear shall be charged to
and paid for by Tenant.
19. Tenant will refer all contractors, contractor's representatives and
installation technicians, rendering any service to Tenant, to Landlord for
Landlord's supervision, approval, and control before performance of any
contractual service. This provision shall apply to all work performed in the
Building including installations of telephones, telegraph equipment, electrical
devices and attachments and installations of any nature affecting floors, walls,
woodwork, trim, windows, ceilings, equipment or any other physical portion of
the Building.
20. Movement in or out of the Building of furniture, office equipment, or
other bulky materials, or movement through the Building entrances or lobby shall
be restricted to hours designated by Landlord. All such movements shall be under
supervision of Landlord and in the manner agreed between Tenant and Landlord by
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prearrangement before performance. Such prearrangement initiated by Tenant will
include determination by Landlord and subject to its decision and control, of
the time, method, and routing of movement, limitations imposed by safety or
other concerns which may prohibit any article, equipment or any other item from
being brought into the Building. Tenant is to assume all risk as to damage to
articles moved and injury to persons or public engaged or not engaged in such
movement, including equipment, property, and personnel of Landlord if damaged or
injured as a result of acts in connection with such service performed for Tenant
and Tenant hereby agrees to indemnify and hold harmless Landlord from and
against any such damage, injury, or loss, including attorney's fees.
21. No portion of Tenant's area or any other part of the Building shall at
any time be used or occupied as sleeping or lodging quarters.
22. Landlord will not be responsible for lost or stolen personal property,
equipment, money, or jewelry from Tenant's area or any public rooms regardless
of whether such loss occurs when such area is locked against entry or not.
23. Employees of Landlord shall not receive or carry messages for or to any
tenant or other persons, nor contract with or render free or paid services to
any tenant or tenant's employees, or invitees; in the event any of Landlord's
employees perform any such services, such employees shall be deemed the agent of
Tenant regardless of whether or how payment is arranged for services and
Landlord is expressly relieved from any all liability in connection with any
such services and any associated injury or damage to person or property.
24. Tenant and its employees, agents, and invitees shall observe and comply
with the driving and parking signs and markers on the property surrounding the
Building.
25. Tenant shall not place, install, or operate on the Premises or in any
part of the Building, any coffee making device or equipment without the prior
written consent of Landlord.
26. Tenant shall give prompt notice to Landlord of any accidents to or
defects in plumbing, electrical fixtures, or heating apparatus so that such
accidents or defects may be attended to promptly.
27. the directories of the Building shall be used exclusively for the
display of the name and location of the tenants only and will be provided at the
expense of Landlord. Any additional names requested by Tenant to be displayed in
the directories must be approved by Landlord and, if approved, will be provided
at the sole expense of Tenant.
28. No vending machines of any description shall be installed, maintained
or operated in any part of the Building without the written consent of Landlord.
29. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for the safety,
care and cleanliness of the Building, and for the preservation of good order
therein.
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EXHIBIT E
ADDITIONAL PROVISIONS
This Addendum is made a part of the lease ("Lease") between MINNESOTA CC
PROPERTIES, INC. ("Landlord") and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
("Tenant") dated December 31, 1993, and the following additional terms shall
supersede any contrary terms in the Lease:
27. PREMISES.
A. The Premises shall initially consist of two parts as shown on the
attached Exhibit A: approximately 21,392 rentable square feet on the
fourteenth (14th) floor of the Building ("Fourteenth Floor Space"), and
approximately 8,511 rentable square feet on the twelfth (12th) floor of the
Building ("Twelfth Floor Space"). Effective as of the Commencement Date:
(1) The annual Base Rent for Months 1 through 36 of the Term
shall be $8.50 per rentable square foot, payable on 29,903 rentable
square feet in advance in monthly installments of $21,181.29.
(2) Tenant's Proportionate Share of Operating Costs and Operating
Cost Rent for Months 1 through 36 of the Term shall be determined on
the basis of 29,903 rentable square feet in the Premises. As soon as
reasonably possible in 1994, Landlord shall provide Tenant with a
written estimate of the Operating Costs for the Project for 1994 and
the amount of Tenant's monthly installment of estimated Operating Cost
Rent pursuant to Section 2 of the Lease. The first monthly installment
of Operating Cost Rent shall be payable on or before the date Tenant
takes occupancy of the Premises pursuant to Section 28.
B. Effective as of the first day of Month 37 of the Term, the Twelfth
Floor Space shall be deleted from the Premises, and this Lease shall
continue with respect to the Fourteenth Floor Space for the remaining Term
on all of the terms and conditions of this Lease, except that:
(1) The annual Base Rent for Months 37 through 72 of the Term
shall be $8.50 per rentable square foot, payable on 21,392 rentable
square feet in advance in monthly installments of $15,152.67.
(2) Tenant's Proportionate Share of Operating Costs and Operating
Cost Rent shall be adjusted appropriately based on 21,392 rentable
square feet, and Operating Cost Rent shall thereafter be payable on
the Fourteenth Floor Space as provided in this Lease.
(3) On or before the last day of Month 36 of the Term, Tenant
shall at its expense completely vacate the Twelfth Floor Space and
surrender possession thereof to Landlord in the condition as provided
in Sections 3D, E and F of this Lease.
(4) The term "Premises" shall thereafter be deemed to refer to
and include only the Fourteenth Floor Space, except as expressly
provided otherwise in this Lease.
28. PRE-TERM OCCUPANCY.
A. Landlord shall use reasonable efforts to substantially complete
Landlord's Work in the Premises at least sixty (60) days before the
Commencement Date stated in Section 3 of the Schedule to this Lease. Upon
such substantial completion, Landlord shall permit Tenant to take
possession and occupy the Premises. Any such pre-term occupancy by Tenant
shall be subject to all of the terms and conditions of
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this Lease, except that during the first thirty (30) days after substantial
completion there shall be no charge for Base Rent or Operating Cost Rent,
and during the succeeding thirty (30) days there shall be no charge for
Base Rent but Tenant shall pay Operating Cost Rent as provided in this
Lease.
B. The period of pre-term occupancy shall be reduced by any period of
delay in such substantial completion caused by Tenant Delay as defined in
Exhibit C-1 or by any delay in the delivery to Landlord of four (4) copies
of this Lease executed by Tenant beyond __________________, 1993, and the
Commencement Date shall not be extended on account of such delay. The
period of pre-term occupancy shall not be reduced by any period of delay in
such substantial completion resulting from Force Majeure or from delays
caused by Landlord; and in such case the Commencement Date shall be delayed
until sixty (60) days after substantial completion of Landlord's Work, and
the Term shall be extended as provided in Section 3B. During such pre-term
occupancy, Tenant shall cooperate to minimize any interference with the
completion of Landlord's Work.
29. RETENTION OPTION. Notwithstanding anything to the contrary contained in
Section 27, Tenant shall have the option ("Retention Option") to retain the
Twelfth Floor Space as part of the Premises during Months 37 through 72 of the
Term, as follows:
A. To exercise the Retention Option, Tenant shall give Landlord
written notice of exercise on or before the last day of Month 24 of the
Term. Within fifteen (15) days thereafter, Landlord shall give written
notice to Tenant of Landlord's initial estimate of the Market Rate for the
Twelfth Floor Space. Tenant's notice of exercise and Landlord's initial
estimate of the Market Rate shall be binding and conclusive unless Tenant
gives Landlord written notice on or before the last day of Month 25 of the
Term either (1) withdrawing Tenant's notice of exercise, or (2) confirming
Tenant's notice of exercise but objecting to Landlord's initial estimate of
the Market Rate. Tenant may only exercise the Retention Option as to all of
the Twelfth Floor Space.
B. If Tenant exercises the Retention Option, the Twelfth Floor Space
shall be retained as part of the Premises for Months 37 through 72 of the
Term on all of the terms and conditions of this Lease, except that:
(1) In addition to Base Rent for the Fourteenth Floor Space,
Tenant shall pay Base Rent for the Twelfth Floor Space at a rate equal
to the greater of: (a) ninety percent (90%) of the Market Rate for
such space (as defined and determined under Section 31 if Tenant
timely objects to Landlord's initial estimate of the Market Rate), or
(b) an annual rate of $8.50 per rentable square foot.
(2) Tenant's Proportionate Share of Operating Costs and Operating
Cost Rent shall be adjusted appropriately based on 29,903 rentable
square feet, and Operating Cost Rent shall thereafter be payable on
the Fourteenth Floor Space and the Twelfth Floor Space as provided in
this Lease.
(3) The Twelfth Floor Space shall be provided in an "as is"
condition, with no obligation for Landlord to do or pay for any work
or plans.
(4) The term "Premises" shall thereafter be deemed to refer to
and include the Fourteenth Floor Space and the Twelfth Floor Space,
except as expressly provided otherwise in this Lease.
C. Tenant's right to exercise the Retention Option is subject to the
condition that, at the time that Tenant delivers the Tenant's notice of
exercise, Tenant is not in default under any of the terms or conditions of
this Lease. Further, the Retention Option shall automatically terminate
upon the earliest to
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occur of (1) the expiration or termination of this Lease; (2) the
termination of Tenant's right to possession of the Premises; (3) the
assignment of this Lease by Tenant or the sublease by Tenant of all or any
part of the Premises; or (4) the failure of Tenant to timely or properly
exercise the Retention Option.
D. Within ten (10) days after written request by Landlord, Tenant
shall execute and deliver an instrument in form reasonably satisfactory to
Landlord confirming the exercise or termination of the Retention Option.
30. RIGHT OF FIRST OFFER. Tenant shall have a right of first offer ("ROFO
Right") on all remaining space on the twelfth (12th) floor of the Building
("ROFO Space"), as follows:
A. Upon written request by Tenant ("Tenant's ROFO Notice"), Landlord
shall within thirty (30) days thereafter give written notice to Tenant
("Landlord's ROFO Notice") stating: (1) any portion of the ROFO Space
("Subject ROFO Space") which is, or will during the first thirty-six (36)
months of the Term become, available for lease; (2) the estimated date of
availability ("Target Delivery Date"); (3) Landlord's initial estimate of
the Market Rate for the Subject ROFO Space; and (4) the Tenant Finish
Allowance, if any, Landlord will provide for the Subject ROFO Space (which
shall be based on prevailing market conditions as reasonably determined by
Landlord). Before Tenant's ROFO Notice, if Landlord desires to offer any
portion of the ROFO Space for lease, Landlord shall first deliver a
Landlord's ROFO Notice to Tenant relating to the Subject ROFO Space. Tenant
shall notify Landlord within ten (10) days after Landlord's ROFO Notice is
given whether it desires to exercise its right to lease the Subject ROFO
Space and whether Tenant objects to Landlord's initial estimate of the
Market Rate. Tenant may exercise the ROFO Right only as to all of the
Subject ROFO Space.
Notwithstanding anything to the contrary contained in this Section,
the ROFO Right shall be subject to and shall exclude: (i) all leases,
renewals, extensions, expansions or other rights relating to any part of
the ROFO Space that may previously have been granted by Landlord; and (ii)
any renewals or extensions of any existing leases for any part of the ROFO
Space, whether or not pursuant to an option or right in such lease.
B. If Tenant exercises the ROFO Right with respect to the Subject ROFO
Space, such space shall be added to and become part of the Premises for the
remaining Term of this Lease (including any renewals or extensions) on all
of the terms and conditions of this Lease, except that:
(1) The Subject ROFO Space shall be added to the Premises
effective on the earlier of (the "Delivery Date"): (a) the date Tenant
occupies the Subject ROFO space, or (b) the date on which Landlord
delivers the Subject ROFO Space to Tenant in the condition provided in
this Section (which, without Tenant's consent, shall not be before the
Target Delivery Date).
(2) Effective on the Delivery Date, (a) the Base Rent for the
Subject ROFO Space shall be payable at the greater of (i) Market Rate
for such space (as defined and determined under Section 31 if Tenant
objects in its notice of exercise, to Landlord's initial estimate of
the Market Rate), or (ii) an annual rate of $8.50 per rentable square
foot; and (b) Tenant's Proportionate Share of Operating Costs shall be
adjusted appropriately to take into account the net rentable area in
the Subject ROFO Space, and Operating Cost Rent shall thereafter be
payable at the same rate per rentable square foot as then payable for
the Premises and shall thereafter be subject to the same adjustments
as provided in this Lease.
(3) The Subject ROFO Space shall be delivered in an "as is"
condition and Exhibit C shall not apply; except that Landlord shall
construct leasehold improvements in an amount not to exceed the Tenant
Finish allowance specified in Landlord's ROFO Notice, which shall be
taken into account in determining the Market Rate for the Subject ROFO
Space. The Tenant Finish
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Allowance shall be applied to Tenant Finish Costs relating to the
Subject ROFO Space. No refund or credit shall be made for any unused
portion of the Tenant Finish Allowance. All leasehold improvements
shall be performed as provided in Exhibit C-1.
(4) As of the Delivery Date, the term "Premises" shall be deemed
to refer to and include the Subject ROFO Space, except as expressly
provided otherwise in this Lease.
If Tenant fails to timely exercise the ROFO Right, Tenant shall have no
further rights with respect to the Subject ROFO Space, and Landlord shall
be free to lease such space on any terms. The ROFO right shall only apply
during the first thirty-six (36) months of the Term and, unless previously
exercised or terminated, shall thereupon automatically terminate.
C. Tenant's right to exercise the ROFO Right with respect to any
portion of the ROFO Space is subject to the condition that, at the time
that Tenant delivers its written notice of exercise with respect to such
portion of the ROFO Space, (i) Tenant is not in default under any of the
terms or conditions of this Lease, and (ii) Tenant shall simultaneously
exercise (or shall have previously exercised) the Retention Option as
provided in Section 29. Further, the ROFO Right shall automatically
terminate upon the earliest to occur of (1) the expiration or termination
of this Lease; (2) the termination of Tenant's right to possession of the
Premises; (3) the assignment of this Lease by Tenant or the sublease by
Tenant of all or any part of the Premises; or (4) the expiration or
termination of the Retention Option as provided in Section 29.
D. Within ten (10) days after written request by Landlord, Tenant
shall execute and deliver an instrument in form reasonably satisfactory to
Landlord confirming any exercise or termination of the ROFO Right.
31. MARKET RATE. Whenever this Lease provides that the Market Rate for
space is to be determined pursuant to this Section, the following shall apply:
A. As used herein, "Market Rate" shall mean the net market rental rate
for the applicable space (determined by reference to the annual rental
rates for comparable space in the Project, primarily, and in comparable
suburban office buildings within a five-mile radius of the Project,
secondarily) that would be payable by a willing tenant to a willing
landlord in arms-length bona fide negotiations, neither being under any
compulsion to act, in equal monthly payments during a term equal to the
applicable term and commencing on the first day thereof (taking into
consideration all pertinent factors, including, without limitation, the
length of the term, use, quality of services provided, size of space,
location of the space within the building and/or floor level, definition of
net rentable area, existing leasehold improvements, leasehold improvements
provided (whether directly or by allowance), quality, age, and location of
the applicable building, tenant clientele of the building, financial
strength of the applicable tenant, any applicable reductions arising from
rental concessions and abatements, method for computing and the amount of
operating costs, taxes, and other expenses payable by tenants, parking and
other amenities provided (and any charge therefor), and the time the
particular rate under consideration becomes effective, all to the same
extent and in the same manner as the rental marketplace takes such factors
into account).
B. If Tenant does not timely object to Landlord's initial estimate of
the Market Rate, such estimate shall constitute the Market Rate. If Tenant
timely objects to such estimate, the Market Rate for the Premises shall be
determined as follows:
(1) Promptly after Tenant gives Landlord notice of its objection,
Landlord and Tenant shall commence negotiations to agree upon the
Market Rate for the applicable space. If Landlord and Tenant are
unable to reach agreement on the Market Rate within fifteen (15) days
after Tenant gives Landlord notice of its objection, then within seven
(7) days thereafter, Landlord and Tenant
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shall each simultaneously submit to the other in a sealed envelope its
good faith estimate of the Market Rate. If the higher of such
estimates is not more than one hundred five percent (105%) of the
lower of such estimates, then the Market Rate shall be the average of
the two (2) estimates. Otherwise, the Market Rate shall be determined
by arbitration as provided in the following Subsection (2).
(2) If the Market Rate is not determined as provided in the
preceding Subsection (1), then within seven (7) days after the
exchange of good faith estimates the parties shall select, as an
arbitrator, a mutually acceptable independent MAI appraiser with
experience in real estate activities, including at least five (5)
years experience in appraising office space in the Minneapolis-St.
Paul metropolitan area and no direct or indirect financial or other
business interest in or in common with Landlord or Tenant or any
affiliate of either (a "Qualified Appraiser"). If the parties cannot
agree on a Qualified Appraiser, then within seven (7) days thereafter,
each party shall select a Qualified Appraiser and within seven (7)
days thereafter the two appointed Qualified Appraisers shall select a
third Qualified Appraiser and the third Qualified Appraiser shall be
the arbitrator and shall determine the Market Rate. If one party shall
fail to make such appointment within said seven (7) day period, then
the Qualified Appraiser chosen by the other party shall be the sole
arbitrator. Once the arbitrator has been selected, then, as soon
thereafter as practicable but in any case within fifteen (15) days,
the arbitrator shall select one of the two estimates of Market Rate
submitted by Landlord and Tenant, which shall be the one that is
closer to the Market Rate independently determined by the arbitrator.
The value so selected shall be the Market Rate. The decision of the
arbitrator as to the Market shall be submitted in writing to, and be
final and binding on, Landlord and Tenant. If the arbitrator believes
that expert advice would be of material assistance, the arbitrator may
retain one or more qualified persons, including, without limitation,
legal counsel, brokers, architects, or engineers. The party whose
estimate is not chosen by the arbitrator shall pay the costs of the
arbitrator and of any experts retained by the arbitrator. Any fees of
any counsel or experts engaged directly by Landlord or Tenant,
however, shall be borne by the party obtaining such counsel or expert.
If the foregoing process is not completed by the date the Market Rate
is to become effective, Tenant shall pay rent for the applicable space
at the rental rate then or most recently in effect for the Premises,
which will be adjusted retroactively at the time the foregoing process
is completed to reflect any difference in the rent.
32. SECTION 2C(2). ADD THE FOLLOWING:
Landlord's current fiscal year is a calendar year. If Landlord changes its
fiscal year at any time, appropriate adjustments shall be made so that no
Operating Costs are charged to tenants in excess of 100% of the actual amount.
33. SECTION 2D(2). ADD THE FOLLOWING:
Notwithstanding anything to the contrary contained in Section 2D(2), on the
first occasion during any calendar year of the Term that Tenant defaults in the
payment of any Rent, Landlord shall not charge any late fee or interest with
respect to such default unless such default is not remedied within ten (10) days
after written notice thereof by Landlord to Tenant.
34. SECTION 3C. ADD THE FOLLOWING:
At the end of the first sentence of Section 3C, add the words:
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". . . except (1) punchlist items relating to Landlord's Work as provided in
Exhibit C, and (2) latent defects relating to Landlord's work of which Tenant
notifies Landlord within one (1) year following the Commencement Date."
35. SECTION 4A(1). ADD THE FOLLOWING:
Landlord shall furnish heat and air conditioning in a manner consistent
with prevailing practices for similar first-class suburban office buildings in
the Minneapolis-St. Paul metropolitan area. For purposes of this Lease, the
following dates (or the dates on which the holidays are designated for
observance) shall constitute "holidays": New Year's Day, Memorial Day, July
Fourth, Labor Day, Thanksgiving Day, and Christmas Day.
36. SECTION 4C. ADD THE FOLLOWING:
Notwithstanding anything to the contrary contained in Section 4C, if (1)
Landlord ceases to furnish any service in the Building, and Tenant notifies
Landlord of such cessation, (2) such cessation is within Landlord's reasonable
control (that is, is not caused by force Majeure as defined in Section 18), (3)
such cessation does not arise as a result of an act or omission of Tenant, and
(4) as a result of such cessation, the Premises or a material portion thereof
are rendered untenantable (meaning that Tenant is unable to use such space in
the normal course of its business), then Tenant's exclusive remedy for such
cessation shall be as follows: beginning on the third business day after the
affected space becomes untenantable and Tenant so notifies Landlord in writing
thereof, the Rent and other charges payable hereunder shall be equitably abated
based on the percentage of the space in the Premises so rendered untenantable,
and such abatement shall continue until the date the Premises become tenantable
again.
37. SECTION 10A. ADD THE FOLLOWING:
Provided, that Landlord shall pay Tenant's reasonable out-of-pocket
expenses for replacing or modifying reasonable quantities of stationery and
business materials if a change of street address is (1) made on less than
forty-five (45) days prior written notice, and (2) not required by governmental
authority or the United States Post Office.
38. SECTION 11A(3). ADD THE FOLLOWING:
(1) Notwithstanding anything contained in Section 11A(3) to the
contrary, the original Tenant named in this Lease or an Affiliate shall not
be in default under such Section so long as (a) the Premises are kept in a
clean and orderly condition; (b) Tenant pays its Base Rent and Operating
Cost Rent by the due date; and (c) Tenant gives Landlord ten (10) days
prior written notice of its intent to vacate the Premises.
(2) If Tenant vacates the Premises during the Term for a continuous
period of more than ninety (90) days, Landlord shall have the option
("Cancellation Option") to cancel this Lease at any time thereafter upon
thirty (30) days written notice to Tenant. If Landlord exercises the
Cancellation Option, this Lease shall be deemed to have lapsed on the
cancellation date specified in Landlord's notice, and neither Landlord nor
Tenant shall have any obligations thereunder accruing under this Lease,
except the following obligations of Tenant shall survive: (a) Tenant's
obligations for the payment to Landlord of all rent and the performance of
all other obligations under the Lease which accrue on or before the
Cancellation Date; (b) any rights and liabilities which by the terms of
this Lease expressly survive the termination of this Lease; and (c) if
Tenant fails to completely vacate the Premises and surrender possession
thereof on or before the cancellation date in compliance with the Lease,
such failure shall be treated as a holding over by Tenant and Landlord
shall be entitled to exercise all of its remedies against Tenant under this
Lease.
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39. SECTION 11A(1). ADD THE FOLLOWING:
Notwithstanding anything to the contrary contained in Section 11A(1), on
the first two (2) occasions during any calendar year of the Term that Tenant
defaults in payment of Base Rent or Operating Cost Rent, Landlord shall not be
entitled to exercise its remedies set forth in this Lease or at law or in equity
with respect to such default unless such default is not remedied within ten (10)
days after written notice thereof by Landlord to Tenant.
40. SECTION 8C. ADD THE FOLLOWING:
Notwithstanding anything to the contrary contained in this Lease, Tenant is
self-insured against the risks of general public liability and property damage,
and Landlord hereby waives Tenant's requirement to provide the insurance
coverages specified in Section 8C. Upon ten (10) days written request by
Landlord, Tenant shall provide reasonable financial information so that Landlord
can evaluate the continued self-insurance by Tenant; and Landlord may require
Tenant to provide the insurance specified in Section 8C upon thirty (30) days
written notice if Landlord reasonably determines that such insurance would be
required by a prudent landlord of a comparable building based on Tenant's
financial circumstances. Landlord may also require such insurance to be provided
if Tenant assigns this Lease or subleases all or any part of the Premises.
Without limiting any indemnity stated in Section 8, Tenant agrees that it will
indemnify and save harmless Landlord from any all liability for bodily injury,
death and property damage to the same extent that would be available if Tenant
were to provide insurance with the coverage and the amounts as specified in
Section 8C.
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EXHIBIT 10.16
LEASE AGREEMENT
THE COLONNADE
5500 WAYZATA BOULEVARD,
GOLDEN VALLEY, MINNESOTA
<PAGE>
LANDLORD: ND PROPERTIES, INC.
TENANT: NETWORK MANAGEMENT SERVICES, INC.
PROJECT: 5500 WAYZATA BOULEVARD, GOLDEN VALLEY, MINNESOTA
LEASE INDEX
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Page
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Schedule
1. Premises.........................................................
2. Project..........................................................
3. Term.............................................................
4. Base Rent........................................................
5. Operating Cost Rent..............................................
6. Security Deposit.................................................
7. Advance Payment..................................................
8. Tenant's Permitted Use...........................................
9. Landlord's Address...............................................
10. Tenant's Capacity and Address....................................
11. Real Estate Brokers..............................................
1. LEASING AGREEMENT....................................................
2. RENT.................................................................
3. CONDITION, POSSESSION AND SURRENDER OF PREMISES......................
4. PROJECT SERVICES.....................................................
5. ALTERATIONS AND REPAIRS..............................................
6. USE OF PREMISES......................................................
7. PROJECT RULES AND GOVERNMENTAL REGULATIONS...........................
8. CLAIMS; INSURANCE; LIABILITY.........................................
9. FIRE AND OTHER CASUALTY..............................................
10. RIGHTS RESERVED TO THE LANDLORD......................................
11. DEFAULT AND LANDLORD'S REMEDIES......................................
12. HOLDOVER.............................................................
13. SUBORDINATION........................................................
14. ASSIGNMENT AND SUBLETTING............................................
15. SALE BY LANDLORD.....................................................
16. ESTOPPEL CERTIFICATE.................................................
17. SECURITY DEPOSIT.....................................................
18. FORCE MAJEURE........................................................
19. PERSONAL PROPERTY AND TENANT FIXTURES................................
20. NOTICES..............................................................
21. QUIET POSSESSION.....................................................
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22. REAL ESTATE BROKERS..................................................
23. CONDEMNATION.........................................................
24. UNRELATED BUSINESS INCOME............................................
25. LIMITATION OF LIABILITY..............................................
26. MISCELLANEOUS........................................................
EXHIBITS
Exhibit A: Floor Plan of the Premises 7031297
Exhibit B: Legal Description 7032897
Exhibit C: Leasehold Improvements
Exhibit D: Rules and Regulations
Exhibit E: Additional Provisions (if applicable)
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<PAGE>
STANDARD OFFICE LEASE
LEASE AGREEMENT ("Lease") made as of March 12, 1997, between ND PROPERTIES,
INC. ("Landlord") and NETWORK MANAGEMENT SERVICES, INC. ("Tenant").
SCHEDULE
Each reference in this Lease to any of the terms set forth on the following
Schedule ("Schedule") shall be construed to incorporate the following:
1. Premises: The Premises consisting of approximately 1,390 rentable square
feet as shown on Exhibit A, on the seventh (7th) floor(s) of the building
commonly known as 5500 Wayzata Boulevard, Golden Valley, Minnesota (the
"Building").
2. Project: The Project consisting of the land described in Exhibit B (the
"Land"), together with the buildings, improvements and appurtenances now or
hereafter located on or used in connection with the Land.
3. Term: The Term shall be thirty-six (36) months commencing on May 1, 1997
(the "Commencement Date"), and ending on April 30, 2000 (the "Termination
Date"), subject to adjustment as provided in Section 3 of this Lease.
4. Base Rent: The annual Base Rent shall be: see Exhibit E, Section 27.
5. Operating Cost Rent: Landlord's estimate of the annual Operating Cost
Rent for 1997 is $12.76 per rentable square foot in the Premises, payable in
monthly installments of $1,478-03.
6. Security Deposit: $ 3,215.53, payable upon execution of this Lease by
Tenant.
7. Advance Payment: $3,215.53, payable upon execution of this Lease by
Tenant, to be applied to the first monthly installments of Base Rent and
Operating Cost Rent due under this Lease.
8. Tenant's Permitted Use: General office purposes consistent with a
first-class office building only.
9. Landlord's Address: ND Properties, Inc., c/o Koll Management Services,
Inc., 5500 Wayzata Boulevard, Suite 315, Golden Valley. Minnesota 55416 or such
other address as Landlord may from time to time designate by notice to Tenant.
10. Tenant's Capacity and Address: Tenant, a corporation under the laws of
Minnesota, has the following address for notices before the Commencement Date:
5500 Wayzata Boulevard, Suite 1275, Golden Valley, Minnesota 55416 and the
Premises for notices
<PAGE>
after the Commencement Date, or such other address as Tenant may from time to
time designate by notice to Landlord.
11. Real Estate Brokers: Koll Management Services, Inc.
FOR VALUABLE CONSIDERATION, the parties agree as follows:
1. LEASING AGREEMENT. Landlord leases to Tenant, and Tenant accepts from
Landlord, the Premises as set forth on the Schedule. The Term shall begin on the
Commencement Date and continue until the Termination Date as set forth on the
Schedule, unless sooner terminated or extended under the terms of this Lease.
Tenant and its agents, employees and invitees have the non-exclusive right
with others designated by Landlord to use the common areas in the Project for
their intended and normal purposes, subject to the terms and conditions of this
Lease and the rules for the Project as provided in Section 7. Common areas
include elevators, sidewalks, unrestricted parking areas, driveways, hallways,
stairways, public bathrooms, common entrances, lobbies and other areas
designated by Landlord for common use. Landlord may change the common areas at
any time, provided the changes do not materially and unreasonably interfere with
Tenant's access to or use of the Premises.
2. RENT.
A. Kinds. Tenant agrees to pay to Landlord, without setoff, deduction or
demand, at Landlord's Address as set forth on the Schedule, or to such other
person or at such other place as Landlord designates by written notice to
Tenant, in lawful money of the United States, the aggregate of the following,
all of which are rent reserved under this Lease (collectively, "Rent"):
(1) Base Rent, in the amount set forth on the Schedule, shall be paid in
monthly installments in advance on or before the first day of each month of the
Term of this Lease.
(2) Operating Cost Rent, in an amount equal to Tenant's Proportionate Share
of the Operating Costs for the applicable fiscal year of this Lease, shall be
paid monthly in advance in an estimated amount, as adjusted and corrected by
Landlord from time to time, as provided in Sections 2B and 2C.
(3) Additional Rent, consisting of all of the sums, liabilities,
obligations and other amounts (excepting Base Rent and Operating Cost Rent)
which Tenant is required to pay or discharge pursuant to this Lease (including,
without limitation, any amounts which this Lease provides shall be Tenant's cost
or expense), together with any late charge or interest, an as hereafter
provided.
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<PAGE>
B. Payment of Operating Cost Rent.
(1) Payment of Estimated Operating Cost Rent. Landlord shall estimate the
Operating Costs of the Project from time to time each year. Such estimates may
be revised by Landlord whenever it obtains information relevant to making such
estimates more accurate. Within ten (10) days after notice from Landlord setting
forth an estimate of Operating Costs for a particular fiscal year, Tenant shall
pay Landlord an amount equal to one-twelfth (1/12th) of Tenant's Proportionate
Share of such estimate multiplied by the number of months during the Term that
have elapsed in such fiscal year to the date of such payment, minus payments of
estimated Operating Cost Rent previously paid for said period. Thereafter on the
first day of each month, Tenant shall pay monthly until a new estimate is
applicable, one-twelfth (1/12th) of Tenant's Proportionate Share of the
estimated Operating Costs.
(2) Correction of Operating Cost Rent. As soon as reasonably possible after
the end of each fiscal year, Landlord shall deliver to Tenant a notice (the
"Operating Cost Report") setting forth (a) the actual Operating Costs for the
preceding fiscal year, (b) the amount of Operating Cost Rent due to Landlord for
such fiscal year, and (c) the amount of Operating Cost Rent paid by the Tenant
for such fiscal year. Within thirty (30) days after such report, Tenant shall
pay to Landlord the amount of any additional Operating Cost Rent due for the
preceding fiscal year (or a prorated portion thereof if this Lease was not in
effect for the entire fiscal year). If Tenant's payments of Operating Cost Rent
exceed the amount due Landlord for the fiscal year in question, Landlord shall
promptly either refund any such amount to Tenant or apply any such amount as a
credit against Tenant's other obligations under this Lease. Unless Tenant takes
written exception to any item within thirty (30) days after the furnishing of
the Operating Cost Report, such report shall be considered as final and accepted
by Tenant.
C. Definitions.
(1) Operating Costs. "Operating Costs" shall mean the sum of the Taxes and
Expenses for the Project, determined in accordance with sound accounting and
management practices as follows:
(a) Taxes. "Taxes" shall mean all taxes, assessments and other
governmental charges, general and special, ordinary and extraordinary, of
any kind and nature whatsoever, including, without limitation, assessments
for public improvements or benefits, imposed by any lawful authority upon
the Project or payable by Landlord in connection with the ownership,
leasing, renting, management, control or operation of the Project. Taxes
shall include, without limitation, real estate taxes, personal property
taxes, sewer rents, assessments (special or otherwise), transit taxes, ad
valorem taxes, and any new or increased taxes, assessments or charges which
are in place of or arise out of any changes in current Taxes. Taxes shall
also include all reasonable fees and expenses incurred to contest,
determine or reduce any Taxes; and if a refund is obtained, Landlord shall
promptly either pay to Tenant or apply as a credit against Tenant's other
obligations
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<PAGE>
under this Lease a portion of the refund based on the percentage of the
original Taxes paid by Tenant from which the refund was derived. Landlord
shall have the exclusive right to contest, petition for review, or
otherwise seek a reduction in Taxes. If at any time during the Term, a
federal, state or local tax, excise or surcharge on rents or income or
other tax however described (herein called "Rent Tax") is levied or
assessed on account of the rents hereunder or the interest of Landlord
under this Lease, such Rent Tax shall be included in Taxes. Taxes shall not
include any net income, capital stock, succession, transfer, franchise,
gift, estate or inheritance taxes, unless the same shall be imposed in
place of all or any portion of Taxes.
The Taxes for any given fiscal year shall be the amount of Taxes payable
during such fiscal ear, even though levied or assessed for a different
fiscal year, provided, that in the case of special assessments which may be
paid in installments, only the installment, plus any interest, payable
during the fiscal year shall be included in Taxes. Tenant shall be solely
responsible for any taxes on its personal property and trade fixtures used
in connection with the Premises.
(b) Expenses. "Expenses" shall mean all expenses, costs and
disbursements (other than Taxes) of every kind and nature, paid or incurred
by or on behalf of Landlord in connection with the ownership, management,
maintenance, operation and repair of all or any part of the Project.
Expenses shall not include (1) costs of alterations of tenant premises; (2)
costs of capital improvements, except for a reasonable amortization plus
interest expense for any capital improvement, which are made to reduce
Expenses, or for emergency, labor-saving, security or property protection
equipment and systems, or to comply with all governmental laws, ordinances,
regulations or orders applicable to the Project from time to time; (3)
depreciation, except as permitted in the preceding Subsection; (4) interest
and principal payments on mortgages, any rental payments on any ground or
other underlying leases and other debt costs, if any; (5) real estate
brokers' leasing commissions, and (6) any cost or expenditure for which
Landlord is reimbursed, whether by tenants, insurance proceeds or otherwise
(excluding Operating Cost Rent).
If the Project is not fully occupied at any time during any fiscal year,
Landlord may reasonably adjust the Operating Costs which vary with occupancy in
the Project for such fiscal ear, employing sound accounting and management
principles, to the amount of Operating Costs that would have been incurred had
the Project been fully occupied for the entire fiscal year. If during any fiscal
year a tenant performs any service (the cost of which would constitute an
Operating Cost) in lieu of Landlord furnishing the service, Landlord may
reasonably adjust the Operating Costs for such fiscal year to the amount which
would have been incurred if Landlord had furnished such service.
(2) Fiscal Year. "Fiscal year" shall mean any twelve (12) month period
(including, without limitation, the calendar year) which Landlord may from time
to time select as the fiscal
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<PAGE>
year of the Project; provided, that in case Landlord changes such fiscal year,
the fiscal years before and after the change may contain less than twelve (12)
months.
(3) Tenant's Proportionate Share. "Tenant's Proportionate Share" shall mean
the percentage obtained by dividing the rentable square feet in the Premises by
the rentable square feet in the Project, each as reasonably determined by
Landlord.
D. Rules of Interpretation and Computation of Base Rent and Rent
Adjustments.
(1) If the Term commences or terminates on other than the first or last day
of a month, the Base Rent and Operating Cost Rent for such month shall be
prorated based upon the number of days of the Term falling within such month and
shall be paid in advance. If the Term of this Lease commences on any day other
than the first day of the designated fiscal year, or if the Term of this Lease
ends on any day other than the last day of the designated fiscal year, any
Operating Cost Rent due to Landlord with respect to such fiscal year shall be
prorated based on the number of days in the Term falling within such fiscal
year. Tenant's covenants to pay Rent shall be independent of every other
covenant set forth in this Lease. If Tenant is in default under this Lease,
Tenant shall not be entitled to any refund otherwise due hereunder until all
such defaults are cured.
(2) If Tenant fails to pay any Base Rent, Operating Cost Rent or Additional
Rent within five (5) days from the date due, Tenant shall pay to Landlord a late
charge in the amount of five percent (5%) of such sum to help defray Landlord's
additional administrative costs. In addition, any sum due from Tenant to
Landlord not paid within five (5) days from the date due shall bear interest
from the date due until the date paid at an annual rate equal to the lesser of
(a) the highest lawful rate, or (b)/1/. The payment of such late charge or
interest shall not excuse or cure any default of Tenant under this Lease, or
limit any right or remedy of Landlord./2/
(3) If changes are made to the number of rentable square feet in the
Premises or in the Project, Tenant's Proportionate Share shall be appropriately
adjusted and the computations of rent shall be appropriately adjusted upon
written notice to Tenant so as to take into account the different Tenant's
Proportionate Share figures applicable during each portion of the applicable
fiscal year.
(4) Landlord shall, in its reasonable discretion and consistent with the
provisions of this Lease, determine from time to time the method of computing
Operating Costs, the allocation of Operating Costs among the various parts and
types of space within the Project and the allocation of Operating Costs relating
to more than one fiscal year.
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1/ a variable annual rate equal to two percent (2%) over the rate publicly
announced in the Wall Street Journal from time to time as the "Prime Rate,"
with each change in the interest rate to become effective on the date the
corresponding change in the Wall Street Journal Prime Rate becomes
effective.
2/ See Exhibit E, Section 28.
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(5) Landlord's and Tenant's obligations under this Section 2 shall survive
the expiration or termination of this Lease.
3. CONDITION, POSSESSION AND SURRENDER OF PREMISES.
A. Landlord shall make the improvements to the Premises, if any, as
provided in Exhibit C. Except as otherwise provided in this Lease, Landlord is
leasing the Premises to Tenant "as is," without any representations or
warranties of any kind (including, without limitation, any express or implied
warranties of fitness or habitability) and without any obligation on the part of
the Landlord to alter, remodel, improve, repair, decorate or clean the Premises,
the Project or any part thereof.
B. If Landlord is unable to deliver possession of the Premises by the
Commencement Date set forth on the Schedule because construction has not been
substantially completed, or due to a holding over by a prior tenant, or for any
other reason beyond Landlord's control (except Tenant's default hereunder or
Tenant Delay as provided in Exhibit C), then the Commencement Date and Tenant's
obligation for payment of Rent shall be postponed until the date on which
Landlord delivers possession of the Premises; Landlord shall not be liable for
any loss, damage or expense arising in any manner from any such delay; this
Lease shall remain in effect during the period of any delay; the Term shall be
automatically extended to include the same number of full calendar months set
forth on the Schedule after the Commencement Date, plus, if the Commencement
Date is not the first day of a calendar month, the partial month in which the
Commencement Date occurs; and the Termination Date shall be the last day of the
final calendar month of the Term as so extended.
C. Except as otherwise provided in this Lease, Tenant's taking possession
of the Premises or any portion thereof shall be conclusive evidence that the
Premises or such portion were then in good order, repair and satisfactory
condition. If Landlord permits Tenant to take possession of all or any part of
the Premises prior to the Commencement Date, all of the terms of this Lease,
except where clearly inappropriate, shall apply to and shall control such
pre-term occupancy. Rent for such pre-term occupancy shall be paid before taking
possession and on the first day of each calendar month thereafter at the rate
set forth in Section 2A hereof, prorated on a per diem basis for any fractional
month.
D. During the Term of this Lease, Tenant shall maintain the Premises in as
good condition as when Tenant took possession (or as completed after possession,
if applicable), except for ordinary wear and as otherwise provided in this
Lease. At the expiration or termination of this Lease, Tenant shall, subject to
Sections 3E and 3F below, return the Premises to Landlord broom clean and in
good condition as described in the immediately preceding sentence.
E. Unless otherwise agreed in a writing signed by Landlord, all Work (as
defined in Section 5A. including, without limitation, partitions, hardware,
floor coverings, ceilings, wiring,
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telephone, communications and computer cabling, light fixtures and other
fixtures, but excluding trade fixtures, movable partitions and personal property
belonging to Tenant) in or upon the Premises, whether installed by Landlord or
Tenant, shall be surrendered with the Premises at the expiration or termination
of this Lease and shall become Landlord's property without compensation to
Tenant; provided, that if prior to any such expiration or termination of this
Lease, or within ten (10) days thereafter, Landlord so directs by written
notice, Tenant shall promptly remove any Work installed in or upon the Premises
by or for Tenant and designated in such notice, and repair any damage to the
Premises caused by such removal.
F. Tenant shall also- remove its trade fixtures and personal property from
the Premises prior to the end of the Term, or within ten (10) days following the
early termination of this Lease or Tenant's right of possession; and if Tenant
does not remove such property, Landlord may, at Tenant's expense, remove, store,
destroy or otherwise dispose of all or any part thereof in any manner that
Landlord shall choose without incurring liability to Tenant or to any other
person, and Tenant shall pay to Landlord, upon demand, all reasonable expenses
incurred in taking, any of such actions. The failure of Tenant to remove all
such property from the Premises and the Project shall forever bar Tenant from
bringing any action or asserting any liability against Landlord with respect to
any such property.
G. /3/Landlord's and Tenant's obligations under this Section 3 shall
survive the expiration or termination of this Lease.
4. PROJECT SERVICES.
A. Services. So long as Tenant is not in default hereunder, Landlord shall
furnish the following services to the Tenant without charge except for Operating
Cost Rent and as otherwise specifically provided herein:
(1) Heat and air conditioning to provide a temperature required, in
Landlord's reasonable judgment, for comfortable occupancy of the
Premises under normal business operations from 8:00 a.m. to 6:00 p.m.
Monday through Friday and from 8:00 a.m. to 1:00 p.m. Saturdays,
holidays excepted ("Operating Hours").
(2) Non-exclusive passenger elevator service to the Premises at all
times (provided Landlord may limit the elevators in operation during
non-Operating Hours), and non-exclusive freight elevator service as
scheduled by Landlord.
(3) Electrical facilities to provide sufficient power for normal
lighting and small business office equipment (but not equipment using
amounts of power disproportionate to that used by other tenants in the
Project) during Operating Hours. If the installation of any equipment
requires additional electrical or air
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3/ Landlord's and
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conditioning capacity above the Building standard system, then the
additional installation, metering and operating costs shall be paid by
Tenant to Landlord as Additional Rent. Landlord shall replace Building
standard lamps, bulbs, ballasts or starters in the Premises as
required by normal usage.
(4) Hot and cold municipal water at those points of supply provided
for the general use of tenants in the Project.
(5) Janitorial and customary cleaning services nightly in the
Premises, except Saturdays, Sundays and holidays; and window washing
for exterior windows at intervals reasonably determined by Landlord.
B. Additional Services. Except as specifically provided in this Lease,
Landlord shall not be obligated to furnish any additional services or to furnish
services at other times. If Landlord provides additional services at Tenant's
request, Tenant shall pay for such additional services at Landlord's then
prevailing rates as Additional Rent. If Landlord from time to time reasonably
determines that the use of any utility or service in the Premises is
disproportionate to the use of other tenants, Landlord may separately charge
Tenant for the excess costs attributable to such disproportionate use and may
install metering devices at Tenant's expense, which amounts shall be due from
Tenant as Additional Rent.
C. Interruption of Service. Landlord does not warrant that any service will
be free from interruptions, failures or defects caused by labor controversies,
accidents, inability to obtain utilities, fuel, steam, water or supplies,
governmental regulations or other causes beyond the reasonable control of the
Landlord, or repairs, alterations, replacements or improvements to the Project
or its systems. Landlord shall use reasonable diligence to remedy any
interruption or failure of or defect in such services after notice from Tenant,
but no such interruption or failure of or defect in any service shall be deemed
an eviction or disturbance of Tenant's use and possession of the Premises or any
part thereof, or render Landlord liable to Tenant for any loss, expense or
damage, by abatement of Rent or otherwise, or relieve Tenant from performance of
Tenant's obligations under this Lease.
D. Keys and Locks. Landlord shall furnish Tenant with two (2) keys or
access cards ("keys") for each corridor door entering the Premises and any
applicable access system for the Project, and additional keys ordered by Tenant
will be furnished by Landlord at Tenant's expense. All such keys shall remain
the property of Landlord; provided, that Tenant shall be solely responsible for
monitoring distribution and use of keys furnished to Tenant. No additional locks
shall be allowed on any door of the Premises without Landlord's written consent.
Upon termination of this Lease, Tenant shall surrender to Landlord all keys to
any locks on doors entering or within the Premises or the Project, and shall
give to Landlord the combination for all locks for safes and vaults, if any,
left in the Premises.
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5. ALTERATIONS AND REPAIRS.
A. Tenant shall not make or permit any interior or exterior alterations,
additions, improvements or changes, structural or otherwise, to the Premises or
the Project, nor make any installations which may require any change to the
heating, ventilating, air conditioning, electrical or plumbing systems of the
Project (collectively, "Work") without obtaining the prior written consent of
Landlord in each instance. As a condition to granting its consent, Landlord may
impose reasonable requirements, including, without limitation, requirements as
to the manner and time for the performance of any Work, the M>-- and amount of
insurance, bonds and security for payment Tenant must provide, the plans and
specifications relating to the Work, the contractors performing the Work, the
contracts and building permits relating to the Work, the activities being
undertaken within the Project relating to the Work, and the removal of the Work
at the expiration or termination of this Lease. Landlord shall be reimbursed by
Tenant for all reasonable costs incurred in connection with its review and
supervision of the Work. In no event will such supervision or right to supervise
by Landlord, nor any approvals given by Landlord under this Lease, constitute
any warranty by Landlord' to Tenant of the adequacy of the design, workmanship
or quality of any Work or materials for Tenant's intended use or otherwise, or
impose any liability upon Landlord in connection with the performance of such
Work. All Work shall be performed in a good and workmanlike manner and in full
compliance with applicable laws, ordinances and regulations, and all insurance
requirements.
B. Tenant shall promptly pay all contractors and materialmen for the Work
and furnish Landlord with sworn construction statements and lien waivers upon
request of Landlord. Any mechanic's lien filed against the Premises or the
Project for Work or materials furnished or claimed to have been furnished in
connection with the Work or to Tenant shall be released and discharged by
Tenant, by bond or otherwise, within ten (10) days after the filing of such lien
at Tenant's sole expense. Tenant agrees to indemnify, hold harmless and defend
Landlord, its agents and employees, the Premises, the Building and the Project
from any loss, damage or expense, including reasonable attorney's fees, arising
out of any lien claim or other claim relating to any Work. Nothing contained in
this Lease shall be construed as a consent by Landlord so as to subject the
Landlord's interest in the Premises to any lien or liability under applicable
mechanic's lien laws.
C. Landlord shall maintain and repair the foundations, exterior walls,
structural portions, roof and common areas of the Project, and the heating, air
conditioning, ventilating, electrical, elevator and plumbing systems serving the
Project (except improvements or fixtures in or primarily serving the Premises)
in good condition, ordinary wear excepted; provided that: (1) Landlord's
obligations shall be subject to the provisions of this Lease concerning casualty
loss and condemnation, and the cost of such repairs shall be included in
Operating Costs subject to the terms and conditions of Section 2; (2) Tenant
shall promptly at its expense repair all damage to the Premises or the Project
caused by Tenant or any of its employees, agents or invitees, by Tenant's
failure to comply with or perform any of Tenant's obligations under this Lease,
or by the installation, operation or removal of Tenant's improvements or
fixtures; and (3) Landlord
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shall use reasonable diligence in carrying out its obligations under this
Section, but shall not be liable under any circumstances for any loss, expense
or damage for any failure to do so, by abatement of Rent or otherwise, nor shall
the same constitute an eviction of Tenant or relieve Tenant from performance of
Tenant's obligations under this Lease.
D. Except for ordinary wear and as otherwise provided in this Lease, Tenant
shall at its expense maintain and repair the Premises, all improvements and
fixtures in or primarily serving the Premises, and all of Tenant's trade
fixtures and personal property at the Premises in good condition. If due to
Tenant's use of the Premises, alterations or improvements to the Premises or the
Project are necessary to comply with any present or future governmental laws,
ordinances or regulations or requirements of insurance carriers, Tenant shall at
its expense promptly perform such alterations or improvements in compliance with
this Section 5. If Tenant fails to perform any obligation under this Section 5,
then on not less than ten (10) days' notice to Tenant (or immediately if an
emergency), Landlord may enter the Premises and perform such obligations, and
Tenant shall pay Landlord, upon demand, the cost thereof as Additional Rent.
6. USE OF PREMISES.
A. The Premises shall be occupied and used by Tenant only for Tenant's
Permitted Use as set forth on the Schedule, and for no other purpose. Without
limiting the generality of the foregoing, no use shall be made of the Premises
nor acts done which are unlawful, unsafe, create a nuisance, unreasonably
interfere with the operation of the Project, or which will increase the existing
rate of insurance upon the Project or cause a cancellation of any insurance
policy covering the Project or any part thereof or require additional insurance
coverage. Tenant shall not permit to be kept, used or sold in or about the
Premises any article which may be prohibited by Landlord's insurance policies.
If Tenant's particular use of the Premises causes the rate of fire or other
insurance on the Premises to be increased beyond the rate otherwise applicable
to the Premises, Tenant shall pay the amount of any such increase.
B. Tenant shall not install, use, generate, store, release or dispose of
any Hazardous Materials in or about the Premises or the Project, nor cause or
permit Tenant Parties or others to do so, except immaterial quantities of
ordinary janitorial and office products customarily used by tenants in office
business operations so long as such products are properly used, stored and
disposed of in accordance with all Environmental Laws and the highest prevailing
industry standards. Tenant shall at its expense comply with all Environmental
Laws affecting its use of the, Premises and shall immediately give Landlord
written notice of any communication from any governmental agency regarding the
application of any Environmental Laws to the Premises or Tenant's use of the
Premises. Tenant shall indemnify, defend and hold harmless Landlord and its
officers, employees, agents and lenders from and against any loss, claim, damage
or expense, including, without limitation, all testing, enforcement, cleanup and
remedial costs and reasonable attorney's fees, arising by reason of the presence
in or about the Premises or the Project of any Hazardous Materials as a result
of or in connection with any act or omission of Tenant or Tenant Parties or the
breach of this Lease or any Environmental Laws by Tenant or Tenant Parties,
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regardless of whether Landlord has approved the activity. As used herein,
"Hazardous Materials' means any hazardous substance, hazardous material,
hazardous waste, pollutant, toxic material, or contaminant, defined or regulated
under any Environmental Laws (including, without limitation, petroleum,
asbestos, PCBs and any substance or material which may be hazardous to human
health, safety or the environment); "Environmental Laws" means all present or
future federal, state, and local laws, statutes, ordinances, regulations, rules,
guidelines, orders, decisions, decrees, or other requirements of any
governmental agency or authority pertaining to the regulation or protection of
human health, safety or the environment; and "Tenant Parties" means Tenant's
principals, officers, agents, employees, contractors, invitees, subtenants or
assignees. Tenant's obligations under this Section 6B shall survive the
expiration or termination of this Lease.
7. PROJECT RULES AND GOVERNMENTAL REGULATIONS. Tenant shall at its expense
comply with all applicable governmental laws, ordinances and regulations
concerning its use of the Premises. Tenant shall also comply with all reasonable
rules and regulations adopted from time to time by Landlord pertaining to the
operation and management of the Project. If any rules and regulations are
contrary to the term of this Lease, the terms of this lease shall prevail. The
present rules are contained in Exhibit D. The violation of the Project rules or
the laws or regulations governing Tenant's use of the Premises shall be a
default under this Lease allowing Landlord all remedies for default set forth
under Section 11 of this Lease. Landlord shall not be responsible to Tenant for
violation of the rules or regulations, or the terms of this Lease or any other
lease in the Project, by another tenant, nor shall failure to obey the same by
others relieve Tenant from its obligations to comply therewith.
8. CLAIMS; INSURANCE; LIABILITY.
A. To the fullest extent permitted by law, Tenant waives all claims it may
have against Landlord, its officers, directors, agents or employees for damage
to person or property sustained by Tenant or by any occupant of the Premises or
the Project, or any other person, occurring in or about the Premises or the
Project, resulting from the Premises or the Project or any part of said Premises
or Project becoming out of repair or resulting from any existing or future
condition, defect, matter or thing in the Premises, the Project or any part of
it, or from equipment or appurtenances therein, or from the action of the
elements, or from any security or lack thereof, or any criminal or intentional
misconduct of third parties, or any accident within or adjacent to the Premises
or Project, or resulting directly or indirectly from any act or omission of
Landlord or any occupant of the Premises or Project or any other person while on
the Premises or the Project. This Section 8A shall include, without limitation,
damage caused by water, snow, frost, steam, excessive or inadequate heat or
cooling, sewers, gas, odors or noise, the bursting or leaking of pipes or
plumbing fixtures, broken glass, sprinkling or air conditioning devices or
equipment, or flooding. All property on the Project or in the Premises belonging
to the Tenant, its agents, employees, contractors or invitees or to any occupant
of the Premises shall be there at the risk of the Tenant or such other person
only, and Landlord shall not be liable for damage thereto or theft,
misappropriation or loss thereof. Notwithstanding anything contained in this
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Section 8A to the contrary, no agreement of Tenant in this Section 8A shall be
deemed to exempt Landlord from liability for injury to persons or damage to
property caused by or resulting from the gross negligence or willful misconduct
of Landlord, its agents or employees in the operation or maintenance of the
Premises or the Project or to any extent prohibited by law.
B. Landlord and Tenant each hereby waive all claims of recovery from the
other party for loss or damage to any of its property to the extent the loss or
damage is covered by valid and collectable fire and extended coverage insurance
policies or would be covered by the insurance required under Section 8C(2), and
each party agrees to have its insurance policies endorsed to provide for a
waiver of subrogation by the insurance carrier, if necessary to prevent the
invalidation of such insurance coverage.
C. At all times during the Term of this Lease, Tenant shall at its expense
maintain in effect insurance protecting Tenant and Landlord and their respective
agents and employees, and any other parties designated by Landlord from time to
time, with terms, coverages and in companies at all times reasonably
satisfactory to Landlord and with such increases in limits as Landlord may, from
time to time, request. Initially, such coverage shall be in the following
amounts:
(1) Commercial general liability insurance (including coverage for
bodily injury, broad form property damage, personal injury, broad form
contractual liability applying to this Lease, independent contractors,
and products and completed operations) with limits of not less than
Two Million Dollars ($2,000,000) combined single limit per occurrence
for Bodily Injury, Death and Property Damage, and umbrella coverage of
not less than Two Million Dollars ($2,000,000), naming Landlord, any
Mortgagees or Lessees (as hereafter defined) and its management
company as additional insureds.
(2) Insurance against "All Risks" of physical loss for the full
replacement cost of all tenant improvements and Work, if any, made by
Tenant or at Tenant's expense, and all equipment, furniture, trade
fixtures, merchandise and other items of Tenant's property on the
Premises.
D. Tenant shall, prior to the commencement of the Term hereof and prior to
the expiration of any policy, furnish Landlord certificates evidencing that all
required insurance is in force and providing that such insurance may not be
canceled or changed without at least thirty (30) days' prior written notice to
Landlord and Tenant (unless such cancellation is due to nonpayment of premiums,
in which event ten (10) days' prior written notice shall be provided).
E. Except to the extent caused by the gross negligence or willful
misconduct of Landlord, Tenant hereby agrees to indemnify, defend and hold
harmless Landlord and its officers, directors, agents and employees against any
claims or liability for damage to person or property (or for loss or,
misappropriation of property) occurring in or about the Premises, arising
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from Tenant's occupancy of the Premises, from any breach or default on the part
of Tenant during the Term of this Lease or from any act or omission of Tenant or
of any employee, agent, invitee or contractor of Tenant, and from any costs
relating thereto (including, without limitation, reasonable attorneys' fees).
Tenant's obligations under this Section 8E shall survive the termination or
expiration of this Lease.
9. FIRE AND OTHER CASUALTY.
A. In the event that (1) the Premises are made substantially untenantable
by fire or other casualty, and Landlord shall decide not to restore or repair
the same, or (2) the Building or the Project is so damaged by fire or other
casualty that Landlord shall decide to demolish or not rebuild the Building,
then, in either of such events, either Landlord or Tenant shall have the right
to terminate this Lease by notice to the other within ninety (90) days after the
date of such fire or other casualty.
B. If the Premises or the Building are made untenantable by fire or other
casualty, and this Lease is not terminated pursuant to Sections 9A or 9C,
Landlord shall, to the extent permitted by any mortgages or ground leases with
respect to the Project, immediately take such action as is necessary to make
applicable insurance proceeds available and to use the same to reconstruct,
repair and restore the Building and the Premises, subject to zoning laws and
building codes then in effect, and including only tenant improvements
constructed at Landlord's expense, or, if any portion of the Premises has been
leased on an "as is" basis, including only improvements similar to those located
in such portion of the Premises on the Commencement Date or the date on which
such portion was added to the Premises, if later than the Commencement Date
(herein, the improvements Landlord is required to make are called the "Required
Improvements"). At Landlord's option, Tenant may be permitted or required to
devote the proceeds of its insurance described in Section 8C(2) to cause
restoration of tenant improvements and the Premises over and above the Required
Improvements, and pay for the same to Landlord or through Landlord as if newly
done pursuant to Section 5 of this Lease. In the event a fire or other casualty
occurs and both Landlord and Tenant are insured, it is agreed that the coverage
of the Landlord shall be primary and that Landlord's recovery in no event shall
be reduced by any insurance recovery to Tenant. In no event shall Landlord have
any liability to Tenant by reason of any damage to or interference with the
Premises, the Project, or Tenant's business, improvements or property arising
from fire or other casualty, however caused, or any resulting repairs.
C. Notwithstanding anything in this Section 9 to the contrary, if all or
any portion of the Premises shall be made untenantable by fire or other
casualty, Landlord shall with reasonable promptness, cause an architect selected
by Landlord to estimate the amount of time required to substantially complete
repair and restoration of the Premises and make the premises tenantable again
using standard working methods. If the estimate indicates that the Premises
cannot be made tenantable within nine (9) months from the date the fire or
casualty occurred, either party shall have the right to terminate this Lease by
giving to the other notice of such election within
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ten (10) days after its receipt of the architect's certificate. If the estimate
of the architect indicates that the Premises can be made tenantable within such
nine (9) months and neither party terminates Section 9A, or if neither party
terminates this Lease pursuant to this Section 9C, Landlord shall proceed with
reasonable promptness to repair and restore the Premises pursuant to Section 9B,
provided that if the estimate of the architect indicates that the Premises can
be made tenantable within such nine (9) months, and if Landlord does not repair
and restore the Premises within such nine (9) month period, which period shall
be extended to the extent of any Reconstruction Delays, then Tenant may
terminate this Lease upon fifteen (15) days' prior written notice to Landlord
(except that if the Premises are repaired and restored before the date specified
in Tenant's notice, this Lease shall not terminate and shall continue in
effect). For purposes of this Lease, the term "Reconstruction Delays" shall
mean: (1) any delays caused by the insurance adjustment process, (2) any delays
caused by Tenant, and (3) any delays caused by events beyond Landlord's
reasonable control.
D. In the event that this Lease is terminated pursuant to Section 9A or
Section 9C above, Base Rent and Operating Cost Rent shall be apportioned on a
per them basis and paid to the date of the fire or other casualty. In the event
that such fire or casualty renders all or any portion of the Premises
untenantable and this Lease is not terminated pursuant to Section 9A or Section
9C, then subject to the last sentence of this Section 9D, the Base Rent and
Operating Cost Rent provided for in this Lease shall abate on a per them basis
during the period of repair and restoration until the Premises are tenantable
again, and the abatement shall be in an amount bearing the same ratio to the
total amount of such Rent due for such period as the untenantable portion of the
Premises from time to time bears to the entire Premises. Any provision hereof
notwithstanding, Tenant's Rent shall not abate if the negligence of Tenant, or
its agents or employees, was the cause of the fire or other casualty.
10. RIGHTS RESERVED TO THE LANDLORD. Landlord reserves the following
rights, exercisable without notice to Tenant except as otherwise expressly
provided herein, and without liability to Tenant for damage or injury to
property, person or business (all such claims being hereby released, except to
the extent they are caused by Landlord's gross negligence or willful
misconduct), and without effecting an eviction or disturbance of Tenant's use or
possession or giving rise to any claim for offsets, or abatements of Rent or
affecting any of Tenant's obligations under this Lease:
A. Name: To change the Project's name or street address.
B. Signs: To install, affix and maintain any and all signs on the exterior
and interior of the Building and to prescribe the location and style of all
signs visible from the exterior of the Building or from within its lobbies or
common corridors.
C. Windows/Design: To designate and approve, prior to installation, all
types of window shades, blinds, drapes, awnings, window ventilators and other
similar equipment; to control all the internal lighting that may be visible from
the exterior of the Building; and to
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approve the design, arrangement, style, color and general appearance of any
portion of the Premises (Including, without limitation, furniture, fixtures, art
work, wall coverings, carpet and decorations) which is visible from the common
areas or from the exterior of the Building, and all changes or additions
thereto.
D. Service Contracts: To designate all sources furnishing sign painting and
lettering, ice and drinking water, towels, toilet supplies, beverages, food
service, or other services on the Premises, provided that the rates for such
services as are designated by Landlord are reasonably competitive with rates
charged therefor in the Minneapolis-St. Paul metropolitan area. No vending or
dispensing machines of any kind shall be placed in or about the Premises without
the prior written consent of Landlord.
E. Keys: To retain at all times, and to use for purposes authorized in this
Lease, passkeys to the Premises and keys to all locks for doors within and into
the Premises.
F. Access for Repairs, etc.: Upon reasonable prior notice to Tenant (except
in an emergency), to have access to the Premises to perform its duties and
obligations under this Lease and to inspect the Premises, make repairs,
alterations, additions or improvements, whether structural or otherwise, in and
about the Premises, the Project or any part thereof as set forth in various
Sections of this Lease including, without limitation, Section 5 and Section 10M.
G. Occupancy: To decorate, remodel, repair, alter or otherwise prepare the
Premises for reoccupancy at any time after Tenant vacates or abandons the
Premises. Such acts of Landlord shall not relieve Tenant of its obligation to
pay Rent to the Termination Date.
H. Rights to Conduct Businesses: To grant to anyone the exclusive right to
conduct any business or render any service in the Project provided such
exclusive right shall not operate to exclude Tenant's Permitted Use as set forth
on the Schedule.
I. Heavy Equipment: To approve the weight, size or location of safes and
other heavy equipment and articles in and about the Premises and the Project and
to require all such items and furniture to be moved into and out of the Building
or anywhere else in the Project and the Premises only at such times and in such
manner as Landlord shall direct in writing. Movement of Tenant's property into
or out of the Project and within the Project is entirely at the risk and
responsibility of Tenant.
J. Show Premises: To show the Premises to prospective tenants or brokers
during the last twelve ( 12) months of the Term of this Lease or of any
extension thereof or to show the Premises to prospective purchasers at all
reasonable times, provided prior reasonable notice is given to Tenant in each
case and Tenant's use and occupancy of the Premises shall not materially be
inconvenienced by any such action of Landlord.
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K. Close Project: To restrict access to the Project during such hours as
Landlord shall from time to time reasonably determine and on holidays, subject,
however, to Tenant's right to admittance at all times under such regulations as
Landlord may prescribe from time to time which ma include, by way of example but
not of limitation, that persons entering or leaving the Project identify
themselves to a security guard by registration or otherwise and that said
persons establish their right to enter or leave the Project. In case of an
emergency, Landlord may restrict or prevent access to the Project, or otherwise
take such actions as deemed necessary by Landlord for the safety of tenants or
other occupants of the Building or the protection of the Project.
L. Substitution of Space: At any time hereafter, Landlord may relocate all
or part of the Premises to another area in the Project (herein referred to as
the "new premises"), provided, that: (1) the new premises shall be substantially
similar to the Premises in area and suitable for the use which Tenant had made
of the old Premises; (2) if the Premises are being improved pursuant to the
provisions of Exhibit C, Landlord will pay the costs of improving the new
premises so they are substantially similar to the old Premises; and (3) Landlord
shall pay all of Tenant's reasonable moving costs. Tenant shall cooperate with
Landlord in all reasonable ways to facilitate the move to the new premises
including, by way of example but not of limitation, designating locations to
move furniture and equipment, supervising moving of files or fragile equipment,
designating location of telephone outlets, and listing color of paint and of
flooring desired in the new premises. If Landlord exercises its right under this
Section, the new premises shall thereafter be deemed for all purposes of this
Lease as the Premises./4/
M. Repairs and Alterations: At any time Landlord may make repairs,
alterations, additions, decorations or improvements, structural or otherwise, in
or to the Project or any part thereof, including the Premises, and perform any
acts required or permitted hereunder, or related to the safety, protection,
preservation or improvement of the Project or the Premises, and during, such
operations Landlord shall have the right to take into and through the Premises
or any part of the Project all material and equipment required and to close and
temporarily suspend operation of entrances, doors, corridors, elevators and
other facilities, and to have access to and open all ceilings, without liability
to Tenant by reason of interference, inconvenience, annoyance or loss of
business; provided, that Landlord shall not interfere with Tenant's use of the
Premises any more than is reasonably necessary under the circumstances. Landlord
shall do any such work during ordinary business hours, and Tenant shall pay
Landlord for overtime and for any other expenses incurred if such work is done
during other hours at Tenant's request. Landlord may do or permit any work to be
done upon or along and any use of, any adjacent or nearby building, land,
street, alley or way.
N. Lock Box Agent: Landlord may from time to time designate a bank or other
lock box agent for the collection of amounts due Landlord. The date of any
payment to such agent shall be the date of such agent's receipt of the payment
(subject to actual collection of any check); provided, that for purposes of this
Lease, no such payment or collection shall be deemed
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4/ See Exhibit E, Section 29.
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"accepted" by Landlord if Landlord mails a check in such amount to Tenant at the
address set forth on the Schedule within a reasonable period after such receipt
or collection. The mailing of such payment to Tenant shall be deemed to be a
rejection of Tenant's tender of such payment for all purposes as of the date of
the lock box agent's receipt or collection of such payment, without thereby
waiving any default or any right or remedy of Landlord.
O. Other Rights: All other rights accruing to Landlord by operation of law
or reserved specifically or by inference by the Landlord pursuant to the
provisions of this Lease.
11. DEFAULT AND LANDLORD'S REMEDIES.
A. Defaults. The occurrence of any of the following shall constitute a
default hereunder:
(1) If Tenant defaults in the payment of Rent (whether Base Rent, Operating
Cost Rent or Additional Rent) or any other sum required to be paid by this
Lease; provided, that Landlord shall not be entitled to exercise its remedies
set forth herein or at law or in equity with respect to such default unless such
default continues for a period of ten (10) days after the due date./5/
(2) If Tenant defaults in the prompt and full performance or observance of
any of Tenant's obligations or agreements as provided in this Lease (except
those specified in Subsections (1), (3), and (4) of this Section I IA) or in any
other agreement between Landlord and Tenant; provided, that Landlord shall not
be entitled to exercise its remedies set forth herein or at law or in equity
with respect to such default, (a) if such default is cured within ten (10) days
after written notice to Tenant (or immediately upon written notice if the
default involves a hazardous condition), or (b) with respect to a non-hazardous
default which is curable but cannot reasonably be cured within ten (10) days, if
Tenant immediately commences to cure and diligently proceeds to complete the
cure of such default within a reasonable time period which shall in no event
extend beyond thirty (30) days after written notice to Tenant;
(3) If Tenant abandons or vacates the Premises during the Term; or
(4) If the leasehold interest of Tenant is levied upon under execution or
is attached under process of law which levy or attachment continues for a period
of thirty (30) days; or if Tenant becomes insolvent or bankrupt or shall
generally not pay its debts as they become due or shall admit in writing its
inability to pay its debts or shall make an assignment for the benefit of
creditors; or if any proceeding or other action shall be filed by or against
Tenant seeking reorganization, arrangement, adjustment. liquidation, dissolution
or composition of Tenant or its debts under any law relating to bankruptcy,
insolvency or relief of debtors, or seeking appointment of a receiver, trustee,
custodian or other similar official for it or any substantial part
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5/ See Exhibit E, Section 30.
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of its property (provided, that no such proceeding or action shall constitute a
default under this Lease if Tenant shall vigorously contest the same by
appropriate proceedings and the same shall be vacated or dismissed within thirty
(30) days after the date of filing); or if Tenant is a corporation, partnership
or other entity, Tenant shall be dissolved, liquidated or otherwise cease to
exist.
B. Landlord's Remedies.
(1) Upon the occurrence of any one or more defaults by Tenant. Landlord may
elect, at any time thereafter by written notice to Tenant, to terminate this
Lease and Tenant's right to the Premises as of the date set forth in the notice
or, without terminating this Lease, to terminate Tenant's right to possession of
the Premises as of the date set forth in the notice. Upon any termination of
this Lease, whether by lapse of time or otherwise, or upon any termination of
Tenant's right to possession without termination of the Lease, Tenant shall
surrender possession and vacate the Premises and deliver possession thereof to
Landlord, and Tenant hereby authorizes Landlord to enter into and upon the
Premises with or without process of law, and to repossess the Premises and to
remove Tenant and all occupants and property therefrom using such force as may
be necessary without being deemed in any manner guilty of trespass, eviction or
forcible entry or detainer, and without relinquishing Landlord's rights to Rent
and/or damages for the balance of the Term or any other right given to Landlord
hereunder or by law or in equity. Landlord may enforce its rights under this
Lease in one action or in separate actions from time to time. Except as
otherwise provided in this Section 11, Tenant expressly waives the service of
any notice of intention to terminate this Lease or to reenter the Premises, any
demand for payment of Rent or possession, all present or future redemption
rights, and any other notice or demand. Landlord and Tenant each hereby waive
trial by jury in any action, proceeding or counterclaim brought by either party
against the other on all matters arising out of this Lease, Tenant's use or
occupancy of the Premises, or for recovery of the Premises or eviction. Tenant
agrees not to interpose any counterclaims (other than compulsory counterclaims)
in any proceeding for recovery of the Premises.
(2) If Landlord elects to terminate Tenant's right to possession only
without terminating the Lease, Landlord may at Landlord's option enter into the
Premises and take and hold possession thereof as set forth in Section 11 B(l)
without such entry and possession terminating the Lease or releasing Tenant, in
whole or in part, from Tenant's obligation to pay the Rent hereunder for the
full Term, and, at Landlord's option, the aggregate amount of the Base Rent and
Operating Cost Rent (based upon the amount thereof for the calendar month
immediately preceding the month in which the default has occurred) for the
period from the date stated in the written notice terminating possession to the
stated end of the Term shall be immediately due and payable by Tenant to
Landlord, together with any other monies due hereunder, and Landlord shall have
right to immediate recovery of all such amounts. In addition, Landlord shall
have the right from time to time, to recover from Tenant, and Tenant shall
remain liable for, all Rent not theretofore accelerated and paid pursuant to the
foregoing sentence and any other sums thereafter accruing as they become due
under this Lease during the period from
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the date stated in the notice terminating possession to the stated end of the
Term. Upon and after entry into possession without termination of the Lease,
subject to Landlord's right to first rent other vacant areas in the Project,
Landlord may relet the Premises or any part thereof for such Rent, for such time
(which may be a period extending beyond the stated Term of this Lease) and upon
such terms as Landlord in Landlord's sole discretion shall determine. In any
such case, Landlord may make repairs, alterations and additions in or to the
Premises and redecorate the same to the extent deemed necessary or desirable by
Landlord, and in connection therewith Landlord may change the locks to the
Promises, and Tenant shall upon written demand pay the cost thereof, together
with Landlord's expenses of reletting. Any proceeds from the reletting of the
Premises by Landlord shall be collected by Landlord and shall first be applied
against the costs and expenses of reentry and of reletting the Premises
including, without limitation, all brokerage, advertising, legal, alteration,
redecoration, repair and other reasonably necessary costs and expenses incurred
to secure a new tenant for the Premises, and second to the payment of Rent
herein provided to be paid by the Tenant. If the consideration collected by
Landlord upon any such reletting, after payment of the expenses of reletting the
Premises, is not sufficient to pay any accelerated amounts of Rent due and owing
and to pay monthly the full amount of the Rent reserved in this Lease and not
theretofore accelerated, Tenant shall pay to Landlord the accelerated amounts
upon demand, and the amount of each monthly deficiency as it becomes due (as the
case may be). If the consideration collected by Landlord upon any such reletting
for Tenant's account after payment of the expenses of reletting the Premises is
greater than the amount necessary to pay accelerated amounts of Rent due and
owing and to pay the RM amount of Rent reserved in this Least and not
theretofore accelerated, the full amount of such excess shall be retained by
Landlord and in no event shall be payable to Tenant. No such reentry,
repossession, repairs, alterations, additions or reletting shall be construed as
an eviction of Tenant or as an election on Landlord's part to terminate this
Lease, unless written notice of such intention is given to Tenant, or shall
operate to release Tenant in whole or in part from any of Tenant's obligations
hereunder. Notwithstanding any reentry or reletting by Landlord, Landlord may at
any time thereafter elect to terminate this Lease for such previous default.
(3) If Landlord elects to terminate this Lease, Landlord shall be entitled
to recover from Tenant all of the amounts of Rent accrued and unpaid for the
period up to and including the date of the termination, as well as all other
additional sums for which Tenant is liable, or in respect of which Tenant has
agreed to indemnify Landlord under any of the provisions of this Lease, which
may then be owing and unpaid, and all costs and expenses including, without
limitation, court costs and reasonable attorneys' fees incurred by Landlord in
the enforcement of its rights and remedies hereunder; and in addition, Landlord,
at its sole option, shall be entitled to recover from Tenant and Tenant shall
pay to Landlord, on demand, as final and liquidated damages (and not as a
penalty), a sum equal to the amount of Landlord's reasonable estimate of the
aggregate amount of Base Rent, Operating Cost Rent and Additional Rent that
would be payable for the period from the date of such termination through the
Termination Date, reduced by the then reasonable rental value of the Premises
for the same period (as such reasonable rental value may be decreased for
Landlord's reasonably anticipated costs, expenses and delays in reletting the
Premises). If, before presentation of proof of such liquidated damages to any
court,
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all or any part of the Premises shall have been relet by Landlord for all or any
part of such period, the amount of Rent payable upon such reletting shall be
deemed to be the reasonable rentable value for the part or the whole of the
Premises relet during the term of the reletting.
(4) Upon any default by Tenant under this Lease, Landlord may, but shall
not be obligated to, take any action to cure the default without waiving or
releasing any obligation of Tenant or preventing Landlord from pursuing any
available remedy. All amounts paid or incurred by Landlord in curing any default
of Tenant or performing any of Tenant's obligations under this Lease, and
reasonable attorneys' fees in connection therewith, shall be paid by Tenant to
Landlord as Additional Rent on demand.
(5) Notwithstanding anything in this Lease to the contrary, any and all,
remedies set forth in this Lease (a) shall be in addition to any and all other
remedies Landlord may have at law or in equity, and (b) shall be cumulative. The
waiver by Landlord of any breach of any term, covenant or condition herein
contained shall only be effective if it is in writing and shall not be deemed to
be a waiver of a continuing or subsequent breach of the same, or of any other
term-, covenant or condition herein contained. The acceptance of Rent or any
other amounts due hereunder shall not be construed to be a waiver of any breach
by Tenant o any term, covenant or condition of this Lease, and if the same shall
be accepted after the termination of this Lease, by lapse of time or otherwise,
or of the Tenant's right of possession hereunder, or after the giving of any
notice, such acceptance shall not reinstate, continue or extend the Term of this
Lease or affect any notice given to Tenant prior to the receipt of such amounts,
it being agreed that after the service of notice or the commencement of a suit
or after final judgment for possession of the Premises, Landlord may receive and
collect any Rent and other sums due, and the payment of the same shall not waive
or affect said notice, suit or judgment. No payment by Tenant or receipt by
Landlord of a lesser amount than the amount due hereunder shall be deemed to be
other d-w on account of the earliest portion thereof due, or as Landlord may
elect to apply such payment, nor shall any endorsement or statement on any check
or letter accompanying a check for payment of Rent be deemed an accord and
satisfaction; and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such Rent or to pursue any other
remedy provided in this Lease. Unless otherwise agreed in writing, any partial
payment of Rent which is accepted by Landlord prior to or after commencement of
an action to recover possession of the Premises shall be applied to the balance
due but shall not waive any of Landlord's rights, or any action to recover
possession of the Premises, for nonpayment of the balance of the Rent owed
Landlord.
(6) Notwithstanding any provision in this Lease prohibiting Landlord from
exercising its rights if Tenant cures a default within a specified period of
time, if Tenant shall default (a) in the timely payment of Rent (whether any or
all of Base Rent, Operating Cost Rent or Additional Rent) two (2) or more times
in any period of twelve (12) consecutive months, or (b) in the performance of
any particular term, condition or covenant of this Lease two (2) or more times
in any period of twelve (12) consecutive months, then, notwithstanding that such
defaults shall have each been cured within any applicable cure period after
notice, if any, as provided in this Lease,
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in connection with any further similar default during such twelve month period
(including, without limitation, with respect to non-payment of Rent, the further
non-payment of any kind of Rent payable under this Lease) Tenant shall not be
entitled to any further cure period or notice, and Landlord shall have the right
to exercise all of the remedies provided in this Lease immediately after the
occurrence of such similar default.
(7) In the event that Tenant shall file for protection under the Bankruptcy
Code now or hereafter -in effect, or a trustee in bankruptcy shall be appointed
for Tenant, Landlord and Tenant agree to the extent permitted by law to request
that the debtor-in-possession or trustee in bankruptcy, if one shall have been
appointed, assume or reject this Lease within sixty (60) days thereafter.
12. HOLDOVER. If Tenant holds over after the termination or expiration of
the Term without the written consent of Landlord (which may be withheld in
Landlord's sole discretion), Tenant shall pay Base Rent and Operating Cost Rent
at one hundred fifty percent (150%) of the rate payable for the fiscal year
immediately preceding the holding over, computed on a daily basis for each day
Tenant thus remains in possession, and, in addition, Tenant shall pay Landlord
all damages, consequential as well as direct, sustained by reason of Tenant's
holding over. Alternatively, at the election of Landlord by written notice to
Tenant, such retention of possession shall constitute a renewal of this Lease
for a month-to-month tenancy at one hundred fifty percent (150) of the monthly
Base Rent and Operating Cost Rent for the immediately preceding fiscal year, and
Tenant shall continue to make all other payments required under this Lease.
Neither the acceptance of Rent by the Landlord after termination, nor the
provisions of this Section: (a) shall be construed as, or operate as, a renewal
or as a waiver of Landlord's right of reentry or right to regain possession by
actions at law or in equity or by any other right or remedy hereunder, or (b)
shall be construed as, or operate as, a waiver of any other right or remedy of
Landlord.
13. SUBORDINATION.
A. This Lease is and shall be subject and subordinate to each mortgage or
trust deed ("Mortgage") and each ground lease or other underlying lease ("Ground
Lease") now or hereafter in force with respect to the Project at the election of
the trustee or mortgagee under or holder of any Mortgage ("Mortgagee") or the
lessor under any Ground Lease ("Lessor"), including, without limitation, any
amendment, renewal, modification, consolidation, replacement or extension
thereof and all interest thereon and advances thereunder. Any subordination at
the election of any such Mortgagee or Lessor shall be self-operative and no
further instrument of subordination shall be required to make the interest of
such Mortgagee or Lessor superior to the interest of Tenant hereunder. In
confirmation of such subordination, however, within ten (10) days after written
request by Landlord, Tenant shall, without charge, execute and deliver any
necessary or useful instruments acknowledging the subordination of this Lease as
provided herein. Tenant shall not do anything that would constitute a default
under any Mortgage or Ground Lease, or omit to do anything that Tenant is
obligated to do under the terms of this Lease
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so as to cause Landlord to be in default thereunder. In the event of the
enforcement by any Mortgagee or Lessor of the remedies provided for by law or by
such Mortgage or Ground Lease (including, without limitation, a deed in lieu
thereof), Tenant shall, at the election and upon demand of any Mortgagee, Lessor
or other person succeeding to the interest of Landlord as a result of such
enforcement ("Successor") attorn, from time to time, to any such Mortgagee,
Lessor or Successor upon the then executory terms of this Lease; provided, that
any such Mortgagee, Lessor, or Successor shall not be bound by any payment of
Rent for more than one month in advance; bound by any amendment or modification
of this Lease made without the consent of such Mortgagee, Lessor or Successor;
subject to any offsets or defenses Tenant might have against any prior landlord
(including, without limitation, the then defaulting landlord); liable for any
act or omission of any prior landlord (including, without limitation, the then
defaulting landlord); or liable for any security deposit except to the extent
held by such Mortgagee, Lessor or Successor. The provisions of this Section 13
shall inure to the benefit of any such Mortgagee, Lessor or Successor, shall
apply notwithstanding that as a matter of law, this Lease may terminate upon the
enforcement of any such Mortgage or Ground Lease, and shall be self-operative
upon such election and demand, and no further agreement shall be required to
give effect to such provisions. Upon request by such Mortgagee, Lessor or
Successor, however, Tenant shall execute and deliver any instruments necessary
or useful to confirm the attornment.
B. Tenant agrees to give any Mortgagee or Lessor a copy of any notice of
default served upon Landlord, provided that prior to such notice Tenant has been
notified in writing of the address of such Mortgagee or Lessor, Tenant further
agrees that if Landlord shall have failed to cure such default within the time
provided for in this Lease, then such Mortgagee or Lessor shall have an
additional thirty (30) days within which to cure such default, or if such
default cannot be cured within that time, such Mortgagee or Lessor shall have
such additional Lime as may be necessary to cure such default; provided, that
within such thirty (30) days, any Mortgagee or Lessor, as the case may be, has
commenced and is diligently pursuing the cure of such default (including,
without limitation, commencement of foreclosure or lease forfeiture proceedings,
if necessary to effect such cure), and Tenant shall not pursue any of the
remedies it may have for such default and this Lease shall not be terminated
while such cure is being diligently pursued, so long as the default is cured
within a reasonable time thereafter.
14. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not, without the prior written consent of Landlord in each
instance, (1) assign, transfer, mortgage or encumber, or create or permit any
lien upon, this Lease or any interest under it, (2) allow to exist or occur any
transfer of or hen upon this Lease or die Tenant's interest herein by operation
of law, (3) sublet the Premises or any part thereof, or (4) permit the use or
occupancy of the Premises or any part thereof for any purpose not provided for
under Section 6 or by anyone other than Tenant and Tenant's employees. In no
event shall this Lease or any interest herein be assigned or assignable by
voluntary or involuntary bankruptcy proceedings or by operation of law or
otherwise, and in no event shall this Lease or any rights or
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privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or
reorganization proceedings, except to the extent provided by law.
B. Consent by Landlord to any assignment, subletting, use, occupancy,
transfer or encumbrance shall not operate to relieve Tenant from any covenant,
liability or obligation hereunder (whether past, present or future), including,
without limitation, the obligation to pay Rent, except to the extent, if any,
expressly provided for in such consent, nor shall such consent be deemed to be a
consent to any subsequent assignment, subletting, use, occupancy, transfer or
encumbrance. Tenant shall pay all of Landlord's reasonable costs, charges and
expenses (including, without limitation, reasonable attorney's fees) incurred in
connection with any assignment, subletting, use, occupancy, transfer or
encumbrance made or requested by Tenant.
C. Tenant shall, by notice in writing, advise Landlord of its intention
from, on and after a stated date (which shall not be less than sixty (60) days
after the date of Tenant's notice) to assign this Lease or sublet any part or
all of the Premises for the balance or any part of the Term. Tenant's notice
shall include the name and address of the proposed assignee or subtenant, a true
and complete copy of the proposed assignment or sublease, financial statements
for the proposed assignee or subtenant for the preceding two (2) fiscal years
and such additional information as Landlord deems reasonably necessary
concerning the financial responsibility, business and character of the proposed
assignee or subtenant. Upon any request for Landlord's consent under this
Section 14, Landlord shall have the right, to be exercised by giving written
notice to Tenant within thirty (30) days after receipt of Tenant's notice (and
any additional information reasonably requested by Landlord), to terminate this
Lease with respect to the space described in Tenant's notice as of the date
stated in Tenant's notice for the commencement of the proposed assignment or
sublease. If Tenant's notice covers all of the Premises and if Landlord
exercises its right to terminate this Lease as to the Premises, then the Term of
this Lease shall expire and end on the commencement date stated in Tenant's
notice as fully and completely as if that date had been the Termination Date.
If, however, Tenant's notice covers less than all of the Premises, and if
Landlord exercises its right to terminate this Lease with respect to such space,
then as of the commencement date stated in Tenant's notice, the Rent reserved
herein shall be adjusted on the basis of the number of rentable square feet of
the Premises retained by Tenant, such portion of the Premises shall at Tenant's
expense be made a separately demised premises in compliance with all legal
requirements and with an appropriate entrance separate from the Premises, and
this Lease as so amended shall continue thereafter in full force and effect. If
Landlord does not exercise its right to terminate as aforesaid, Landlord shall
notify Tenant within such thirty (30) day period whether Landlord consents to
tho proposed assignment or sublease, which consent shall not be unreasonably
withheld; provided, that in no event shall Landlord be required to consent to
any assignment or sublease: (1) to a tenant or occupant, or an Affiliate of a
tenant or occupant, in the Project or in another building owned by Landlord or
an Affiliate of Landlord ("Affiliate" means a person controlling, controlled by
or under common control with the designated person), (2) which may violate any
restrictions contained in any mortgage, lease or agreement affecting the Project
or Landlord, (3) which is not in compliance with all of the terms
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of this Section and this Lease, or (4) which may cause an excessive density of
occupants or traffic or make excessive demands on the Building systems, services
or facilities.
D. Upon any assignment or sublease, fifty percent (50%) of the rent and
other consideration ("Excess Consideration") received by Tenant in excess of the
amount of Base Rent and Operating Cost Rent payable to Landlord under this
Lease, which amount is to be prorated where a part of the Premises is assigned
or subleased, shall be payable by Tenant to Landlord as Additional Rent within
ten (10) days after receipt thereof by Tenant from time to time.
E. If Tenant shall assign this Lease as permitted herein, the assignee
shall expressly assume all of the obligations of Tenant hereunder and agree to
comply with and be bound by all of the terms, provisions and conditions of this
Lease, in a written instrument satisfactory to Landlord and furnished to
Landlord not later than fifteen (15) days prior to the effective date of the
assignment. If Tenant shall sublease the Premises as permitted herein, Tenant
shall obtain and furnish to Landlord, not later than fifteen (15) days prior to
the effective date of such sublease and in form satisfactory to Landlord, the
written agreement of such subtenant that it shall comply with and be bound by
all of the applicable terms, provisions and conditions of this Lease and that it
will attorn to Landlord, at Landlord's option and written request, in the event
this Lease terminates before the expiration of the sublease.
F. If Tenant is a corporation whose stock is not publicly traded on a
recognized national stock exchange, a partnership or other entity, any
transaction or series of related or unrelated transactions (including, without
limitation, any dissolution, merger, consolidation or other reorganization of
Tenant, any withdrawal or admission of a partner or change in a partner's
interest, or any issuance, sale, gift, transfer or redemption of any capital
stock of or ownership interest in Tenant, whether voluntary, involuntary or by
operation of law, or any combination of any of the foregoing transactions)
resulting in the transfer of control of Tenant, shall be deemed to be an
assignment of this Lease by Tenant subject to the provisions of this Section 14.
The term "control" as used in this Section 14F means the power to directly or
indirectly direct or cause the direction of the management or policies of
Tenant. If Tenant is a corporation, partnership or other entity, a change or
series of changes in ownership of stock or general partnership or ownership
interests which would result in direct or indirect change in ownership of less
than fifty percent (50%) of the outstanding stock of or general partnership or
other ownership interests in Tenant as of the date of the execution and delivery
of this Lease shall not be considered a change of control.
G. Any assignment, subletting, use, occupancy, transfer or encumbrance of
this Lease or the Premises without Landlord's prior written consent shall be of
no effect and shall, at the option of Landlord, constitute a default under this
Lease.
15. SALE BY LANDLORD. In the event of sale or conveyance or transfer by
Landlord of its interest in the Project or in the Building or in this Lease, the
same shall operate to release Landlord (subject to the last sentence of Section
17 hereof) from any future obligations
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and any future liability for or under any of the covenants or conditions,
express or implied, herein contained in favor of Tenant, and in such event, and
with respect to such obligations, covenants and conditions, Tenant agrees to
look solely to the successor in interest of Landlord in and to this Lease. This
Lease shall not be affected by any such sale, conveyance or transfer.
16. ESTOPPEL CERTIFICATE. Tenant shall, at the request of Landlord at any
time and from time to time upon not less than ten (10) days' prior written
notice, without charge, execute, acknowledge in recordable form, and deliver to
Landlord (or to any of Landlord's Mortgagees, Lessors, auditors or prospective
purchasers of the Project or any part thereof) a certificate stating 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 dates to which the Rent and other charges are
paid, and that Tenant is paying Rent on a current basis with no offsets or
claims, and there are not, to Tenant's knowledge, any uncured defaults on the
part of Landlord (or specifying such offsets, claims or defaults, if any are
claimed). Such certificate may require Tenant to specify the date of
commencement of Rent, the Commencement Date, the Termination Date, the Base
Rent, current Operating Cost Rent estimates, the rentable square feet in the
Premises, the date to which Rent has been paid, whether or not Landlord has
completed any improvements required to be made to the Premises and such other
matters as may be reasonably required. Any such certificate may be relied upon
by any prospective purchaser or encumbrancer of all or any portion of the
Project, any Mortgagee or Lessor, auditor or any other person to whom it is
delivered. The failure to deliver such statement within the time required
hereunder shall without limiting Landlord's rights and remedies for such
failure, be conclusive evidence, binding upon Tenant, that this Lease is in full
force and effect, without modification except as may be represented by Landlord,
that there am no uncured defaults by Landlord and that not more than one (1)
month's Rent has been paid in advance, and the Tenant shall be estopped from
asserting any defaults known to it at that time.
17. SECURITY DEPOSIT. Tenant has deposited with Landlord the security
deposit, if any, set forth on the Schedule to secure Tenant's performance of its
obligations under this Lease. If Tenant defaults, Landlord may, without
prejudice to Landlord's other remedies, apply part or all of the security
deposit to cure Tenant's default. If Landlord so uses part or all of the
security deposit, then Tenant shall within ten (10) days after written demand,
pay Landlord the amount necessary to restore the security deposit to its
original amount. Landlord may mix the security deposit with its own funds,
without payment of interest. Any part of the security deposit not used by
Landlord as permitted by this Section shall be returned to Tenant (or to the
last assignee of Tenant's interest) at the expiration or termination of this
Lease. The security deposit is not an advance payment of Rent or a limitation on
Landlord's damages for any default by Tenant. Upon any sale or transfer of'
Landlord's interest in this Lease, Landlord shall transfer the security deposit
to Landlord's successor in interest and shall thereupon be released from all
further liability for repayment of the security deposit.
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18. FORCE MAJEURE. Except as specifically provided to the contrary in this
Lease, this Lease and the obligation of Tenant to pay Rent hereunder and perform
all of Tenant's covenants and agreements hereunder shall not be impaired nor
shall Landlord be in default hereunder because Landlord is unable to fulfill any
of its obligations under this Lease, if Landlord is prevented or delayed from so
doing by any of the following (which shall be referred to herein as a "Force
Majeure"): any acts of God, casualty, accident, breakage, repairs, alterations,
replacements, improvements, strike or labor troubles, shortages of labor or
materials, or any other similar or dissimilar cause whatsoever beyond the
reasonable control of Landlord, including, without limitation, energy shortages,
governmental preemption in connection with a national emergency, or by reason of
governmental laws or any rule, order, regulation or directive of any department,
subdivision, agency or personnel thereof, or by reason of the conditions of
supply and demand which have been or are affected by war or other emergency.
Further, Landlord shall not be deemed in default for failure to perform its
obligations under this Lease, (a) if such failure is cured within thirty (30)
days after Tenant gives written notice to Landlord of such alleged failure, or
(b) with respect to a failure which reasonably requires more than thirty (30)
days to cure, if Landlord immediately commences to cure and diligently proceeds
to complete the cure of such failure within a reasonable time period, which
shall in no event, subject to Force Majeure, extend beyond ninety (90) days
after written notice to Landlord.
19. NOTICES. All notices and approvals to be given by one party to the
other party under this Lease shall be given in writing by United States mail,
delivery by a nationally recognized overnight courier service or by personal
delivery as follows: to Landlord at the address set forth on the Schedule, or to
such other person or at such other address designated by notice to Tenant. and
to Tenant at the address set forth on the Schedule, or to such other person or
at such other address designated by notice to Landlord. Mailed notices shall be
sent by United States certified or registered mail, return receipt requested,
postage prepaid, and shall be deemed to have been given upon posting in the
United States mails. Notice by nationally recognized overnight courier service
shall be deemed given upon receipt by the addressee or upon refusal by the
addressee to accept delivery thereof. Notices by personal delivery shall be
deemed given upon personal delivery.
20. QUIET POSSESSION. So long as Tenant shall observe and perform the
covenants and agreements binding on it hereunder, Tenant shall at all times
during the Term and subject to the provisions of this Lease peacefully and
quietly have and enjoy the possession of the Premises without any encumbrance or
hindrance by, from or through Landlord, its successors or assigns.
21. REAL ESTATE BROKERS. Landlord and Tenant each represent that it has not
dealt with any real estate broker with respect to this Lease, except for any
broker set forth on the Schedule (whose commission, if any, shall be paid by
Landlord pursuant to separate written agreement), and, to its knowledge, no
other broker initiated or participated in the negotiation of this Lease,
submitted or showed the Premises to Tenant or is entitled to any commission in
connection with this Lease. Tenant agrees to indemnify and hold Landlord
harmless from all
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claims, liability or expense (including, without limitation, reasonable
attorney's fees) for brokerage commissions or finder's fees as a result of
Tenant's actions or alleged actions.
22. CONDEMNATION. If during the Term all or any part of the Premises shall
be taken by eminent domain, this Lease shall terminate as to the part so taken
on the date Tenant is required to deliver possession to the condemning
authority. If this Lease is not terminated as provided below, Landlord shall
make such repairs and alterations as may be necessary in order to restore the
part not taken to useful condition (excluding Tenant's property and improvements
made by Tenant); and, effective upon the date of taking, the Base Rent and
Operating Cost Rent shall be reduced proportionately and equitably based on the
portion taken. If all or any portion of the Project, or Premises are taken by
eminent domain so that the Premises cannot be reasonably used for Tenant's
Permitted Use, then at the option of either party this Lease. may be terminated
effective as of the date of the taking and all Rent reserved hereunder shall be
paid to the date of such taking. If any condemnation proceeding shall be
instituted in which it is sought to take or damage any part of the Project, or
if the grade of any street or alley adjacent to the Project is changed by any
competent authority and such taking, damage or change of grade in Landlord's
opinion substantially impairs the use or operation of the Building or the
Project, or makes it necessary or desirable to remodel the Building or the
Project, Landlord shall have the right to terminate this Lease upon not less
than ninety (90) days' notice prior to the date of termination designated in the
notice. All compensation awarded for any taking of the fee and the leasehold
shall belong to and be the property of Landlord; provided, that so long as the
same does not diminish the amount of the award or consideration to Landlord for
taking of real property interests, Tenant shall be entitled to recover from the
condemning authority any separate award for relocation or moving expenses, trade
fixtures and personal property Tenant is entitled to remove from the Premises,
or loss of business. The term "eminent domain" shall include the exercise of any
similar governmental power and any purchase or other acquisition in lieu of
condemnation.
23. UNRELATED BUSINESS INCOME. Landlord shall have the right at any time
and from time to time to unilaterally amend the provisions of this Lease, if
Landlord is advised by its counsel that all or any portion of the monies paid by
Tenant to Landlord hereunder are, or may be deemed to be, unrelated business
income within the meaning of the United States Internal Revenue Code or
regulations issued thereunder, and Tenant agrees that it will execute all
documents or instruments necessary to effect any such amendment; provided, that
no such amendment shall result in Tenant having to pay in the aggregate more
money on account of its occupancy of the Premises under the terms of this Lease,
as so amended, and provided further, that no such amendment shall result in
Tenant receiving fewer services or services of a lesser quality than it is
presently entitled to receive under this Lease. Any services which Landlord is
required to furnish pursuant to the provisions of this Lease may, at Landlord's
option, be furnished from time to time, in whole or in part, by employees of
Landlord or any managing agent of the Project or its employees or by one or more
third persons approved by Landlord.
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24. LIMITATION OF LIABILITY. Tenant specifically agrees to look solely to
Landlord's interest in the Project for the recovery of any judgment against
Landlord; it being agreed that Landlord (and if Landlord is a partnership, its
partners whether general or limited; or if Landlord is a corporation, its
directors, officers or shareholders; or if Landlord is a trust, its trustees or
beneficiaries) shall never be personally liable for any such judgment. All such
personal liability for any representation, warranty, covenant, undertaking or
agreement under this Lease is hereby waived and released by Tenant and by all
persons claiming by, through or under Tenant. The provisions of this Section are
not intended to, and shall not, limit any right that Tenant might otherwise have
to obtain injunctive relief against Landlord or Landlord's successors in
interest or any suit or action in connection with enforcement or collection of
amounts which may become owing or payable under or on account of insurance
maintained by Landlord.
25. MISCELLANEOUS.
A. Except as otherwise expressly set forth herein, wherever the consent or
approval of either Landlord or Tenant is required by the provisions of this
Lease, such party shall not unreasonably withhold or delay such consent or
approval. Tenant hereby waives any claim for damages, liability, abatement or
set-off against Landlord based upon any assertion that Landlord has unreasonably
withheld or delayed any consent or approval requested by Tenant under this
Lease, and Tenant's sole remedy in any such case shall be an action or
proceeding for specific performance, injunction or declaratory judgment.
B. All amounts owed to Landlord hereunder, for which the date of payment is
not expressly fixed herein, shall be paid as Additional Rent within ten (10)
days after Landlord's statement and shall bear interest as provided in Section
2D(2) until paid.
C. The words "re-enter" and "reentry" as used in this Lease are not
restricted to their technical legal meaning. The term "Landlord," as used in
this Lease, means only the landlord from time to time, and upon conveying or
transferring its interest, such conveying or transferring landlord shall be
relieved from any further obligation or liability pursuant to Sections 13, 15
and 17 of this Lease. Time is of the essence of this Lease and each and all of
its provisions.
D. Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or option or offer for lease, and it is not
effective as a lease or otherwise until execution and delivery by both Landlord
and Tenant.
E. The invalidity or unenforceability of any provision hereof shall not
affect or impair any other provisions.
F. This Lease shall be governed by and construed pursuant to the laws of
the State of Minnesota.
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G. Should any mortgagee require a modification of this Lease, which
modification will not bring about any increased cost or expense to Tenant or in
any other way substantially change the rights and obligations of Tenant
hereunder, Tenant agrees that this Lease may be so modified. Within twenty (20)
days after written request by Landlord, Tenant shall furnish to Landlord a
statement of the current financial condition of Tenant in a form reasonably
satisfactory to Landlord.
H. In the event of any litigation or arbitration between Landlord and
Tenant with respect to the enforcement or interpretation of this Lease, the
nonprevailing party shall pay the reasonable costs and attorney's fees of the
prevailing party. Tenant shall pay all costs, charges and expenses, including
the reasonable fees of attorneys, agents and others retained by Landlord,
incurred by Landlord in any litigation, arbitration, negotiation or transaction
in which Tenant causes Landlord, without Landlord's fault, to become involved or
concerned.
I. Captions or titles in this Lease are inserted as a matter of convenience
and for reference and in no way define, limit or describe the scope of this
Lease nor any provision thereof. Words and phrases used in the singular shall be
deemed to include the plural and vice versa, and nouns and pronouns used in any
particular gender shag be deemed to include any other gender If more than one
person or entity signs this Lease as Tenant, each such Tenant will be jointly
and severally liable for all of the obligations of Tenant as provided in this
Lease. This Lease shall be construed without regard to any presumption or other
rule requiring construction against the party causing this Lease to be drafted.
If any deletions are made from this Lease form, this Lease shall be interpreted
as if the deleted portion had never been part of this Lease,
J. All rights and remedies of Landlord under this Lease, or that may be
provided by law, may be exercised by Landlord in its own name individually, or
in its name by any agent thereof, and all legal proceedings for the enforcement
of any such rights or remedies, may be commenced and prosecuted to final
judgment and executed by Landlord in its own name individually or in its name by
any agent thereof. Landlord and Tenant each represents to the other that each
has full power and authority to execute this Lease and to make and perform the
agreements herein contained.
K. Nothing in this Lease shall be construed to prevent Landlord from paying
for services rendered or materials delivered with respect to the Project or to
the Premises (including, without limitation, management services and contracting
out capital improvements or other capital repairs or construction items) by
Affiliates of Landlord provided that the fees or costs of such services and
materials are at market rates in the Minneapolis-St. Paul metropolitan area. All
such fees or costs paid by Landlord to such Affiliates shall be deemed to
constitute Operating Costs on the same terms and conditions as if such fees and
costs were paid to non-Affiliates of Landlord.
L. This Lease (including, without limitation, all exhibits and riders
attached hereto, all of which are hereby made a part of this Lease and
incorporated by this reference) constitutes
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the entire agreement between the Landlord and the Tenant. Tenant acknowledges
that it has not been induced to enter this Lease by any promises, assurances,
agreements, statements or representations (collectively, "Representations")
which are not set forth in this Lease (including, without limitation, any
Representations concerning Operating Costs; the Premises; the Project; the
suitability of the Premises, proper zoning or availability of necessary permits
and authorizations for Tenant's Permitted Use; exclusive rights; or any other
matter). Tenant acknowledges that it has not relied on any such Representations,
agrees that no such Representations shall be used in the construction or
interpretation of this Lease and agrees that Landlord shall have no liability
for any consequences arising as a result of any such Representations. No
subsequent alteration, amendment, change or addition to this Lease shall be
binding upon Landlord or Tenant unless in writing and signed by both parties.
M. Landlord's title is and always shall be paramount to the interest of
Tenant, and nothing herein contained shall empower Tenant to do any act which
can, shall or may encumber Landlord's title. Tenant shall not record or file in
any public records this Lease or any memorandum thereof.
N. This Lease does not gr-ant any rights to fight or air over or about the
Project. Landlord specifically excepts and reserves to itself the use of any
roofs, the exterior portions of the Premises, all rights to and the lar d and
improvements below the improved floor level of the Premises, the improvements
and air rights above the Premises and the improvements and air rights located
outside the demising walls of the Premises, and such areas within the Premises
as are required for installation of utility lines and other installations
required to serve any occupants of the Project and the right to maintain and
repair the same, and no rights with respect thereto are conferred upon Tenant
unless otherwise specifically provided herein.
O. Subject to the terms of Section 14, each provision of this Lease shall
extend to and shall, as the case may require, bind and inure to the benefit of
Landlord and Tenant and their respective heirs, legal representatives and
successors and assigns.
P. No rental or other payment for the use or occupancy of the Premises
shall be, or is, based in whole or in part on the net income or profits derived
by any person from the Building or the Premises, and Tenant agrees that it will
not enter into any sublease, license, concession or other agreements for any use
or occupancy of the Premises which provides for a rental or other payment for
such use or occupancy based in whole or in part on the net income or profits
derived by any person from the Premises.
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IN WITNESS WHEREOF, the parties have executed this Lease as of the above date.
LANDLORD: TENANT:
ND PROPERTIES, INC. NETWORK MANAGEMENT SERVICES, INC.
By: /s/ Mark J. Wood By: /s/ Scott P. Halstead
------------------------------ -----------------------------
Name: Mark J. Wood Name: Scott P. Halstead
------------------------------ -----------------------------
Title: Asst. Sec. Title: Chief Financial Officer
------------------------------ -----------------------------
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EXHIBIT A
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EXHIBIT B
LEGAL DESCRIPTION
Lots 1, 2 and 3, Block 1
The Colonnade P.U.D. No. 53
Hennepin County, Minnesota
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EXHIBIT C
LEASEHOLD IMPROVEMENTS
(ALLOWANCE)
1. Tenant Finish Allowance and Costs. Landlord shall provide an allowance
("Tenant Finish Allowance") not to exceed $5.00 per rentable square foot in the
Premises (total $6,950.00 based on 1,390 rentable square feet) or the actual
cost of such improvements, whichever is less, to be applied to the total cost of
constructing Tenant's leasehold improvements in the Premises ("Tenant Finish
Costs"), including, without limitation: space planning and design fees;
architectural and engineering fees; required building permits; actual cost of
labor, materials, equipment and services; actual cost of Tenant signage; and the
costs of removing, modifying, relocating or making additions to any existing
improvements to accommodate Tenant's space plan. Tenant Finish Costs shall
exclude expenses in connection with services provided by Tenant or Tenant's
employees; telephone, communications and computer equipment and wiring; and
personal property items such as decorations, art work, furniture, equipment, or
trade fixtures not permanently attached to the Premises.
2. Plans. Tenant shall promptly devote such time in consultation with
Landlord and Landlord's architect ("Architect") as necessary to finalize an
initial plan ("Initial Plan") for Tenant's leasehold improvements in the
Premises (or, if the Initial Plan has been completed and approved by Landlord
and Tenant, such plan is attached hereto as Exhibit C-1). If not included in the
Initial Plan and if necessary for the performance of Landlord's Work (as
hereafter defined), Landlord shall cause to be prepared final architectural and
engineering plans, specifications and working drawings for Tenant's leasehold
improvements in the Premises ("Architectural Plans") based on the Initial Plan.
Tenant shall, within five (5) business days after written request, furnish to
Landlord such information as necessary to enable the Architect and Landlord's
engineer ("Engineer") to prepare the Initial Plan and any necessary
Architectural Plans. The information to be furnished by Tenant shall include,
without limitation:
(a) Any requirements of the Tenant for the Premises which are in excess of
or otherwise vary in any respect from Building standard items, and all
critical dimensions.
(b) Special loading, such as the location of and requirements for file
cabinets or special equipment.
(c) Openings in the walls or floors.
(d) Special heating, ventilating, air conditioning, electrical, sprinkler,
lighting, security system, or plumbing work.
(e) Location and dimensions of telephone equipment areas, and location of
telephone and electrical outlets, switches and lights.
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(f) Partitions - locations and type, including doors and hardware, windows,
glass partitions and special framing or support.
(g) Special cabinet work and other millwork items.
(h) Variations to standard ceiling heights.
(i) Location and color selection of painted areas.
(j) Location and selection of floor covering and wall coverings.
(k) Location and type of any kitchen equipment.
(l) Such additional information as reasonably specified by Landlord.
Within five (5) business days after the completed Architectural Plans have
been submitted to Tenant, Tenant shall provide Landlord with Tenant's written
approval of such Architectural Plans (or Tenant's disapproval with a written
explanation of any changes required therein) and shall redeliver the
Architectural Plans to Landlord for Landlord's final approval. Unless otherwise
specified in the Architectural Plans, Landlord's Work shall be constructed with
Building standard materials (or comparable substitute materials designated by
Landlord) in amount, type and quality; and Tenant shall promptly make any
necessary selections. If final Architectural Plans are included in the Initial
Plan or are unnecessary to perform the work, the term "Architectural Plans" as
used herein shall mean the Initial Plan and any supplemental plans and
specifications approved by Landlord and Tenant.
All plans and specifications for any work in the Premises or the Project
(whether Landlord's Work, Additional Work, or any work performed by Tenant as
hereafter provided) shall be subject to Landlord's prior written approval, which
approval shall not be unreasonably withheld. Landlord may withhold its approval
of any plans or specifications if, in Landlord's reasonable opinion, the work
would: involve a structural revision to the Project; adversely affect the market
value or appearance of the Project; violate Landlord's criteria for those
portions of the Premises which are visible from the common areas or from the
exterior of the Project; adversely affect the strength, structural integrity or
safety of the Project; adversely affect the proper functioning and efficiency of
the systems of the Project; violate any requirements of applicable law or of any
holder of a mortgage on or insurer of the Project (or require Landlord to
perform any work or incur any expense in connection therewith); adversely affect
any other rentable space in the Project or increase the expense of operating the
Project; not be in keeping with the character of the Project; or involve a
substantial risk of delaying the performance of Landlord's Work due to
unavailability or shortages of labor or materials, extra lead or performance
time or other requirements for the work. The foregoing reasons are not
exclusive, and Landlord may reasonably withhold its approval for other similar
or dissimilar reasons. Landlord may disapprove any plans in part, reserve
approval of any items pending its review and approval of
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other plans, and condition its approval upon Tenant making revisions to the
plans or supplying additional information. Any review or approval of any plans
or work by Landlord is solely for its benefit, and without any representation,
warranty or liability to Tenant or any other person with respect to the
adequacy, correctness or sufficiency thereof, the fitness for any purpose,
compliance with applicable legal requirements or otherwise.
3. Payment. Landlord shall pay an amount not to exceed the Tenant Finish
Allowance toward the Tenant Finish Costs for Landlord's Work, and Tenant shall
pay for all Tenant Finish Costs in excess of the Tenant Finish Allowance
("Excess Costs") as Additional Rent as hereafter provided. Before commencing
Landlord's Work, Landlord shall provide to Tenant a preliminary estimate of the
total Tenant Finish Costs for Landlord's Work. If such preliminary estimate is
less than the Tenant Finish Allowance, Tenant may include additional work up to
the amount of the Tenant Finish Allowance.. If such preliminary estimate is more
than the Tenant Finish Allowance, Landlord and Tenant will establish the
"Maximum Approved Cost" for Landlord's Work by either: (a) approving in writing
the estimated amount of any Excess Costs; or (b) agreeing to have Landlord's
Work revised as necessary to assure that the estimated Tenant Finish Costs are
no more than the Tenant Finish Allowance plus such amount of Excess Costs as may
be approved by Landlord and Tenant. Tenant shall give immediate attention to
establishing the Maximum Approved Cost, and respond to any requests from
Landlord within five (5) business days. Upon establishment of the Maximum
Approved Cost, the Architectural Plans shall be revised as necessary, and at the
time the final Architectural Plans are approved by Landlord and Tenant, Landlord
shall provide a final written estimate ("Tenant Cost Proposal") of the total
Tenant Finish Costs for Landlord's Work as shown in the final Architectural
Plans and specifying the estimated amount of any Excess Costs. Within five (5)
business days after submission to it of the Tenant Cost Proposal, Tenant shall
authorize Landlord in writing to proceed with Landlord's Work, and Tenant also
shall pay to Landlord the estimated amount of any Excess Costs (or shall provide
security satisfactory to Landlord for payment of such Excess Costs). No work
shall be commenced until Tenant has complied with the requirements of this
Section. Once the final Architectural Plans and the Tenant Cost Proposal have
been approved by Landlord and Tenant, Landlord's Work and the Tenant Cost
Proposal shall not be changed except by written change order approved by
Landlord and Tenant or as otherwise provided in this Exhibit; and in any such
case, Landlord shall deliver" to Tenant a revised Tenant Cost Proposal
indicating the revised calculation of the Maximum Approved Cost, if any. Within
five (5) business days after submission to Tenant of the revised Tenant Cost
Proposal, Tenant shall authorize Landlord in writing to proceed with Landlord's
Work as so revised and shall pay to Landlord any additional estimated amount of
Excess Costs (or shall provide security satisfactory to Landlord for payment of
such Excess Costs); and Landlord 'shall not be required to proceed further with
the work until Tenant has complied with the requirements of this Section. Any
unpaid balance of Excess Costs shall be paid to Landlord by Tenant within thirty
(30) days of Landlord's statement following substantial completion of Landlord's
Work.
4. Landlord's Work. As Landlord's Work, Landlord shall cause its contractor
to construct leasehold improvements in the Premises substantially in accordance
with the Initial
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Plan and any Architectural Plans approved by Tenant and Landlord as provided in
Section 2 of this Exhibit. In all other respects, Tenant agrees to accept the
Premises in its present condition, "as is," with no obligation for Landlord to
do or pay for any improvements or plans. Any work required by Tenant in addition
to Landlord's Work shall be constructed at Tenant's expense by Landlord as
Additional Work as provided in Section 5 of this Exhibit or by Tenant pursuant
to Section 7 of this Exhibit.
Promptly after compliance with Sections 2 and 3 of this Exhibit, Landlord
shall obtain a building permit and, subject to the other terms and conditions of
this Exhibit and the Lease, shall proceed diligently to cause Landlord's Work to
be substantially completed before the scheduled Commencement Date of the Lease,
it being expressly understood that all work to be done in the Premises shall be
subject to approval by Landlord and that no work shall be undertaken in the
Premises until such approval is given in writing. All costs and expenses
relating to the preparation of the Initial Plan and the Architectural Plans, and
any changes thereto or revisions thereof, shall be included in the Tenant Finish
Costs and shall be paid as provided in Section 3 of this Exhibit.
For purposes of this Exhibit, "substantial completion" means: (i)
completion of Landlord's Work except for minor finishing and punchlist activity
which does not materially interfere with Tenant's use and occupancy of the
Premises; (ii) issuance of any necessary municipal certificate of occupancy; and
(iii) Tenant, its employees, agents, and invitees have ready and safe access to
the Building and the Premises through the lobby, entrances, elevators, and
hallways. Within thirty (30) days after the Commencement Date of the Lease, the
parties shall inspect the Premises, have all systems demonstrated, and prepare a
punchlist of incomplete or defective details of construction. Landlord will use
reasonable diligence to promptly complete the punchlist items after Tenant
provides the punchlist to Landlord. Upon notice from Landlord that Landlord's
Work is complete, Tenant agrees to confirm acceptance of the Premises in written
form reasonably acceptable to Landlord, unless the completion of Landlord's Work
is disputed. If Tenant disputes Landlord's notice that Landlord's Work is
complete and such dispute cannot be resolved by Tenant and Landlord within
thirty (30) days after Landlord has furnished such notice, then such dispute
shall be resolved by a Minnesota licensed architect approved by both Landlord
and Tenant, or, if the parties cannot agree on an architect, one shall be
appointed by the president or chief officer of the Minnesota Chapter of the
American Institute of Architects, and the determination of such architect shall
be binding upon the parties; and the fees of such architect shall be shared
equally by Landlord and Tenant.
5. Additional Work. Except to the extent described in this Exhibit or in
the Lease, Landlord has no obligation to do or pay for -any work to the Premises
(or any plans or specifications relating thereto). If Tenant shall require other
work or materials ("Additional Work") in the Premises in addition to Landlord's
Work, Tenant shall deliver to Landlord for its approval final Architectural
Plans for such Additional Work at or before the time Tenant is required pursuant
to Section 2 of this Exhibit to deliver Tenant's written approval of the
Architectural Plans for Landlord's Work. If Landlord does not approve of the
Architectural
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Plans for the Additional Work, as delivered by Tenant, Landlord shall advise
Tenant generally of the changes required in such Plans so that they will meet
with Landlord's approval. Tenant shall cause the Architectural Plans for the
Additional Work to be revised and delivered to Landlord for its final review and
approval within five (5) business days after Tenant's receipt of such advice or
Tenant shall be deemed to have abandoned its request for such Additional Work.
All Architectural Plans for the Additional Work (together with any changes to
the Architectural Plans for the Landlord's Work which may be required as a
result thereof) shall be prepared and completed at Tenant's sole cost and
expense.
Landlord shall furnish Tenant with written estimates of the cost of the
Additional Work within fifteen (15) business days after receipt by Landlord of
the Architectural Plans for the Additional Work. If Tenant approves such written
estimates, Tenant shall authorize Landlord in writing to proceed with the
Additional Work within seven (7) business days after Tenant's receipt of the
estimates, and Tenant shall also pay to Landlord the estimated cost of such
Additional Work (or shall provide security satisfactory to Landlord for payment
of the cost of such Additional Work). If Tenant fails to comply with such
requirements within seven (7) business days after receipt of the written
estimates, Landlord shall not be authorized or required to proceed with any
Additional Work.; and Tenant shall be deemed to have abandoned its request
therefor. If, however, Tenant complies with such requirements within said seven
(7) day period and makes all payments when required herein, Landlord agrees to
cause the Additional Work to be performed by Landlord's contractors. Any unpaid
balance of the cost of the Additional Work shall be paid by Tenant to Landlord
within thirty (30) days of Landlord's statement following substantial completion
of such Additional Work. If Landlord is not required to perform Additional Work
as provided in this Section 5, the alterations and improvements to be made to
the Premises by Landlord prior to the commencement of the Term of the Lease
shall be limited to Landlord's Work.
6. Commencement of Rent. The Commencement Date of the Lease shall not occur
and Tenant's obligation to pay Rent under the Lease shall not commence until
Landlord has substantially completed all of Landlord's Work; provided, however,
that if Landlord is delayed in substantially completing Landlord's Work as a
result of any one or more of the following ("Tenant Delay"):
(a) Tenant's failure to devote the time or furnish all or any of the
information or approvals required under Section 2 of this Exhibit in
connection with the Initial Plan or the Architectural Plans for Landlord's
Work, or to furnish the approvals or make the payments within the time
periods specified in Section 3 of this Exhibit; or
(b) Tenant's failure to furnish Architectural Plans for any Additional
Work, or revisions thereto, as required hereby, or Tenant's failure to
approve cost estimates or make the payments for the Additional Work within
the time periods specified in Section 5 of this Exhibit; or
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(c) Tenant's request for materials, finishes or installations other than
Building standard items; or
(d) Tenant's changes in the Landlord's Work, in the Architectural Plans
relating thereto, or in the Architectural Plans for the Additional Work
(notwithstanding Landlord's approval of any such changes); or
(e) Any other act or omission by Tenant or its employees, contractors, or
agents;
then and in any such event, Landlord shall cause the Architect to certify the
date on which Landlord's Work would have been completed but for any Tenant
Delay, and the Commencement Date and Tenant's obligation to pay Rent under the
Lease shall occur and commence as of such date, and shall not otherwise be
affected or deferred on account of such delay. Additionally, Tenant shall
indemnify Landlord against any additional cost in completing Landlord's Work and
other damages to Landlord caused by any Tenant Delay.
7. Access By Tenant Prior To Commencement Of Tenn. Landlord, in Landlord's
discretion, may permit Tenant and Tenant's agents to enter the Premises prior to
the Commencement Date of the Lease upon reasonable notice during business hours
to make the Premises ready for Tenant's use and occupancy. Any such permission
shall constitute a license only, and such license shall be conditioned upon: (a)
Tenant working in harmony and not interfering with Landlord and Landlord's
agents, contractors, workers, and suppliers in doing Landlord's Work or
Additional Work-, if any, or with other work in the Project, other tenants and
occupants of the Project, or the general operation of the Project; (b) Tenant
obtaining Landlord's prior written approval of the proposed contractors; and (c)
Tenant depositing with Landlord, in advance of any work, in form and substance
reasonably satisfactory to Landlord, (i) security reasonably satisfactory to
Landlord for the lien-free completion thereof, (ii) plans and specifications for
such work, (iii) any necessary permits or licenses, and (iv) certificates of
insurance (with coverages and amounts satisfactory to Landlord and naming
Landlord and its management company and mortgagee as additional insureds) and
instruments of indemnification as Landlord may reasonably require against claims
and liabilities which may arise out of such entry or work. Such pre-term access
shall be subject to scheduling by Landlord. Landlord shall have the right to
withdraw such license upon twenty-four (24) hours' written notice to Tenant for
reasonable cause. Tenant agrees that Landlord shall not be liable in any way for
any injury, loss or damage which may occur to any of Tenant's property placed or
installations made in the Premises prior to the commencement of the Term of the
Lease, the same being at Tenant's sole risk; and Tenant agrees to indemnify,
defend and save harmless Landlord from all liabilities, costs, damages, fees and
expenses arising out of or connected with the activities of Tenant or its
agents, contractors, suppliers or workmen in or about the Premises or the
Building. Any entry or work by or on behalf of Tenant under this Section shall
be subject to all of the terms and conditions of the Lease, including without
limitation Sections 5A and B thereof. If such entry or work causes extra costs
to Landlord or extraordinary use of Project services, Tenant shall
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reimburse Landlord for such extra costs or extraordinary services within thirty
(30) days after Landlord's statement.
8. Telephones/Wiring. Tenant shall at its expense install and maintain all
telephone and communications wiring and equipment from the service access point
in the Project to and within the Premises, and arrange directly with the
telephone company and suppliers of its choice for all service and connections.
The installation of all telephone, communications, computer, security, and other
wiring and equipment shall be subject to Landlord's prior written consent as
provided in this Exhibit or in Section 5 of the Lease.
9. Miscellaneous. This Exhibit shall be incorporated into and considered as
a part of the Lease. Unless otherwise indicated herein, capitalized terms used
in this Exhibit shall have the meanings assigned to them in the Lease. The terms
and provisions of this Exhibit are intended to supplement and are specifically
subject to all the terms and provisions of the Lease. This Exhibit may not be
amended or modified except in a writing signed by Landlord and Tenant. In no
event shall any rights of Tenant hereunder be transferable or assignable to any
party except to a permitted assignee of all of Tenant's rights under the Lease.
All sums due hereunder from Tenant shall be deemed Additional Rent for purposes
of the Lease, and upon any default hereunder, Landlord shall have all of the
rights and remedies provided for in the Lease. This Exhibit shall not create a
contractual relationship of any kind between any persons other than Landlord and
Tenant.
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EXHIBIT D
RULES AND REGULATIONS
1. The sidewalks, halls, passages, elevators and stairways shall not be
obstructed by Tenant or used for any purpose other than for ingress to and
egress from the Premises. T"he halls, passages, entrances, elevators, stairways,
balconies and roof are not for the use of the general public, and Landlord shall
in all cases retain the right to control and prevent access thereto of all
persons whose presence in the judgment of Landlord shall be prejudicial to the
safety, character, reputation and interest of the Building and its tenants,
provided, that nothing herein contained shall be construed to prevent such
access to persons with whom Tenant normally deals in the ordinary course of its
business unless such persons are engaged in illegal activities. Tenant and its
employees shall not go upon the roof of the Building without the written consent
of the Landlord.
2. The sashes, sash doors, windows, glass lights, and any lights or
skylights that reflect or admit light into the halls or other places of the
Buildings shall not be covered or obstructed. The toilet rooms, water and wash
closets and other water 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 tenant
who, or whose agents, employees, or visitors, shall have caused it.
3. If Landlord, by a notice in writing to Tenant, shall object to any
curtain, blind, shade or screen attached to, or hung in, or used in connection
with, any window or door of the Premises, such use of such curtain, bad, shade
or screen shall be discontinued forthwith by Tenant. No awnings shall be
permitted on any part of the Premises.
4. No safes or other objects heavier than the lift capacity of the freight
elevators of the Building shall be brought into or installed on the Premises.
Tenant shall not place a load upon any floor of the Premises which exceeds the
load per square foot which such floor was designed to carry and which is allowed
by law. The moving of safes shall occur only between such hours as may be
designated by, and only upon previous notice to, the manager of the Building,
and the persons employed to move safes in or out of the Building must be
acceptable to Landlord. No freight, furniture or bulky matter of any description
shall be received into the Building or carried into the elevators except during
hours and in a manner approved by Landlord.
5. Tenant 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 objectionable to Landlord or other
occupants of the Building by reason of noise, odors, and/or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds (except Seeing Eye Dogs) be brought into or kept in
or
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about the Building. Tenant shall not place or install any antennae or aerials or
similar devices outside of the Premises.
6. Tenant shall not use or keep in the Building any inflammables, including
but not limited to kerosene, gasoline, naphtha and benzine (except cleaning
fluids in small quantities and when in containers approved by the Board of
Underwriters), or explosives or any other articles of intrinsically dangerous
nature, or use any method of heating other than that supplied by Landlord.
7. If Tenant desires telephone or telegraph connections or alarm systems,
Landlord will direct electricians as to where and how the wires are to be
introduced. No boring or cutting for wires or otherwise shall be made without
specific directions from Landlord.
8. Tenant, upon the termination of the tenancy, shall deliver to the
Landlord all the keys of offices, rooms and toilet rooms which shall have h en
furnished Tenant or which Tenant shall have had made, and in the event of loss
of any keys so furnished shall pay the Landlord therefor.
9. Tenant shall not put down any floor covering in the Premises without the
Landlord's prior approval of the manner and method of applying such floor
covering.
10. On Sundays and legal holidays, and on other days between the hours of 6
p.m. and 8 a.m., 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 watchman of the Building in charge and has
a pass or is properly identified. Landlord shall in no case be liable for
damages for the admission to or exclusion from the Building of any person whom
the Landlord has the right to exclude under Rule 1 above. In case of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of the same by closing the
doors or otherwise, for the safety of the tenants or Landlord and protection of
property in the Building.
11. Tenant assumes full responsibility for protecting its space from theft,
robbery and pilferage which includes keeping doors locked and windows and other
means of entry to the Premises closed.
12. Tenant shall not alter any lock or install a new or additional lock or
any bolt on any door of the Premises without prior written consent of Landlord.
If Landlord shall give its consent, Tenant shall in each case furnish Landlord
with a key for any such lock.
13. In advertising or other publicity, without Landlord's prior written
consent, Tenant shall not use the name of the Building except as the address of
its business and shall not use pictures of the Building.
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14. Tenant shall not make any room to room canvass to solicit business from
other tenants in the Building; and shall. not exhibit, sell or offer to sell,
use, rent or exchange in or from the Premises unless ordinarily embraced within
the Tenant's use of the Premises specified herein.
15. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to assure the most effective operation
of the Building's heating and air conditioning, and shall not allow the
adjustment (except by Landlord's authorized building personnel) of any controls
other than room thermostats installed for Tenant's use. Tenant shall. keep
corridor doors closed and shall not open any windows except that if the air
circulation shall not be in operation, windows which are openable may be opened
with Landlord's consent.
16. Tenant shall not do any cooking in the Premises or engage any coffee
cart service.
17. Any wallpaper or vinyl fabric materials which Tenant may install on
painted walls shall be applied with a strippable adhesive. The use of
nonstrippable adhesives will cause damage to the walls when materials are
removed, and repairs made necessary thereby shall be made by Landlord at
Tenant's expense.
18. Tenant shall provide and maintain hard surface protective mats under
all desk chairs which are equipped with casters to avoid excessive wear and tear
to carpeting. If Tenant fails to provide such mats, the cost of carpet repair or
replacement made necessary by such excessive wear and tear shall be charged to
and paid for by Tenant.
19. Tenant will refer all contractors, contractor's representatives and
installation technicians, rendering any service to Tenant, to Landlord for
Landlord's supervision, approval, and control before performance of any
contractual service. This provision shall apply to all work performed in the
Building including installations of telephones, telegraph equipment, electrical
devices and attachments and installations of any nature affecting floors, walls,
woodwork, trim, windows, ceilings, equipment or any other physical portion of
the Building.
20. Movement in or out of the Building of furniture, office equipment, or
other bulky materials, or movement through the Building entrances or lobby shall
be restricted to hours designated by Landlord. All such movements shall be under
supervision of Landlord and in the manner agreed between Tenant and Landlord by
prearrangement before performance. Such prearrangement initiated by Tenant will
include determination by Landlord and subject to its decision and control, of
the time, method, and routing of movement, limitations imposed by safety or
other concerns which may prohibit any article, equipment or any other item from
being brought into the Building. Tenant is to assume all risk as to damage to
articles moved and injury to persons or public engaged or not engaged in such
movement, including equipment, property, and personnel of Landlord if damaged or
injured as a result of acts in connection with such service performed for Tenant
and Tenant hereby agrees to indemnify and hold harmless Landlord from and
against any such damage, injury, or loss, including attorney's fees.
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21. No portion of Tenant's area or any other part of the Building shall at
any time be used or occupied as sleeping or lodging quarters.
22. Landlord will not be responsible for lost or stolen personal property,
equipment, money, or jewelry from Tenant's area or any public rooms regardless
of whether such loss occurs when such area is locked against entry or not.
23. Employees of Landlord shall not receive or carry messages for or to any
tenant or other persons, nor contract
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EXHIBIT E
ADDITIONAL PROVISIONS
This Addendum is made a part of the Lease ("Lease") between ND PROPERTIES,
INC. ("Landlord") and NETWORK MANAGEMENT SERVICES, INC. ("Tenant"), and the
following additional terms shall supersede any contrary terms in the Lease:
27. BASE RENT. Base Rent shall be determined at an annual rate per rentable
square foot in the Premises and payable in monthly installments as follows:
Annual Rate Monthly
Period Per Square Foot Installment
------ --------------- -----------
Months 1-12 $15.00 $1,737.50
Months 13-24 $16.00 $1,853.33
Months 25-36 $17.00 $1,969.17
28. SECTION 2D(2). ADD THE FOLLOWING:
Notwithstanding anything to the contrary contained in Section 2D(2), on the
first occasion during any calendar year of the Term that Tenant defaults in the
payment of any Rent, Landlord shall not charge any late fee or interest with
respect to such default unless such default is not remedied within ten (10) days
after written notice thereof by Landlord to Tenant.
29. SECTION 10L. ADD THE FOLLOWING:
Notwithstanding anything to the contrary contained in Section 10L: (1)
Landlord shall give Tenant at least sixty (60) days' prior written notice of any
relocation; and (2) Tenant's moving costs include, without limitation,
reasonable out-of-pocket expenses incurred for moving and reinstalling personal
property, trade fixtures, equipment, and telephones, and replacing or modifying
reasonable quantities of stationery, cards, and business materials; but
specifically excluding any indirect or consequential loss or expense.
30. SECTION I IA(l). ADD THE FOLLOWING:
Notwithstanding anything to the contrary contained in Section 11 A(l), on
the first occasion during any calendar year of the Term that Tenant defaults in
payment of Base Rent or Operating Cost Rent, Landlord shall not be entitled to
exercise its remedies set forth in this Lease or at law or in equity with
respect to such default unless such default is not remedied within ten (10) days
after written notice thereof by Landlord to Tenant.
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Exhibit 10.17
AMENDMENT NO. 1 TO LEASE AGREEMENT
AGREEMENT, made as of October 1, 1997, between ND PROPERTIES, INC.
("Landlord") and NETWORK MANAGEMENT SERVICES, INC. ("Tenant").
A. Landlord and Tenant entered into a written Lease Agreement dated March
12, 1997 ("Initial Lease"), relating to the premises ("Initial Premises")
consisting of approximately 1,390 rentable square feet on the seventh floor of
the building commonly known as 5500 Wayzata Boulevard, Golden Valley, Minnesota
(the "Project").
B. The Initial Lease has not previously been amended or modified.
C. Landlord and Tenant desire to include additional space in the Project on
a temporary basis and to amend the Lease as provided in this Amendment.
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are
expressly acknowledged, Landlord and Tenant agree as follows:
1. Effect. The Lease is hereby amended to the extent necessary to give
effect to this Amendment, and the terms of this Amendment shall supersede any
contrary terms in the Lease. All references in the Lease to "this Lease" shall
be deemed to refer to the Lease as amended by this Amendment. In all other
respects, the terms and conditions of the Lease shall remain unmodified and in
effect. Unless otherwise defined herein, capitalized terms shall have the same
meaning as provided in the Lease.
2. Temporary Space. Effective on October 6, 1997 ("Effective Date"), Tenant
accepts and leases from Landlord approximately 2,783 rentable square feet on the
ninth floor of the Project as shown on the attached Exhibit 1 ("Temporary
Space"). The Temporary Space shall be added to and become part of the Premises
on all of the terms and conditions of the Lease, except that:
A. The Temporary Space shall be added to the Premises for a limited term
("Temporary Space Term") beginning on the Effective Date and ending on the
earlier of: (1) termination of the Temporary Space Term by either party,
for any reason, upon ten (10) days advance written notice to the other
party; or (2) the expiration or termination of the Term of the Lease.
Landlord shall not be liable nor shall the Lease be impaired by any delay
or inability to deliver possession of the Temporary Space for any reason
whatsoever; provided, that all Rent for the Temporary Space shall be abated
until Landlord delivers possession of such space to Tenant.
B. During the Temporary Space Term, Tenant shall pay Rent for the Temporary
Space as follows: (1) Base Rent at an annual rate of $15.00 per rentable
square foot, payable in advance in equal monthly installments of $3,478.75,
and (2) Operating Cost Rent at the same rate per rentable square foot as
payable for the Initial Premises and subject to the same adjustments as
provided in the Lease. Rent for the Temporary Space
<PAGE>
shall be payable in advance on the Effective Date and on the first day of
each month thereafter during, the Temporary Space Term. Rent for any
partial month shall be prorated.
C. Tenant acknowledges that it has inspected the Temporary Space and agrees
to accept the Temporary Space on an "as is" basis, with no obligation of
Landlord to do or pay for any work or plans relating to the Temporary
Space.
D. Upon the expiration or termination of the Temporary Space Term, Tenant
shall completely vacate and surrender possession of the Temporary Space to
Landlord in as good condition as when Tenant took possession, ordinary wear
and tear excepted. The expiration or termination of the Temporary Space
Term shall not terminate or modify the Term of the Lease with respect to
the remaining Premises. If Tenant holds over in the Temporary Space after
the termination or expiration of the Temporary Space Term, in addition to
Landlord's other rights and remedies under the law and the Lease and in
addition to payment of Rent for the Initial Premises: (1) Tenant shall pay
holdover rent for the Temporary Space at one hundred fifty percent (150%)
of the rate for Base Rent and Operating Cost Rent payable by Tenant for
such space pursuant to Section 2B of this Amendment, computed on a daily
basis for each day Tenant remains in possession of the Temporary Space; and
(2) Landlord shall immediately be entitled to lawfully retake possession of
the Temporary Space and to recover from Tenant all costs, reasonable
attorneys fees and damages sustained by Landlord as a result of such
holding over by Tenant.
E. Upon reasonable prior notice to Tenant, Landlord reserves the right to
inspect and show the Temporary Space to prospective tenants. Within ten
(10) days after written request by Landlord from time to time, Tenant shall
execute a written confirmation concerning the term, rent, size, location,
or any other matter relating to the Temporary Space.
F. At any time during the Temporary Space Term, Landlord may relocate the
Temporary Space to another area in the Project ("substituted space") upon
ten (10) days prior written notice; provided, that (1) the substituted
space shall be substantially similar to the Temporary Space in area,
condition and suitability for Tenant's use; and (2) Landlord shall pay the
reasonable out-of-pocket costs of moving Tenant's property and equipment to
the substituted space. If Landlord exercises such relocation right, the
substituted space shall thereafter be deemed to be the Temporary Space for
all purposes.
3. Brokers. Landlord and Tenant each represents that it has not engaged or
dealt with any real estate broker, agent or finder with respect to this
Amendment, except for C.B. Commercial Real Estate Group, Inc., formerly known as
Koll Management Services, Inc. (whose commission, if any, shall be paid by
Landlord pursuant to a separate written agreement). Landlord and Tenant shall
indemnify and hold each other harmless from all claims, liability or
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<PAGE>
expense (including reasonable attorneys fees) in connection with any claim for
broker's, finder's or other fees or commissions as a result of such party's
actions or alleged actions.
4. Tenant's Representations. Tenant hereby represents to Landlord that
there has been no assignment of the Lease and no sublease of all or any portion
of the Premises, there are no existing defenses or offsets which Tenant has
against enforcement of the Lease, and Landlord and Tenant are not in default
under the Lease.
5. Entire Agreement. The Lease, including, without limitation, this
Amendment and all exhibits which are attached hereto and hereby incorporated by
reference, constitutes the entire agreement between Landlord and Tenant with
respect to the subject matter hereof. Tenant acknowledges that it has not been
induced to enter into this Amendment by any agreements or representations which
are not set forth in this Amendment. This Amendment shall not be effective until
execution and delivery by both Landlord and Tenant.
By signing this Amendment, the parties agree to the above terms.
LANDLORD: TENANT:
ND PROPERTIES, INC. NETWORK MANAGEMENT SERVICES, INC.
By /s/ Mark J. Wood By /s/ Scott P. Halstead
------------------------------- ----------------------------
Name: Mark J. Wood Name: Scott P. Halstead
------------------------------- ----------------------------
Title: Asst. Sec. Title: Chief Financial Officer
------------------------------- ----------------------------
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<PAGE>
Exhibit 10.18
AMENDMENT NO. 2 TO LEASE AGREEMENT
AGREEMENT, made as of December 23, 1997, between ND PROPERTIES, INC.
("Landlord") and NETWORK MANAGEMENT SERVICES, INC. ("Tenant").
A. Landlord and Tenant entered into a written Lease Agreement dated March
12, 1997 ("Initial Lease"), relating to the premises ("Initial Premises")
consisting of approximately 1,390 rentable square feet on the seventh floor of
the building commonly known as 5500 Wayzata Boulevard, Golden Valley, Minnesota
(the "Project"). The Initial Premises, as amended by any additions or deletions
from time to time pursuant to a written agreement signed by the parties, are
sometimes referred to herein collectively as the "Premises."
B. The Initial Lease has not previously been amended or modified, except by
Amendment No. 1 to Lease Agreement dated October 1, 1997 ("Amendment No. 1"),
which, among other matters, expanded the Premises to include the Temporary
Space, consisting of approximately 2,783 rentable square feet on the ninth floor
of the Project, for the Temporary Space Term. The Initial Lease and Amendment
No. 1 are sometimes referred to herein collectively as the "Lease."
C. Landlord and Tenant desire to expand the Premises and to amend the Lease
as provided in this Amendment.
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are
expressly acknowledged, Landlord and Tenant agree as follows:
1. Effect. The Lease is hereby amended to the extent necessary to give
effect to this Amendment, and the terms of this Amendment shall supersede any
contrary terms in the Lease. All references in the Lease to "this Lease" shall
be deemed to refer to the Lease as amended by this Amendment. In all other
respects, the terms and conditions of the Lease shall remain unmodified and in
effect. Unless otherwise defined herein, capitalized terms shall have the same
meaning as provided in the Lease.
2. Premises. As of the Delivery Date (as defined below), the Premises shall
be amended and expanded by adding to the Initial Premises approximately 7,440
rentable square feet on the fifth floor of the Project as shown on the attached
Exhibit 1 ("Space A"), so that the Premises shall thereafter consist of
approximately 8,830 rentable square feet on the fifth and seventh floors of the
Project. Except as expressly provided otherwise in this Amendment or in the
Lease, Space A shall be added to and become part of the Premises on all of the
terms and conditions of the Lease, and any reference in the Lease to the
Premises shall thereafter be deemed to refer to and include Space A.
3. Space A Term.
A. Space A shall be added to the Premises effective on March 1, 1998
("Delivery Date"). If Landlord has not Substantially Completed (as defined in
the attached Exhibit 2)
<PAGE>
Landlord's Work (as defined in the attached Exhibit 2) in Space A pursuant to
the attached Exhibit 2 by March 1, 1998, other than for delays caused by Tenant
Delay (as defined in the attached Exhibit 2), the Delivery Date for purposes of
this Amendment (and Tenant's obligation to pay Rent for Space A) shall be
postponed until Landlord's Work is Substantially Completed in Space A, Landlord
shall not be liable for any such delay, the Lease shall not be impaired, and the
Space A Term shall be extended as necessary to end sixty (60) full calendar
months after the first day of the calendar month immediately succeeding the
calendar month in which the Delivery Date occurs (but the Term of the Lease with
respect to the Initial Premises shall not be extended or affected thereby). If
Landlord permits Tenant to take possession of Space A before the Delivery Date
for purposes of occupancy, all of the terms of the Lease and this Amendment
shall apply to and control such occupancy, including the obligation to pay Rent
on a prorated daily basis.
B. Subject to adjustment as provided in Section 3A of this Amendment,
Tenant shall lease Space A for a term of sixty (60) months ("Space A Term")
beginning on the Delivery Date and ending on February 28, 2003, unless sooner
terminated under the terms of the Lease. Landlord and Tenant acknowledge that
the Space A Term extends beyond the end of the Term of the Lease with respect to
the Initial Premises. Upon expiration or termination of the Term of the Lease
with respect to the Initial Premises, Tenant shall completely vacate and
surrender possession of the Initial Premises to Landlord in the condition as
provided in the Lease, ordinary wear and tear excepted; the Initial Premises
shall be deleted from the Lease; and the Lease shall continue in effect as to
Space A for the remaining Space A Term (which thereafter shall be deemed the
Term of the Lease).
4. Rent.
A. Commencing on the Delivery Date and continuing during the Space A Term,
Tenant shall pay Base Rent for Space A at an annual rate per rentable square
foot and payable in monthly installments as follows:
Annual Rate Monthly
Period Per Square Foot Installment
------ --------------- -----------
Months 1-12 $15.00 $9,300.00
Months 13-24 $15.25 $9,455.00
Months 25-36 $15.50 $9,610.00
Months 37-48 $15.75 $9,765.00
Months 49-60 $16.00 $9,920.00
If the Delivery Date is postponed as provided in Section 3 of this Amendment and
is not the first day of a calendar month, the Base Rent for any initial partial
month shall be prorated daily at the rate provided for Month I above, and the
first full calendar month after the Delivery Date shall be deemed Month I for
purposes of the above schedule.
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B. Commencing on the Delivery Date and continuing during the Space A Term:
(1) Tenant's Proportionate Share of Operating Costs shall be increased to
reflect the number of rentable square feet In Space A; and (2) Tenant shall pay
Operating Cost Rent for Space A at the same rate per rentable square foot as
then payable for the Initial Premises and subject to the same adjustments as
provided in the Lease.
C. Rent for Space A shall be paid in advance at the same time and in the
same manner as provided in the Lease for payment of Rent for the Initial
Premises. If the Delivery Date is not the first day of a calendar month, the
Base Rent and Operating Cost Rent for Space A for such partial month shall be
prorated daily and paid in advance.
5. Leasehold Improvements. Landlord shall construct leasehold improvements
in Space A as provided in the attached Exhibit 2. In all other respects, Tenant
agrees to accept Space A in its present condition, "as is," with no obligation
for Landlord to do or pay for any leasehold improvements or plans.
6. Additional Security Deposit. In addition to the Security Deposit
previously paid with respect to the Initial Premises, Tenant shall pay to
Landlord an Additional Security Deposit with respect to Space A in the amount of
$17,211.20, payable upon execution of this Amendment by Tenant. The check for
the Additional Security Deposit shall be deposited upon execution of this Lease
by Landlord and shall be held and administered during the Space A Term as
provided in Section 17 of the Lease.
7. Temporary Space. Tenant shall continue to lease the Temporary Space on
the terms and conditions set forth in Amendment No. 1 until the earlier of (the
"Space A Termination Date"): (A) the date Tenant completely vacates and
surrenders the Temporary Space to Landlord, or (B) the date that is thirty (30)
days after the Delivery Date for Space A. The Temporary Space Term shall
terminate as of the Space A Termination Date, and Tenant shall completely vacate
and surrender the Temporary Space to Landlord as provided in Amendment No. 1.
Rent for Space A for any partial month shall be prorated on a daily basis and
paid or refunded between the parties within thirty (30) days after the Space A
Termination Date.
8. Brokers. Landlord and Tenant each represents that it has not engaged or
dealt with any real estate broker, agent or finder with respect to this
Amendment, except for CB Commercial Real Estate Group, Inc. (whose commission,
if any, shall be paid by Landlord pursuant to a separate written agreement).
Landlord and Tenant shall indemnify and hold each other harmless from all
claims, , liability or expense (including reasonable attorneys fees) in
connection with any claim for broker's, finder's or other fees or commissions as
a result of such party's actions or alleged actions.
9. Tenant's Representations. Tenant hereby represents to Landlord that
there has been no assignment of the Lease and no sublease of all or any portion
of the Premises, there are
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<PAGE>
no existing defenses or offsets which Tenant has against enforcement of the
Lease, and Landlord and Tenant are not in default under the Lease.
10. Entire Agreement. The Lease, including, without limitation, this
Amendment and all exhibits which are attached hereto and hereby incorporated by
reference, constitutes the entire agreement between Landlord and Tenant with
respect to the subject matter hereof. Tenant acknowledges that it has not been
induced to enter into this Amendment by any agreements or representations which
are not set forth in this Amendment. This Amendment shall not be effective until
execution and delivery by both Landlord and Tenant.
By signing this Amendment, the parties agree to the above terms.
LANDLORD: TENANT:
ND PROPERTIES, INC. NETWORK MANAGEMENT SERVICES, INC.
By /s/ Mark J. Wood By /s/ Scott P. Halstead
------------------------------- ----------------------------
Name: Mark J. Wood Name: Scott P. Halstead
------------------------------- ----------------------------
Title: Asst. Sec. Title: Chief Financial Officer
------------------------------- ----------------------------
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<PAGE>
EXHIBIT 2
TO AMENDMENT NO. 2
LEASEHOLD IMPROVEMENTS
(ALLOWANCE)
1. Tenant Finish Allowance and Costs. Landlord shall provide an allowance
("Tenant Finish Allowance") not to exceed $5.00 per rentable square foot in
Space A (total $37,200.00 based on 7,440 rentable square feet) or the actual
cost of such improvements, whichever is less, to be applied to the total cost of
constructing Tenant's leasehold improvements in Space A (*Tenant Finish Costs*),
including, without limitation: space planning and design fees; architectural and
engineering fees; required building permits; actual cost of labor, materials,
equipment and services; actual cost of Tenant signage; and the costs of
removing, modifying, relocating or making additions to any existing improvements
to accommodate Tenant's space plan. Tenant Finish Costs shall exclude expenses
in connection with services provided by Tenant or Tenant's employees; telephone,
communications and computer equipment and wiring; and personal property items
such as decorations, art work, furniture, equipment, or trade fixtures not
permanently attached to Space A.
2. Plans. Tenant shall promptly devote such time in consultation with
Landlord and the architect ("Architect") designated by Landlord as necessary to
finalize an initial plan ("Initial Plan") for Tenant's leasehold improvements in
Space A (or, if the Initial Plan has been completed and approved by Landlord and
Tenant, such plan is attached hereto as Exhibit 2-1). If not included in the
Initial Plan and if necessary for the performance of Landlord's Work (as
hereafter defined), Landlord shall cause to be prepared final architectural and
engineering plans, specifications and working drawings for Tenant's leasehold
improvements in Space A ("Architectural Plans") based on the Initial Plan.
Tenant shall, within five (5) business days after written request, furnish to
Landlord such information as necessary to enable the Architect to prepare the
Initial Plan and any necessary Architectural Plans. The information to be
furnished by Tenant shall include, without limitation:
(a) Any requirements of the Tenant which are in excess of or otherwise vary
in any respect from Building standard items, and all critical dimensions.
(b) Special loading, such as the location of and requirements for file
cabinets or special equipment.
(c) Openings in the walls or floors.
(d) Special heating, ventilating, air conditioning, electrical, sprinkler,
lighting, security system, or plumbing work.
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(e) Location and dimensions of telephone equipment areas, and location of
telephone and electrical outlets, switches and lights.
(f) Partitions - locations and type, including doors and hardware, windows,
glass partitions and special framing or support.
(g) Special cabinet work and other millwork items.
(h) Variations to standard ceiling heights.
(i) Location and color selection of painted areas.
(j) Location and selection of floor covering and wall coverings.
(k) Location and type of any kitchen equipment.
(l) Such additional information as reasonably specified by Landlord.
Within five (5) business days after the completed Architectural Plans have been
submitted to Tenant, Tenant shall provide Landlord with Tenant's written
approval of such Architectural Plans (or Tenant's disapproval with a written
explanation of any changes required therein) and shall redeliver the
Architectural Plans to Landlord for Landlord's final approval. If Landlord or
Tenant do not approve any of the Architectural Plans, the parties shall promptly
revise such plans and resubmit such plans until the same are approved by
Landlord and Tenant. Unless otherwise specified in the Architectural Plans,
Landlord's Work shall be constructed with Building standard materials (or
comparable substitute materials designated by Landlord) in amount, type and
quality; and Tenant shall promptly make any necessary selections of such
materials. If final Architectural Plans are included in the Initial Plan or are
unnecessary to perform the work, the term "Architectural Plans" as used herein
shall mean the Initial Plan and any supplemental plans and specifications
approved by Landlord and Tenant. All costs and expenses relating to the
preparation or review of the Initial Plan and the Architectural Plans, and any
changes thereto or revisions thereof, shall be included in the Tenant Finish
Costs and shall be paid as provided in Section 3 of this Exhibit.
All plans and specifications for any work in Space A or the Project
(whether Landlord's Work or any work performed by Tenant as hereafter provided)
shall be subject to Landlord's prior written approval. Landlord may withhold its
approval of any plans or specifications if, in Landlord's reasonable opinion,
the work would: involve a structural revision to the Project; adversely affect
the market value or appearance of the Project; violate Landlord's criteria for
those portions of the Space which are visible from the common areas or from the
exterior of the Project; adversely affect the strength, structural integrity or
safety of the Project; adversely affect the proper functioning and efficiency of
the systems of the Project; violate any requirements of applicable law or of any
holder of a mortgage on or insurer of the Project (or require Landlord to
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<PAGE>
perform any work or incur any expense in connection therewith); adversely affect
any other rentable space in the Project or increase the expense of operating the
Project; not be in keeping with the character of the Project; or involve a
substantial risk of delaying the performance of Landlord's Work due to
unavailability or shortages of labor or materials, extra lead or performance
time or other requirements for the work. The foregoing reasons are not
exclusive, and Landlord may reasonably withhold its approval for other similar
or dissimilar reasons. Landlord may disapprove any plans in part, reserve
approval of any items pending its review and approval of other plans, and
reasonably condition its approval upon Tenant making revisions to the plans or
supplying additional information. Any review or approval of any plans or work by
Landlord is solely for its benefit, and without any representation, warranty or
liability to Tenant or any other person with respect to the adequacy,
correctness or sufficiency thereof, the fitness for any purpose, compliance with
applicable legal requirements or otherwise.
3. Payment. Landlord shall pay an amount not to exceed the Tenant Finish
Allowance toward the Tenant Finish Costs for Landlord's Work, and Tenant shall
pay for all Tenant Finish Costs in excess of the Tenant Finish Allowance
("Excess Costs") as Additional Rent as hereafter provided. Before commencing
Landlord's Work, Landlord shall provide to Tenant a written proposal ("Tenant
Cost Proposal") for the total Tenant Finish Costs for Landlord's Work (other
than services or materials separately contracted for by Tenant). If the Tenant
Cost Proposal is more than the Tenant Finish Allowance, Landlord and Tenant will
either: (a) approve in writing the Tenant Cost Proposal and the amount of any
Excess Costs; or (b) revise Landlord's Work as necessary to reduce the Tenant
Cost Proposal to no more than the Tenant Finish Allowance plus such amount of
Excess Costs as may be approved by Landlord and Tenant. Tenant shall give
immediate attention to the Tenant Cost Proposal, and respond to any requests
from Landlord within five (5) business days. Within five (5) business days after
submission to it of the final Tenant Cost Proposal and Architectural Plans,
Tenant shall authorize Landlord in writing to proceed with Landlord's Work, and,
if the estimated Excess Costs after crediting the Tenant Finish Allowance exceed
$37,200.00, Tenant also shall pay to Landlord one-half (1/2) of the estimated
amount of the Excess Costs that exceed $37,200.00 (or shall provide security
satisfactory to Landlord for payment of such Excess Costs). No work shall be
commenced until Tenant has complied with the requirements of this Section. Once
the final Tenant Cost Proposal and Architectural Plans have been approved by
Landlord and Tenant, Landlord's Work and the Tenant Cost Proposal shall not be
changed except by written change order approved by Landlord and Tenant or as
otherwise provided in this Exhibit; and in any such case, Landlord shall deliver
to Tenant a revised Tenant Cost Proposal indicating the revised total for Excess
Costs, if any. Within five (5) business days after submission to Tenant of the
revised Tenant Cost Proposal, Tenant shall authorize Landlord in writing to
proceed with Landlord's Work as so revised and, if the total estimated Excess
Costs after crediting the Tenant Finish Allowance exceed an aggregate amount of
$37,200.00, Tenant shall pay to Landlord one-half (1/2) of any additional
estimated amount of Excess Costs that exceed a total of $37,200.00 (or shall
provide security satisfactory to Landlord for payment of such Excess Costs); and
Landlord shall not be required to proceed further with the work until Tenant has
complied with the requirements of this Section. Any unpaid balance of Excess
Costs shall be paid to Landlord by
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Tenant within thirty (30) days of Landlord's statement following Substantial
Completion (as defined below) of Landlord's Work.
4. Landlord's Work. As Landlord's Work, Landlord shall cause its contractor
to construct leasehold improvements in Space A substantially in accordance with
the Initial Plan and any Architectural Plans approved by Tenant and Landlord as
provided in Section 2 of this Exhibit. In all other respects, Tenant agrees to
accept Space A in its present condition, "as is," with no obligation for
Landlord to do or pay for any improvements or plans. Any work required by Tenant
in addition to Landlord's Work shall be constructed at Tenant's expense pursuant
to Section 6 of this Exhibit or after the Delivery Date pursuant to Section 5 of
the Lease.
Promptly after compliance with Sections 2 and 3 of this Exhibit, Landlord
shall obtain a building permit and, subject to the other terms and conditions of
this Exhibit and the Lease, shall proceed diligently to cause Landlord's Work to
be Substantially Completed before the scheduled Delivery Date, it being
expressly understood that all work to be done in Space A shall be subject to
approval by Landlord and that no work shall be undertaken in Space A until such
approval is given in writing. Tenant acknowledges that the work will be
performed during Tenant's occupancy of the Initial Premises and normal business
hours; and, to the extent applicable to work in the Initial Premises, Landlord
and Tenant shall cooperate to reasonably minimize any interference with the
performance of the work and Tenant's use of the Initial Premises.
For purposes of this Exhibit, "Substantial Completion" or "Substantially
Completed" means: (i) completion of Landlord's Work except for minor finishing
and punchlist activity which does not materially interfere with Tenant's use and
occupancy of Space A; and (ii) issuance of any necessary municipal certificate
of occupancy. Within thirty (30) days after the Delivery Date, the parties shall
inspect Space A, have all systems demonstrated, and prepare a punchlist of
incomplete or defective details of construction. Landlord will use reasonable
diligence to promptly complete the punchlist items after Tenant provides the
punchlist to Landlord. Upon notice from Landlord that Landlord's Work is
complete, Tenant agrees to confirm acceptance of Space A in written form
reasonably acceptable to Landlord. A certificate signed by the Architect that
Landlord's Work has been Substantially Completed or finally completed shall be
conclusive and binding on the parties.
5. Delivery Date. The Delivery Date shall not occur and Tenant's obligation
to pay Rent for Space A shall not commence until Landlord has Substantially
Completed all of Landlord's Work; provided, however, that if Landlord is delayed
in Substantial Completion of Landlord's Work as a result of any one or more of
the following ("Tenant Delay"):
(a) Tenant's failure to devote the time or furnish all or any of the
information or approvals required under Section 2 of this Exhibit in
connection with the Initial Plan or the Architectural Plans for Landlord's
Work, or to furnish the approvals or make the payments within the time
periods specified in Section 3 of this Exhibit; or
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(b) Tenant's request for materials, finishes or installations other than
Building standard items to the extent the same actually delays the
Substantial Completion of Landlord's Work; or
(c) Any other act or omission by Tenant or its employees, contractors, or
agents to the extent the same actually delays the Substantial Completion of
Landlord's Work;
then and in any such event, Landlord shall cause the Architect to certify the
date on which Landlord's Work would have been completed but for any Tenant
Delay, and the Delivery Date and Tenant's obligation to pay Rent for Space A
shall occur and commence as of such date, and shall not otherwise be affected or
deferred on account of such delay. Additionally, Tenant shall indemnify Landlord
against any additional cost in completing Landlord's Work and other damages to
Landlord caused by any Tenant Delay.
6. Access By Tenant Prior To Delivery Date. Landlord, in Landlord's
discretion, may permit Tenant and Tenant's agents to enter Space A prior to the
Delivery Date upon reasonable notice during business hours to make Space A ready
for Tenant's use and occupancy. Any such permission shall constitute a license
only, and such license shall be conditioned upon: (a) Tenant working in harmony
and not interfering with Landlord and Landlord's agents, contractors, workers,
and suppliers in doing Landlord's Work, if any, or with other work in the
Project, other tenants and occupants of the Project, or the general operation of
the Project; (b) Tenant obtaining Landlord's prior written approval of the
proposed contractors; and (c) Tenant depositing with Landlord in advance of any
work, in form and substance reasonably satisfactory to Landlord, (i) security
reasonably satisfactory to Landlord for the lien-free completion thereof, (fi)
plans and specifications for such work, (iii) any necessary permits or licenses,
and (iv) certificates of insurance (with coverages and amounts satisfactory to
Landlord and naming Landlord and its management company and mortgagee as
additional insureds) and instruments of indemnification as Landlord may
reasonably require against claims and liabilities which may arise out of such
entry or work. Such pre-term access shall be subject to scheduling by Landlord.
Landlord shall have the right to withdraw such license upon twenty-four (24)
hours' written notice to Tenant for reasonable cause. Tenant agrees that
Landlord shall not be liable in any way for any injury, loss or damage which may
occur to any of Tenant's property placed or installations made in Space A prior
to the Delivery Date, the same being at Tenant's sole risk; and Tenant agrees to
indemnify, defend and save harmless Landlord from all liabilities, costs,
damages, fees and expenses arising out of or connected with the activities of
Tenant or its agents, contractors, suppliers or workmen in or about Space A or
the Project. Any entry or work by or on behalf of Tenant under this Section
shall be subject to all of the terms and conditions of the Lease, including
without limitation Section 5 thereof. If such entry or work causes extra costs
to Landlord or extraordinary use of Project services, Tenant shall reimburse
Landlord for such extra costs or extraordinary services within thirty (30) days
after Landlord's statement.
7. Telephones/Wiring. Tenant shall at its expense install and maintain all
telephone and communications wiring and equipment from the service access point
in the Project to and
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within Space A, and arrange directly with the telephone company and suppliers of
its choice for all service and connections. The installation of all telephone,
communications, computer, security, and other wiring and equipment shall be
subject to Landlord's prior written consent as provided in this Exhibit or in
Section 5 of the Lease.
8. Miscellaneous. This Exhibit shall be incorporated into and considered as
a part of the attached Amendment No. 2. Unless otherwise indicated herein,
capitalized terms used in this Exhibit shall have the meanings assigned to them,
in the Lease or the attached Amendment No. 2. The terms and provisions of this
Exhibit are intended to supplement and are specifically subject to all the terms
and provisions of the Lease and the attached Amendment No. 2. This Exhibit may
not be amended or modified except in a writing signed by Landlord and Tenant. In
no event shall any rights of Tenant hereunder be transferable or assignable to
any party except to a permitted assignee of all of Tenant's rights under the
Lease. All sums due hereunder from Tenant shall be deemed Additional Rent for
purposes of the Lease, and upon any default hereunder, Landlord shall have all
of the rights and remedies provided for in the Lease as well as all remedies
otherwise available to Landlord, including, without limitation, the right to
suspend work hereunder or to withhold delivery of possession of Space A until
any such default is cured. Whenever the consent or approval of Landlord or
Tenant is required herein, the same shall not be unreasonably withheld or
delayed. This Exhibit shall not create a contractual relationship of any kind
between any persons other than Landlord and Tenant.
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Exhibit 10.19
AMENDMENT TO NO. 3 TO LEASE AGREEMENT
AGREEMENT, made as of January 19, 1999, between TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA, successor to ND PROPERTIES, INC. ("Landlord")
and NETWORK MANAGEMENT SERVICES, INC. ("Tenant").
A. Landlord and Tenant entered into a written Lease Agreement dated March
12, 1997 ("Initial Lease"), as amended by Amendment No. 1 to Lease Agreement
dated October 1, 1997 ("Amendment No. 1") and Amendment No. 2 to Lease Agreement
dated December 23, 1997 ("Amendment No. 2"). The Initial Lease and Amendments
No. 1 and 2 are sometimes referred to herein collectively as the "Lease".
B. The Lease currently relates to the premises ("Premises") consisting of
approximately 8,830 rentable square feet in the building located at 5500 Wayzata
Boulevard, Golden Valley, Minnesota ("Building") and comprised of the following
parcels:
Approximately 1,390 rentable square feet on the seventh floor of the
Building ("Initial Leased Premises") through the end of the initial Term of
the Lease ("Initial Term") on April 30, 2000; and
Approximately 7,440 rentable square feet on the fifth floor of the Building
("Space A") through the end of the Space A Term on February 28, 2003.
C. Landlord and Tenant desire to expand the Premises and to amend the Lease
as provided in this Amendment.
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are
expressly acknowledged, Landlord and Tenant agree as follows:
1. Effect. The Lease is hereby amended to the extent necessary to give
effect to this Amendment, and the terms of this Amendment shall supersede any
contrary terms in the Lease. All references in the Lease to "this Lease" shall
be deemed to refer to the Lease as amended by this Amendment. In all other
respects the terms and conditions of the Lease shall remain unmodified and in
effect, Unless otherwise defined herein, capitalized terms shall have the same
meaning as provided in the Lane.
2. Space B.
A. For purposes of this Amendment, the "Space B Commencement Date" shall be
the earlier of: (1) March 1, 1999 (subject to extension as provided in Section
2E(4) below in the event of Landlord Delay or Excusable Delay as hereafter
defined, or (2) the date Tenant occupies any Portion of Space B (hereafter
defined) for the, conduct of business.
B. As of the Space B Commencement Date, the Premises shall be amended and
expanded by adding to the Premises approximately 3,462 rentable square feet on
the sixth floor
<PAGE>
of the Project as shown on the attached Exhibit 1 ("Space B"), so that the
Premises Shall thereafter consist of approximately 12,292 rentable square feet
in the Project. Except as expressly provided otherwise in this Amendment or in
the Lease, Space B shall be added to and become part of the Premises for the
remaining Initial Tem (including any extension or renewal thereof), on all of
the terms and conditions of the Lease, and any reference in the Lease to the
Promises shall thereafter be deemed to refer to and include Space B.
C. The parties acknowledge that the Initial Term and the Space A Term are
not co-terminous. Upon the sooner expiration or termination of the Initial Term
or the Space A Term (including any renewal or extension of either such term), as
the case may be, Tenant shall completely vacate and surrender possession of the
applicable space to Landlord in the condition required under the Lease; the
applicable space shall be deleted from the Premises; and the Lease shall
continue in effect as to the remaining space for the remainder of the Initial
Term or the Space A Term, as the case may be.
D. In addition to Rent for the Initial Premises and Space A as provided in
the Lease, Tenant shall pay Rent for Space B as follows:
(1) Commencing as of the Space Commencement Date and continuing during the
remaining Initial Term, Tenant shall pay Base Rent for Space B at an annual
rate of $17.00 per rentable square foot, payable in advance in monthly
installments of $4,904.50.
(2) As of the Space B Commencement Date: (i) Tenant's Proportionate Share
of Operating Costs shall be adjusted appropriately to take into account the
number of rentable square feet in Space B; and (H) Operating Cost Rem shall
thereafter be payable for Space B at the same rate per rentable square foot
as then payable for the Initial Premises and subject to the same
adjustments as provided in the Lease.
(3) Rent for Space B shall be paid at the same time and in the same manner
as provided in the Lease for payment of Rent for the Initial Premises, If
the Space B Commencement Date is not the first day of a calendar month, the
Base Rent and Operating Cost Rent for Spare B for such partial mouth shall
be prorated daily and paid in advance.
E. Tenant agrees to accept Space 13 in its present condition, "as is," with
no obligation for Landlord to do or pay for any leasehold improvements or plans.
All work desired by Tenant to prepare Space B for occupancy ("Tenant's Work")
shall be performed as follows:
(1) Landlord and Tenant have approved the plans and specifications for
Tenant's Work in Space B attached hereto as Exhibit 2. Any changes in
Tenant's Work in Space B shall be subject to Landlord's prior written
approval, which approval shall not be unreasonably withheld. Tenant shall
submit plans and specifications for any changes in Tenant's Work to
Landlord, and Landlord shall within five (5) days after receipt of such
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plans either approve such plans or advise Tenant in writing of its
objections to the plans. If Landlord does not approve any such plans,
Tenant shall promptly revise such plans and resubmit such plans to
Landlord, and Landlord shall within five (5) days thereafter either approve
Such resubmitted plans or advise Tenant in writing of its objections to the
plans (in which case the same process shall be repeated until the plans are
approved by Landlord).
(2) Upon full execution of this Amendment, Landlord shall make Space B
available for the performance of Tenant's Work. No delay in the completion
of Tenant's Work shall delay the Space B Commencement Date except in the
event of Landlord Delay or Excusable Delay as provided in Section 2E(4)
below.
(3) Tenant's Work in Space B shall be performed at Tenant's expense by KMS
Construction Company, or another construction company at Landlord's
election, as general contractor (the "Contractor") in accordance with
Section 5 of the Lease. The Contractor shall submit the work for three (3)
competitive bids for all subcontracts for the major trades and shall
furnish a complete copy of all bids received to Tenant. The Contractor and
Tenant will jointly review the bids and jointly select the subcontractors,
which may not be the low bidders, based on the subcontractor's guaranteed
bid price and taking into account the quality of work, financial
responsibility, and ability to perform and complete the work in compliance
with the bid specifications and Landlord's construction rules for the
Project, Following approval of the bids and issuance of a building permit,
the Contractor shall promptly commence and diligently proceed to complete
Tenant's Work, subject to Excusable Delay.
(4) If the Substantial Completion of Tenant's Work in Space B is delayed
beyond March 1, 1999, as a result of Excusable Delay or Landlord Delay,
then Landlord shall cause Landlord's architect to certify the date to which
the Substantial Completion of Tenant's Work was delayed as a result of
Excusable Delay or Landlord Delay, after offsetting any period of delay
caused by Tenant or otherwise; and the Space B Commencement Date and
Tenants obligation to pay Rent for Space B shall occur and commence as of
such date.
The certification of Landlord's architect regarding the date of Substantial
Completion shall be binding and conclusive unless Tenant disputes such
certification by written notice within thirty (30) days after Tenant
receives such certification. If Tenant makes timely written objection and
such dispute cannot be resolved by Tenant and Landlord within thirty (30)
days after Tenant's written objection, then such dispute shall be resolved
by a Minnesota licensed architect approved by both Landlord and Tenant, or,
if the parties cannot agree on an architect, one shall be appointed by the
chief officer of the Minnesota Chapter of the American Institute of
Architects, and the determination of such architect shall be binding upon
the parties; and the fees of such architect shall be shared equally by
Landlord and Tenant.
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Notwithstanding the foregoing, no extension of the Spare B Commencement
Date shall be claimed by Tenant unless Tenant delivers to Landlord written
notice of any Landlord Delay or Excusable Delay as soon as practicable, but
in any event within five (5) days after Tenant knows of the event or
condition that causes the delay, and unless Tenant shall continue to pursue
Tenant's Work to the extent reasonably practicable during such delay.
Further, in no event shall the Space B Commencement Date be delayed beyond
the date on which Tenant occupies any portion of Space B for the conduct of
business.
(5) As used in this Amendment:
(i) "Excusable Delay" means any actual delay in Substantial Completion
of Tenant's Work as a result of any one or more of the following,
except to the extent that such delay is caused by Landlord Delay or by
Tenant: (a) strikes or labor troubles; (b) acts of war, terrorism or
civil commotion; (c) fire or other casualty or natural disaster; or
(d) other conditions similar to those enumerated in this Section
beyond the reasonable control of Tenant or Landlord.
(ii) "Landlord Delay" means any actual delay in Substantial Completion
of Tenant's Work as a result of any one or more of the following,
except to the extent that such delay is caused by Excusable Delay or
by Tenant: (a) Landlord's failure to approve or disapprove Tenant's
plans within the time periods provided herein; (b) Landlord's request
for changes in any plans or construction documents which have been
previously approved by Landlord; (c) Landlord's failure to deliver
Space B for the beginning of construction as provided herein; or (d)
any other material delay wrongfully caused in the bidding or
construction process by Landlord or the Contractor, their employees
and agents.
(iii) "Substantial Completion" means completion of Tenant's Work
except for finishing and punchlist activity which does not materially
interfere with Tenant's use and occupancy of the applicable space.
3. Space C.
A. For purposes of this Amendment, the "Space C Commencement Date" shall be
the earlier of: (1) April 1, 1999 (subject to extension in the event that
Landlord Delay or Excusable Delay delays Substantial Completion of Tenant's
Work, if any, in Space C as provided in Section 31)(4) below), or (2) the date
Tenant occupies any portion of Space C (hereafter defined) for the conduct of
business.
B. As of the Space C Commencement Date, the Premises, shall be amended and
expanded by adding to the Premises approximately 2,779 rentable square feet on
the sixth floor of the Project as shown on the attached Exhibit 1 ("Space C"),
so that the Premises shall thereafter consist of approximately 15,071 rentable
square feet in the Project. Except as
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expressly provided otherwise in this Amendment or in the Lease, Space C shall be
added to and become part of the Premises for the remaining Initial Term
(including any extension or renewal thereof), on all of the terms and conditions
of the Lease, and any reference in the Lease to the Premises shall thereafter be
deemed to refer to and include Space C.
C. in addition to Rent for the Initial Premises and Spaces A and B, Tenant
shall pay Rent for Space C as follows:
(1) Commencing as of the Space C Commencement Date and continuing during
the remaining Initial Term, Tenant shall pay Base Rent for Space C at an
annual rate of $17.00 per rentable square foot, payable in advance in
monthly installment of $3,936.92.
(2) As of the Space C Commencement Date: (i) Tenant's Proportionate Share
of Operating Costs shall be adjusted appropriately to take into account the
number of rentable square feet in Space C; and (ii) Operating Cost Rent
shall thereafter be payable for Space C at the same rate per rentable
square foot as then payable for the Initial Premises and subject to the
same adjustments as provided in the Lease.
(3) Rent for Space C shall be paid at the same time and in the same manner
as provided in the Lease for payment of Rent for the Initial Premises. If
the Space C Commencement Date is not the first day of a calendar month, the
Base Rent and Operating Cost Rent for Space C for such partial month shall
be prorated daily and paid in advance.
D. Tenant agrees to accept Space C in its present condition, "as is," with
no obligation for Landlord to do or pay for any leasehold improvements or plans.
Tenant is under no obligation to make any leasehold improvements in Space C. All
work, if any, desired by Tenant to prepare Space C for occupancy ("Tenant's
Work') shall be performed as follows:
(1) All plans and specifications for Tenant's Work in Space C shall be
subject to Landlord's prior written approval, which approval shall not be
unreasonably withheld. If Tenant desires any Tenant's Work in Space C,
Tenant shall within a reasonable time submit plans and specifications for
Tenant's Work to Landlord, and Landlord shall within five (5) days after
receipt of such plans either approve such plans or advise Tenant in writing
of its objections to the plans. If Landlord does not approve any such
plans, Tenant shall promptly revise such plans and resubmit such plans to
Landlord, and Landlord shall within five (5) days thereafter either approve
such resubmitted plans or advise Tenant in writing of its objections to the
plans (in which case the same process shall be repeated until the plans are
approved by Landlord).
(2) After approval of the plans for Space C, Landlord shall make Space C
available for the performance of Tenant's Work. No delay in the completion
of Tenant's Work
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shall delay the Space C Commencement Date except in the event of Landlord
Delay or Excusable Delay as provided in Section 3D(4) below.
(3) Tenant's Work in Space C shall be performed at Tenant's expense by the
Contractor in the same manner as provided in Section 2E above,
(4) If the Substantial Completion of Tenant's Work in Space C is delayed
beyond April 1, 1999, as a result of Excusable Delay or Landlord Delay,
then the Space C Commencement Date and Tenant' s obligation to pay Rent for
Space C shall postponed in the same manner as provided in Section 2E above.
4. Demising Wall. Spaces R and C are adjacent to certain vacant space as
shown on the attached Exhibit I that is not currently separated by a demising
wall. If, at any time during the remaining Initial Term including any renewal or
extension thereof), either (i) Landlord leases such adjacent vacant space to
another tenant, or (ii) Tenant requests construction of a demising wall by
written notice to Landlord, then Landlord shall construct (and/or complete, as
applicable) a demising wall separating Spaces B and C from such adjacent vacant
space and creating a common corridor providing access to such adjacent vacant
space. Tenant shall be responsible to pay one-half (1/2) of the reasonable cost
of constructing such demising wall (including any associated demolition,
separation, relocation and repair work) and of finishing both sides of the
demising wall and the common corridor with Building standard materials and
finishes ("Separation Costs"). The Separation Costs are currently estimated to
be approximately $18,600.00. Tenant shall pay such one-half (1/2) of the
Separation Costs as Additional Rent within thirty (30) days after the completion
of such work based on Landlord's itemized statement of such costs. Tenant
acknowledges that the construction will be performed during Tenant's occupancy
of Spaces B and C, if applicable, and normal business hours; and Landlord and
Tenant shall cooperate to reasonably minimize any interference with the
performance of the construction and Tenant's use of Space B and C.
5. Tenant's Representations. Tenant hereby represents to Landlord that
there has been no assignment of the Lease and no sublease of all or any portion
of the Premises; and, to the best of Tenant's knowledge, them are no existing
defenses or offsets which Tenant has against enforcement of the Lease, and
Landlord and Tenant are not in default under this Lease.
6. Brokers. Landlord and Tenant each represents that it has not engaged or
dealt with any real estate broker, agent or finder with respect to this
Amendment, except for CB, Richard Ellis, Inc. (whose commission, if any, shall
be paid by Landlord pursuant to a separate written agreement). Landlord and
Tenant shall indemnify and hold each other harmless from all claims, liability
or expense (including reasonable attorneys fees) in connection with any claim
for broker's, finder's or other fees or commissions as a result of such party's
actions or alleged actions.
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7. Entire Agreement. The Lease, as amended to date (including, without
limitation, this Amendment), and all exhibits which are attached hereto and
hereby incorporated by reference, constitutes the entire agreement between
Landlord and Tenant with respect to the subject matter hereof. Tenant
acknowledges that it has not been induced to enter into this Amendment by any
agreements or representations which are not set forth in this Amendment. This
Amendment shall not be effective until execution and delivery by both Landlord
and Tenant.
By signing this Amendment, the parties agree to the above terms.
LANDLORD: TENANT:
TEACHERS INSURANCE AND ANNUITY NETWORK MANAGEMENT SERVICES, INC.
ASSOCIATION OF AMERICA
By /s/ Mark J. Wood By /s/ Scott P. Halstead
------------------------------- ----------------------------
Name: Mark J. Wood Name: Scott P. Halstead
------------------------------- ----------------------------
Title: Asst. Sec. Title: Chief Financial Officer
------------------------------- ----------------------------
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