<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VANTAGEMED CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 68-0383530
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Number) Identification No.)
</TABLE>
3017 KILGORE ROAD, SUITE 195
RANCHO CORDOVA, CALIFORNIA 95670
(916) 638-4744
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
JOEL M. HARRIS
PRESIDENT
VANTAGEMED CORPORATION
3017 KILGORE ROAD, SUITE 195
RANCHO CORDOVA, CALIFORNIA 95670
(916) 638-4744
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
GILLES ATTIA, ESQ. JACK STEELE, ESQ.
KEVIN COYLE, ESQ. WILLIAM FABBRI, ESQ.
TERESA M. DERICHSWEILER, ESQ. McDermott, Will & Emery
Gray Cary Ware & Freidenrich LLP 28 State Street
400 Capitol Mall, 21(st) Floor Boston, Massachusetts 02109-1775
Sacramento, California, 95814
(916) 930-3200
</TABLE>
--------------------------
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 being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") 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, please check the following box
and list the Securities Act registration 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 number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock ($.001 par value).............................. $37,950,000 $10,551
</TABLE>
(1) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
--------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1999.
3,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
VantageMed is offering 3,000,000 shares of its common stock. This is our
initial public offering, and no public market currently exists for our shares.
We have applied for approval for quotation of our common stock on the Nasdaq
National Market under the symbol "VMDC." We anticipate that the initial public
offering price will be between $9.00 and $11.00 per share.
------------------------
AN INVESTMENT IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price.....................
Underwriting discounts and commissions....
Proceeds to VantageMed....................
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT, NOR HAS ANY STATE SECURITIES
REGULATOR, APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
VantageMed has granted the underwriters a 30-day option to purchase up to an
additional 450,000 shares of common stock to cover any over-allotments. The
underwriters expect to deliver the shares of common stock to purchasers on or
about January __, 2000.
------------------------
ADVEST, INC. J.C. BRADFORD & CO.
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
DESCRIPTION OF ARTWORK
INSIDE FRONT COVER
Centered horizontally across the top of the page is the caption, 'VantageMed
Regional Offices. A National Company with a Local Presence. Products and
Services Created on a National Scale...Sold and Supported Locally by 15
Strategically Located Offices.'
Below this caption is a map of the United States with the State of Alaska
appearing to the left of the top caption. This map is in contrasting pastel
colors and is marked and the locations, including city names, of each of
VantageMed's regional offices are marked with a dot. These regional offices
include: Seattle, Washington; Sacramento and Van Nuys, California; Honolulu,
Hawaii; Boulder, Colorado; Kansas City, Missouri; Little Rock, Arkansas;
Houston, Texas; Springfield, Illinois; Birmingham, Alabama; Detroit, Michigan;
Pittsburgh, Pennsylvania; Greensboro, North Carolina; Pompton Plains, New
Jersey; and Boston, Massachusetts.
Arranged below the map are logo for VantageMed and for the following
VantageMed products: Ridgemark; eMCee; Therapist Helper; DentalMate; and Chart
Keeper.
INSIDE GATEFOLD
A lavender stripe is centered horizontally across the top of the Gatefold.
Immediately below this stripe, also centered horizontally, is a caption which
reads, 'Offering Healthcare Providers Comprehensive Systems Solutions.' A
lavender stripe runs under the lower right half of this caption.
Centered on the left side of the Gatefold are three ovals, linked together
at their center. The left oval is outlined in red and contains a color picture
of a woman typing at a computer terminal. Above this oval, in red text, is the
caption, 'Practice Operations.' The right oval contains is outlined in blue and
contains a color picture of a doctor talking with a young patient. Above this
oval, in blue text, is the caption, 'Clinical Records.' The bottom oval is
outlined in green and contains a color picture of a woman taking notes while
viewing a computer terminal. Below this oval, in green text, is the caption,
'Managed Care Contracting.' These three ovals overlap at their centers. In the
overlapping section of the three ovals is a dark purple curved triangle with the
caption, 'Internet.'
Centered above the linked ovals is a pink rectangular box, outlined in
bright pink, containing the text, 'Practice Operations/Clinical Information.
Chart Documentation. Automatically Posts Charges, Procedures and Diagnoses.
Computerized Tracking of Patient Follow-Up. Audit Trail of Services Performed
and Billed.' A bright pink line runs from the bottom of this rectangular box
into the center of linked ovals.
To the lower left of the linked ovals is a yellow rectangular box, outlined
in bright yellow, containing the text, 'Practice Operations/Managed Care.
Membership Verification. Coverage Eligibility. Incoming Referral Confirmation.
Tracking of Services Rendered.' A bright yellow line runs from the top right of
this rectangular box into the center of the linked ovals.
To the lower right of the linked ovals is a turquoise rectangular box,
outlined in turquoise, containing the text, 'Managed Care/Clinical Records.
Outgoing Referral Authorizations. Documentation of Medical Conditions.
Verification of Contractual Carve-Outs. Outcomes Information.' A turquoise line
runs from the top left of this rectangular box into the center of the linked
ovals.
Below the linked ovals are arranged three rectangular boxes. The box to the
left is light red, outlined in darker red, and contains the caption, 'Practice
Operations Systems. Patient Scheduling and Registration. Accounts Receivable
Management Actually Tracking and Reporting.' The box to the right is light blue,
outlined in darker blue, and contains the caption, 'Computerized Clinical
Records. Electronic Charting with Imaging and Voice Recognition. Patient
Education and Instruction Materials. Electronic Communication with Pharmacies,
Hospitals and Other Ancillary Facilities, Clinical Reporting.' The middle box,
aligned slightly lower, is light green, outlined in darker green, and contains
the caption, 'Managed Care Contracting Systems. Member Tracking and Eligibility.
Service and
<PAGE>
Procedure Authorization Management. Referral Tracking and Claims Adjudication.
Activity and Decision Support Reporting.'
The right side of the Gatefold contains a lavender box containing the
caption, 'Services. Application Services Outsourcing. Medical Transcription.
Software Support and Upgrades. Information Transfer. Eligibility and
Authorizations. Electronic Claims and Statements. Ancillary Service Diagnostic
Information.* Pharmacy Prescriptions and Refills.* Communication.
Patient-Provider Messages.* Remote Provider Access to Office Database.' At the
bottom of this box is an asterisk followed by the caption, 'Under Development.'
Centered vertically on the inside left of the lavender box is a dark purple
curved triangle which contains the caption, 'Internet.'
Between the three linked ovals on the left side of the Gatefold and the
lavender box on the right side of the Gatefold, as if to link the two sides of
the Gatefold, are the captions, 'Linking the Practice' and, 'to the Outside
World' in purple text. In between these two captions are four purple triangles,
growing in size from the left triangle to the right.
Across the bottom of the Gatefold, in purple text running from left to
right, is the caption, 'Integrated Systems with an Internet Advantage.' Below
the right portion of this caption is a lavender hill-shaped graphic. To the
right of this graphic is the VantageMed logo, which includes the caption,
'VantageMed. Integrated Solutions for Healthcare.'
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED IN THIS
PROSPECTUS. WE AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE
OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN
THIS PROSPECTUS 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.
IN THIS PROSPECTUS, "VANTAGEMED," "WE," "US" AND "OUR" REFER TO VANTAGEMED
CORPORATION AND ITS SUBSIDIARIES.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Disclosure Regarding Forward-Looking Statements............. i
Summary..................................................... 1
Risk Factors................................................ 4
Use of Proceeds............................................. 13
The Company................................................. 13
Dividend Policy............................................. 13
Dilution.................................................... 14
Capitalization.............................................. 15
Selected Consolidated Financial Data........................ 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 29
Management.................................................. 41
Certain Transactions and Relationships...................... 46
Principal Stockholders...................................... 48
Description of Capital Stock................................ 50
Shares Eligible for Future Sale............................. 51
Underwriting................................................ 53
Legal Matters............................................... 54
Experts..................................................... 54
Where You Can Find More Information......................... 55
Index to Financial Statements............................... F-1
</TABLE>
VantageMed, DentalMate, Ridgemark, eMCee, Therapist Helper, ChartKeeper and
MedSoft are trademarks of VantageMed Corporation or its wholly-owned
subsidiaries. This prospectus also contains other trade names and trademarks of
VantageMed and of other companies.
------------------------
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to a number
of risks and uncertainties, many of which are beyond our control. All statements
other than statements of historical facts included in this prospectus, including
the statements under "Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business," regarding our
business strategy, future operations, financial position, estimated revenues,
projected costs, prospects, plans and objectives of management, as well as
information concerning expected actions of third parties are forward-looking
statements. When used in this prospectus, the words "anticipate," "intend,"
"estimate," "expect," "project," and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain such identifying words. All forward-looking statements speak only as of
the date of this prospectus. Neither we nor the underwriters undertake any
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
can give no assurance that such expectations will prove to be correct. Important
factors that could cause our actual results to differ materially from our
expectations ("cautionary statements") are disclosed under "Risk Factors" and
elsewhere in the prospectus. The cautionary statements qualify all
forward-looking statements attributable to us or persons acting on our behalf.
i
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THE ENTIRE PROSPECTUS SHOULD BE READ CAREFULLY, INCLUDING THE RISK FACTORS
SECTION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS. UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS HAVE NOT EXERCISED THEIR OPTION TO PURCHASE ADDITIONAL SHARES, THAT
A ONE-FOR-THREE REVERSE STOCK SPLIT HAS OCCURRED AND THAT ALL SHARES OF
CONVERTIBLE PREFERRED STOCK AND CERTAIN PROMISSORY NOTES HAVE BEEN AUTOMATICALLY
CONVERTED INTO SHARES OF COMMON STOCK.
OUR BUSINESS
VantageMed is a leading provider of healthcare information systems and
services distributed to over 10,000 customer sites through a national network of
15 regional offices. Our suite of software products and services automates
administrative, financial, clinical and management functions for physicians,
dentists, other healthcare providers and provider organizations. We provide our
customers with:
- Windows-based, Internet-enabled software products;
- hardware and supplies;
- product maintenance and support services; and
- electronic transaction services.
We believe our recurring revenues are a strong indicator of customer
satisfaction. Historically since 1996, in excess of 80% of our revenues have
come from sales of products and services to existing customers. Since July 1997,
we have acquired 27 healthcare information systems companies in order to build a
national distribution network and increase our customer base. We are leveraging
this network to increase our revenues through the sale of our Windows-based,
Internet-enabled products and services.
Our installed customer base, software products and services, and Internet
strategy have positioned us to address the information needs of healthcare
providers through the implementation and continued development of our integrated
technology solution.
OUR INDUSTRY
The healthcare industry's information technology infrastructure is
characterized by numerous, incompatible and, in many cases, outdated legacy
software systems. Healthcare information is often communicated via paper, fax,
and telephone, resulting in errors and delays. We believe that these
inefficiencies lead to wasteful spending and have contributed to rising
healthcare costs. In order to compete effectively in today's complex healthcare
environment, healthcare providers need advanced integrated systems that
streamline access to information and improve the flow of that information among
healthcare participants.
The Internet has created a new means for healthcare providers and physician
organizations to interact directly with patients and other healthcare
participants. As a result, we believe that healthcare providers can benefit from
technology solutions that integrate Internet functionality with software systems
that support the management of healthcare practices. We are continuing to expand
the Internet capabilities of our existing Windows-based products and developing
new Windows-based, Internet-enabled products to increase our customers' access
to information and their ability to communicate with numerous other healthcare
participants. Since our customers are already utilizing our software products
and services, we are a logical candidate to provide them with the next
generation of Internet-based technology solutions.
1
<PAGE>
We believe both the healthcare information systems industry and the market
it serves are highly fragmented, with over 500 geographically dispersed
healthcare information systems companies serving healthcare providers throughout
the U.S., primarily on a regional basis. This market dynamic presents
significant opportunities to grow our business through strategic business
combinations.
OUR STRATEGY
Our objective is to expand our market share through acquisitions and
internal growth and to increase our recurring revenues in order to strengthen
our position as one of the leading suppliers of healthcare information systems
and services. We intend to increase our revenues and market share through growth
strategies that focus on:
- offering Windows-based, Internet-enabled products and services;
- providing product migration alternatives that enable our customers to move
from legacy products to our Windows-based, Internet-enabled products;
- strengthening our national distribution network through the selective
acquisition of established healthcare information systems companies in
attractive regional markets;
- cross-selling our products and services to existing customers and pursuing
opportunities with new customers; and
- forming strategic Internet partnerships to develop a full range of
services for clinical, administrative and electronic commerce functions in
order to become our customers' primary Internet interface.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by VantageMed........... 3,000,000 shares
Common stock outstanding after this
offering................................... 8,717,126 shares(1)
Use of proceeds by VantageMed................ Repayment of approximately $1.9 million of
indebtedness, working capital and general
corporate purposes, including financing of
possible future acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... VMDC
</TABLE>
- ------------------------
(1) Based upon shares outstanding as of November 24, 1999 and assuming an
initial public offering price of $10.00 per share and a closing date of
January 31, 2000. Excludes, as of November 24, 1999, 453,067 shares of
common stock reserved for issuance under our 1998 Stock Option/Stock
Issuance Plan, 545,978 shares of common stock issuable upon exercise of
outstanding stock options, 43,333 shares of common stock issuable upon the
exercise of outstanding warrants and 73,333 shares of common stock issuable
on the conversion of promissory notes convertible at the election of the
holders.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------------ ------------------------
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software and systems...................................... $ 3,943 $ 10,053 $ 5,751 $ 9,654
Customer support and electronic services.................. 5,430 13,335 6,709 10,857
------- -------- ------- --------
Total revenues.......................................... 9,373 23,388 12,460 20,511
Operating Costs and Expenses:
Software and systems...................................... 2,146 4,464 2,603 3,803
Customer support and electronic services.................. 3,606 7,354 4,462 5,956
Selling, general and administrative....................... 4,706 13,174 6,213 11,107
Product development....................................... 1,500 3,330 2,797 3,543
Depreciation and amortization............................. 1,472 5,943 2,578 4,539
------- -------- ------- --------
Total operating costs and expenses...................... 13,430 34,265 18,653 28,948
------- -------- ------- --------
Loss From Operations........................................ (4,057) (10,877) (6,193) (8,437)
Interest expense, net....................................... (207) (274) (419) (484)
------- -------- ------- --------
Loss Before Income Taxes.................................... (4,264) (11,151) (6,612) (8,921)
------- -------- ------- --------
Benefit for income taxes.................................... (343) (1,387) (3,284) (3,652)
------- -------- ------- --------
Net loss.................................................... $(3,921) $ (9,764) $(3,328) $ (5,269)
======= ======== ======= ========
Basic and diluted loss per share(2)......................... $ (1.82) $ (3.22) $ (1.16) $ (1.54)
Weighted-average shares outstanding--basic and diluted(2)... 2,158 3,032 2,877 3,415
Basic and diluted loss per share(3)......................... $ (2.95) $ (1.27)
Weighted-average shares outstanding--basic and diluted(3)... 3,314 4,158
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------------
PRO FORMA(5)
ACTUAL PRO FORMA(4) AS ADJUSTED
-------- ------------- -------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital......................................... $(4,179) $ (4,378) $ 25,122
Total assets................................................ 29,295 41,293 67,793
Long-term debt, net of current portion...................... 1,943 2,795 2,795
Series A-1 preferred stock.................................. 2 2 --
Series B preferred stock.................................... -- -- --
Accumulated deficit......................................... (7,590) (7,590) (7,590)
Total stockholders' equity.................................. 19,327 26,256 55,756
</TABLE>
- ------------------------------
(1) The pro forma consolidated statement of operations data presents our
consolidated results of operations as if our acquisitions had occurred as of
January 1, 1998. The pro forma information is not necessarily indicative of
what would have occurred had the acquisitions been made as of such periods,
nor is it indicative of future results of operations.
(2) Excludes shares from the assumed conversion of convertible preferred stock,
shares from the assumed conversion of convertible notes and shares issuable
upon the exercise of stock options and warrants.
(3) Includes shares of preferred stock converted to common shares as if the
shares had been converted on the dates of their issuance.
(4) The pro forma balance sheet presents information as if our acquisitions that
occurred after September 30, 1999 occurred as of September 30, 1999 and has
been adjusted to record the October issuance of a convertible promissory
note in the amount of $3.0 million.
(5) The pro forma as adjusted balance sheet data presents information as if our
acquisitions that occurred after September 30, 1999 occurred as of
September 30, 1999 and has been adjusted to reflect the conversion of all
outstanding shares of preferred stock into 743,425 shares of common stock
upon completion of this offering, conversion of a $3.0 million promissory
note plus accrued interest into 611,441 shares of common stock upon
completion of this offering, and receipt of the estimated net proceeds from
the sale of the 3,000,000 shares of common stock offered by us at an assumed
offering price of $10.00 per share, after deducting the estimated
underwriting discounts and commissions and the estimated offering expenses.
3
<PAGE>
RISK FACTORS
THE PURCHASE OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF INVESTMENT RISK.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN
THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. THIS
PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED
IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THE
RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
RISKS ASSOCIATED WITH OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY, A HISTORY OF LOSSES, EXPECT OUR
EXPENDITURES TO INCREASE AND OUR LOSSES TO CONTINUE, AND MAY NEVER ACHIEVE
PROFITABILITY
We have incurred operating losses since we became a Delaware corporation in
April 1997. We operate with a negative cash flow primarily due to acquisition
expenses, prior debt incurred by acquired companies and assumed by us, and the
costs of improving our operating, sales and product development infrastructure
to position us for future growth. In our first two years of operation, we
incurred aggregate net losses of $7.3 million, of which $3.4 million was
amortization and depreciation. Our business strategies may not be successful and
we may not be able to achieve or sustain revenue growth or profitability.
OUR FINANCIAL SUCCESS DEPENDS IN PART ON OUR ABILITY TO INCREASE REVENUES
GENERATED FROM EXISTING CUSTOMERS
In addition to increasing revenues through the addition of new customers,
our strategy is also based upon increasing revenues from existing customers. We
focus our marketing efforts on upgrades to existing systems, migration to our
Windows-based products and additional customer support and electronic services
revenues. If existing customers fail to migrate to our newer systems, we may not
be successful in increasing our revenues in the near term or at all.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
INTERNET-ENABLE OUR PRODUCTS IN A TIMELY FASHION
Although our some of our products are Internet-enabled, not all of our
Windows-based products have been Internet-enabled and those that are have not
been tested in the market for any substantial length of time. The success of our
business depends upon our ability to continue the Internet-enabling of our
products in a timely manner and to gain market acceptance of these products. Our
failure to do so may harm our ability to increase our revenues in the near term
or at all.
THE SUCCESS OF OUR BUSINESS MODEL DEPENDS IN PART UPON THE ADOPTION OF INTERNET
SOLUTIONS
Growth in the demand for our products and services depends upon the adoption
of Internet solutions by healthcare participants. Acceptance of this new way of
conducting business and exchanging information may be slow or may fail to
materialize. Customers that have made extensive investments in older legacy
systems may refuse to adopt new systems. In addition, the Internet may not prove
to be a viable commercial marketplace for a number of reasons, including:
- inadequate development of the necessary infrastructure for communication
speed, access and server reliability;
- security and confidentiality concerns;
- lack of development of complementary products, such as high-speed modems
and high-speed communication lines;
- implementation of competing technologies;
4
<PAGE>
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; and
- governmental regulations.
If any of these factors limit the acceptance or effectiveness of Internet
solutions, the growth and success of our business could suffer dramatically.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO DECLINE
It is possible that our revenues and operating results may be below the
expectations of securities analysts or investors in future quarters. If we fail
to meet or surpass the expectations of securities analysts or investors, the
market price of our common stock will most likely decline. We expect that our
quarterly revenue and operating results may fluctuate as a result of a number of
factors, including:
- future acquisitions;
- entry into new healthcare markets;
- introduction of new products and service offerings and reductions in
prices of products by our competitors;
- software defects, delays in development and other quality factors;
- changes in customer demand for our applications and services; and
- changes within the healthcare industry.
We expect to increase activities and spending in substantially all of our
operational areas. We base our expense levels in part upon our expectations
concerning future revenues, and these expense levels are relatively fixed in the
short term. If we have lower revenues, we may not be able to make corresponding
reductions in our spending in the short term. Any shortfall in revenues would
have a direct impact on our results of operations. Fluctuations in our quarterly
results or the failure to meet analysts' expectations could affect the market
price of our common stock in a manner unrelated to our long-term operating
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
WE RELY ON OUR INTELLECTUAL PROPERTY, AND THE FAILURE TO PROTECT THIS
INTELLECTUAL PROPERTY COULD SEVERELY HARM OUR BUSINESS
We rely primarily on a combination of copyrights, trademarks, trade secret
laws, restrictions on disclosure and other methods to protect the intellectual
property and trade secrets inherent in our products. We currently have no
patents or registered copyrights covering technology related to our products. We
have no plans to seek such legal protection and, if we do, protection may not be
granted.
We enter into confidentiality agreements with our acquisition candidates,
employees, directors and consultants, and generally control access to and
distribution of our documentation and other proprietary information. Despite
such precautions, it may be possible for a third party to copy, reverse engineer
or otherwise obtain and use our intellectual property or trade secrets without
authorization. In addition, others may have developed, or may develop,
independently, substantially equivalent intellectual property.
Our intellectual property may be misappropriated or infringed upon or may
infringe upon the rights of others. Consequently, litigation may be necessary in
the future to enforce our intellectual property rights, to protect our
confidential information or trade secrets, or to determine the validity or scope
of the rights of others. Litigation could result in substantial costs and
diversion of management
5
<PAGE>
and other resources and could adversely effect our business, financial condition
and results of operations. Additionally, we may deem it advisable to enter into
royalty or licensing agreements to resolve such claims. Such agreements, if
required, may not be available on commercially reasonable or desirable terms or
at all.
PERFORMANCE PROBLEMS WITH OUR PRODUCTS OR THE PRODUCTS OF OTHERS COULD DAMAGE
OUR BUSINESS
Certain of our products provide for the processing and transmission of
confidential financial and patient medical information over the Internet or
through direct-dial telephone connections. In addition, we plan to integrate
such Internet capabilities into certain of our other products. Our
Internet-enabled products depend on the efficient operation of Internet and
telephone connections, web browsers and Internet service providers, which have
experienced periodic operational problems or outages. Our customers'
satisfaction and our business could be harmed if our customers experience any
system delays, failures or losses of data whether due to errors on our part or
third parties. The occurrence of a major catastrophic event or other system
failure at any of our facilities could interrupt data processing or result in
the loss of stored data. Such failures could result in significant product
liability, breach of contract litigation or damage to our reputation against us
by our customers or others.
BREACHES OF OUR NETWORK SECURITY COULD RESULT IN LIABILITY AND DAMAGE TO OUR
BUSINESS REPUTATION
The performance of our electronic services involves the storage of
confidential customer and patient information at our network data centers and
the transmission of this data over private and public networks, including the
Internet. Security breaches could result in legal liability and damage to our
business reputation. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses or
similar disruptive problems. In the event of such a security breach, proprietary
and confidential information could be misappropriated or our operations could be
interrupted. Such a security breach or interruption of our operations could
damage our reputation and cause us to lose customers. In addition, any costs or
imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on our business,
financial condition and results of operations.
SOFTWARE ERRORS MAY SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS
Software frequently contains undetected errors when first introduced or as
new versions are released. We expect that such errors will be found from time to
time in new or enhanced versions of our products after commencement of
commercial shipments. These problems may cause us to incur significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
Our products must successfully operate with products from other vendors. The
occurrence of software errors, whether caused by our products or another
vendor's products, may result in the delay or loss of market acceptance of our
products or significant liability.
YEAR 2000 PROBLEMS COULD CAUSE US TO LOSE REVENUES OR INCUR ADDITIONAL COSTS
Many currently installed computer and software products are coded to accept
only six-digit entries in the date code field rather than the eight-digit
entries required to distinguish twenty-first century dates from twentieth
century dates. This problem is commonly referred to as the "Year 2000" problem.
We presently believe that the products we are developing and marketing are
Year 2000 compliant. However, as a result of certain acquisitions, we have
acquired and do support certain software that is not Year 2000 compliant and
that some customers continue to use. It is our policy to notify such customers
that their software and/or systems are not Year 2000 compliant and that we have
no plans to make them ready for the Year 2000. However, we cannot guarantee that
we will be able to identify and
6
<PAGE>
contact all such customers. We offer these customers an opportunity to upgrade
to newer products that are Year 2000 compliant, but such customers may not
upgrade and we may be subject to liability for the non-compliance of these
acquired software products.
We do not independently test third-party software that is incorporated into
our products and instead rely on the representations made by the suppliers of
such third-party software as to the Year 2000 compliance of their products.
Therefore, it is possible that Year 2000 problems will occur with these internal
and/or third-party systems. Such problems could have an adverse impact on our
business, operating results and financial condition. The risk exists primarily
in three areas:
- potential warranty or other claims from our customers, which may result in
significant expense to us;
- failures of systems we use to run our business, which could disrupt our
business operations; and
- the potential for failures of our products due to Year 2000 problems
associated with products developed by other vendors and used in
conjunction with our products, which may require that we incur significant
unexpected expenses.
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN, AS IS OUR ABILITY TO RAISE
FURTHER FINANCING, IF REQUIRED
We may need to raise additional funds to respond to business contingencies
which may include the need to:
- fund more rapid expansion;
- fund additional marketing expenditures;
- enhance our operating infrastructure;
- respond to competitive pressures; or
- acquire or develop complementary businesses or necessary technologies.
Additional financing may not be available on terms favorable to us, or at
all. In the event that such financing requires the issuance of additional shares
of our capital stock, you will experience dilution in your ownership of us. If
adequate funds are not available or are not available on acceptable terms, our
ability to fund our operations, take advantage of opportunities, develop
products or services or otherwise respond to competitive pressure could be
significantly limited.
RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
OUR ACQUISITION STRATEGY MAY HARM OUR BUSINESS
As a part of our growth strategy, we intend to acquire additional healthcare
information systems companies. We devote substantial time and resources to
acquisition related activities. Such acquisitions involve a number of special
risks, including:
- possible adverse effects on our operating results;
- diversion of management's attention;
- possible failure to retain key acquired personnel;
- amortization of acquired intangible assets; and
- risks associated with unanticipated events or liabilities.
The occurrence of problems in any of these areas could have a material
adverse effect on our results of operations, financial condition or business.
7
<PAGE>
IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR NEGOTIATE THE PURCHASE OF
ACQUISITION CANDIDATES, OUR ABILITY TO GROW OUR BUSINESS AND EXPAND OUR
DISTRIBUTION NETWORK MAY BE HARMED
We know that certain of our competitors are undertaking an acquisition
strategy similar to ours. If competition for acquisition targets increases,
there may be fewer qualified acquisition candidates available to us. The price
of acquisitions may increase and the terms of such acquisitions may become less
favorable for us. Identifying appropriate acquisition candidates and negotiating
and consummating an acquisition can be a lengthy and costly process. We may not
be able to identify, acquire or profitably integrate and manage additional
healthcare information systems companies or companies which provide technology
complimentary to ours without substantial costs, delays or other operational or
financial problems.
FAILURE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES COULD HAVE A NEGATIVE
IMPACT ON OUR FINANCIAL CONDITION AND COULD HARM OUR BUSINESS
We may be unable to successfully integrate acquired businesses and realize
anticipated economic, operational and other benefits in a timely manner or at
all. Some of the integration challenges we face include:
- cross-training of existing and acquired sales personnel;
- standardization of accounting, operational and financial functions of
acquired businesses;
- retention of key acquired personnel; and
- incorporation of acquired technology into our existing products.
We may be unable to integrate acquired companies smoothly and without
substantial costs, delays or other operational, technical or financial problems.
Failure to successfully and timely integrate acquisitions could divert
management's attention from our existing business, damage our relationship with
key customers and employees and have an adverse effect on our business,
financial condition and results of operations.
TECHNICAL PROBLEMS WITH ACQUIRED TECHNOLOGY OR PRODUCTS COULD HARM OUR
REPUTATION AND CAUSE OUR REVENUES TO DECREASE
Although we test and examine an acquisition target's technology and products
prior to consummating an acquisition, there may be technical product problems
that we fail to discover. Any resulting customer dissatisfaction could harm our
reputation and cause a decrease in our overall revenues.
WE MAY BECOME RESPONSIBLE FOR UNKNOWN OR UNEXPECTED LIABILITIES FOLLOWING AN
ACQUISITION
When we purchase a target company, we generally acquire all of that
company's liabilities. Although we perform due diligence prior to an
acquisition, we may become responsible for a liability that is unknown or
greater than anticipated. Any recourse we may have against the former
shareholders of an acquired company is limited. Therefore, any such unexpected
liabilities could have a significant impact on our business, financial condition
and results of operations.
OUR ACQUISITION STRATEGY MAY REQUIRE US TO RAISE ADDITIONAL CAPITAL, WHICH COULD
RESULT IN DILUTION
We intend to finance future acquisitions by issuing shares of common and/or
preferred stock for all or a substantial portion of the acquisition price. In
the event that the potential acquisition candidates are unwilling to accept
stock as part of the consideration for the sale of their businesses, we may
decide to utilize more of our cash resources, if available, in order to maintain
our acquisition program.
8
<PAGE>
This may result in the need to raise additional capital. To the extent we issue
shares of our capital stock to finance acquisitions or raise capital, you will
experience dilution in your ownership of us.
RISKS ASSOCIATED WITH OUR INDUSTRY
INTENSE COMPETITION IN THE MARKET FOR HEALTHCARE INFORMATION SYSTEMS AND
SERVICES COULD PREVENT US FROM INCREASING OR SUSTAINING REVENUES AND PREVENT US
FROM ACHIEVING OR SUSTAINING PROFITABILITY
Our competitors vary in size, geographic coverage and scope of products and
services offered. The market demand for certain products varies across
geographic territories. Industry competitors include organizations such as
Medical Manager Corporation, Physician Computer Network, Inc., Infocure
Corporation, Medic Computer Systems, Inc., IDX Systems Corporation, CyCare, a
division of McKessonHBOC, Quality Systems Inc., Dentrix Dental Systems, Inc.,
and National Data Corporation. Additionally, within each regional market there
are several smaller competitors who have developed technologically advanced
niche products offered at lower prices. Finally, with the integration of
clinical information systems into practice management systems, several
well-funded pharmaceutical, medical supply and biotech companies have entered
the practice management systems market. New healthcare information Internet
companies may become direct competitors in the future. Many of our competitors
have greater financial, research and development, technical, marketing and sales
resources than we do. In addition, other entities not currently offering
products and services similar to ours may enter our market. We may not be able
to compete successfully with current and/or future competitors. Failure to do so
would have a material adverse effect on our results of operations, financial
condition and business.
ECONOMIC PRESSURES FACED BY HEALTHCARE PROVIDERS MAY LIMIT THE ABILITY OF OUR
CUSTOMERS TO BUY OUR PRODUCTS AND SERVICES
The economic pressures of managed care may limit the ability of healthcare
providers to make expenditures for new software systems or for upgrades to
existing software systems. A reluctance or inability on the part of healthcare
providers to make such expenditures could result in fewer sales and a reduction
in our revenues.
OUR FAILURE TO RESPOND TO THE RAPIDLY CHANGING TECHNOLOGY THAT CHARACTERIZES OUR
MARKET COULD HARM OUR COMPETITIVE POSITION
The market for our products is highly competitive and changes rapidly.
Therefore, timely introduction of new products, features and services to
existing customers will significantly impact our future success. We will be
required to meet rapidly changing market demands, respond to market
requirements, develop new proprietary solutions, and successfully market new
products and enhancements to new customers and our existing customer base.
We will be required to invest significant resources in order to enhance our
existing products and market these systems to existing and new customers. We may
not be successful in developing new products or transitioning existing products
to new platforms and our current or future products may not satisfy the needs of
the market. Products or technologies developed by others may adversely affect
our competitive position, or render our products or technologies noncompetitive
or obsolete.
CHANGES IN GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD ADVERSELY
AFFECT OUR BUSINESS
During the past several years, the healthcare industry has been subject to
increasing levels of government regulation of, among other things, reimbursement
rates and certain capital expenditures. In addition, proposals to reform the
healthcare system have been considered by Congress. These proposals, if enacted,
may further increase government involvement in healthcare, lower reimbursement
rates and otherwise adversely affect the healthcare industry which could
adversely impact our business.
9
<PAGE>
Healthcare providers may react to these proposals and the uncertainty
surrounding such proposals in ways that could result in a reduction or deferral
in the use of our technologies and services. We cannot predict with any
certainty what impact, if any, such proposals or healthcare reforms might have
on our business, financial condition and operating results.
The confidentiality of patient records and the circumstances under which
such information may be used or released are subject to substantial regulation
by state and federal laws and regulations. Regulations governing electronic
health data transmissions are evolving rapidly and are often unclear and
difficult to apply.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
was enacted on August 21, 1996 and required the Secretary of Health and Human
Services (the "Secretary") to adopt national standards for certain types of
electronic healthcare information transactions and the data elements used in
such transactions and to adopt standards to ensure the integrity and
confidentiality of such information.
In August 1998, the U.S. Department of Health and Human Services issued
proposed regulations regarding Electronic Signatures and Security Protections.
These regulations establish certain standards for electronic recordkeeping. We
do not know if these regulations will be adopted in their present form, a
different form or at all. However, if these regulations are adopted, they may
require modifications to our computer software and record-keeping practices.
These changes may require us to make substantial capital investments.
HIPAA mandated that if Congress did not enact legislation by August 1999,
the Secretary was required to promulgate regulations concerning Privacy
Protections. Congress failed to enact legislation within the specified time
period and on November 3, 1999, the Secretary promulgated proposed regulations
designed to protect the privacy of electronically transmitted or maintained,
individually identifiable health information. We do not know if these
regulations will be adopted in their present form, a different form, or at all.
However, if these regulations are adopted, authorization may be required before
identifiable patient information could be electronically transmitted to third
parties for any purpose other than treatment, payment or health care operations.
Accordingly, authorization could be required for activities such as quality
assessment, credentialing and recredentialing, insurance rating, peer review,
fraud and abuse compliance review and document production for use in civil or
criminal legal proceedings. These regulations also would require that we enter
into agreements with certain of our customers governing the dissemination of
such information and would require that holders or users of such information to
implement specified security measures. The proposed regulations, if adopted in
their current or a revised form, could have an adverse effect on our business,
financial condition and results of operations.
Any violation of HIPAA, or any regulations promulgated pursuant to HIPAA,
may result in civil or criminal monetary penalties and imprisonment, depending
on the degree of the offense.
The confidentiality of patient records is subject to substantial regulation
by state governments. These state laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Although compliance with these laws and regulations is at present principally
the responsibility of healthcare providers, regulations governing patient
confidentiality rights are evolving rapidly. Additional legislation governing
the dissemination of medical record information has been proposed at both the
state and federal level. This legislation may require holders of medical
information to implement security measures and impose restrictions on the
ability of third-party processors, like us, to transmit certain patient data
without specific patient consent. Any change in legislation could restrict
healthcare providers from using our services.
Federal and state consumer protection laws may apply to us when we bill
patients directly for the cost of physician services provided. Failure to comply
with any of these laws or regulations could result
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<PAGE>
in losses of licensure or other fines and penalties. Any of these results could
have a material adverse effect on our business, financial conditions and
operating results.
We perform billing and claims services that are governed by numerous federal
and state civil and criminal laws. In recent years the federal government has
placed increased scrutiny on billing and collection practices of healthcare
providers and related entities and particularly on potential false or improper
billing practices, such as submissions of inflated claims for payment and
upcoding. Violations of the state or federal laws regarding billing and coding
may lead to civil monetary penalties, criminal fines, imprisonment or exclusion
from participation in Medicare, Medicaid and other federally funded healthcare
programs for us and our customers. Any of these results could have a material
adverse effect on our business, financial condition and operating results.
The FDA has jurisdiction under the 1976 Medical Device Amendments to the
Federal Food, Drug, and Cosmetic Act to regulate computer products and software
as medical devices if they are intended for use in the diagnosis, cure,
mitigation, treatment or prevention of disease in humans. We have not determined
to what extent our practice management software products would be deemed to be
medical devices subject to FDA regulation. Non-compliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, total or partial suspension of production, refusal by the government
to approve products, revocation of approval or clearness previously granted and
criminal prosecution. Final FDA policy governing computer products, once issued,
and future laws or regulations concerning the manufacturer or marketing of
medical devices or healthcare information systems may increase our costs in time
to market of new or existing products.
The Federal Drug Enforcement Agency has promulgated regulations that may
prohibit a pharmacy from the initial dispensing and/or refilling of certain
controlled substances through an electronically transmitted prescription. A
violation of these regulations may result in civil and criminal penalties. Such
regulations may limit the scope of our prescription ordering and refill
functions of our current or future software.
SINCE WE INTEGRATE INTERNET CAPABILITIES INTO MANY OF OUR PRODUCTS, OUR BUSINESS
IS SUBJECT TO GOVERNMENT REGULATION RELATING TO THE INTERNET THAT COULD IMPAIR
OUR OPERATIONS
Because of the increasing use of the Internet as a communication and
commercial medium, the government has adopted and may adopt additional laws and
regulations with respect to the Internet covering such areas as user privacy,
pricing, content, taxation, copyright protection, distribution and
characteristics and quality of production and services. Any of these regulations
could have a material adverse effect on our business, financial condition and
operating results.
RISKS ASSOCIATED WITH THIS OFFERING
PURCHASERS OF OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE SUBSTANTIAL DILUTION
The purchasers of the shares of common stock sold in this offering will
experience immediate and substantial dilution in the pro forma net tangible book
value as of September 30, 1999 of their shares of $7.21 per share (assuming an
initial public offering price of $10.00 per share).
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE
Prior to this offering, there has been no public market for our common
stock. An active trading market may not develop or be sustained upon
consummation of the offering and the market price of the common stock may
decline below the initial offering price. The market price of our common stock
11
<PAGE>
may fluctuate significantly due to a variety of factors, some of which are
outside of our control, including:
- announcements of technological innovations or new products or services by
us or our competitors;
- fluctuations in our quarterly and annual results of operations;
- changes in the general condition of the economy or the healthcare or
information technology industries;
- changes in earnings estimates by public market analysts; and
- changes in our business strategies.
THERE WILL BE A SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE FOLLOWING
THIS OFFERING, WHICH COULD CAUSE OUR STOCK PRICE TO DROP
Sales of substantial amounts of our common stock in the public market
following this offering could adversely affect the market price of the common
stock. Upon the completion of this offering, we will have 8,717,126 shares of
common stock outstanding. Of this amount, the 3,000,000 shares sold in this
offering (plus any additional shares sold upon the underwriters' exercise of
their over-allotment option) will be available for immediate sale in the public
market. An additional shares will be available for sale in the public
market (subject to the volume and other restrictions of Rule 144) following the
expiration of the 180-day lock-up agreement with the underwriters. shares
not subject to the 180 day lock-up agreement will be available for sale in the
public market 90 days after this offering in accordance with Rule 144. The sale
of a substantial number of these shares could result in a decline in the price
of our common stock.
SINCE WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS FROM THIS OFFERING, WE
MAY USE PROCEEDS IN WAYS WITH WHICH YOU DISAGREE
We have allocated approximately $1.9 million of the net proceeds from this
offering for the repayment of outstanding debt; the remainder of the net
proceeds have not been allocated for any specific purpose. Accordingly, our
management will have significant flexibility in applying the net proceeds of
this offering. If our management team fails to use such funds effectively, it
could have a material adverse effect on our business, financial condition and
results of operations.
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<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale and issuance of the 3,000,000 shares of
common stock being offered, after deducting the estimated underwriting discounts
and estimated offering expenses payable by us and assuming an initial offering
price of $10.00 per share, are estimated to be $26.5 million ($30.7 million if
the underwriters' over-allotment option is exercised in full).
We will use the net proceeds of this offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPLICATION OF NET PROCEEDS AMOUNT
- --------------------------- --------------
(IN THOUSANDS)
<S> <C>
To repay promissory notes(1)................................ $ 1,944
For working capital and other general corporate purposes,
including the financing of possible acquisitions of
complementary products, technologies and businesses....... $24,556
-------
$26,500
=======
</TABLE>
- ------------------------
(1) Consists of 14 promissory notes in an aggregate principal amount of
$1,923,220 and interest thereon through January 31, 2000 (the assumed
closing date of this offering). These notes have a weighted-average annual
interest rate of 10.4% and have maturity dates that range from February 2000
through July 2004. These promissory notes were issued in connection with
certain of our acquisitions.
We continually evaluate acquisition opportunities, and accordingly potential
acquisitions are currently being considered. We do not have any binding
understandings or agreements to acquire any companies, products or technologies.
Pending application of the net proceeds as described above, we intend to
invest the net proceeds of this offering in short-term, investment-grade,
interest bearing investment securities.
THE COMPANY
Our predecessor, VantageMed Corporation, was incorporated in California in
June 1995. The California corporation effected a migratory merger into
VantageMed Corporation, a Delaware corporation, in April 1997. Our executive
offices are located at 3017 Kilgore Road, Suite 195, Rancho Cordova, California
95670. Our telephone number is (916) 638-4744.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock, and
we do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, for
use in our business.
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DILUTION
As of September 30, 1999, our net tangible book value was $(3.4 million), or
$(0.87) per share of common stock. Net tangible book value per share represents
the amount of total tangible assets less total liabilities, divided by the
number of shares of common stock then outstanding. After giving effect to the
sale of 3,000,000 shares of common stock in this offering at an assumed initial
public offering price of $10.00 per share and after deduction of the estimated
underwriting discounts and commissions and the estimated expenses of this
offering, net tangible book value on September 30, 1999 would have been $23.1
million or approximately $2.79 per share. This represents an immediate increase
in net tangible book value of $3.66 per share of common stock to existing
investors and an immediate dilution of $7.21 per share to new investors
purchasing shares in the offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 10.00
Net tangible book value before the offering........... $(0.87)
Increase per share attributable to new investors...... 3.66
------
Net tangible book value per share after the offering........ 2.79
-------
Dilution per share to new investors......................... $ 7.21
=======
</TABLE>
The following table summarizes, as of September 30, 1999, on a pro forma
basis described above, the difference between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by the existing stockholders and the new investors purchasing shares
of common stock in this offering before deducting underwriting discounts and
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 5,277,191 63.7% $ 22,327,000 42.7% $ 4.24
New investors........... 3,000,000 36.3 30,000,000 57.3 $ 10.00
--------- ----- ------------- -----
Total............... 8,277,191 100.0% $ 52,327,000 100.0%
========= ===== ============= =====
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of September 30, 1999, and exclude shares of common stock
issuable upon exercise of outstanding stock options, additional shares reserved
for future issuance under our 1998 Stock Option/Stock Issuance Plan, shares of
common stock issuable upon the exercise of outstanding warrants and shares of
common stock issuable upon the conversion of promissory notes convertible at the
election of the holders. See "Capitalization."
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<PAGE>
\
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis giving effect to all acquisitions occurring to date
and the issuance of the $3.0 million secured convertible promissory note;
and
- pro forma as adjusted to reflect our receipt of the estimated net proceeds
from the sale of the 3,000,000 shares of common stock offered by us at an
assumed offering price of $10.00 per share after deducting the estimated
underwriting discounts and commissions and the estimated offering
expenses, the conversion of all outstanding shares of preferred stock into
743,425 shares of common stock and the conversion of the $3.0 million
convertible promissory note into 611,441 shares of common stock upon
completion of this offering.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS, EXCEPT FOR SHARE DATA) -------- --------- -----------
<S> <C> <C> <C>
Current portion of long-term debt........................... $ 2,270 $ 5,327 $ 2,327
======= ======= =======
Long-term debt, net of current portion...................... $ 1,943 $ 2,795 $ 2,795
------- ------- -------
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, actual and pro forma; 5,000,000 shares
authorized, pro forma as adjusted Series A-1--1,795,300
shares outstanding, actual and pro forma; and no shares
outstanding pro forma as adjusted......................... 2 2 --
Series B--120,000 shares outstanding, actual and pro
forma; and no shares outstanding pro forma as
adjusted................................................ -- -- --
Common stock, $0.001 par value per share, 20,000,000 shares
authorized, 3,922,325 shares issued and outstanding,
actual; 20,000,000 shares authorized, 4,362,260 shares
issued and outstanding, pro forma; 20,000,000 shares
authorized, 8,717,126 shares issued and outstanding, pro
forma as adjusted......................................... 4 4 9
Additional paid-in capital.................................. 26,911 33,840 63,337
Retained earnings (deficit)................................. (7,590) (7,590) (7,590)
------- ------- -------
Total stockholders' equity................................ 19,327 26,256 55,756
------- ------- -------
Total capitalization.................................... $21,270 $29,051 $58,551
======= ======= =======
</TABLE>
The table shown above excludes, as of September 30, 1999: 531,054 shares of
common stock issuable upon exercise of stock options outstanding at a
weighted-average exercise price of $7.83 per share; 268,946 shares reserved for
future issuance under our 1998 Stock Option/Stock Issuance Plan; 13,333 shares
of common stock issuable upon the exercise of an outstanding warrant at an
exercise price equal to 60% of the initial price of shares of our common stock
as sold in this offering; 30,000 shares of common stock issuable upon the
exercise of other warrants at an exercise price of $11.10 per share; and 40,000
shares of common stock issuable upon the conversion of outstanding convertible
promissory notes at a conversion price of $7.50 per share.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below are derived from
our audited and unaudited financial statements and should be read in conjunction
with our consolidated financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this prospectus. The consolidated statement of
operations for the years ended December 31, 1996, 1997, and 1998, and the
consolidated balance sheets at December 31, 1997, and 1998 have been audited by
Arthur Andersen LLP, independent public accountants, and are included elsewhere
in this prospectus. The consolidated statement of operations data for the year
ended December 31, 1995 and the nine months ended September 30, 1998 and 1999,
and the consolidated balance sheets data at December 31, 1995 and 1996 and
September 30, 1998 and 1999, are derived from our unaudited financial
statements. We believe that the unaudited financial data fairly reflects our
results of operations and our financial condition for the respective periods
presented.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- -------------------
1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Software and systems...................................... $2,051 $2,056 $2,800 $ 3,943 $ 2,591 $ 5,751
Customer support and electronic services.................. 1,623 1,874 2,448 5,430 3,452 6,709
------ ------ ------ ------- ------- -------
Total revenues.......................................... 3,674 3,930 5,248 9,373 6,043 12,460
Operating Costs and Expenses:
Software and systems...................................... 1,060 1,181 1,274 2,146 1,427 2,603
Customer support and electronic services.................. 796 981 1,200 3,606 2,355 4,462
Selling, general and administrative....................... 1,250 1,209 2,566 4,706 2,951 6,213
Product development....................................... 280 287 441 1,500 1,015 2,797
Depreciation and amortization............................. 50 141 376 1,472 976 2,578
------ ------ ------ ------- ------- -------
Total operating costs and expenses...................... 3,436 3,799 5,857 13,430 8,724 18,653
------ ------ ------ ------- ------- -------
Income (Loss) From Operations............................... 238 131 (609) (4,057) (2,681) (6,193)
Interest income (expense), net.............................. 40 16 (20) (207) (157) (419)
------ ------ ------ ------- ------- -------
Income (Loss) Before Income Taxes........................... 278 147 (629) (4,264) (2,838) (6,612)
------ ------ ------ ------- ------- -------
Provision (benefit) for income taxes........................ 58 64 (195) (343) (218) (3,284)
------ ------ ------ ------- ------- -------
NET INCOME (LOSS)........................................... $ 220 $ 83 $ (434) $(3,921) $(2,620) $(3,328)
====== ====== ====== ======= ======= =======
Basic and diluted earnings (loss) per share(1).............. $ 1.05 $ 0.07 $(0.27) $ (1.82) $ (1.25) $ (1.16)
====== ====== ====== ======= ======= =======
Weighted-average shares outstanding(1)--basic and diluted... 210 1,255 1,620 2,158 2,089 2,877
Pro forma basic and diluted loss per share(2)............... $ (1.67) $ (1.16) $ (0.92)
Pro forma weighted-average shares outstanding--basic and
diluted(2)................................................ 2,347 2,253 3,605
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------------------------- ---------------------
1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital......................................... $ 83 $ $ 82 $(4,587) $(2,289) $(4,179)
Total assets................................................ 923 993 5,189 11,391 10,296 29,295
Long-term debt, net of current portion...................... -- -- 1,501 1,721 1,969 1,943
Series A-1 preferred stock.................................. -- -- -- -- -- 2
Series B preferred stock.................................... -- -- -- -- -- --
Accumulated earnings (deficit).............................. 116 199 (267) (4,262) (2,961) (7,590)
Total stockholders' equity.................................. 183 (293) 2,242 3,234 4,277 19,327
</TABLE>
- ------------------------------
(1) Does not include the shares from the assumed conversion of convertible
preferred stock, shares from the assumed conversion of convertible notes and
shares issuable upon the exercise of stock options and warrants.
(2) Includes conversion of preferred stock into common shares, as if the shares
had been converted on the dates of their issuance.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
VantageMed is one of the leading providers of healthcare information systems
and services. Our strategy is to continue to expand our national distribution
network through the acquisition of established regional healthcare products and
managed care systems companies who will sell and support our new software
products and services to an existing and expanding customer base. We plan to
continue to grow our recurring revenues through additional acquisitions and the
migration of current customers from legacy systems to our Windows-based,
Internet-enabled software products and Internet and electronic services, while
at the same time continuing to expand both our market penetration and product
offerings.
Of the 27 business combinations we have completed to date, Healthcare
Information Systems, Inc. and Northern Health Solutions, Inc. were accounted for
as pooling of interests, and therefore, our financial statements were restated
to reflect them as a part of our operations for all periods presented. We
acquired five established regional healthcare information systems companies in
1997, with the first occurring in July 1997, eight companies in 1998 and nine
companies in the first nine months of 1999. In addition, we completed five
acquisitions since September 30, 1999. We have financed our 27 business
combinations to date through the issuance of approximately 3.1 million shares of
common stock, 120,000 shares of Series B preferred stock, $4.1 million in
promissory notes and $970,000 in cash.
We derive revenues from two sources: software and systems; and customer
support and electronic services. Software and systems revenues result from the
licensing of our proprietary software, as well as third-party software, computer
hardware and supplies. The third-party software is primarily desktop operating
systems and standard communication/security software. Customer support revenues
are derived from software maintenance and customer service, network and computer
hardware support, training, data conversion and system installation. Electronic
services revenues are generated by electronic claims processing, electronic
statement printing and mailing and electronic remittance advices.
Our revenues include both recurring and non-recurring revenues. We define
recurring revenues as any revenues derived from an existing or acquired customer
after the initial installation of the product and revenues generated from sales
of new products to existing customers. We consider our non-recurring revenues to
be revenues generated on sales to new customers. We expect the mix of recurring
and non-recurring revenues to fluctuate because of our acquisition activities
and our ability to sell our products to new customers. Over time, we believe
that recurring revenues will continue to represent a large portion of our
overall revenues. Recurring revenue is not a measurement defined by generally
accepted accounting principles (GAAP) and should not be considered an
alternative to, or more meaningful than, revenues as defined by GAAP. All
companies do not calculate recurring revenues in the same manner or at all.
Accordingly, our recurring revenue data may not be comparable with that of other
companies. We have included information concerning recurring revenues because we
believe recurring revenues provides useful information regarding our overall
revenue mix.
17
<PAGE>
Cost of revenues consists primarily of the costs of software and computer
hardware products sold to customers and associated shipping costs, third-party
costs for supplies and electronic services and salary and benefit costs for
employees performing customer support. Selling, general and administrative
expenses include the salaries, commissions and benefits of sales staff,
executive and administrative personnel costs, advertising and promotional
materials costs and travel, communications, facilities, insurance and other
administrative expenses. Product development expenses are primarily payroll and
related costs to develop new products and enhance existing products.
BUSINESS SEGMENT GROSS PROFIT DATA
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SOFTWARE AND SYSTEMS:
Revenues............................................ $2,056 $2,800 $3,943 $2,591 $5,751
Cost of revenues.................................... 1,181 1,274 2,146 1,427 2,603
------ ------ ------ ------ ------
Gross profit........................................ $ 875 $1,526 $1,797 $1,164 $3,148
====== ====== ====== ====== ======
Gross profit percentage............................. 42.6% 54.5% 45.6% 44.9% 54.7%
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CUSTOMER SUPPORT AND ELECTRONIC SERVICES:
Revenues............................................ $1,874 $2,448 $5,430 $3,452 $6,709
Cost of revenues.................................... 981 1,200 3,606 2,355 4,462
------ ------ ------ ------ ------
Gross profit........................................ $ 893 $1,248 $1,824 $1,097 $2,247
====== ====== ====== ====== ======
Gross profit percentage............................. 47.7% 51.0% 33.6% 31.8% 33.5%
====== ====== ====== ====== ======
</TABLE>
Our acquisitions have resulted in significant intangibles and related
amortization. Amortization expenses result from the amortization of intangible
assets. Intangible assets acquired include software, covenants not to compete,
customer lists, assembled workforce and goodwill and has averaged 95% of the
consideration paid by VantageMed for an acquisition. Software is amortized over
two to four years depending on the estimated continued use of the software
product acquired. Covenants not to compete are amortized over two to five years,
representing the life of such agreements. Customer lists and goodwill are
amortized over two to ten years, representing the estimated future life of
customer relationships. Assembled workforce is amortized over one to ten years,
depending upon the average length of employment for the employees of those
companies we have acquired.
Depreciation expenses also include depreciation of tangible property and
equipment over their useful lives, which range from three to seven years.
Depreciation expenses are not material to our operating results. Depreciation
and amortization expenses have resulted in sizeable non-cash charges to our
historical operating results and are expected to continue to generate
significant operating expenses in the near term due to our acquisition strategy.
We have invested approximately $5.3 million in product development since our
inception. These funds have been primarily invested in our medical and dental
products and to a lesser extent into our electronic claims processing systems
and a clinical information management system.
As of September 30, 1999, we had a post-acquisition federal net operating
loss carryforward of approximately $5.3 million available to offset future
taxable income, if any. This net operating loss carryforward will begin to
expire incrementally at various dates beginning in 2017 through 2019.
18
<PAGE>
For the next 12 months we expect our revenues to increase through both
acquisitions and internal growth. We believe that migration of current and
acquired customers to our Windows-based, Internet-enabled products and the
development and marketing of these products to new and existing customers are
the keys to our internal growth strategy. Our internal growth model is therefore
focused on increasing revenues from software licensing and electronic
transaction services, as well as maintaining recurring support revenues. We
recognize revenues from software license fees in accordance with American
Institute of Certified Public Accountants Statement of Position 97-2. Software
license fees are recognized as revenues upon delivery of our software products
to our customers, as long as evidence of an arrangement exists, the amounts of
fees are fixed and determinable and the collection of the resulting receivable
is probable. Computer hardware and supplies revenues are recognized upon product
shipment. Revenues from support and maintenance contracts are recognized ratably
over the life of the contract. Revenues from other services are recognized as
the services are provided.
Our strategy is to acquire companies with technology that will enhance our
overall product offerings or companies that build regional market penetration in
support of our national distribution channel. Since July 1997, we have acquired
over 10,000 customer sites. Our acquisitions have produced an established
distribution channel of 15 regional offices nationwide, provided us access to an
existing customer base, new product offerings, and helped us to build our
management team. As we continue to grow, we expect our operating expenses as a
percentage of sales to decrease. Our operating expenses to date have grown
faster than our revenues as a result of building our infrastructure and a
management team to execute our strategy.
RESULTS OF OPERATIONS
The following table sets forth certain data expressed as a percentage of
total revenues for the periods indicated.
SELECTED CONSOLIDATED FINANCIAL DATA PERCENTAGES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Software and systems.............................. 52.30% 53.30% 42.10% 42.90% 46.20%
Customer support and electronic services.......... 47.70 46.70 57.90 57.10 53.80
------ ------ ------ ------ ------
Total revenues.............................. 100.00 100.00 100.00 100.00 100.00
Operating Costs And Expenses:
Software and systems.............................. 30.10 24.30 22.90 23.60 20.90
Customer support and electronic services.......... 25.00 22.80 38.50 39.00 35.80
Selling, general & administrative................. 30.80 48.80 50.20 48.80 49.90
Product development............................... 7.30 8.40 16.00 16.80 22.40
Depreciation and amortization..................... 3.60 7.20 15.70 16.20 20.70
------ ------ ------ ------ ------
Total costs and operating expenses.......... 96.80 111.50 143.30 144.40 149.70
------ ------ ------ ------ ------
Income (Loss) From Operations....................... 3.20 (11.50) (43.30) (44.40) (49.70)
Interest Income (Expense)........................... 0.40 (0.40) (2.20) 2.60 (3.40)
------ ------ ------ ------ ------
Income (Loss) Before Income Taxes................... 3.60 (11.90) (45.50) (47.0) (53.10)
------ ------ ------ ------ ------
Provision (benefit) for income taxes................ 1.60 (3.60) (3.70) (3.60) (26.40)
------ ------ ------ ------ ------
Net income (loss)................................... 2.00% (8.30)% (41.80)% (43.40)% (26.70)%
====== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
A large portion of the variances between the nine months ended
September 30, 1998 and the corresponding period of 1999 is attributable to our
acquisition activity. During the nine months ended
19
<PAGE>
September 30, 1998, we completed eight business combinations, six of which were
accounted for using the purchase method of accounting and two accounted for as
poolings. Therefore, revenues and expenses from these companies were only
included for a portion of the nine months ended September 30, 1998, but were
included in the entire nine months ended September 30, 1999. In addition, nine
companies were acquired using purchase accounting between October 1, 1998 and
September 30, 1999, resulting in additional revenues and expenses for the nine
months ended September 30, 1999 that were not present in the corresponding
period of 1998.
REVENUES. Total revenues increased 106.2% from $6.0 million in the nine
months ended September 30, 1998 to $12.5 million in the corresponding period of
1999. Of this $6.5 million increase, $5.0 million was attributable to additional
revenues from acquisitions and the remaining $1.5 million was attributable to
internal growth. Recurring revenues increased 97.4% from $5.0 million in the
nine months ended September 30, 1998 to $10.0 million in the corresponding
period of 1999, while non-recurring revenues increased 151.8% from $1.0 million
in the nine months ended September 30, 1998 to $2.5 million in the corresponding
period of 1999.
SOFTWARE AND SYSTEMS. The software and systems component of total
revenues increased 122.0% from $2.6 million, or 42.9% of total revenues for
the nine months ended September 30, 1998 to $5.8 million, or 46.2% of total
revenues in the corresponding period of 1999. Software and systems revenues
consist of software licensing revenues and revenues from the sale of
computer hardware and supplies. Software licensing revenues were 38.9% and
45.6% and computer hardware and supply revenues were 61.1% and 54.4% of
total software and systems revenues for the nine months ended September 30,
1998 and 1999, respectively. The increase in software and systems revenues
was due to acquisitions and our internal growth.
Revenues from software licensing increased 159.9% from $1.0 million for
the nine months ended September 30, 1998 to $2.6 million for the same period
in 1999. Legacy product sales were 92.2% of software licensing revenues for
the nine months ended September 30, 1998 compared to 54.9% in the
corresponding period of 1999. New product sales were 7.8% of software
licensing revenues for the nine months ended September 30, 1998 compared to
45.1% in the corresponding period of 1999. The gross profit for software
licensing revenue increased 179.7% from $855,000 for the nine months ended
September 30, 1998 to $2,391,000 in the corresponding period of 1999.
Revenues from computer hardware and supplies increased 97.8% from
$1.6 million for the nine months ended September 30, 1998 to $3.1 million in
the corresponding period of 1999. The gross profit for computer hardware and
supplies revenues increased 144.9% from $310,000 for the nine months ended
September 30, 1998 to $759,000 in for the corresponding period of 1999.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. The customer support and
electronic services component of total revenues increased 94.3% from
$3.5 million, or 57.1% of total revenues in the nine months ended
September 30, 1998, to $6.7 million, or 53.8% of total revenues in the
corresponding period of 1999. Customer support and electronic services
revenues consists of customer support revenues and electronic services
revenue. Customer support revenues were 90.0% and 91.5% and electronic
services revenues were 10.0% and 8.5% of total customer support and
electronic services revenues for the nine months ended September 30, 1998
and 1999, respectively.
Revenues from customer support increased 97.7% from $3.1 million for the
nine months ended September 30, 1998 to $6.1 million in the corresponding
period of 1999. The gross profit for customer support revenues increased
110.7% from $918,000 for the nine months ended September 30, 1998 to
$1.9 million in the corresponding period of 1999.
Revenues from electronic services increased 64.1% from $345,000 for the
nine months ended September 30, 1998 to $567,000 in the corresponding period
of 1999. The gross profit for electronic services revenues increased 74.4%
from $179,000 for the nine months ended September 30, 1998 to $312,000 in
the corresponding period of 1999.
20
<PAGE>
COST OF REVENUES. Total cost of revenues increased 86.8% from $3.8 million
for the nine months ended September 30, 1998 to $7.1 million in the
corresponding period of 1999, but decreased as a percentage of total revenues
from 62.6% for the nine months ended September 30, 1998 to 56.7% in the
corresponding period of 1999.
SOFTWARE AND SYSTEMS. Software and systems costs include both software
licensing costs and computer hardware and supplies. Software and systems
costs increased 82.4% from $1.4 million or 23.6% of total revenues for the
nine months ended September 30, 1998 to $2.6 million, or 20.9% of total
revenues in the corresponding period of 1999. Software licensing costs were
10.8% and 8.9%, and computer hardware and supplies costs were 89.2% and
91.1% of total software systems costs for the nine months ended
September 30, 1998 and 1999, respectively.
Costs for software licensing increased 50.4% from $154,000, or 2.5% of
total revenues in the nine months ended September 30, 1998 to $231,000, or
1.9% of total revenues in the corresponding period of 1999. The decrease as
a percent of total revenues is due to a change in the mix of products and
services sold. The gross margin percentage for new products was 90.2% and
95.4% for the nine months ended September 30, 1998 and 1999, respectively.
The gross margin percentage for legacy products was 84.3% and 87.7% for the
nine months ended September 30, 1998 and 1999, respectively.
Costs for computer hardware and supplies increased 86.3% from
$1.3 million, or 21.1% of total revenues in the nine months ended
September 30, 1998 to $2.4 million, or 19.0% of total revenues in the
corresponding period of 1999. The decrease as a percent of total revenues is
due to a change in the mix of product and services sold. Gross margin
percentage for computer hardware and supplies increased from 19.6% for the
nine months ended September 30, 1998 to 24.2% in the corresponding period of
1999.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. Customer support and
electronic services costs increased 89.4% from $2.4 million, or 39.0% of
total revenues in the nine months ended September 30, 1998 to $4.5 million,
or 35.8% of total revenues in the corresponding period of 1999. Customer
support costs were 92.9% and 94.3%, and electronic services costs were 7.1%
and 5.7% of total customer support and electronic services costs for the
nine months ended September 30, 1998 and 1999, respectively.
Costs for customer support increased 92.3% from $2.2 million in the nine
months ended September 30, 1998 to $4.2 million in the corresponding period
of 1999. The customer support gross margin percentage increased from 29.6%
for the nine months ended September 30, 1998 to 31.5% in the corresponding
period of 1999, primarily due to acquisitions.
Costs for electronic services increased 53.1% from $166,000 in the nine
months ended September 30, 1998 to $254,500 in the corresponding period of
1999. The electronic services gross margin percentage increased from 51.9%
for the nine months ended September 30, 1998 to 55.1% in the corresponding
period of 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 110.5% from $3.0 million, or 48.8% of total revenues for the
nine months ended September 30, 1998, to $6.2 million, or 49.9% of total
revenues in the corresponding period of 1999. Of the $3.2 million increase,
selling expenses, corporate administration, and regional distribution channel
expenses increased approximately $700,000, $700,000, and $1.8 million,
respectively. This $1.8 million increase resulted from regional operating costs
directly related to our acquired distribution channel and the associated
increases in headcount and building of corporate staff and infrastructure.
PRODUCT DEVELOPMENT. Product development expenses increased from
$1.0 million, or 16.8% of total revenues for the nine months ended
September 30, 1998, to $2.8 million, or 22.5% of total revenues in the
corresponding period of 1999. The dollar and percentage increases were due
primarily to additional staffing and related costs necessary for development of
our new products.
21
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $976,000, or 16.2% of total revenues for the nine months ended
September 30, 1998, to $2.6 million, or 20.7% of total revenues in the
corresponding period of 1999. Of these amounts, amortization expenses were
$875,000 for the nine months ended September 30, 1998 and $2.0 million in the
corresponding period of 1999. At September 30, 1999, we had intangible assets
totaling $26.3 million with accumulated amortization of $3.6 million. The
weighted average life of these intangibles was 7.8 years.
INTEREST INCOME (EXPENSE), NET. Interest expense increased from $157,000, or
2.6% of total revenues for the nine months ended September 30, 1998 to $419,000,
or 3.4% of total revenues in the corresponding period of 1999. The percentage
and dollar increases primarily resulted from interest expense associated with
indebtedness incurred to complete our acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. A tax benefit of $218,000 was recorded
for the nine months ended September 30, 1998 compared to a tax benefit of
$3.3 million in the corresponding period of 1999. The tax benefit resulted from
net operating losses recognized to the extent of deferred tax liabilities
recorded in connection with purchased intangibles other than goodwill in
accordance with SFAS 109 "Accounting for Income Taxes."
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The increase in revenues and expenses from the year ended December 31, 1997
to December 31, 1998 was primarily the result of two factors. First, the five
companies we acquired in 1997 were accounted for on a purchase accounting basis
and were acquired at various times throughout the year, representing less than a
full year's revenues and expenses as compared to a full year in 1998. Second,
two of the eight companies acquired in 1998 were accounted for as pooling of
interests. The remaining 1998 acquisitions were accounted for on a purchase
accounting basis. Therefore, revenues from these companies acquired on a
purchase accounting basis represent revenues and expenses incremental to 1997.
REVENUES. Total revenues increased 78.6% from $5.2 million for the year
ended December 31, 1997 to $9.4 million in the corresponding period of 1998.
This increase resulted from acquisitions and internal growth. Recurring revenues
increased 74.1% from $4.3 million for the year ended December 31, 1997 to
$7.5 million in the corresponding period of 1998, while non-recurring revenues
increased 100.0% from $914,000 for the year ended December 31, 1997 to
$1.8 million in the corresponding period of 1998.
SOFTWARE AND SYSTEMS. The software and systems component of total
revenues increased 40.8% from $2.8 million, or 53.3% of total revenues for
the year ended December 31, 1997 to $3.9 million, or 42.1% of total revenues
in the corresponding period of 1998. Software licensing revenues were 31.5%
and 38.0% and computer hardware and supplies revenues were 68.5% and 62.0%
of total software and systems revenues for the year ended December 31, 1997
and 1998, respectively. This increase in revenues was due to change in
product mix between legacy and new products.
Revenues from software licensing increased 69.6% from $882,200 for the
year ended December 31, 1997, to $1.5 million in the corresponding period of
1998. Legacy products were 96.1% of software licensing revenues for the year
ended December 31, 1997 as compared to 85.8% in the corresponding period of
1998. New product sales were 3.9% of software licensing revenues for the
year ended December 31, 1997 as compared to 14.2% in the corresponding
period of 1998. The gross profit for software licensing revenue increased
65.5% from $802,000 for the year ended December 31, 1997 to $1.3 million in
the corresponding period of 1998.
Revenues from computer hardware and supplies increased 27.6% from
$1.9 million for the year ended December 31, 1997 to $2.4 million in the
corresponding period of 1998. The gross profit for computer hardware and
supplies revenues decreased 35.1% from $724,000 for the year ended
December 31, 1997 to $470,000 in the corresponding period of 1998.
22
<PAGE>
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. The customer support and
electronic services component of total revenues increased 121.8% from
$2.4 million, or 46.7% of total revenues for the year ended December 31,
1997 to $5.4 million, or 57.9% of total revenues in the corresponding period
of 1998. Customer support revenues were 91.8% and 89.7% and electronic
services revenues were 8.2% and 10.3% of total customer support and
electronic service revenues for the year ended December 31, 1997 and 1998,
respectively.
Revenues from customer support increased 116.8% from $2.2 million for
the year ended December 31, 1997, to $4.9 million in the corresponding
period of 1998. The gross profit for customer support revenues increased
33.4% from $1.1 million for the year ended December 31, 1997, to
$1.5 million in the corresponding period of 1998.
Revenues from electronic services increased 176.5% from $202,000 for the
year ended December 31, 1997, to $557,000 in the corresponding period of
1998. The gross profit for electronic services revenues increased 169.4%
from $117,000 for the year ended December 31, 1997, to $316,000 in the
corresponding period of 1998.
COST OF REVENUES. The total cost of revenues increased 132.4% from
$2.5 million, or 47.1% of total revenues for the year ended December 31, 1997,
to $5.8 million, or 61.4% of total revenues in the corresponding period of 1998.
This increase was primarily due to an acquisition providing a platform for
application service provider type services with historically lower margins than
our other products and services.
SOFTWARE AND SYSTEMS. Software and systems costs increased 68.5% from
$1.3 million, or 24.3% of total revenues for the year ended December 31,
1997 to $2.1 million, or 22.9% of total revenues in the corresponding period
of 1998. Software licensing costs were 6.3% and 7.9%, and computer hardware
and supplies costs were 93.7% and 92.1% of total software and systems costs
for the year ended December 31, 1997 and 1998, respectively.
Costs for software licensing increased 112.0% from $80,000, or 1.5% of
total revenues for the year ended December 31, 1997 to $170,000, or 1.8% of
total revenues in the corresponding period of 1998. Gross margin percentage
for new products was 87.5% and 95.1% for the year ended December 31, 1997
and 1998, respectively. Gross margin percentage for legacy products was
91.0% and 87.6% for the year ended December 31, 1997 and 1998, respectively.
Costs for computer hardware and supplies increased 65.6% from
$1.2 million, or 21.1% of total revenues for the year ended December 31,
1997 to $2.0 million, or 21.1% of total revenues in the corresponding period
of 1998. Gross margin percentage for computer hardware and supplies was
37.8% and 19.2% for the year ended December 31, 1997 and 1998, respectively.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. Customer support and
electronic services costs increased 200.5% from $1.2 million, or 22.9% of
total revenues for the year ended December 31, 1997 to $3.6 million, or
38.5% of total revenues in the corresponding period of 1998. Customer
support costs were 93.0% and 93.3%, and electronic services costs were 7.0%
and 6.7% of total customer support and electronic services costs for the
year ended December 31, 1997 and 1998, respectively.
Costs for customer support increased 201.5% from $1.1 million, or 21.3%
of total revenues for the year ended December 31, 1997 to $3.3 million, or
35.9% of total revenues in the corresponding period of 1998. The customer
support gross margin percentage decreased from 50.3% for the year ended
December 31, 1997 to 31.0% in the corresponding period of 1998 primarily due
to acquisitions.
23
<PAGE>
Costs for electronic services increased 186.4% from $84,000 or 1.6% of
total revenues for the year ended December 31, 1997 in 1997 to $242,000, or
2.6% of total revenues in the corresponding period of 1998. The electronic
services gross margin percentage decreased from 58.1% for the year ended
December 31, 1997 to 56.7% in the corresponding period of 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $2.6 million, or 48.9% of total revenues for the year
ended December 31, 1997 to $4.7 million, or 50.2% of total revenues in the
corresponding period of 1998. Of this $2.1 million increase, selling expenses,
corporate administration, and regional distribution channel expenses increased
approximately $1.0 million, $500,000, and $600,000, respectively. Increased
selling expenses included approximately $500,000 of additional marketing
expense, increased corporate infrastructure to manage the rapid rate of growth
and increased regional operating expenses from acquisitions.
PRODUCT DEVELOPMENT. Product development expenses increased from $441,000,
or 8.4% of total revenues for the year ended December 31, 1997 to $1.5 million,
or 16.0% of total revenues, in the corresponding period of 1998. This increase
was due to the additional staffing and related expenses to develop new products
and enhancement of existing products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $376,000, or 7.2% of total revenues for the year ended December
31, 1997, to $1.5 million, or 15.7% of total revenues in the corresponding
period of 1998. Of these amounts, amortization expenses were $292,000 for the
year ended December 31, 1997 and $1.3 million in the corresponding period of
1998. At December 31, 1998, we had intangible assets totaling $8.9 million with
accumulated amortization of $1.6 million. The weighted average life of these
intangibles was 7.5 years.
INTEREST INCOME (EXPENSE), NET. Interest expense increased from $20,000, or
0.4% of total revenues for the year ended December 31, 1997 to $207,000, or 2.2%
of total revenues in the corresponding period of 1998. The increase primarily
reflects increases in interest expense associated with indebtedness incurred to
complete our acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. We realized an income tax benefit of
$195,000 for the year ended December 31, 1997 compared to an income tax benefit
of $343,000 in the corresponding period of 1998. This increase resulted from an
increase in our operating loss before income taxes between 1997 and 1998.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Nearly all revenues and expenses in 1996 were attributable to two business
combinations completed in 1998 that were accounted for as pooling of interests.
In 1997, revenues and expenses were comprised of these two entities along with
another five companies acquired using purchase accounting. Also in 1997, we
focused on selling our higher margin software products, placing less emphasis on
computer hardware and service sales.
REVENUES. Total revenues increased 33.5% from $3.9 million for the year
ended December 31, 1996 to $5.2 million in the corresponding period of 1997. The
entire $1.3 million increase in revenues resulted from companies acquired in
1997. Recurring revenues increased 32.1% from $3.3 million for the year ended
December 31, 1996 to $4.3 million in the corresponding period of 1997, while
non-recurring revenues increased 40.6% from $650,000 for the year ended
December 31, 1996 to $914,000 in the corresponding period of 1997.
SOFTWARE AND SYSTEMS. The software and systems component of total
revenues increased 36.2% from $2.1 million for the year ended December 31,
to $2.8 million in the corresponding period of 1997. Software licensing
revenues were 19.2% and 31.5% and computer hardware and supplies revenues
were 80.8% and 68.5% of software and systems revenues for the year ended
24
<PAGE>
December 31, 1996 and 1997, respectively. The increase in revenues was due
to the variation in mix resulting from both changes in the existing base of
business and from acquisitions.
Revenues from software licensing increased 123.7% from $394,000 for the
year ended December 31, 1996, to $882,000 in the corresponding period of
1997. Legacy products were 100% of software licensing revenues for the year
ended December 31, 1996 compared to 96.1% in the corresponding period of
1997. Software revenues did not include any new product sales for the year
ended December 31, 1996, compared to 3.9% in the corresponding period of
1997. The gross profit for software licensing revenues increased 129.9% from
$349,000 for the year ended December 31, 1996 to $802,000 in corresponding
period of 1997.
Revenues for computer hardware and supplies increased 15.4% from
$1.7 million for the year ended December 31, 1996 to $1.9 million in the
corresponding period of 1997. The gross profit for computer hardware and
supplies revenues increased 37.7% from $526,000 for the year ended
December 31, 1996 to $724,000 in the corresponding period of 1997. This
increase is due to acquisitions and our internal growth.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. The customer support and
electronic services component of total revenues increased 30.7% from
$1.9 million for the year ended December 31, 1996 to $2.4 million in the
corresponding period of 1997. Customer support revenues were 93.7% and 91.8%
and electronic services revenues were 6.3% and 8.2% of total customer
support and electronic services revenues for the year ended December 31,
1996 and 1997, respectively.
Revenues from customer support increased 28.0% from $1.8 million for the
year ended December 31, 1996, to $2.2 million in the corresponding period of
1997. The gross profit for customer support increased 34.6% from $841,000
for the year ended December 31, 1996, to $1.1 million in the corresponding
period of 1997.
Revenues from electronic services increased 70.7% from $118,000 for the
year ended December 31, 1996, to $202,000 in the corresponding period of
1997. The gross profit for electronic services increased 120.5% from $53,000
for the year ended December 31, 1996, to $117,000 in the corresponding
period of 1997.
COST OF REVENUES. The total cost of revenues increased 14.4% from
$2.2 million, or 55.0% of total revenues for the year ended December 31, 1996,
to $2.5 million, or 47.1% of total revenues in the corresponding period of 1997,
primarily due to acquisitions.
SOFTWARE AND SYSTEMS. Software and systems costs increased 7.9% from
$1.2 million, or 30.1% of total revenues for the year ended December 31,
1996 to $1.3 million, or 24.3% of total revenues in the corresponding period
of 1997. Software licensing costs were 3.8% and 6.3%, and computer hardware
and supplies costs were 96.2% and 93.7% of total software and systems costs
for the year ended December 31, 1996 and 1997, respectively.
Costs for software licensing increased 76.7% from $45,000 or 1.2% of
total revenues for the year ended December 31, 1996 to $80,000 or 1.5% of
total revenues in the corresponding period of 1997. Gross margin percentage
for new products was 87.5% for the year ended December 31, 1997. No new
products were sold in 1996. Gross margin percentage for legacy products was
88.5% and 91.0% for the year ended December 31, 1996 and 1997, respectively.
Costs for computer hardware and supplies increased 5.1% from
$1.1 million, or 28.9% of total revenues for the year ended December 31,
1996 to $1.2 million, or 22.7% of total revenues in the corresponding period
of 1997. Gross margin percentage for computer hardware and supplies was
31.7% and 37.8% for the year ended December 31, 1996 and 1997, respectively.
CUSTOMER SUPPORT AND ELECTRONIC SERVICES. Customer support and
electronic services costs increased 22.3% from $981,000, or 25.0% of total
revenues for the year ended December 31, 1996 to $1.2 million, or 22.9% of
total revenues in the corresponding period of 1997. Customer support
25
<PAGE>
costs were 93.4% and 93.0%, and electronic services costs were 6.6% and 7.0%
of total customer support and electronic services costs for the year ended
December 31, 1996 and 1997, respectively.
Costs for customer support increased 21.8% from $917,000, or 23.3% of
total revenues for the year ended December 31, 1996 to $1.1 million or 21.3%
of total revenues in the corresponding period of 1997. The customer support
gross margin percentage increased from 47.8% for the year ended December 31,
1996 to 50.3% in the corresponding period of 1997 primarily due to
acquisitions.
Costs for electronic services increased 29.9% from $65,000 or 1.7% of
total revenues for the year ended December 31, 1996 to $84,000 or 1.6% of
total revenues in the corresponding period of 1997. The electronic services
gross margin percentage increased from 45.0% for the year ended December 31,
1996 to 58.1% in the corresponding period of 1997.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general, and administrative
expenses increased from $1.2 million, or 30.8% of total revenues, for the year
ended December 31, 1996 to $2.6 million, or 48.9% of total revenues in the
corresponding period of 1997. Of the $1.4 million increase, selling expenses,
corporate administration, and regional distribution channel expenses increased
approximately $300,000, $600,000, and $500,000, respectively. The increases
resulted from acquisitions and the costs associated with executing our plan for
growth.
PRODUCT DEVELOPMENT. Product development expenses increased from $287,000,
or 7.3% of total revenues for the year ended December 31, 1996, to $441,000, or
8.4% of total revenues in the corresponding period of 1997. The increase was due
to a focus on our new product offerings released in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $141,000, or 3.6% of total revenues for the year ended December
31, 1996 to $376,000, or 7.2% of total revenues in the corresponding period of
1997. Of these amounts, amortization expenses were zero for the year ended
December 31, 1996 and $292,000 in the corresponding period of 1997. The dollar
and percentage increases were due substantially to the additional non-cash
amortization of intangible assets purchased in connection with our acquisitions.
At December 31, 1997, we had intangible assets totaling $3.8 million with
accumulated amortization of $291,000.
INTEREST INCOME (EXPENSE), NET. Interest income (expense) changed from
$16,000 of income, or 0.4% of total revenues for the year ended December 31,
1996 to $20,000 of expense, or 0.4% of total revenues in the corresponding
period of 1997. The change in interest income (expense) was due to the
indebtedness incurred to finance our operations, as well as to complete our
acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. An income tax provision of $64,000
was recorded for the year ended December 31, 1996, compared to a tax benefit of
$195,000 in the corresponding period of 1997. The tax benefit for the year ended
December 31, 1997 was recognized in connection with the pre-tax operating loss.
LIQUIDITY AND CAPITAL RESOURCES
Since 1996, we have financed our operations primarily through a combination
of indebtedness, capital leases and equity financings. Approximately 84.1% of
the consideration paid for our acquisitions was paid with our stock. The balance
of the consideration was promissory notes and cash.
In October 1999, we borrowed $3.0 million from Friedli Corporate Finance, an
entity related to one of our Directors. For a description of the terms of this
borrowing, please see "Certain Transactions and Relationships."
At September 30, 1999, we had $1.2 million of cash and cash equivalents. At
September 30, 1999, we had $408,000 in capital leases primarily for computers
and office equipment, most of which we assumed in connection with acquisitions.
In addition, we had $3.6 million in promissory notes
26
<PAGE>
outstanding at September 30, 1999. Of this amount, $3.0 million was assumed debt
or promissory notes issued in connection with acquisitions, and $300,000 was a
loan from an individual convertible into 40,000 shares of common stock at the
election of the holder. Interest rates on the promissory notes range from
non-interest bearing to 15%. Future minimum principal payments under debt and
lease obligations (capital and operating) for the balance of 1999, 2000, 2001
and 2002 are $556,000, $1.7 million, $642,000 and $522,000 respectively.
Approximately $2.0 million of debt will be paid off with proceeds from this
offering. The remaining debt will remain outstanding due to its favorable terms,
including interest rates. Minimum principal payments after this offering are
expected to be $939,000, $550,000, $428,000 and $391,000 respectively for 2000
through 2003.
We have operated with negative working capital and with negative cash flow
primarily due to acquisition expenses, prior debt incurred by acquired companies
and the costs of building infrastructure and product development activities. For
the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1999, net cash used for operating activities was $611,000,
$298,000 and $6.6 million, respectively. The net cash used for operating
activities was funded by $7.6 million of investment capital and net cash of $4.1
million received from businesses acquired. This offering will eliminate our
negative working capital position, however, the negative cash flow from
operations is expected to continue until cross-selling of new products and
add-on services to our existing customer base produces positive cash flow.
Net cash used for investing activities for the years ended December 31, 1997
and 1998 was $499,000 and $1.4 million, respectively. Net cash provided by
investing activities for the nine months ended September 30, 1999 was
$3.9 million. During this 33-month period, approximately $520,000 was paid for
computers and office equipment used in our regional offices, $1.5 million was
invested in software for claims processing and $4.1 million was net cash
received from businesses acquired. During 1997, net cash paid for acquired
businesses was $378,000 compared to net cash received from acquired businesses
of $270,000 in 1998 and $4.2 million for the nine months ended September 30,
1999.
During 1997, net cash provided by financing activities was $1.3 million. A
small group of investors purchased $414,000 of common stock, and one investor
purchased 413,018 shares of Series A preferred stock for $1.2 million and
provided a $500,000 line of credit. The Series A preferred stock, subsequently
rolled into the Series A-1 preferred stock, is convertible into common stock on
the closing of this offering. We issued $41,000 in long-term debt and made
payments of $290,000 on long-term debt, which was primarily incurred in
connection with the six acquisitions completed in 1997. Also, one of the pooled
companies distributed $32,000 to its shareholders.
During 1998, net cash provided by financing activities was $1.4 million.
This consisted of $588,000 in proceeds from the issuance of common stock to four
investors, the issuance of $1.3 million in long-term debt and $433,000 for
payments of long-term debt. Substantially all of the $1.3 million in new debt
came from five private lenders, four of which are significant stockholders.
For the nine months ended September 30, 1999, net cash provided by financing
activities was $3.5 million. This consisted of $633,000 in proceeds from
issuance of common stock, $374,000 in issuance of long-term debt and
$3.0 million in proceeds from issuance of preferred stock to a previous
investor. This $3.0 million of additional investment was combined with a
previous investment of $1.2 million and the conversion of a $500,000 fully drawn
line of credit into the Series A-1 preferred stock convertible into common stock
on the closing of this offering. Payment of long-term debt totaled $551,000.
We believe that the net proceeds from this offering, together with other
available funds, will be sufficient to meet our capital requirements for the
next 12 months. We expect to finance any acquisitions through a combination of
the net proceeds from this offering, internally generated funds, if any,
additional debt or equity financing.
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<PAGE>
YEAR 2000
Our Windows-based, Internet-enabled products and most of our acquired legacy
systems are Year 2000 complaint. We have identified three of our practice
management legacy systems currently in operation that potentially have Year 2000
problems. These three products are being discontinued and in most instances have
been replaced with Year 2000 compliant software. Certain customers, however,
have not responded to notifications we have sent to inform them of the potential
impact to their systems. These customers have been informed that third party
software and/or computer hardware products may have potential Year 2000 problems
that may require upgrades and/or replacements. Such customers may not upgrade
their systems.
Our internal information systems including accounting, customer support and
tracking, reporting and communications utilize computer hardware and software
from several commercial suppliers. We have investigated the internal information
systems for Year 2000 compliance and have not identified any computer hardware
or software applications that require further modification. To date, we have not
incurred any material expenses associated with our efforts to become Year 2000
compliant and do not anticipate that any future costs associated with our Year
2000 remediation efforts will be material.
We have relationships with and to varying degrees are dependent on a large
number of third parties that supply information, goods and services to us. Our
business, results of operations and financial condition could be materially
adversely effected if any of the third parties with whom we have relationships
were to experience significant Year 2000 related problems. We have communicated
with our significant suppliers to evaluate their Year 2000 compliance plans and
states of readiness and to determine the extent to which our systems may be
affected by the failure of others to resolve their own Year 2000 issues.
However, we have not independently confirmed all information received from other
parties with respect to Year 2000 issues. Such other parties may not complete
their Year 2000 conversion in a timely fashion and may suffer Year 2000 business
disruptions.
The risk to us from Year 2000 problems exists primarily in three areas:
- potential warranty or other claims from our customers, which may result in
significant expense to us;
- failures of systems we use to run our business, which could disrupt our
business operations; and
- the potential for failures of our products due to Year 2000 problems
associated with products developed by other vendors and used in
conjunction with our products, which may require that we incur significant
unexpected expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities," issued in April 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 will be
effective for the Company's fiscal year ending December 31, 1999. The adoption
of SOP 98-5 is not expected to have a material impact on the Company's financial
statements.
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities," will be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires
companies to value derivative financial instruments, including those used for
hedging foreign currency exposures, at current market value with the impact of
any change in market value being charged against earnings in each period. This
statement is not expected to affect the Company as it currently does not engage
or plan to engage in derivative instruments or hedging activities.
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BUSINESS
THE COMPANY
VantageMed is a leading national provider of healthcare information systems
and services distributed to over 10,000 customer sites through a network of 15
regional offices. Our suite of software products and services automates
administrative, financial, clinical and management functions for physicians,
dentists, other healthcare providers and provider organizations. Because our
software manages the patient data necessary to efficiently integrate
Internet-based solutions with the functions processed by our systems, we are
uniquely positioned to manage our customers' migration to Internet-enabled
products and services. With the addition of the Internet capabilities of our new
and enhanced Windows-based products, we will increase our customers' access to
information and their ability to communicate with numerous healthcare
participants such as their patients, providers, payers, managed care
organizations, pharmacies, and other ancillary service providers.
As of October 31, 1999, we have acquired 27 healthcare information systems
companies. We plan to strengthen our market position through the continued
acquisition of established healthcare information systems companies. For the
nine months ended September 30, 1999, 80.3% of our revenues were recurring,
which we define as any revenues derived from an existing or acquired customer
after the initial installation of the product, including revenues from sales of
new products to existing customers. To increase recurring revenues, we are
expanding our service offerings and migrating existing customers to our
Windows-based, Internet-enabled products and services.
Our installed customer base, software products and services, and Internet
strategy have positioned us to address the information needs of healthcare
providers through the development of an integrated technology solution.
INDUSTRY BACKGROUND
The healthcare industry is burdened with growing economic pressures,
inefficient communications and a lack of consistency among healthcare
information systems. Healthcare is further complicated by the need to manage
numerous relationships among healthcare participants and the information
requirements of managed care and other payers.
The Health Care Financing Administration estimates that healthcare
expenditures currently represent $1.2 trillion, or 14% of the U.S. economy.
Furthermore, these expenditures are expected to almost double to $2.2 trillion
by 2008 due to both rising healthcare costs and an aging population.
Inefficient, paper-intensive administrative processes are contributing to the
nation's escalating healthcare costs. This market dynamic has driven managed
care organizations and other payers to carefully evaluate cost saving measures.
For example, some payers are beginning to require healthcare providers to submit
reimbursement claims electronically. Manual claims require more time and are
significantly more expensive to prepare, file and process than electronically
submitted claims.
According to Faulkner & Gray, while the percentage of health claims
processed electronically rose nearly 9% in 1999, 57% of all claims submitted by
physicians are still processed manually. This implies significant market upside
for electronic healthcare transaction services. Overall, Sheldon Dorenfest and
Associates projects that healthcare information technology expenditures will
grow from $13.6 billion in 1997 to $21.0 billion by 2000, a compound annual
growth rate of 15.6%.
The following are several key factors affecting the market for healthcare
information systems:
MANAGED CARE. To control rising costs, the U.S. healthcare industry has
shifted away from traditional fee-for-service indemnity plans to various types
of managed care plans. This shift to managed care plans has increased economic
pressure to contain costs and has shifted much of the financial risk of
delivering healthcare from traditional insurance companies and other third-party
payers
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to healthcare providers. Many healthcare providers have entered into contracts
with payers that involve complex reimbursement arrangements, resulting in
additional administrative tasks and an increase in the amount of information
exchanged. In order to succeed in this changing environment, healthcare
providers must operate their businesses more efficiently by streamlining the
flow and management of information, reducing operating costs, and improving cash
flow.
MARKET FRAGMENTATION. Both the healthcare information systems industry and
the market it serves are highly fragmented. Approximately 70% of doctors in the
U.S. practice in groups of fewer than 26 individuals. There are over 500
geographically dispersed healthcare information systems vendors serving
healthcare providers throughout the U.S., primarily on a regional basis. Over
the past decade, these companies have introduced and sold a number of software
products to the healthcare market. Most of these products have focused on
solving the basic back-office requirements of healthcare providers. However,
many have not adequately kept pace with the rapidly changing economics of the
healthcare market and have limited functionality and integration capabilities.
DEPENDENCE ON EXISTING VENDOR RELATIONSHIPS. Our experience has
demonstrated that the economic pressures and demands of patient care limit the
ability of healthcare providers to experiment with and evaluate new information
systems. As a result, healthcare providers depend upon accessible, proven and
reliable suppliers of healthcare information systems.
NEED TO UPDATE TECHNOLOGY. The healthcare industry's current technology
infrastructure is characterized by numerous, incompatible and, in many cases,
outdated legacy systems. Many healthcare participants communicate via paper,
fax, and telephone, often resulting in errors and delays. We believe that these
inefficiencies lead to wasteful spending and have contributed to the rising cost
of healthcare.
THE VANTAGEMED SOLUTION
We offer integrated Windows-based, Internet-enabled healthcare information
systems that reduce the impact of growing economic pressures, administrative
burdens and increased information requirements now faced by healthcare providers
and physician organizations. Our products enable our customers to access and
process information more efficiently and reliably, reduce staff time, and more
effectively meet the challenges of healthcare cost containment. With our
established distribution network, we are well-positioned to take advantage of
the opportunities that result from the increasingly complex needs of the
healthcare industry.
Our objective is to expand our market share and increase our recurring
revenues in order to strengthen our position as one of the leading suppliers of
information systems and services to healthcare providers. We intend to increase
our revenues and market share through growth strategies that focus on:
- OFFERING WINDOWS-BASED, INTERNET-ENABLED PRODUCTS AND SERVICES. These
products and services are scalable in price and performance and will
enable our customers to meet the complex demands of the healthcare market
and to access and manage critical information more efficiently.
- OFFERING PRODUCT MIGRATION ALTERNATIVES. We enable our current and future
customers to move from their existing legacy technology products to our
Windows-based, Internet-enabled products and services.
- STRENGTHENING OUR NATIONAL DISTRIBUTION NETWORK. Through the continued
acquisition of established healthcare information systems companies in
regional markets where we can gain critical mass, we are expanding our
customer base and broadening our market reach.
- CROSS-SELLING OUR PRODUCTS AND SERVICES TO EXISTING CUSTOMERS AND PURSUING
NEW CUSTOMERS. With over 10,000 customer sites, we have the ability to
generate significant growth by cross-selling additional products and
services, including ongoing maintenance support and electronic
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transaction services, to our installed customer base. These services are
important sources of recurring revenues. We believe that our strong
relationships with our customers position us to be the vendor of choice
within our client base and to obtain access to new customers through
referrals.
- FORMING STRATEGIC INTERNET PARTNERSHIPS. By leveraging the systems
capabilities of our Internet-enabled products, we intend to provide the
primary interface to the Internet for our customers. We are developing
partnerships with leading Internet participants to provide a full range of
services for clinical, administrative and electronic commerce functions.
PRINCIPAL PRODUCTS
We classify our software products as either "Windows-based" or "legacy." Our
Windows-based products are the primary products currently offered to our new
customers and are the focus of our on-going product development efforts. Our
suite of Windows-based products includes Ridgemark, eMCee, eMCee Connect,
ChartKeeper, Therapist Helper and DentalMate. With the exception of DentalMate
and ChartKeeper, each of these products is Internet-enabled. Our Windows-based
products provide our customers with software designed to automate
administrative, financial, clinical and other practice management and managed
care functions. These products offer advanced functionality and are compatible
with the latest generation of operating systems and hardware platforms. These
products are scalable in size and can accommodate from one to hundreds of
healthcare providers and users.
As a result of our acquisitions, we support a number of legacy systems.
These systems operate on variations of UNIX or DOS-based platforms and generally
lack the most advanced features of our Windows-based products. We currently have
30 legacy products. Although we do not actively market our legacy products,
these systems provide on-going revenues derived from support services, software
and hardware upgrades, electronic transaction services and new system sales.
Approximately 59% of our customer sites use our Windows-based products, while
approximately 41% use one or more of our legacy products. We are in the process
of migrating customers from the legacy systems to our Windows-based products and
believe this represents a significant sales and marketing opportunity.
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We have designed our products to enable our customers to easily transition
from their legacy systems to Windows-based products and services. The features,
functions and targeted customers of our Windows-based products and services are
described below.
<TABLE>
<CAPTION>
- --------------------- INTERNET- TYPE OF PRACTICE OR ORGANIZATION
PRODUCTS AND SERVICES ENABLED FEATURES AND FUNCTIONS PRIMARY CUSTOMER
<S> <C> <C> <C>
Ridgemark Yes Scheduling, billing, patient Primary and specialty
registration, electronic claims, medical practices.
reporting.
eMCee Yes Member tracking, patient Managed healthcare
eligibility and authorizations, organizations and physician
referral tracking, claims associations contracted with
adjudication, utilization third-party payers,
review, risk and contracting traditionally referred to as
analysis. Management Services
Organizations (MSOs),
Independent Physician
Associations (IPAs) and
Physician Hospital
Organizations (PHOs).
eMCee Connect Yes Internet access to member MSOs, IPAs and PHOs.
demographics, patient
eligibility and referrals,
authorization and claim payment
status.
ChartKeeper Under Electronic storage and tracking Medium to large medical
development of patient charts, transcription groups.
notes, document imaging,
security and authentication and
electronic chart distribution.
Therapist Helper Yes Patient registration, Psychologists and behavioral
scheduling, billing, managed health practitioners.
care tracking, electronic claims
and reporting. Palm
Pilot-enabled.
DentalMate Under Scheduling, billing, General dental practices.
development registration, electronic claims,
charting, digital camera and
x-ray.
</TABLE>
The Internet is emerging as a means of delivering management information
services to customers from an off-site computer operation center, known as an
Application Service Provider, or ASP. Although our products are primarily
installed at customer sites, we intend to offer our products and services
through an ASP. Customers will be able to use our ASP for all or a portion of
their information technology and related business service needs. Our ASP
alternative will expand the type of information services we can offer our
customers. Our experience in providing an ASP alternative over private
communications networks with our on-line service businesses, combined with the
capabilities of our Windows-based products, will enable us to quickly capitalize
on this opportunity.
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OUR INTERNET STRATEGY
We believe that most of the clinical and financial problems facing
healthcare providers require solutions that integrate Internet functionality
with software systems that support the management of healthcare practices. Our
Internet strategy is to provide a full range of Windows-based, Internet-enabled
products and services that reduce inefficiencies and expand the quality and
scope of information exchanged between healthcare participants. This strategy is
designed to:
- link information systems in medical offices with payer and other
healthcare management organizations to improve the flow of information;
- provide integrated Internet access for healthcare providers through our
suite of software products;
- enhance the value of information collected and managed by our customers;
- expand access to our information systems through our Application Service
Provider;
- allow healthcare providers to deliver information and services to patients
over the Internet; and
- facilitate electronic commerce for both commercial and consumer use within
the healthcare delivery system.
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As described in the following table, many clinical and administrative
functions are poorly automated and require manual processing. The following
table describes the Internet opportunities we are pursuing which will enable
healthcare providers to communicate interactively with their patients and
related healthcare entities through the Internet.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
<CAPTION>
- --------------------- CURRENT DELIVERY SERVICE PROBLEMS INTERNET STRATEGY VALUE-ADDED
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
CLINICAL FUNCTIONS
Prescription Ordering Paper and telephone Time consuming, E-mail or access Access to patient
accuracy, patient pharmacy order system education site and
satisfaction, drug improved accuracy
interaction
Patient Chart Handheld recorder Time consuming, labor Browser-based Wireless hand-held
Dictation with transcriber intensive recorder with browser
internet
transcription service
Laboratory Orders and Paper, fax or printer Time consuming, Access laboratory and Patient and hospital
Results errors, misplaced store data on patient system Internet
documents chart system access
Patient Education Paper Accuracy, manual Internet search and Query system database
storages, maintenance health-related web to identify patients
sites by disease,
prescriptions,
demographics, etc.
Doctor On-Call Telephone or paper Lack of familiarity Remote access to Access from hand-held
with patient patient chart or portable devices
- -----------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE FUNCTIONS
Patient Appointment Telephone or none Time consuming, Send e-mail to Attach patient
Reminder missed appointments patients through the education or visit
scheduling system as instructions and
a reminder of future forms; patient
appointments directed access to
the scheduler
Patient Billing and Mail Time consuming, Send e-mail with Enable consumer
Statements potential errors, billing statements to payment of
cash management patients from the outstanding bills via
delays billing system credit card
acceptance
Billing to Insurance Telephone, electronic Time consuming, data Access electronic Provide patient and
Companies or paper errors, patient claims clearinghouse; doctor access to
eligibility and access benefit claim status
benefits not verified systems to determine
benefit status
Insurance Remittance Check or paper Delays in payment and Receive electronic Electronically
Advice time consuming to file and post to receive and post
post payments accounts receivable funds
system
Verification of Telephone Ineligible patients Access benefit plans Verify through the
Patient Eligibility scheduled and before patient visit Internet at time of
and Benefits services are rendered appointment
without knowing
benefits
Authorization of Telephone, fax or Delays in patient Electronically send Automatic approval of
Additional Medical mail care, time consuming and receive standard
Services authorizations authorization
requests
- -----------------------------------------------------------------------------------------------------------------
ELECTRONIC COMMERCE AND OTHER FUNCTIONS
Prescription Refill Paper or telephone Time consuming, E-mail or access Access to patient
accuracy, and drug pharmacy order system education site
interaction
Medical Supplies Telephone or fax Time consuming, Access supplier Web Search for low cost
Ordering costly sites to order products, volume
supplies purchasing
opportunities
Office Supplies and Telephone or fax Time consuming and Access supplier web Search for low cost
Services costly sites to order products and volume
supplies purchases
</TABLE>
34
<PAGE>
To build customer and patient confidence, we are developing a secure
Internet portal to provide confidentiality for information transferred between
the healthcare provider, the patient and related healthcare participants.
Through a log-on procedure, our secure portal will enable us to verify access
while introducing the user to other health-related sites ranging from
prescription ordering to patient education sources through the Internet.
The following diagram shows connections between our products and services
and our secure portal and also shows potential connections to external
Internet-based services. The top oval shows our Windows-based software products,
each of which contain, or will contain, Internet functions which could be
utilized through our secure portal. The middle oval shows services we are
currently able to provide through the Internet. The lower oval shows potential
connections to external Internet-based services which we hope to offer access to
in the future.
[INTERNET PORTAL DIAGRAM]
The entire graphic is in black ink. At the left center of the graphic is a
circle overlaid with a picture of a computer server. To the left of this circle
is the caption, 'VantageMed Secure Internet Portal.' Lines emanating out from
the center circle link to three ellipses, arranged around the center circle.
The top ellipse contains graphics of five computer monitors curving around
the inside top of the ellipse. Each monitor is connected to the center circle by
a line. From left to right, these monitors contain the following captions:
'Ridgemark Medical Practice,' 'DentalMate Practice,' 'Therapist Helper
Practice,' eMCee Managed Care,' and 'ChartKeeper Electronic Charting.' Beneath
these five monitors is the caption, 'Our Software Systems.
The center ellipse is positioned to the right of the circle and contains
four graphics which curve around the inner right side of the ellipse. Each of
these graphics is connected to the center circle by a line. The graphics and
their captions are as follows: (i) a graphic of a woman at a computer terminal
talking on the telephone with the caption, 'Software Support'; (ii) a graphic of
a document with a lightening bolt behind it and the caption, 'Electronic
Authorizations, Referrals, Claims, and Statements'; (iii) a graphic of a man
holding a personal digital assistant with the caption, 'Individual Provider Web
Sites'; and (iv) a graphic of three men working with a computer and the caption,
'Application Service Provider.' In the center left portion of the ellipse is the
caption, 'Our Internet Services.'
The bottom ellipse contains seven graphics, which curve around the inside
edge of the ellipse. Each of these graphics is connected to the center circle by
a line. The graphics and their captions are as follows: (i) a graphic of a nurse
administering to a patient in a hospital bed with the caption, 'Hospitals and
Ancillary Facilities'; (ii) a graphic of a man talking on a telephone with the
caption, 'Provider Remote Access'; (iii) a graphic of a wheelchair with the
caption, 'Medical Supplies and Equipment'; (iv) a graphic of a pharmacist with
the caption, 'Pharmacies'; (v) a graphic of a physician and a medical chart with
the caption, 'Healthcare Information and Education'; (vi) a graphic of a man
talking on a telephone with the caption, 'Transcription Services'; and (vii) a
graphic of a woman and children working with a computer with the caption,
'Patient Home Access.' In the center of the ellipse is the caption, 'Potential
Internet Connections.'
35
<PAGE>
ELECTRONIC SERVICES
Our products enable electronic data interchange, or EDI functions. EDI can
improve a healthcare practice's cash flow by enabling more cost-efficient
processing of patient statements, accurate and timely submission of claims to
third-party payers, and more rapid receipt of payer reimbursements. Our EDI
services currently include the following:
ELECTRONIC CLAIMS SUBMISSION. Electronically submits insurance claims from
practices to payers, either directly or through an independent national
clearinghouse.
ELECTRONIC PATIENT BILLING. Electronically submits patient billing
information from practices by dial-up modem to either our printing center or
to an independent national clearinghouse which processes, prints and mails
invoices and provides billing reports to the practice.
ELECTRONIC PAYMENT REMITTANCE. Electronically remits insurance payments and
automatically posts explanation of benefits into the practice management
system.
PATIENT INSURANCE VERIFICATION. Electronically accesses insurance and
managed care plans to determine a patient's eligibility and benefits.
We generate revenues by providing these electronic services on a per
transaction or flat monthly fee basis. With the implementation of our central
claims clearinghouse service, we have added nearly 400 customers in less than
one year who submit claims on a recurring basis and are charged transaction
and/or flat fees for these electronic services. We have started to convert our
customers to our internal clearinghouse service to improve the quality of
information, increase the level of customer service, and generate additional
revenues. We offer additional EDI services such as eligibility verification,
referral authorization, and claims status services through our Internet-enabled
product eMCee Connect.
SUPPORT SERVICES
We believe that customer satisfaction with support and services is critical
to our on-going success. The scope of our support services includes software and
hardware installation, training, software maintenance, data conversion, network
support and hardware maintenance. To achieve a higher level of customer
satisfaction, many of these services are performed at the customer's site. Our
technical service is organized by regional office, product, and practice
specialty. In addition to providing on-site training for certain of our product
lines, we maintain classroom-based training facilities in 10 locations
throughout the U.S. We publish periodic newsletters and sponsor user group
conferences. These forums provide the user with current information and provide
us with an opportunity to demonstrate new products.
We provide our customers with on-going software support and services under
monthly and annual agreements that typically have automatically renewable terms.
These agreements provide for help desk support, software maintenance, and remote
diagnostics. We plan to provide customer support and services through a wide
area voice and data network which enables automated call distribution of
customer calls from any location to the appropriate support person. As of
October 31, 1999, our customer service and support groups consisted of 196
employees, representing approximately 50% of our total employee base.
HARDWARE AND SUPPLIES
In many cases, the sale of our software products is combined with the sale
of hardware systems and installation services. In addition, because many medical
practices require additional hardware as their practices grow, we sell computers
and other peripherals as part of our product offerings. We typically receive
installation and on-going maintenance revenues as a result of these hardware
sales.
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<PAGE>
PRODUCT DEVELOPMENT
As of October 31, 1999, our product development organization consisted of 82
employees. We focus our product development efforts on improving the
functionality and performance of our core products and on developing new
products that operate on a common architecture. This common architecture, based
upon the latest Microsoft tools, gives our products the capability to
simultaneously operate on different systems such as standard desktop computers
or less sophisticated and lower cost workstations using standard Internet
browsers.
Our development teams are organized by product. Each product team has a
product manager, a project manager and various developers. Our quality assurance
and testing teams follow established guidelines in all phases of development.
Subject matter experts and analysts contribute to work flow design, content and
business rule development. A formalized process for software enhancement
requests provides feedback from end users and our sales teams. Project
management tools, project scheduling and distribution of technical and training
notes are managed through our corporate intranet.
SALES AND MARKETING STRATEGY
Although we are a national company, we manage our sales and marketing
efforts to serve our customers on both a regional and national basis. This
allows us to meet the unique needs and expectations of each customer. Organized
by specialty practice area and product line, the members of our sales force
focus on maintaining strong customer relationships within regional markets to
build recurring revenues. Within our existing customer base, we promote and sell
system upgrades, maintenance services, add-on software modules and electronic
data interchange services. Our sales force focuses on cross-selling to existing
customers as well as attracting new customers.
As a result of our acquisition strategy, we have acquired a number of
qualified sales personnel with strong experience and customer relationships in
the regions they serve. As of October 31, 1999, we had 47 sales and marketing
personnel, including national sales managers, regional sales specialists and
direct sales representatives.
ACQUISITION INTEGRATION
Our infrastructure has been designed to support the acquisition and
integration of targeted businesses. An acquisition team, which includes key
members of our management and technical staff, identifies acquisition targets,
performs due diligence investigations and negotiates the terms of each
acquisition. An integration team, which includes key operational personnel,
works with each acquired company to identify and complete the various
post-acquisition tasks of integration, including incorporation of desired
product features into our products and consolidation of administrative and
financial functions.
Operating systems and procedures are typically integrated within 30 days of
the close of an acquisition. We rapidly standardize the reporting of newly
acquired companies to minimize the time and expense associated with financial
integration.
As part of our integration process, we facilitate communications with
acquired businesses through our corporate intranet and software systems. Our
corporate intranet connects our regional offices and provides up-to-date and
complete information on our policies and procedures, product descriptions, and
administrative functions along with full e-mail and contact management.
We believe that our existing infrastructure and our integration practices
and procedures effectively position us to continue the acquisition of new
companies as such opportunities arise.
37
<PAGE>
COMPETITION
The healthcare information systems market is highly competitive on both a
regional and a national level. We believe that the primary competitive factors
in this market are:
- service and support;
- price;
- product features, functionality and ease of use;
- ongoing product enhancements; and
- reputation and stability of the seller.
We believe that our principal competitive advantage stems from our offerings
of feature-rich products based on an open system architecture designed to meet
our customers' needs, our substantial installed customer base, our focus on
customer support and training programs and our network of offices.
Our principal competitors include practice management systems and Internet
companies. Industry competitors include organizations such as Medical Manager
Corporation, Physician Computer Network, Inc., Infocure Corporation, Medic
Computer Systems, Inc., IDX Systems Corporation, CyCare, a division of
McKessonHBOC, Quality Systems, Inc., Dentrix Dental Systems, Inc., and National
Data Corporation. Additionally, within each regional market there are several
smaller competitors who have developed technologically advanced niche products
offered at lower prices. Finally, with the integration of clinical information
systems into practice management systems, several well-funded pharmaceutical,
medical supply and biotech companies have entered the practice management
systems market. Many of our competitors have greater financial, development,
technical, marketing and sales resources than we do. These competitors may be
able to respond more rapidly to new or emerging technologies and changes in
customer requirements than we can. In addition, as the market for our products
develops, additional competitors may enter the market and competition may
intensify, requiring us to lower the prices of our products and services.
INTELLECTUAL PROPERTY
Our success is dependent, in part, on our ability to protect our proprietary
software and confidential information from unauthorized use and disclosure. We
rely on a combination of trade secrets, common law intellectual property rights,
license agreements, nondisclosure and other contractual provisions and technical
measures to establish and protect our proprietary rights in our intellectual
property and confidential information. We do not own any patents on our
products. Employees and technical consultants and contractors are required to
execute agreements with us providing for the confidentiality of information and
the assignment to us of all proprietary rights. The legal protections afforded
to us or the steps taken by us may not be adequate to prevent misappropriation
of our technology and confidential information. In addition, these protections
do not prevent independent third-party development of competitive products or
services. We believe that our proprietary rights do not infringe upon the
proprietary rights of third parties. However, third parties may assert
infringement claims against us in the future and any such assertion may require
us to enter into a license agreement or royalty arrangement with the party
asserting the claim. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our confidential information or trade
secrets, or to determine the validity or scope of the rights of others.
Litigation could result in substantial costs and diversion of management and
other resources and could seriously harm our business.
38
<PAGE>
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such information may be used or released are subject to substantial regulation
by state and federal laws and regulations. Regulations governing electronic
health data transmissions are evolving rapidly and are often unclear and
difficult to apply.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
was enacted on August 21, 1996. HIPAA required the Secretary of Health and Human
Services (the "Secretary") to adopt national standards for certain types of
electronic healthcare information transactions and the data elements used in
such transactions, and to adopt standards to ensure the integrity and
confidentiality of such information.
In August 1998, the Secretary issued proposed standards specifying
electronic transactional code sets, data security and electronic signature
standards and certain provider and employer identifiers (standards governing
identifiers for health plans have not yet been proposed). Final standards are
expected following a public comment period for each proposal and are expected to
become mandatory within 24 to 36 months thereafter. If these regulations are
adopted, they may require modifications to our computer software and
record-keeping practices. These changes may require us to make substantial
capital investments.
HIPAA mandated that if Congress did not enact legislation by August 1999,
the Secretary was required to promulgate regulations concerning Privacy
Protections. Congress failed to enact legislation within the specified time
period and on November 3, 1999, the Secretary promulgated proposed regulations
designed to protect the privacy of electronically transmitted or maintained,
individually identifiable health information. We do not know if these
regulations will be adopted in their present form, a different form, or at all.
However, if these regulations are adopted, authorization may be required before
identifiable patient information could be electronically transmitted to third
parties for any purpose other than treatment, payment or health care operations
which including such activities as quality assessment, credentialing and
recredentialing, insurance rating, peer review, fraud and abuse compliance
review and document production for use in civil or criminal legal proceedings.
These regulations also would require that we enter into agreements with certain
of our customers governing the dissemination of such information and would
require that holders or users of such information implement specified security
measures. The proposed regulations, if adopted in their current or a revised
form, could have an adverse effect on our business, financial condition and
results of operations. Any violation of HIPAA, or any regulations promulgated
pursuant to HIPPA, may result in civil or criminal monetary penalties and
imprisonment, depending on the degree of the offense.
The confidentiality of patient records is subject to substantial regulation
by state governments. These state laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Although compliance with these laws and regulations is at present principally
the responsibility of healthcare providers, regulations governing patient
confidentiality rights are evolving rapidly. Additional legislation governing
the dissemination of medical record information has been proposed at both the
state and federal level. This legislation may require holders of medical
information to implement security measures and impose restrictions on the
ability of third-party processors, like us, to transmit certain patient data
without specific patient consent. Any change in legislation could restrict
healthcare providers from using our services.
Other legislation governing the dissemination of medical record information
is frequently proposed and debated at both the federal and state levels. Such
legislation, if enacted, could require patient consent before even coded or
anonymous patient information may be shared with third parties and could also
require that holders or users of such information implement specified security
measures. Any material restriction on the ability of healthcare providers to
obtain or disseminate patient information could substantially harm our business,
financial condition and results of operations.
39
<PAGE>
The U.S. Food and Drug Administration (the "FDA") has jurisdiction under the
1976 Medical Device Amendments to the Federal Food, Drug, and Cosmetic Act to
regulate computer products and software as medical devices if they are intended
for use in the diagnosis, cure, mitigation, treatment or prevention of disease
in humans. We have not determined to what extent our practice management
software products would be deemed to be medical devices subject to FDA
regulation. Non-compliance with applicable requirements can result in, among
other things, fines, injunctions, civil penalties, total or partial suspension
of production, refusal by the government to approve products, revocation of
approvals or clearances previously granted and criminal prosecution. We cannot
assure you that any final FDA policy governing computer products, once issued,
or future laws or regulations concerning the manufacture or marketing of medical
devices or healthcare information systems will not increase our costs and time
to market of new or existing products.
The Federal Drug Enforcement Agency has promulgated regulations that may
prohibit a pharmacy from the initial dispensing and/or refilling of certain
controlled substances through an electronically transmitted prescription. A
violation of these regulations may result in civil and criminal penalties. Such
regulations may limit the scope of our planned prescription ordering and refill
functions.
FACILITIES
We currently occupy approximately 13,500 square feet at our corporate
headquarters at 3017 Kilgore Road, Rancho Cordova, California. We also lease
space at each of our regional offices.
EMPLOYEES
As of October 31, 1999, we employed 403 persons, including 47 in sales and
marketing, 196 in customer support services, 82 in product development and 78 in
administration, finance and management. In order to augment our hiring of
ready-to-work skilled individuals, we utilize several programs to educate and
train our work force. None of our employees is represented by a labor union. We
have not experienced any work stoppages and consider relations with our
employees to be good.
LEGAL PROCEEDINGS
We are not currently party to any legal proceedings which would have a
material adverse effect on our business, results of operations or financial
condition.
40
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of October 31, 1999
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
James L. Seiler(1)........................ 53 Chief Executive Officer and Director
Joel M. Harris(1)......................... 44 President and Director
Richard W. Pendleton(1)................... 51 Chairman of the Board and Senior
Vice President of Mergers and Acquisitions
Thomas A. McCreery........................ 46 Chief Financial Officer
Larry W. LeGate........................... 57 Senior Vice President of Sales
Gregory F. Vap............................ 47 Chief Operating Officer
Peter Friedli(2)(3)....................... 41 Director
John R. Stevens(2)(3)..................... 78 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
JAMES L. SEILER has served as our Chief Executive Officer since our
acquisition of Mariner Systems, Inc. in August 1999. Prior to joining us,
Mr. Seiler served as President and Chief Executive Officer of Mariner Systems, a
managed care software company, from September 1993 to August 1999, and also as
Chairman of the Board from November 1997 to August 1999. Before joining Mariner,
Mr. Seiler served first as Chief Financial Officer and then as President and
Chief Executive Officer of Destron/IDI, Inc., a public radio frequency
technology company. Mr. Seiler is a Certified Public Accountant and received a
Bachelor of Science degree in Accounting from the University of Akron.
JOEL M. HARRIS was a co-founder of VantageMed since May 1996 and has served
as our President since May 1997. Mr Harris also served concurrently as our Chief
Executive Officer from May 1997 through August 1999. From October 1994 through
April 1996, Mr. Harris served as Chief Operating Officer of Insurance Benefit
Spot Check, Inc., a provider of electronic data interchange services for
healthcare providers. Previously, Mr. Harris co-founded the Stratum Group, a
software development and consulting firm. Mr. Harris received a Bachelor of
Science degree in Business Administration from California State University,
Northridge.
RICHARD W. PENDLETON was a co-founder of VantageMed and has served as
Chairman of the Board since our inception in April 1995. Mr. Pendleton has also
served concurrently as Senior Vice President of Mergers and Acquisitions since
April 1997. From October 1993 to February 1995, Mr. Pendleton served as Senior
Vice President and Director of Software Development for QuadraMed Corporation, a
healthcare information technology company. Prior to his work with QuadraMed,
Mr. Pendleton served as President of Coast Micro, Inc., a medical software
company, and founded and served as Chief Executive Officer of Cost Containment
Systems, Inc., a healthcare software company. Mr. Pendleton has also held senior
administrative positions at several medical centers. Mr. Pendleton received a
Master of Business Administration in Hospital Administration from the University
of Chicago and a Bachelor of Science degree in Business Administration from the
University of Illinois--Chicago.
THOMAS A. MCCREERY joined VantageMed as our Chief Financial Officer in
August 1998. From April 1997 to August 1997, Mr. McCreery served as the Chief
Financial Officer and negotiated the sale of Falcon Systems, a computer storage
systems company. From May 1989 through March, 1997, Mr. McCreery held a number
of executive positions with several affiliates of Wickland Oil Company, an
international petroleum company. Mr. McCreery is a certified public accountant
and received a Master
41
<PAGE>
of Business Administration from the University of Chicago and a Bachelor of Arts
degree in Economics from the University of California at Davis.
LARRY W. LEGATE was a co-founder of VantageMed and has served as our Senior
Vice President of Sales since inception in April 1995. Mr. LeGate also served as
a member of our Board of Directors from April 1997 through August 1999. From
January 1994 through June 1995, Mr. LeGate was the Senior Vice President of
Sales and Marketing for QuadraMed Corporation. Prior to joining QuadraMed,
Mr. LeGate served as Vice President of Sales and Customer Service for DATIS
Corporation, a database software products company. Mr. LeGate received a
Bachelor of Science degree in Architectural Engineering from Oklahoma State
University.
GREGORY F. VAP has served as our Chief Operating Officer since
December 1998 and served as our Senior Vice President from April 1998 through
December 1998. Prior to joining us, Mr. Vap founded Heathcare Information
Systems, Inc., a provider of medical practice management products, and served as
President and Chief Executive Officer from 1984 until our acquisition of
Healthcare Information Systems in April 1998. Mr. Vap received a Bachelor of
Science degree in Electronic Engineering from the Missouri Institute of
Technology.
PETER FRIEDLI has served as director of VantageMed since August 1999.
Mr. Friedli has been the principal of Friedli Corporate Finance, Inc., a venture
capital firm, since its inception in 1986. Prior to joining Friedli Corporate
Finance, Mr. Friedli worked as an international management consultant for
service and industrial companies in Europe and the U.S. Mr. Friedli has over a
decade of experience as an independent investment manager for venture capital
and has managed various venture investment companies in the U.S.
JOHN R. STEVENS has served as a director of VantageMed since May 1997. Since
1987, Mr. Stevens has served as the Chief Executive Officer and Chairman of the
Board of StellarNet, Inc., a software and communications company, which he
founded. Mr. Stevens received a Bachelor of Science degree in Military Science
from the University of Maryland.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by us
for the fiscal year ended December 31, 1998 for our Chief Executive Officer and
our two other executive officers whose total annual salary and bonus exceeded
$100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- -------- ---------------------------
<S> <C> <C>
Joel M. Harris(1)....................................... $120,000(2) --
Chief Executive Officer
Richard W. Pendleton.................................... $120,000 --
Vice President of Mergers and Acquisitions
Larry W. LeGate......................................... $119,636 --
Senior Vice President of Sales
</TABLE>
- ------------------------
(1) Mr. Harris served as our Chief Executive Officer until August 1999 at which
time James L. Seiler became our Chief Executive Officer. Mr. Harris
currently serves as our President.
(2) Includes $20,000 of compensation deferred until 1999 at the election of
Mr. Harris.
42
<PAGE>
EMPLOYEE BENEFIT PLANS
1998 STOCK OPTION/STOCK ISSUANCE PLAN. 1998 Stock Option/Stock Issuance
Plan (the "1998 Plan") was adopted by our Board of Directors and approved by our
stockholders in May 1999, amended by the Board of Directors with stockholder
approval in July 1999 and again amended by our Board of Directors, pending
stockholder approval, in November 1999. The 1998 Plan authorizes the grant of
incentive and non-statutory stock options and stock bonuses.
Effective upon the close of this offering, and assuming stockholder approval
of the November 1999 amendment, we will have a total of 1,000,000 shares of our
common stock reserved for issuance under the 1998 Plan. This share reserve will
automatically increase on January 1(st) of each year, beginning with calendar
year 2001, by an amount equal to 5% of the total number of shares of our common
stock outstanding on December 31(st) of the prior year, but in no event will
this annual increase exceed 333,333 shares. As of October 31, 1999, there were
options to purchase a total of 545,978 shares of our common stock outstanding
under the 1998 Plan.
Our 1998 Plan includes two separate programs:
- The discretionary option grant program, under which eligible employees may
be granted options to purchase shares of our common stock at an exercise
price not less than the fair market value of those shares on the grant
date.
- The stock issuance program, under which eligible employees may be issued
shares of common stock directly, upon the attainment of performance
milestones or upon the completion of a period of service or as a bonus for
past services.
The individuals eligible to participate in our 1998 Plan include our
officers and other employees, our directors and any consultants we hire. The
discretionary stock option grant and stock issuance programs are administered by
our Compensation Committee. This committee determines which eligible individuals
are to receive option grants or stock issuances under those programs, the time
or times when the grants or issuances are to be made, the number of shares
subject to each grant or issuance, the status of any granted option as either an
incentive stock option or a nonstatutory stock option under the federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding.
Our 1998 Plan includes the following features:
- The exercise price for any options granted under the 1998 Plan may be paid
in cash or in shares of our common stock valued at fair market value on
the exercise date. Options may also be exercised through a same-day sale
program without any cash outlay by the option holder.
- The compensation committee has the authority to cancel outstanding options
under the discretionary option grant program in return for the grant of
new options for the same or for a different number of option shares with
an exercise price per share based upon the fair market value of our common
stock on the new grant date.
Our 1998 Plan includes the following change in control provisions, which may
result in the accelerated vesting of outstanding option grants and stock
issuances:
- In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation or substituted with a
substantially equivalent option, will immediately become exercisable
except to the extent our repurchase rights with respect to those shares
are to be assigned to the successor corporation.
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<PAGE>
- The Compensation Committee has complete discretion to grant one or more
options which will become fully vested and exercisable in the event those
options are assumed in an acquisition but the optionee's service with us
or the acquiring entity is subsequently terminated.
- The Compensation Committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our Board of Directors through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
The Board of Directors may amend or modify the 1998 Plan at any time,
subject to any required stockholder approval.
401(K) PLAN. Substantially all full-time employees are covered by a defined
contribution plan. Employees are permitted to defer up to 15% of their salaries.
No matching has occurred to date and accordingly no charges have been taken to
operations.
EMPLOYMENT AGREEMENTS
JAMES L. SEILER. We entered into an employment agreement with James L.
Seiler pursuant to which he is employed as our Chief Executive Officer. The
initial term of this employment agreement expires on August 1, 2002. This
employment agreement will continue on a month-to-month basis thereafter. Under
the terms of the employment agreement, Mr. Seiler is paid a monthly base salary
of $10,000, subject to increases as authorized by the Board of Directors and
subject to any company-wide compensation cap then in place. Mr. Seiler's salary
will be reviewed by the Board of Directors on February 1, 2000 and on
August 1(st) of each year thereafter to determine if an increase in salary is
appropriate. At no time shall Mr. Seiler be paid a base salary that is less than
the greater of $120,000 per annum; any compensation cap then in place; or the
base salary of our highest paid officer and/or employee. Our employment
agreement with Mr. Seiler can be terminated at any time by mutual agreement,
upon 100 days written notice on the part of Mr. Seiler, or immediately for good
cause. If, prior to the expiration of the agreement's initial three year term,
we terminate Mr. Seiler's employment without good cause or due to his death, or
if he terminates his employment for good cause, he will receive monthly payments
equal to his monthly base salary through the expiration of that initial three
year term and all options then held by him shall become fully-vested and
immediately exercisable. Mr. Seiler has agreed not to compete with us for a
period of one year following the cessation of his employment. In connection with
the signing of this employment agreement, Mr. Seiler was granted an option to
purchase 100,000 shares of our common stock.
DIRECTOR COMPENSATION
The members of our Board of Directors currently do not receive compensation
for their services as Directors. Members of the Board of Directors are eligible
to receive option grants and stock issuances under the 1998 Plan.
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COMMITTEES OF THE BOARD OF DIRECTORS
We have the following special committees of our Board of Directors:
EXECUTIVE COMMITTEE. The Executive Committee is empowered to exercise all
authority of our Board of Directors except as limited by the Delaware General
Corporation Law. Under Delaware law, an executive committee may not approve,
adopt or recommend to stockholders actions required by Delaware law to be
approved by stockholders, or adopt, amend or repeal any bylaw of the
corporation. The Executive Committee consists of Richard W. Pendleton, James L.
Seiler and Joel M. Harris.
COMPENSATION COMMITTEE. The Compensation Committee is primarily responsible
for reviewing and approving our general compensation policies and setting
compensation levels for executive officers. The Compensation Committee also
administers and establishes the terms and conditions of all stock options
granted under the 1998 Plan. The Compensation Committee consists of Peter
Friedli and John R. Stevens.
AUDIT COMMITTEE. The Audit Committee is primarily responsible for approving
the services performed by our independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement, monitoring
our financial policies and control procedures and reviewing and monitoring the
provisions of non-audit services performed by our auditors. The Audit Committee
consists of Peter Friedli and John R. Stevens.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of our Board of Directors are
Peter Friedli and John R. Stevens. None of our executive officers serves on the
Board of Directors or Compensation Committee of any entity which has one or more
executive officers serving as a member of our Board of Directors or Compensation
Committee.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Amended and Restated Certificate of Incorporation provides that our
directors shall not be personally liable to us or our shareholders, except
liability for:
- breach of the director's duty of loyalty;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
- the unlawful payment of a dividend or unlawful stock purchase or
redemption; and
- any transaction from which the director derives an improper personal
benefit.
Our Amended and Restated Certificate of Incorporation and our Amended and
Restated Bylaws also provide that we shall indemnify our directors and officers
to the fullest extent permitted by the Delaware General Corporation Law. We have
also entered into indemnification agreements with each of our directors.
At present, there is no pending litigation or proceeding involving any of
our directors or officers where indemnification is required or permitted.
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<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
SERIES A PREFERRED STOCK
In July 1997 we issued 377,647 shares of our Series A preferred stock to
QuadraMed Corporation for an aggregate purchase price of $1.2 million, which
included the cancellation of a promissory note for $125,000 payable to
QuadraMed. Pursuant to the terms of this transaction, we agreed that the
$1.2 million purchase price paid by QuadraMed entitled them to receive an
aggregate of 10% of our issued and outstanding shares of capital stock at the
close of four acquisitions then pending. Therefore, we agreed that upon the
close of those acquisitions, we would issue to QuadraMed, without payment of
additional consideration, that number of additional shares of Series A preferred
stock necessary to maintain such 10% ownership interest. Accordingly, upon the
close of the four acquisitions, we issued an additional 35,371 shares of
Series A preferred stock to QuadraMed, bringing their total holdings to 413,018
shares of Series A preferred stock.
Richard Pendleton, our Chairman of the Board, was employed by QuadraMed from
October 1993 through February 1995, prior to joining us. Larry LeGate, our
Senior Vice President of Sales, was employed by QuadraMed from January 1994
through June 1995, prior to joining us.
SERIES A-1 PREFERRED STOCK
In January 1999 we issued 1,795,300 shares of our Series A-1 preferred stock
to QuadraMed Corporation for an aggregate purchase price of $3,500,000, which
included the cancellation of a promissory note for $500,000 payable to QuadraMed
and the exchange of 413,018 shares of Series A preferred stock, representing all
of the shares of Series A preferred stock held by QuadraMed, for an equal number
of shares of Series A-1 preferred stock.
ACQUISITION OF NORTHERN HEALTH SOLUTIONS, INC.
In December 1998 we acquired all of the outstanding shares of Northern
Health Solutions, Inc. Michael W. Bulger, the sole shareholder of Northern
Health Solutions, received 210,417 shares of our common stock in exchange for
all of his shares of Northern Health Solutions.
ACQUISITION OF HEALTHCARE INFORMATION SYSTEMS, INC.
In April 1998 we acquired all of the outstanding shares of Healthcare
Information Systems, Inc. In connection with this acquisition, Gregory F. Vap
joined us as Senior Vice President, and currently serves as Chief Operating
Officer. Mr. Vap received 212,774 shares of our common stock in exchange for all
of his shares of Healthcare Information Systems.
ACQUISITION OF MARINER SYSTEMS, INC.
In August 1999 we acquired Mariner Systems, Inc. In connection with this
acquisition, James L. Seiler, Mariner's President, Chief Executive Officer and
Chairman, signed a three-year employment agreement whereby he agreed to serve as
our Chief Executive Officer. Mr. Seiler received 20,680 shares of our common
stock in exchange for all of his shares of Mariner Systems, Inc. and we assumed
options held by Mr. Seiler which entitle him to purchase an additional 36,321
shares of our common stock at a weighted exercise price of $2.40. Upon the
signing of his employment agreement with us we granted Mr. Seiler an option to
purchase an additional 100,000 shares of our common stock at an exercise price
of $11.10 per share. Venturetec, Inc., a shareholder in Mariner, became a
principal stockholder of our company and now owns 416,667 shares of our common
stock. In addition, in exchange for services rendered in connection with the
acquisition of Mariner, we issued two warrants to purchase 30,000 shares of our
common stock to Peter Friedli at an exercise price of $11.10 per share.
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<PAGE>
Mr. Friedli, a principal with Venturetec, was a member of the Board of Directors
of Mariner and later became a member of our Board of Directors.
CONSULTING AGREEMENT WITH FREIDLI CORPORATE FINANCE
We have entered into a consulting agreement with Friedli Corporate Finance
pursuant to which we agreed to pay Friedli Corporate Finance a $2,000 per month
consulting fee and to take action to support the election of Peter Friedli, the
principal of Friedli Corporate Finance, to our Board of Directors. In exchange,
Friedli Corporate Finance provides us with financial consulting services. We
charge the cost of the consulting arrangement to expense as the services are
used. This consulting agreement terminates on July 31, 2002 or upon 30 days
written notice by either party. If we terminate the consulting agreement without
cause, we must immediately pay Friedli Corporate Finance the full balance,
through July 31, 2002, owed under the consulting agreement.
FINANCING ARRANGEMENT WITH FRIEDLI CORPORATE FINANCE
In October 1999, we borrowed $3.0 million from Friedli Corporate Finance.
Peter Friedli assisted us in securing this loan. In connection with the
borrowing of these funds we issued a secured convertible promissory note which
requires us to repay the principal sum of $3.0 million, plus interest at an
annual rate of 6%, by July 1, 2000. The outstanding principal and any accrued
interest on this note will be automatically converted into shares of our common
stock at a conversion ratio equal to 50% of the initial price of shares of
common stock sold in this offering. In addition, we issued to Friedli Corporate
Finance convertible promissory notes in the principal amounts of $190,000 and
$180,000, each due and payable on October 6, 2002. The $190,000 note will be
cancelled in the event that we sell shares of our common stock for an initial
price of greater than $21.00 per share. Upon the close of this offering this
promissory note will be convertible into 17,117 shares of our common stock, at
the option of the holder. The $180,000 note is convertible into 16,216 shares of
common stock at the election of the holder at any time.
In exchange for the services rendered in securing this loan, we granted
Mr. Friedli a warrant to purchase 13,333 shares of our common stock at an
exercise price equal to 60% of the initial price of shares of our common stock
as sold in this offering. This warrant may be exercised at any time following
the completion of this offering and terminates on October 6, 2002.
PROMISSORY NOTE FROM RICHARD PENDLETON
In July 1997, we loaned $148,000 to Mr. Pendleton, our Chairman of the Board
and Senior Vice President of Mergers and Acquisitions. We received a promissory
note from Mr. Pendleton which is to be repaid on or before July 15, 2000.
Interest accrues on this note at a rate of 5.25% per year and can be paid
annually on July 15(th) of each year, beginning July 15, 1998 or upon repayment
of the principal amount of the promissory note.
NON-EXCLUSIVE SOFTWARE LICENSE AGREEMENT WITH QUADRAMED CORPORATION
In December 1998, we entered into a non-exclusive software license agreement
with QuadraMed Corporation, one of our principal stockholders. Under the terms
of this agreement, QuadraMed granted us a royalty-free license to certain of
their software modules. The terms of this license allow us to: incorporate these
modules into our products; reproduce and distribute the software contained in
the modules; and make modifications, enhancements and improvements to one of the
modules, the Claimstar EDI module. As consideration for this software license
agreement, we paid QuadraMed an up-front fee of $1.5 million. We also agreed to
negotiate with QuadraMed for the grant to QuadraMed of a non-exclusive right to
use, reproduce, modify, sublicense and/or distribute any improvements we make to
the Claimstar EDI module.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to us with respect
to the beneficial ownership of our common stock as of October 31, 1999, except
as noted in the footnotes below, by:
- all persons who are beneficial owners of 5% or more of our common stock;
- each director;
- our Chief Executive Officer and the Named Executive Officers; and
- all directors and executive officers as a group.
The number of shares of common stock beneficially owned and the percentage
of shares beneficially owned prior to the offering are based on 4,362,560 shares
of common stock outstanding as of October 31, 1999. The percentage of shares
beneficially owned after the completion of the offering is based on 8,717,126
shares of common stock outstanding immediately following the completion of the
offering.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED(2)
----------------------
NUMBER OF BEFORE THE AFTER THE
NAME AND ADDRESS(1) SHARES OFFERING OFFERING
- ------------------- ---------- ---------- ---------
<S> <C> <C> <C>
QuadraMed Corporation(3).................................... 599,425 13.9% 6.9%
1003 W. Cutting Blvd., Ste. 2
Richmond, CA 94804
Peter Friedli(4)............................................ 1,104,778 25.3% 12.7%
Venturetec Inc.(5).......................................... 416,667 9.6% 4.8%
c/o Friedli Corporate Finance
Freigustrasse #5
8002 Zurich, Switzerland
Richard W. Pendleton........................................ 300,000 6.9% 3.4%
Michael W. Bulger........................................... 210,417 4.8% 2.4%
100 Brooktree Road, Ste. 110
Wexford, PA 15090
Joel M. Harris.............................................. 150,000 3.4% 1.7%
Larry W. LeGate............................................. 133,333 3.1% 1.5%
James L. Seiler(6).......................................... 68,112 1.6% *%
Tom A. McCreery(7).......................................... 27,743 * *
John R. Stevens............................................. 10,000 * *
Executive officers and directors as a group (8 persons)..... 2,006,740 46.0% 23.0%
</TABLE>
- ------------------------
* Less than 1%
(1) Except as otherwise noted, the address of each person listed on the table is
c/o VantageMed Corporation, 3017 Kilgore Road, Suite 195, Rancho Cordova,
California 95670. Unless otherwise indicated, each of the stockholders has
sole voting and investment power with respect to the shares beneficially
owned, subject to community property laws, where applicable.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to such shares. All shares of common stock subject to options
or warrants currently exercisable or exercisable within 60 days
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<PAGE>
after October 31, 1999, are deemed to be outstanding and to be beneficially
owned by the person holding such options or warrants for the purpose of
computing the number of shares beneficially owned and the percentage
ownership of such person, but are not deemed to be outstanding and to be
beneficially owned for the purpose of computing the percentage ownership of
any other person.
(3) Reflects the conversion of 1,795,300 shares of Series A-1 preferred stock
into an aggregate of 599,425 shares of common stock immediately prior to the
completion of this offering.
(4) Includes: (i) 43,333 shares issuable upon the exercise of warrants;
(ii) 33,333 shares issuable upon the conversion of secured promissory notes
held by Friedli Corporate Finance, Inc.; (iii) 611,441 shares issuable at
the close of this offering upon the conversion of a secured convertible
promissory note held by Friedli Corporate Finance, Inc. (assuming a public
offering price of $10.00 per share for the shares registered in this
offering and closing this offering on January 31, 2000); and (iv) 416,667
shares held by Venturetec, Inc. Mr. Friedli is a principal in Venturetec and
in Friedli Corporate Finance. Mr. Friedli disclaims beneficial ownership of
any shares held by Venturetec.
(5) Peter Friedli, a director of VantageMed, is principal of Venturetec, Inc.
Mr. Friedli disclaims beneficial ownership of shares held by Venturetec.
(6) Includes 47,432 shares underlying options granted to Mr. Seiler which are
exercisable within 60 days of October 31, 1999.
(7) Includes 27,743 shares underlying options granted to Mr. McCreery which are
exercisable within 60 days of October 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
After this offering, our authorized capital stock will consist of
[ ] shares of common stock and [ ] shares of undesignated
preferred stock. As of October 31, 1999, there were an aggregate 4,362,560
shares of common stock issued and outstanding held of record by 215 stockholders
and 743,425 shares of preferred stock issued and outstanding held of record by
five stockholders. After giving effect to this offering, there will be an
aggregate of 8,717,126 shares of common stock outstanding and approximately
663,000 shares of common stock issuable upon exercise of outstanding options and
warrants and conversion of notes, assuming an initial public offering price of
$10.00 per share and a closing date of this offering of January 31, 1999. There
will be no shares of preferred stock issued or outstanding.
COMMON STOCK
Holders of shares of common stock are entitled to one vote per share for the
election of directors and all matters to be submitted to a vote of the
stockholders. The holders of shares of common stock are entitled to share
ratably in such dividends as may be declared by the Board of Directors and paid
by us out of funds legally available therefor. In the event of our dissolution,
liquidation, or winding up, holders of shares of common stock are entitled to
share ratably in all assets remaining after payment of all liabilities and
liquidation preferences, if any. Holders of shares of common stock have no
preemptive, subscription, redemption, or conversion rights. The outstanding
shares of common stock are, and the shares of common stock to be issued by us in
connection with this offering will be, duly authorized, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the preferred stock in one
or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation of
such series, without any further vote or action by our stockholders. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of delaying, deferring or preventing a change in control without further action
by the stockholders and may adversely affect the market price, and the voting
and other rights of the holders of common stock. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the
holders of common stock, including the loss of voting control to others. We have
no current plans to issue any shares of preferred stock.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203"). In general, Section 203 prohibits a publicly
held Delaware corporation, such as the Company shall become upon completion of
this offering, from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
pursuant to which the person became an interested stockholder, unless the
business combination is approved in a manner prescribed by Delaware law. For
purposes of Section 203, a "business combination" includes a merger, asset sale
or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of our voting stock. Section 203 could prohibit or delay mergers or other
takeover or change in control attempts with respect to us and, accordingly, may
discourage attempts to acquire us.
LISTING
We have applied to have our common stock approved for quotation on The
Nasdaq National Market under the symbol VMDC.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is American Securities
Transfer and Trust, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no market for our shares of common
stock. We can make no predictions as to the effect, if any, that sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of significant amounts of the common
stock in the public market, or the perception that such sales may occur, could
adversely affect prevailing market prices.
The number of shares outstanding after this offering is based on the number
of shares outstanding as of October 31, 1999 and assumes no exercise of
outstanding options. Of the 8,717,126 shares outstanding upon completion of this
offering, the 3,000,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
they are purchased by one of our "affiliates" as that term is defined in
Rule 144 under the Securities Act (which sales would be subject to certain
limitations and restrictions described below). The remaining
outstanding shares of common stock may be sold in the public market only if
registered or sold pursuant to an exemption from registration such as
Rules 144, 144(k) or 701 promulgated under the Securities Act. In addition,
shares are subject to a 180 day lock-up agreements either directly with
us or as described below.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least one year is entitled to sell in
"brokers' transactions" or to market makers, within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock outstanding (approximately
87,171 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 required
filing of a Form 144 with respect to such sale.
Sales under Rule 144 are subject to the availability of current public
information about us.
Under Rule 144(k), a person, or persons whose shares are aggregated, who is
not deemed to have been our affiliate at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner except an affiliate),
is entitled to sell such shares without having to comply with the manner of
sale, public information, volume limitation, or notice filing provisions of
Rule 144. Unless otherwise restricted, such "144(k) shares" may therefore be
sold immediately upon the completion of this offering. Ninety days after
completion of this offering shares will be eligible for sale in the
public market pursuant to Rule 144. After the expiration of the 180-day lock-up
period, shares will be eligible for sale in the public market subject
to compliance with Rule 144.
All of our officers, directors, and stockholders having beneficial ownership
of an aggregate of shares, or % of the total shares outstanding,
have entered into lock-up agreements generally providing that they will not
offer, pledge, sell, offer to sell, contract to sell, sell any option or
contract to purchase, purchase any option to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the shares of common stock or any securities convertible
into, or exercisable or exchangeable for, common stock owned by them, or enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the common stock, for a
period of 180 days after the date of this prospectus, without the prior written
consent of Advest, Inc. Transfers may be made earlier:
- as a bona fide gift or gifts, provided the donee or donees agree in
writing to be bound by this restriction;
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<PAGE>
- as a distribution to partners, stockholders or beneficiaries of the
transferor, provided that the distributees agree in writing to be bound by
the terms of this restriction;
- with respect to dispositions or purchases of common stock acquired on the
open market; or
- with the prior written consent of Advest, Inc.
Advest, Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. When
determining whether or not to release shares from the lock-up agreements,
Advest, Inc. will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time. Following the expiration of the
180 day lock-up period, additional shares of common stock will be available for
sale in the public market subject to compliance with Rule 144 or Rule 701.
After the completion of this offering, we intend to file a Registration
Statement on Form S-8 under the Securities Act to register the 1,000,000 shares
of common stock reserved for issuance under the 1998 Stock Option/Stock Issuance
Plan. Such registration statements will automatically become effective
immediately upon filing. Any shares issued upon the exercise of stock options
will be eligible for immediate public sale, subject to the lock-up agreements
noted above.
Following the offering, under specified circumstances and subject to
customary conditions, Messrs. Friedli, Seiler and Vap and certain other
stockholders will have rights with respect to 2,019,463 shares of common stock,
subject to the 180-day lock-up arrangement described above, to require us to
register their shares of common stock under the Securities Act, and these will
have rights to particpate in any future registration of securities by us.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under the 1998
Stock Option/Stock Issuance Plan.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement,
the underwriters named below through their representatives, Advest, Inc., and
J.C. Bradford & Co., have severally agreed to purchase from us, the following
respective numbers of shares of common stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Advest, Inc..............................................
J.C. Bradford & Co.......................................
Total..................................................
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will
purchase all shares of the common stock offered hereby if any of such shares are
purchased.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
initial public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession not in excess of $ per
share. The underwriters may allow, and such dealers may allow, a concession not
in excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
representatives.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 450,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. To the
extent that the underwriters exercise such option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of common stock to be purchased by it shown in the
above table bears to 3,000,000, and we will be obligated, pursuant to the
option, to sell such shares to the underwriters. The underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
common stock offered hereby. If purchased, the underwriters will offer such
additional shares on the same terms as those on which the 3,000,000 shares are
being offered.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
--------------- ---------------
<S> <C> <C>
Per Share............................................. $ $
Total................................................. $ $
</TABLE>
The underwriters will offer the shares, including the shares from the
over-allotment option if it is exercised, on a firm commitment basis.
Advest, Inc. expects to deliver the shares of common stock to purchasers on
, 2000.
We have agreed to indemnify the underwriters and their contracting persons
against certain liabilities, including liabilities under the Securities Act of
1933, as amended.
We and our officers, directors and stockholders holding in the aggregate
approximately shares of common stock, have agreed, subject to certain
exceptions, not to offer, sell or otherwise dispose of any shares of common
stock for a period of 180 days after the date of this prospectus without the
prior written consent of Advest, Inc. When determining whether to release shares
from the
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<PAGE>
lock-up agreements, Advest, Inc. may consider, among other factors, market
conditions at the time, the number of shares for which the release is requested
and the shareholder's reasons for requesting the release.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thereby creating a
short position in the common stock for their own account. Additionally, to cover
such over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of the common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiations among us and the representatives of the
underwriters. Among the factors to be considered in such negotiations will be:
- prevailing market conditions;
- our results of operations in recent periods;
- the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to us;
- estimates of our business potential; and
- the present state of our development and other factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of the common stock offered
hereby will be passed upon for us by Gray Cary Ware & Freidenrich LLP,
Sacramento, California and certain matters will be passed upon for the
underwriters by McDermott, Will & Emery.
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, under the Securities Act
a Registration Statement on Form S-1 relating to the common stock offered. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to us and the common stock
offered hereby, reference is made to the registration statement. Statements made
in this prospectus as to the contents of any contract, agreement, or other
document are not necessarily complete and in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. The registration statement and the exhibits and schedules
thereto may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the Commission: Seven World
Trade Center, Room 1400, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at
prescribed rates. In addition, we are required to file electronic versions of
these documents with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web Site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
We intend to make available to its stockholders annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
55
<PAGE>
VANTAGEMED CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
VANTAGEMED CORPORATION
Report of Independent Public Accountants.................. F-4
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Operations..................... F-6
Consolidated Statements of Stockholders' Equity........... F-7
Consolidated Statements of Cash Flows..................... F-8
Notes to Consolidated Financial Statements................ F-9
Unaudited Consolidated Balance Sheet as of September 30,
1999.................................................... F-27
Unaudited Consolidated Statements of Operations for the
nine months ended September 30, 1998 and 1999........... F-28
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1999........... F-29
Notes to Unaudited Consolidated Financial Statements...... F-30
The notes to the financial statements of Atek Computer
Distributors, Inc., Brand Software, Inc., Civitec
Healthcare Computers, Inc., CM Healthcare
Technologies, Inc., Computerized Doctors
Systems, Inc., CSS, Inc., Data Decisions, Inc., Mariner
Systems, Inc., Medical Digital Technologies, Inc.,
Medical Software Solutions, Inc., Medicom Corporation
and Trend Sierra do not reflect the effect of the
one-for-three reverse stock split which has been
reflected in the consolidated financial statements of
VantageMed Corporation.
ATEK COMPUTER DISTRIBUTORS, INC.
Report of Independent Public Accountants.................. F-33
Balance Sheets............................................ F-34
Statements of Operations.................................. F-35
Statements of Stockholders' Deficit....................... F-35
Statements of Cash Flows.................................. F-36
Notes to Financial Statements............................. F-37
BRAND SOFTWARE, INC.
Report of Independent Public Accountants.................. F-42
Balance Sheets............................................ F-43
Statements of Operations.................................. F-44
Statements of Stockholders' Deficit....................... F-45
Statements of Cash Flows.................................. F-46
Notes to Financial Statements............................. F-47
CIVITEC HEALTHCARE COMPUTERS, INC.
Report of Independent Public Accountants.................. F-53
Balance Sheet............................................. F-54
Statement of Operations................................... F-55
Statement of Changes in Stockholders' Deficit............. F-56
Statement of Cash Flows................................... F-57
Notes to Financial Statements............................. F-58
CM HEALTHCARE TECHNOLOGIES, INC.
Report of Independent Public Accountants.................. F-62
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Balance Sheets............................................ F-63
Statements of Operations.................................. F-64
Statements of Cash Flows.................................. F-65
Statements of Stockholders' Deficit....................... F-66
Notes to Financial Statements............................. F-67
COMPUTERIZED DOCTORS SYSTEMS, INC
Report of Independent Public Accountants.................. F-71
Balance Sheet............................................. F-72
Statement of Income and Retained Earnings................. F-73
Statement of Cash Flows................................... F-74
Notes to Financial Statements............................. F-75
CSS, INC.
Report of Independent Public Accountants.................. F-79
Balance Sheet............................................. F-80
Statement of Income....................................... F-81
Statement of Shareholders' Equity......................... F-82
Statement of Cash Flows................................... F-82
Notes to Financial Statements............................. F-83
DATA DECISIONS, INC.
Report of Independent Public Accountants.................. F-86
Balance Sheets............................................ F-87
Statements of Operations.................................. F-88
Statements of Stockholders' Deficit....................... F-89
Statements of Cash Flows.................................. F-90
Notes to Financial Statements............................. F-91
MARINER SYSTEMS, INC.
Report of Independent Public Accountants.................. F-96
Balance Sheets............................................ F-97
Statements of Operations.................................. F-98
Statements of Shareholders' Equity........................ F-99
Statements of Cash Flows.................................. F-100
Notes to Financial Statements............................. F-101
MEDICAL DIGITAL TECHNOLOGIES, INC.
Report of Independent Public Accountants.................. F-111
Balance Sheet............................................. F-112
Statement of Income....................................... F-113
Statement of Stockholders' Equity (Deficit)............... F-114
Statement of Cash Flows................................... F-115
Notes to Financial Statements............................. F-116
MEDICAL SOFTWARE SOLUTIONS, INC.
Report of Independent Public Accountants.................. F-120
Balance Sheet............................................. F-121
Statement of Operations................................... F-122
Statement of Changes in Stockholders' Equity.............. F-123
Statement of Cash Flows................................... F-124
Notes to Financial Statements............................. F-125
Unaudited Balance Sheet as of April 30, 1999.............. F-129
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
Unaudited Statements of Operations for the three months
ended April 30, 1999 and 1998........................... F-130
Unaudited Statements of Cash Flows for the three months
ended April 30, 1999 and 1998........................... F-131
Notes to Condensed Financial Statements................... F-132
MEDICOM CORPORATION
Report of Independent Public Accountants.................. F-133
Balance Sheets............................................ F-134
Statements of Operations.................................. F-135
Statements of Changes in Stockholders' Equity............. F-136
Statements of Cash Flows.................................. F-137
Notes to Financial Statements............................. F-138
TREND SIERRA
Report of Independent Public Accountants.................. F-142
Balance Sheets............................................ F-143
Statements of Operations.................................. F-144
Statements of Owners Deficit.............................. F-145
Statements of Cash Flows.................................. F-146
Notes to Financial Statements............................. F-147
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation..................................... F-149
Pro Forma Consolidated Balance Sheet...................... F-150
Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1998............................ F-151
Pro Forma Consolidated Statement of Operations
for the nine months ended September 30, 1999............ F-152
Notes to Pro Forma Consolidated Financial Statements...... F-153
</TABLE>
F-3
<PAGE>
After the reverse stock split discussed in note 16 to VantageMed
Corporation's consolidated financial statements is effected, we expect to be in
a position to render the following report.
November 8, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VantageMed Corporation:
We have audited the accompanying consolidated balance sheets of VANTAGEMED
CORPORATION (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998 and June 30, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998 and the six months ended June 30, 1999. 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 audits 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 financial position of VantageMed Corporation and
subsidiaries as of December 31, 1997 and 1998 and June 30, 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 and the six months ended June 30, 1999, in
conformity with generally accepted accounting principles.
Sacramento, California
November , 1999
F-4
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 680 $ 435 $ 192
Accounts receivable, net of allowance of $68, $311 and
$231, respectively...................................... 731 1,206 1,671
Inventories............................................... 50 105 114
Prepaid expenses and other................................ 67 103 241
------ ------- -------
Total current assets................................ 1,528 1,849 2,218
PROPERTY AND EQUIPMENT, net................................. 196 2,232 2,170
INTANGIBLES, net of accumulated amortization of $291, $1,597
and $2,611, respectively.................................. 3,465 7,310 11,002
------ ------- -------
Total assets........................................ $5,189 $11,391 $15,390
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft............................................ $ -- $ 1,632 $ --
Current portion of long-term debt......................... 283 1,510 1,874
Accounts payable.......................................... 162 886 1,679
Accrued liabilities....................................... 305 882 1,480
Customer deposits and deferred revenue.................... 696 1,526 1,870
------ ------- -------
Total current liabilities........................... 1,446 6,436 6,903
LONG-TERM DEBT, net of current portion...................... 1,501 1,721 1,639
------ ------- -------
Total liabilities................................... 2,947 8,157 8,542
------ ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized
Series A-1--413,018, 413,018 and 1,795,300 shares issued
and outstanding, respectively (aggregate liquidation
preference of $4,722 at June 30, 1999)................ -- -- 2
Series B--0, 100,000 and 100,000 shares issued and
outstanding, respectively (aggregate liquidation
preference of $1,000 at June 30, 1999)................ -- -- --
Common stock, $0.001 par value, 20,000,000 shares
authorized; 1,819,299, 2,405,996 and 2,706,315 shares
issued and outstanding, respectively.................... 2 2 3
Additional paid-in capital................................ 2,507 7,494 13,809
Accumulated deficit....................................... (267) (4,262) (6,966)
------ ------- -------
Total stockholders' equity.......................... 2,242 3,234 6,848
------ ------- -------
Total liabilities and stockholders' equity.......... $5,189 $11,391 $15,390
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Software and systems............. $ 2,056 $ 2,800 $ 3,943 $ 1,596 $ 3,162
Customer support and electronic
services....................... 1,874 2,448 5,430 2,035 4,062
---------- ---------- ---------- ---------- ----------
Total revenues................. 3,930 5,248 9,373 3,631 7,224
---------- ---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Software and systems............. 1,181 1,274 2,146 870 1,648
Customer support and electronic
services....................... 981 1,200 3,606 1,374 2,781
Selling, general and
administrative................. 1,209 2,566 4,706 1,767 3,371
Product development.............. 287 441 1,500 598 1,560
Depreciation and amortization.... 141 376 1,472 574 1,405
---------- ---------- ---------- ---------- ----------
Total operating costs and
expenses..................... 3,799 5,857 13,430 5,183 10,765
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS...... 131 (609) (4,057) (1,552) (3,541)
---------- ---------- ---------- ---------- ----------
INTEREST INCOME (EXPENSE):
Interest income.................. 19 27 45 27 12
Interest expense................. (3) (47) (252) (118) (307)
---------- ---------- ---------- ---------- ----------
Total interest income
(expense).................... 16 (20) (207) (91) (295)
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME
TAXES............................ 147 (629) (4,264) (1,643) (3,836)
PROVISION (BENEFIT) FOR INCOME
TAXES............................ 64 (195) (343) (120) (1,132)
---------- ---------- ---------- ---------- ----------
Net income (loss).............. $ 83 $ (434) $ (3,921) $ (1,523) $ (2,704)
========== ========== ========== ========== ==========
Basic and diluted earnings (loss)
per share........................ $ 0.07 $ (0.27) $ (1.82) $ (0.76) $ (1.07)
========== ========== ========== ========== ==========
Weighted-average shares--basic and
diluted.......................... 1,254,854 1,620,245 2,158,314 2,009,477 2,520,789
========== ========== ========== ========== ==========
Pro forma basic and diluted loss
per share........................ $ (1.67) $ (.84)
========== ==========
Pro forma weighted-average shares--
basic and diluted................ 2,346,567 3,240,335
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------
SERIES A-1 SERIES B COMMON STOCK
---------------------- -------------------- ---------------------- ADDITIONAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL
--------- ---------- -------- --------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995....... -- $ -- -- $ -- 952,729 $ 1 $ 66
Issuance of common stock to
founders....................... -- -- -- -- 513,943 1 --
Issuance of common stock......... -- -- -- -- 14,367 -- 26
Net income....................... -- -- -- -- -- -- --
--------- ---------- ------- --------- --------- ---------- -------
BALANCE AT DECEMBER 31, 1996....... -- $ -- -- $ -- 1,481,039 $ 2 $ 92
Issuance of common stock to
founders....................... -- -- -- -- 10,000 -- --
Issuance of common stock......... -- -- -- -- 134,773 -- 414
Issuance of common stock in
connection with acquisition.... -- -- -- -- 193,487 -- 801
Issuance of Series A preferred
stock.......................... 413,018 -- -- -- -- -- 1,200
Distribution to shareholders of
NHS............................ -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
--------- ---------- ------- --------- --------- ---------- -------
BALANCE AT DECEMBER 31, 1997....... 413,018 $ -- -- $ -- 1,819,299 $ 2 $ 2,507
Issuance of common stock......... -- -- -- -- 111,253 -- 838
Issuance of common stock in
connection with acquisitions... -- -- -- -- 474,944 0 3,149
Issuance of Series B preferred
stock in connection with
acquisition.................... -- -- 100,000 -- -- -- 1,000
Distribution to shareholders of
NHS............................ -- -- -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
--------- ---------- ------- --------- --------- ---------- -------
BALANCE AT DECEMBER 31, 1998....... 413,018 $ -- 100,000 $ -- 2,405,996 $ 2 $ 7,494
Issuance of common stock......... -- -- -- -- 54,933 -- 412
Issuance of common stock in
connection with acquisitions... -- -- -- -- 245,386 1 2,355
Conversion of Series A preferred
stock to Series A-1 preferred
stock.......................... (413,018) -- -- -- -- -- (1,200)
Issuance of Series A-1 preferred
stock.......................... 1,795,300 2 -- -- -- -- 4,698
Issuance of warrants............. -- -- -- -- -- -- 50
Net loss......................... -- -- -- -- -- -- --
--------- ---------- ------- --------- --------- ---------- -------
BALANCE AT JUNE 30, 1999........... 1,795,300 $ 2 100,000 $ -- 2,706,315 $ 3 $13,809
========= ========== ======= ========= ========= ========== =======
<CAPTION>
ACCUMULATED
EARNINGS
(DEFICIT) TOTAL
------------ --------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995....... $ 116 $ 183
Issuance of common stock to
founders....................... -- 1
Issuance of common stock......... -- 26
Net income....................... 83 83
------- -------
BALANCE AT DECEMBER 31, 1996....... $ 199 $ 293
Issuance of common stock to
founders....................... -- --
Issuance of common stock......... -- 414
Issuance of common stock in
connection with acquisition.... -- 801
Issuance of Series A preferred
stock.......................... -- 1,200
Distribution to shareholders of
NHS............................ (32) (32)
Net loss......................... (434) (434)
------- -------
BALANCE AT DECEMBER 31, 1997....... $ (267) $ 2,242
Issuance of common stock......... -- 838
Issuance of common stock in
connection with acquisitions... -- 3,149
Issuance of Series B preferred
stock in connection with
acquisition.................... -- 1,000
Distribution to shareholders of
NHS............................ (74) (74)
Net loss......................... (3,921) (3,921)
------- -------
BALANCE AT DECEMBER 31, 1998....... $(4,262) $ 3,234
Issuance of common stock......... -- 412
Issuance of common stock in
connection with acquisitions... -- 2,356
Conversion of Series A preferred
stock to Series A-1 preferred
stock.......................... -- (1,200)
Issuance of Series A-1 preferred
stock.......................... -- 4,700
Issuance of warrants............. -- 50
Net loss......................... (2,704) (2,704)
------- -------
BALANCE AT JUNE 30, 1999........... $(6,966) $ 6,848
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 83 $ (434) $(3,921) $(1,523) $(2,704)
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities-
Depreciation and amortization............... 141 376 1,472 574 1,405
Bad debt expense............................ -- 68 243 38 (80)
Deferred income taxes....................... -- (212) (438) (121) (1,226)
Changes in assets and liabilities, net of
effects from acquisitions-
Accounts receivable....................... 68 (50) (335) (178) (203)
Inventories............................... 69 126 (15) (18) 2
Prepaid expenses and other................ -- (61) 50 (110) (78)
Book overdraft............................ -- -- 1,632 -- (1,632)
Accounts payable and accrued
liabilities............................. (110) (231) 506 86 1,116
Customer deposits and deferred revenue.... 61 (193) 508 181 (72)
----- ------ ------- ------- -------
Net cash provided by (used for)
operating activities.................. 312 (611) (298) (1,071) (3,472)
----- ------ ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........... (92) (121) (1,637) (120) (285)
Cash (paid) received from businesses acquired,
net......................................... -- (378) 270 19 115
----- ------ ------- ------- -------
Net cash used for investing
activities............................ (92) (499) (1,367) (101) (170)
----- ------ ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................... 27 414 588 581 412
Issuance of preferred stock................. -- 1,200 -- -- 3,000
Proceeds from issuance of long-term debt.... 9 41 1,339 753 274
Payments on long-term debt.................. -- (290) (433) (275) (287)
Distributions to shareholders of Northern
Health Solutions, Inc..................... -- (32) (74) (74) --
----- ------ ------- ------- -------
Net cash provided by financing
activities............................ 36 1,333 1,420 985 3,399
----- ------ ------- ------- -------
Net change in cash and cash
equivalents........................... 256 223 (245) (187) (243)
CASH AND CASH EQUIVALENTS, beginning of year.... 201 457 680 680 435
----- ------ ------- ------- -------
CASH AND CASH EQUIVALENTS, end of year.......... $ 457 $ 680 $ 435 $ 493 $ 192
===== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RISKS:
VantageMed Corporation (the Company) was incorporated in California on
June 11, 1995. On April 9, 1997, the Company was reincorporated in Delaware. The
basis of presentation includes Northern Health Solutions, Inc. and Healthcare
Information Systems, Inc., two business combinations effected in 1998 accounted
for as poolings and included for all periods presented. The Company is a
diversified healthcare information systems supplier headquartered in Sacramento,
California with regional offices in Walnut Creek and San Francisco, California;
Honolulu, Hawaii; Seattle, Washington; Kansas City, Missouri; Flint, Michigan;
Pompton Plains, New Jersey; Detroit, Michigan; and Pittsburgh, Pennsylvania. The
Company develops, sells, installs and supports software products and services
that assist physicians, dentists, physician organizations and other healthcare
providers in the operation of their practices and organizations. The Company is
building a national distribution network by acquiring established regional
healthcare practice management systems companies to sell and support its new
generation software and services. Subsequent to June 30, 1999, the Company
acquired additional businesses and began operations in Massachusetts, Illinois,
Colorado, Utah, Texas, Alabama, North Carolina and Arkansas.
The practice management software products offered by the Company provide
physicians, dentists and other healthcare professionals with comprehensive
office management software designed to automate the administrative, financial,
practice management and clinical requirements of a practice. These systems range
in capacity from one to approximately one hundred users. The Company also
provides software, network and hardware support, training, electronic claims
processing, electronic statement printing and mailing and electronic remittance
advices.
RISKS AND UNCERTAINTIES
The Company has suffered recurring losses from operations since its
inception and does not currently have substantial operating reserves. The
Company operates with a negative cash flow primarily because of acquisition
expenses, prior debt incurred by the acquired companies, and the costs of
building infrastructure for future growth. In order to make acquisitions and pay
for the startup losses, the Company must raise additional capital.
The Company is also subject to a number of additional risks, including, but
not limited to, risks associated with acquisitions (successful integration and
operation of new products, technologies and businesses), uncertainties in the
healthcare industry, and dependence on the medical and dental market. There can
be no assurance that the Company will successfully integrate acquired entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim consolidated statements of operations and cash flows for the six
months ended June 30, 1998 included herein are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the annual
financial statements and, in the opinion of management, reflect all normal
recurring adjustments necessary for a fair presentation of the results of their
F-9
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
operations and their cash flows for the six months ended June 30, 1998. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations relating to interim
financial statements. The results of operations for the six months ended
June 30, 1998 are not necessarily indicative of the results to be expected for
future periods.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
FINANCIAL INSTRUMENTS
The fair values of financial instruments are the amounts at which the
instruments could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying consolidated balance sheets are not
materially different from their fair values.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of supplies, new computer equipment purchased to
fill customer orders and used computer equipment to service the Company's
customers pursuant to revenue producing service agreements.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally three to seven years. Leasehold improvements are amortized
over the remaining lease term. Maintenance and repairs are expensed as incurred.
INTANGIBLES
Intangibles include goodwill, acquired software, customer lists, covenants
not to compete and assembled workforces. Goodwill represents the amount of
purchase price in excess of the fair value of the identifiable assets purchased
in acquisitions completed by the Company and is amortized on a straight-line
basis over a period of two to ten years. Acquired software consists of software
purchased in acquisitions completed by the Company and is amortized on a
straight-line basis over a period of two to four years. Covenants not to compete
are amortized on a straight-line basis over two to five years, while all other
intangible assets are amortized on a straight-line basis over a period of one to
ten years.
Long lived assets, including intangibles and goodwill are evaluated annually
for impairment and written down to net realizable value if necessary. No
impairment has been recorded to date.
F-10
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes software development costs incurred after
technological feasibility of the software development projects has been
established. To date, all of the Company's costs for research and development of
software products have been expensed as incurred since the amount of software
development costs incurred subsequent to the establishment of technological
feasibility has been immaterial.
REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted Statement of Position 97-2
(SOP 97-2), "Software Revenue Recognition." SOP 97-2 provides guidance on
applying generally accepted accounting principles for recognizing revenue on
software transactions. The adoption of SOP 97-2 did not have a material impact
on the Company's revenue. In December 1998, the American Institute of Certified
Public Accountants issued Statement of Position 98-9 (SOP 98-9), "Modification
of SOP 97-2. Software Revenue Recognition With Respect to Certain Transactions."
SOP 98-9 is effective for fiscal years beginning after March 15, 1999. The
Company believes that the adoption of SOP 98-9 will not have a material effect
on the results of their operations or financial condition.
Software and systems revenue consists primarily of licenses of software
products and sales of hardware manufactured by third parties. In accordance with
SOP 97-2, revenue from software product sales is recognized upon delivery to the
customer provided the collection of the sale proceeds is deemed probable, the
fee is fixed and determinable, and persuasive evidence of an agreement exists.
Customer support and electronic services revenue is generated primarily from
hardware maintenance agreements and software support and electronic transaction
services. Revenue from support and maintenance contracts, which are typically
one year in length, is recognized ratably over the life of the contract. Revenue
from other services is recognized as the services are provided.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," under which deferred income taxes are provided
based upon enacted tax laws and rates applicable to the periods in which taxes
become payable. A valuation allowance is provided against the future benefits of
deferred tax assets if it is determined that it is more likely than not that the
future tax benefits associated with the deferred tax asset will not be realized.
EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of
shares of common stock outstanding while diluted earnings per share reflects the
potential dilution that would have occurred if preferred stock had been
converted and stock options and warrants had been exercised. Common equivalent
shares from preferred stock, stock options and convertible notes have been
excluded from the computation of diluted income (loss) per share in all loss
periods, as their effect is antidilutive.
F-11
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
Pro forma basic and diluted loss per share has been calculated assuming the
conversion of Series A-1 and Series B preferred stock into common shares, as if
the shares had been converted on the dates of their issuance.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130),"Reporting Comprehensive Income."
SFAS 130 establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner sources. The
adoption of this statement had no material impact on the Company's financial
statements for the periods presented.
USE OF ESTIMATES
The preparation of the 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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." As permitted by
SFAS 123, the Company has not changed its method of accounting for stock options
but has provided the additional required disclosures. For the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998 and
1999, the Company recognized no compensation expense related to stock options.
RECENT PRONOUNCEMENTS
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities," issued in April 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. SOP 98-5 will be
effective for the Company's fiscal year ending December 31, 1999. The adoption
of SOP 98-5 is not expected to have a material impact on the Company's financial
statements.
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities," will be effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 requires
companies to value derivative financial instruments, including those used for
hedging foreign currency exposures, at current market value with the impact of
any change in market value being charged against earnings in each period. This
statement is not expected to affect the Company as it currently does not engage
or plan to engage in derivative instruments or hedging activities.
F-12
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS:
BUSINESS COMBINATIONS ACCOUNTED FOR AS PURCHASES
Each of the following acquisitions was accounted for under the purchase
method of accounting, applying the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations." As a result, the Company recorded the
assets and liabilities of the acquired companies at their estimated fair values
with the excess of the purchase price over these amounts being recorded as
goodwill. Intangibles including acquired software, customer lists, covenants not
to compete and assembled workforce are valued based upon discounted future cash
flows associated with the related intangible asset and its economic life. The
financial statements reflect the operations of the acquired businesses for the
periods after their respective dates of acquisition.
During the year ended December 31, 1997, the Company acquired ATEK Computer
Distributors, Inc., Trend Sierra, Prophase System, Inc., DentalMate, Inc. and
Patriot Healthcare, Inc. Aggregate consideration for these acquisitions
completed in 1997 was 193,487 shares of common stock, $415,000 in cash, and
$1,705,000 in notes payable for an approximate aggregate value of $2,921,000.
During the year ended December 31, 1998, the Company acquired
Medsoft, Inc., American Voice Computer, Inc., Pacific Software, Inc., DOT
Medical, Inc., Medicom Corporation and CM Healthcare Technologies, Inc.
Aggregate consideration for these acquisitions completed in 1998 was 474,944
common shares, 100,000 shares of Series B preferred stock, $25,000 in cash, and
$350,000 in notes payable for an approximate aggregate value for $4,524,000.
During the six months ended June 30, 1999, the Company acquired Civitec
Healthcare Computers, Inc., Acrotrex Corporation, Medical Software
Solutions, Inc. and Metropolitan Information Services, Inc. Aggregate
consideration for these acquisitions completed in the first six months of 1999
was 245,386 common shares, $152,000 in cash, and $974,000 in notes payable for
an approximate aggregate value of $3,482,000.
Direct merger and acquisition costs associated with the acquisitions
accounted for as purchases were included in accrued liabilities as of the date
of each acquisition. These fees totaled $167,000, $142,000, and $81,000 for the
years ended December 31, 1997 and 1998 and the six months ended June 30, 1999,
respectively.
F-13
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS: (CONTINUED)
The following tables summarize the fair values of the assets acquired,
liabilities assumed and consideration given in connection with the foregoing
acquisitions accounted for as purchases (in thousands):
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- --------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash............................................... $ 37 $ 295 $ 267
Accounts receivable................................ 348 383 182
Inventory.......................................... 113 40 11
Prepaid expenses and other......................... -- 86 235
Property and equipment............................. 95 563 44
Goodwill........................................... 1,945 3,628 1,706
Other intangibles.................................. 1,810 1,525 3,000
Accounts payable................................... (172) (322) (115)
Accrued liabilities................................ (200) (473) (160)
Customer deposits and deferred revenue............. (400) (322) (416)
Long-term debt..................................... (443) (441) (46)
Deferred tax liability............................. (212) (438) (1,226)
------ ------ -------
Net assets acquired............................ $2,921 $4,524 $ 3,482
====== ====== =======
</TABLE>
These acquisitions were funded as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- ----------
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Common stock..................................... $ 801 $3,149 $2,356
Preferred stock.................................. -- 1,000 --
Notes payable.................................... 1,705 350 974
Cash............................................. 415 25 152
------ ------ ------
Total acquisition............................ $2,921 $4,524 $3,482
====== ====== ======
</TABLE>
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if all of the acquisitions had occurred
as of the beginning of 1998. The pro forma information is not necessarily
indicative of what would have occurred had the acquisitions been made
F-14
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS: (CONTINUED)
as of January 1, 1998, nor is it indicative of future results of operations.(in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ ---------------
1998 1999
------------ ---------------
<S> <C> <C>
Revenue............................................ $14,733 $ 8,377
Depreciation and amortization...................... 2,410 1,323
Loss available to common stockholders.............. (4,647) (2,579)
Basic and diluted loss per share................... (1.79) (0.97)
</TABLE>
BUSINESS COMBINATIONS ACCOUNTED FOR AS POOLING OF INTERESTS
In April 1998, the Company acquired all of the outstanding capital stock and
options of Healthcare Information Systems, Inc. (HIS), based in Kansas City,
Missouri, for 384,695 shares of VantageMed common stock and 17,022 options. Upon
closing the acquisition, the assets and liabilities of HIS were recorded at net
book value. Assets consisted primarily of cash, accounts receivable, inventory
and fixed assets. Liabilities consisted primarily of vendor payables, accrued
liabilities and deferred revenue. The accompanying consolidated financial
statements reflect the acquisition of HIS as a pooling of interests.
In December 1998, the Company acquired all of the outstanding capital stock
of Northern Health Solutions, Inc. (NHS), based in Pittsburgh, Pennsylvania, for
210,416 shares of VantageMed common stock. Upon closing the acquisition, the
assets and liabilities of NHS were recorded at net book value. Assets consisted
primarily of cash, accounts receivable and fixed assets. Liabilities consisted
primarily of vendor payables and accrued liabilities. The accompanying
consolidated financial statements reflect the acquisition of NHS as a pooling of
interests.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Software rights..................................... $ -- $1,500 $1,500
Office and computer equipment....................... 203 409 619
Furniture and fixtures.............................. 185 319 422
Vehicles............................................ 27 41 41
Leasehold improvements.............................. 48 399 414
----- ------ ------
463 2,668 2,996
Less: accumulated depreciation...................... (267) (436) (826)
----- ------ ------
$ 196 $2,232 $2,170
===== ====== ======
</TABLE>
Depreciation expense was approximately $141,000, $84,000, $164,000, $52,000
and $391,000 for the years ended December 31, 1996, 1997 and 1998 and the six
months ended June 30, 1998 (unaudited) and 1999, respectively.
F-15
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLES:
Intangibles consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Goodwill.......................................... $1,945 $ 5,572 $ 7,277
Acquired software................................. 636 1,191 1,824
Customer lists.................................... 1,117 2,008 4,305
Covenants not to compete.......................... 27 39 84
Assembled workforce............................... 31 98 123
------ ------- -------
3,756 8,907 13,613
Less: accumulated amortization.................... (291) (1,597) (2,611)
------ ------- -------
$3,465 $ 7,310 $11,002
====== ======= =======
</TABLE>
Amortization expense related to intangibles was approximately $0, $292,000,
$1,308,000, $522,000 and $1,014,000 for the years ended December 31, 1996, 1997
and 1998 and the six months ended June 30, 1998 (unaudited) and 1999,
respectively.
6. LONG-TERM DEBT:
The Company's long-term debt consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Promissory note, owner of acquired company, interest at
prime plus 1.5%, not to exceed 10.5% per annum (9.25% at
June 30, 1999), monthly principal payments of $18,750 plus
accrued interest commencing August 1999, due in full by
August 2005, unsecured.................................... $ 1,500 $ 1,400 $ 1,400
Promissory notes, stockholders, various fixed interest rates
between 8.75% and 10%, monthly principal and interest
payments between $1,000 and $3,000, principal ranges from
due on demand to due June 2005, secured by assets of the
Company................................................... 136 253 225
Promissory notes, stockholders, various fixed interest rates
between 7% and 12%, monthly principal and interest
payments between $2,000 and $11,000, principal ranges from
due in December 1999 to due in May 2000 unless an initial
public offering is completed, at which time the principal
is due on demand, secured by assets of the Company........ -- -- 83
Promissory notes, stockholders, bearing interest at 8%,
principal payment of $75,000 due in October 1999, monthly
payments of $15,000 beginning January 2000 through
December 2000 unless an initial public offering is
completed, at which time the principal is due on demand,
secured by certain assets of the Company.................. -- -- 248
</TABLE>
F-16
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Promissory note, stockholder, bearing interest at 15%,
monthly principal and interest payments of $30,000 from
April 1999 through May 2000, due in full June 2000 unless
an initial public offering is completed, at which time the
principal is due on demand, secured by certain assets of
the Company............................................... -- -- 383
Promissory notes, stockholders, various fixed interest rates
between 6% and 10%, monthly payments consist of accrued
interest only, principal is due on demand, secured by
certain assets of the Company............................. 24 42 19
Promissory note, stockholder, various fixed interest rates
between 6% and 10%, monthly payments consist of accrued
interest only, principal is due in March 2000 to June 2000
unless an initial public offering is completed, at which
time the principal is due on demand, secured by certain
assets of the Company..................................... -- 138 263
Promissory note, stockholder, bearing interest at 10%,
monthly payments consist of accrued interest only,
principal due in March 2000 unless an initial public
offering is completed, at which time the principal is due
on demand, secured by certain assets of the Company....... -- 350 250
Promissory notes, financial institution, bearing interest at
9.5%, monthly principal and interest payments between $300
and $600 through February 2003, secured by Company
vehicles.................................................. -- -- 30
Convertible promissory notes, stockholders, bearing interest
at 10% per annum, convertible into 40,000 shares of the
Company's common stock at $7.50 per share, subject to a
conversion provision upon completion of a public offering,
principal and interest due May 1999, unsecured............ -- 300 300
Promissory notes, stockholders, non-interest bearing,
$20,000 paid in January 1998 and the balance paid in
January 1999, secured by stock in the Company............. 40 20 --
Promissory notes, stockholders, non-interest bearing,
monthly payments of $2,000, due on demand, personally
guaranteed by Chairman of the Company..................... 20 52 40
Line of credit, stockholder, maximum borrowing of $500,000,
bearing interest at 8%. In January 1999 the note was
converted into shares of Series A- 1 preferred stock of
the Company............................................... -- 500 --
Convertible promissory note, stockholder, bearing interest
at 10% per annum, convertible into 13,333 shares of the
Company's common stock at $7.50 per share, subject to a
conversion provision. Payee also has an option to purchase
additional 66,666 shares at $7.50 per share and 50,000
shares at $10.50 per share. Principal and interest due
August 1999. The note was converted to stock in August
1999...................................................... -- -- 100
</TABLE>
F-17
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Line of credit, financial institution, maximum borrowing of
$50,000, bearing interest at lender's base rate plus 3.1%
(11.85% at June 30, 1999), personally guaranteed by a
stockholder............................................... -- 50 50
Capital lease obligations................................... 64 126 122
------- ------- -------
1,784 3,231 3,513
Less: current portion....................................... (283) (1,510) (1,874)
------- ------- -------
$ 1,501 $ 1,721 $ 1,639
======= ======= =======
</TABLE>
Future minimum payments under all debt obligations excluding capital lease
obligations, during the twelve months subsequent to June 30, 1999, are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- --------------------
<S> <C>
2000........................................................ $1,837
2001........................................................ 481
2002........................................................ 278
2003........................................................ 278
2004........................................................ 262
Thereafter.................................................. 255
------
$3,391
======
</TABLE>
7. CAPITAL AND OPERATING LEASE OBLIGATIONS:
The Company leases its headquarters and certain other facilities under
operating leases and a portion of its equipment under capital lease
arrangements. The minimum future lease payments required under the Company's
capital and operating leases at June 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
- -------------------- -------- ---------
<S> <C> <C>
2000....................................................... $ 46 $361
2001....................................................... 39 175
2002....................................................... 31 19
2003....................................................... 27 --
2004....................................................... 1 --
---- ----
Total minimum payments................................... $144 $555
====
Less: interest on capital lease obligations at rates of
8.13% to 17.25%.......................................... (22)
----
Net minimum principal payments............................. 122
Less: current maturities................................... (37)
----
Long-term portion.......................................... $ 85
====
</TABLE>
Rent expense was approximately $134,000, $204,000, $509,000, $208,000 and
$340,000 for the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1998 (unaudited) and 1999, respectively.
F-18
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY:
COMMON STOCK
As of June 30, 1999, the Company is authorized to issue 20,000,000 shares of
common stock with a par value of $0.001 per share.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock with
a par value of $0.001 per share, of which 1,850,000 shares are designated for
Series A-1 preferred stock (Series A-1), 1,795,300 of which are issued and
outstanding as of June 30, 1999 and 500,000 are designated for Series B
preferred stock (Series B), 100,000 of which are issued and outstanding as of
June 30, 1999. As of January 1, 1999, 413,018 shares of previously issued
Series A preferred stock was re-designated as Series A-1 in conjunction with the
issuance of an additional 1,382,282 shares of Series A-1 to the same investor.
Significant terms of the preferred stock are as follows:
- Each share of Series A-1 is convertible at the option of the holder into
shares of common stock as determined by a conversion ratio applicable to
the Series A-1 preferred stock. Shares of Series A-1 and B will
automatically be converted into common stock upon the closing of public
offering in excess of $12,500,000 and $10,000,000, respectively, and at a
price equal to or greater than $27.00 per share for Series A-1. Subsequent
to June 30, 1999, the Company has received a commitment from the
Series A-1 preferred shareholder to convert their preferred stock upon the
closing of a public offering.
- Each share has the same voting rights as the number of shares of common
stock to which it could be converted.
- In the event of liquidation, dissolution or winding up of the Company, the
preferred shareholders of Series A-1 and B shall receive an amount equal
to $2.63 and $10.00 per share, respectively, plus an amount equal to all
declared but unpaid dividends on each share. Subsequent to June 30, 1999,
the amount that Series B shareholders would receive in the event of a
liquidation was increased to $12.00 per share. In the event available
assets are insufficient to pay the full liquidation preference amount, any
remaining assets will be distributed ratably among the holders of
Series A-1 and B preferred stock in proportion to the amount of stock
owned by each holder.
- Holders of preferred stock are entitled to annual non-cumulative dividends
of $2.63 per share for Series A-1 and $0.08 for Series B, as declared by
the Board of Directors, before any dividend declared on common stock. No
dividends have been declared since inception through June 30, 1999.
9. STOCK OPTION PLANS AND WARRANTS:
The Company has two stock option plans, the Healthcare Information Systems
Plan (HIS Plan) and the 1998 Stock Option/Stock Issuance Plan (1998 Plan). No
further options may be granted under the HIS Plan, and all 17,022 options
previously granted and outstanding under the HIS Plan have been converted into
options of the Company's common stock. Each HIS option was converted into
0.13055 of the Company's options at an exercise price of $1.89 per share. Under
the 1998 Plan, the Board of Directors is authorized to grant options for up to
400,000 shares of common stock to employees, directors and consultants at prices
not less than the fair market value at date of grant for incentive
F-19
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLANS AND WARRANTS: (CONTINUED)
stock options and not less than 85% of fair market value for non-statutory stock
options. The 1998 Plan is divided into two separate equity programs: the Option
Grant Program under which eligible persons may be granted options to purchase
shares of common stock and the Stock Issuance Program under which eligible
persons may be issued shares of common stock directly, either through the
immediate purchase of shares or as a bonus for services rendered the Company.
The stock options generally vest 25% in the first year and ratably over the
following three-year period and expire ten years from the date of grant. The
1998 Plan permits the exercise of unvested options. Unvested common stock
purchased under the 1998 Plan is subject to repurchase by the Company at the
option exercise price.
As permitted by SFAS 123, the Company has elected to account for its
stock-based compensation plans under the intrinsic value method as outlined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Had compensation cost for the Company's
option plan been determined based on the fair value at the grant dates for the
awards, calculated in accordance with the method prescribed by SFAS 123, the
Company's pro forma net income (loss) would have been as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ --------------
1996 1997 1998 1999
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
Net income (loss) available to common
stockholders
As reported.......................... $ 83 $ (434) $(3,921) $(2,704)
Pro forma............................ $ 79 $ (438) $(4,046) $(2,828)
Basic and diluted earnings (loss) per
share
As reported.......................... $0.07 $(0.27) $ (1.82) $ (1.07)
Pro forma............................ $0.06 $(0.27) $ (1.87) $ (1.12)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1999: risk free interest rate of 5.5%,
expected stock price volatility of 50%, an expected life of six years and no
dividend payments. The resulting pro forma compensation cost may not be
representative of that to be expected in future years.
A summary of stock option activity and related information is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------------------------- ---------------------
1996 1997 1998 1999
--------------------- --------------------- --------------------- ---------------------
WTD.-AVG. WTD.-AVG. WTD.-AVG. WTD.-AVG.
EXERCISE EXERCISE EXERCISE EXERCISE
NUMBER PRICE PER NUMBER PRICE PER NUMBER PRICE PER NUMBER PRICE PER
OF SHARES SHARE OF SHARES SHARE OF SHARES SHARE OF SHARES SHARE
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
beginning of period........... 17 $1.89 17 $1.89 17 $1.89 186 $7.14
Granted....................... -- -- -- -- 169 7.65 83 8.28
Exercised..................... -- -- -- -- -- -- -- --
Forfeited or canceled......... -- -- -- -- -- -- -- --
-- ----- -- ----- --- ----- --- -----
Balance, end of period.......... 17 $1.89 17 $1.89 186 $7.14 269 $7.49
== ===== == ===== === ===== === =====
Vested, end of period........... 4 9 16 24
== == === ===
</TABLE>
F-20
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTION PLANS AND WARRANTS: (CONTINUED)
The following table summarizes information about the Company's outstanding
stock options at June 30, 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
- ------------------------------------------------------------- ------------------------------
NUMBER OF WTD.-AVG.
RANGE OF SHARES CONTRACT LIFE WTD.-AVG. NUMBER OF WTD.-AVG.
EXERCISE PRICE OUTSTANDING REMAINING EXERCISE PRICE SHARES VESTED EXERCISE PRICE
- -------------- ----------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.89 17 6.5 $1.89 15 $1.89
7.50 189 9.5 7.50 -- 7.50
8.34 32 8.9 8.34 9 8.34
9.60 31 9.8 9.60 -- 9.60
--- --- ----- -- -----
$1.89-9.60 269 9.3 $7.49 24 $4.31
=== === ===== == =====
</TABLE>
During 1997, the Company issued options to purchase up to 1,437 shares of
the Company's common stock at a price of $1.74 per share, 2,283 shares at a
price of $4.50 per share and 3,786 shares at a price of $7.50 per share to a
consultant in connection with raising capital for the Company. The exercise
price approximates the stock price on the issuance dates and the options were
fully vested at issuance. The fair value of the options of approximately $25,000
was calculated using the Black-Scholes option pricing model and is netted
against proceeds from common stock issued.
During 1999, the Company issued options to purchase up to 2,166 shares of
the Company's common stock at a price of $7.50 per share to a consultant in
connection with raising capital for the Company. The fair value of the options
of approximately $12,000 was calculated using the Black-Scholes option pricing
model and is netted against the proceeds from common stock issued.
WARRANTS
In June 1999, in connection with the issuance of a convertible promissory
note, the Company issued warrants to purchase up to 66,666 shares of the
Company's common stock at a price of $7.50 per share, the fair value on the date
of issuance, and the right to purchase another 50,000 shares of the Company's
common stock at the price of $10.50 per share. The warrants become immediately
exercisable upon the conversion of the note to common stock and all unexercised
warrants were to expire on August 31, 1999. The fair value of the warrants of
approximately $50,000 was calculated using the Black-Scholes option pricing
model and was amortized to interest expense over the two month term of the note.
Subsequent to June 30, 1999, the note was converted to 13,333 shares of common
stock at $7.50 per share, and 6,666 warrants were exercised at $7.50 per share.
The remaining warrants expired on August 31, 1999.
F-21
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS:
The Company had receivables from related parties included in prepaid
expenses and other as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Due from stockholder.................................. $52 $20 $10
Due from employees.................................... 3 6 --
--- --- ---
$55 $26 $10
=== === ===
</TABLE>
During 1998, the Company incurred consulting costs to the president of an
acquired company in the amount of approximately $35,000. In addition, the
Company purchased software from a corporate shareholder for $1,500,000.
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest amounted to approximately $3,000, $47,000,
$220,000, $114,000 and $310,000 for the years ended December 31, 1996, 1997 and
1998 and the six months ended June 30, 1998 (unaudited) and 1999, respectively.
The Company made cash payments for income taxes of approximately $800, $800,
$800, $0 and $7,000 for the years ended December 31, 1996, 1997 and 1998 and the
six months ended June 30, 1998 (unaudited) and 1999, respectively.
During the year ended December 31, 1997, the Company acquired ATEK Computer
Distributors, Inc., Trend Sierra, Prophase System, Inc., DentalMate, Inc. and
Patriot Healthcare, Inc. Aggregate consideration for these acquisitions
completed in 1997 were 193,487 shares of common stock, $415,000 in cash, and
$1,705,000 in notes payable for an approximate aggregate value of $2,921,000.
Additionally, the Company financed the purchase of property and equipment under
capital leases of approximately $61,000
During the year ended December 31, 1998, the Company acquired
Medsoft, Inc., American Voice Computer, Inc., Pacific Software, Inc., DOT
Medical, Inc., Medicom Corporation and CM Healthcare Technologies, Inc.
Aggregate consideration for these acquisitions completed in 1998 was 474,944
common shares, 100,000 shares of Series B preferred stock, $25,000 in cash, and
$350,000 in notes payable for an approximate aggregate value for $4,524,000. The
Company issued stock warrants with an aggregate fair value of approximately
$50,000 for services rendered to the Company. Additionally, the Company financed
the purchase of property and equipment under capital leases of approximately
$114,000 and converted a note payable for $250,000 into common stock.
During the six months ended June 30, 1999, the Company acquired Civitec
Healthcare Computers, Inc., Acrotrex Corporation, Medical Software
Solutions, Inc. and Metropolitan Information Services, Inc. Aggregate
consideration for these acquisitions completed in the first six months of 1999
was 245,386 common shares, $152,000 in cash, and $974,000 in notes payable for
an approximate aggregate value of $3,482,000. Additionally, the Company
converted a $500,000 line of credit to 197,628 shares of Series A-1 preferred
stock and financed the purchase of property and equipment under capital leases
of approximately $16,000.
F-22
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS:
The Company maintains a 401(k) Savings Plan (the Plan). Under the terms of
the Plan, employees may elect to contribute up to 15% of their pre-tax
compensation to the Plan. Employee contributions are 100% vested at all times.
The Company may make discretionary contributions to the Plan, which vest
annually over a six-year period. Discretionary contributions made to the Plan
were approximately $0, $0, $4,000, $1,500 and $2,500 for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30, 1998
(unaudited) and 1999, respectively.
13. INCOME TAXES:
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------ SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Current:
Federal........................... $50 $ -- $ -- $ --
State............................. 14 -- -- --
--- ----- ------ -------
Total current................... 64 -- -- --
Deferred:
Federal........................... (4) (307) (1,188) (1,186)
State............................. -- (61) (302) (265)
--- ----- ------ -------
Total deferred.................. (4) (368) (1,490) (1451)
--- ----- ------ -------
Change in valuation allowance....... 4 173 1,147 319
--- ----- ------ -------
Net income tax provision
(benefit)..................... $64 $(195) $ (343) $(1,132)
=== ===== ====== =======
</TABLE>
Deferred taxes result from temporary differences between the bases of assets
and liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations. At June 30, 1999, the Company had net operating loss
carryforwards of approximately $1,832,000 and $329,000 available to offset
future federal and state taxable income, respectively. Such federal and state
carryforwards expire through 2018 and 2003, respectively. The extent to which
the loss carry forwards
F-23
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES: (CONTINUED)
can be used to offset future taxable income may be limited. The sources of the
temporary differences and their effect on deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $199 $ 988 $2,161
Accruals and reserves............................ 107 415 388
Depreciation..................................... -- 31 31
Difference between book and tax basis of
intangibles.................................... 38 211 305
---- ------ ------
344 1,645 2,885
Deferred tax liabilities:
Difference between book and tax amortization
related to acquired identifiable intangibles
other than goodwill............................ (150) (304) (1,225)
---- ------ ------
Net deferred tax asset before allowance............ 194 1,341 1,660
---- ------ ------
Valuation allowance................................ (194) (1,341) (1,660)
---- ------ ------
Net deferred tax asset......................... $ -- $ -- $ --
==== ====== ======
</TABLE>
The following table accounts for the differences between the actual tax
provision (benefit) and amounts obtained by applying the Statutory U.S. Federal
rate to the income (loss) before income taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------ SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Expected tax provision (benefit)... $51 $(214) $(1,434) $(1,304)
Increase (decrease)in income taxes
resulting from:
State income benefit........... 9 (38) (253) (230)
Change in deferred tax asset
valuation allowance.......... 4 173 1,128 319
Nondeductible goodwill......... -- -- 77 --
Other, net..................... -- (116) 139 83
--- ----- ------- -------
Net income tax provision
(benefit)........................ $64 $(195) $ (343) $(1,132)
=== ===== ======= =======
</TABLE>
14. CONTINGENCIES:
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
June 30, 1999, the Company was not a party to any legal proceedings, which, if
decided adversely to the Company, would, in the opinion of management,
individually or in the aggregate, have a material adverse effect on the
Company's business, financial condition or results of operations.
F-24
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT REPORTING:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information," which was adopted by the Company for
the fiscal year ended December 31, 1998. This statement establishes standards
for reporting selected segment services, geographic areas and major customers.
The Company reported on two operating segments in 1998 and 1999--the software
and systems sales and customer support and electronic services groups. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on margin level before selling general and administrative and other
operating costs. The Company does not manage costs below gross margin by
segment. The Company does not track long-lived assets by segment and therefore
related disclosures are not relevant and are not presented. The software and
systems sales group sells and licenses practice management software products to
physicians, dentists and other professionals with comprehensive office
management software designed to automate the administrative, financial, practice
management and clinical requirements of a practice. The customer support and
electronic services group provides software, network and hardware support,
training, electronic claims processing, electronic statement printing and
mailing and electronic remittance advices. The Company's reportable segments
offer different products and services, which are sold and serviced by the same
selling and support personnel.
For the year ended December 31, 1998, the following table reports selected
segment information (in thousands):
<TABLE>
<CAPTION>
CUSTOMER
SOFTWARE AND SUPPORT AND
SYSTEMS ELECTRONIC
SALES SERVICES TOTAL
------------ ----------- --------
<S> <C> <C> <C>
Revenues.................................................... $3,943 $5,430 $9,373
Cost of revenues............................................ 2,146 3,606 5,752
------ ------ ------
Gross margin.............................................. $1,797 $1,824 $3,621
====== ====== ======
</TABLE>
For the six months ended June 30, 1999, the following table reports selected
segment information (in thousands):
<TABLE>
<CAPTION>
CUSTOMER
SOFTWARE AND SUPPORT AND
SYSTEMS ELECTRONIC
SALES SERVICES TOTAL
------------ ----------- --------
<S> <C> <C> <C>
Revenues.................................................... $3,162 $4,062 $7,224
Cost of revenues............................................ 1,648 2,781 4,429
------ ------ ------
Gross margin.............................................. $1,514 $1,281 $2,795
====== ====== ======
</TABLE>
16. SUBSEQUENT EVENTS (UNAUDITED):
In November 1999, the Company filed a registration statement with the
Securities and Exchange Commission that would permit the Company to sell shares
of the Company's common stock in connection with a proposed initial public
offering (IPO). Approximately $2 million the proceeds will be used to retire
outstanding promissory notes. The balance of the proceeds will be used for
working capital and for other general corporate purposes, including the funding
of future acquisitions. If the
F-25
<PAGE>
VANTAGEMED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
offering is consummated under the terms presently anticipated, each of the
outstanding shares of the Company's Series B preferred stock will automatically
convert into 1.2 shares of common stock. Each of the shares of Series A-1
preferred stock will convert into 0.33886 shares of common stock.
On November 22, 1999, the board of directors approved a one-for-three
reverse stock split which is subject to shareholders' approval. The split would
be effective upon the completion of an IPO and would affect all outstanding
shares of common stock. All common share and per share data in these financial
statements have been retroactively adjusted to give effect to the reverse stock
split. In addition, the conversion and exercise provisions of the outstanding
shares of preferred stock, stock options and warrants have been adjusted
accordingly.
In October 1999, the Company issued a $3,000,000 convertible note. The note
is convertible into shares of the Company's common stock at 50% of the IPO share
price.
Subsequent to June 30, 1999, the Company has committed to issue an aggregate
of 38,666 shares of common stock at $7.50 per share. Of the shares committed,
16,666 were converted from notes and 22,000 were sold for cash. In addition, 955
stock options were exercised at $6.27 per share.
Subsequent to June 30, 1999, the Company executed and closed agreements to
acquire the following companies: (i) Brand Software, Inc., based in
Massachusetts, (ii) CARE Information Systems, Inc., based in Illinois,
(iii) Mariner Systems, Inc., based in Colorado, (iv) Health Information
Network, L.C., based in Utah, (v) Logos Systems, Inc., based in Texas,
(vi) Pep-ware Software, Inc., based in Utah, (vii) Computerized Doctors
Systems, Inc., based in Alabama, (viii) Medical Digital Technologies, Inc.,
based in California, (ix) CSS, Inc., based in North Carolina and (x) Data
Decisions, Inc., based in Arkansas. The acquisitions were accounted for using
the purchase method of accounting. The aggregate consideration paid was
1,616,323 shares of common stock, 20,000 shares of Series B preferred stock,
$1,113,000 in notes payable and $378,000 in cash.
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if these acquisitions, and those
discussed in Note 3, had occurred as of the beginning of 1998. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisitions been made as of January 1, 1998, nor is it indicative of future
results of operations (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ ---------------
1998 1999
------------ ---------------
<S> <C> <C>
Revenue..................................................... $23,388 $13,622
Depreciation and amortization............................... 5,943 3,061
Loss available to common stockholders....................... (9,764) (4,416)
Basic and diluted loss per share............................ (3.12) (1.38)
</TABLE>
F-26
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,190
Accounts receivable, net of allowance of $329............. 1,773
Notes receivable, current portion......................... 64
Inventories............................................... 273
Prepaid expenses and other................................ 546
-------
Total current assets.................................... 3,846
NOTES RECEIVABLE, net of current portion.................... 141
PROPERTY AND EQUIPMENT, net................................. 2,573
INTANGIBLES, net of accumulated amortization of $3,590...... 22,735
-------
Total assets............................................ $29,295
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Book overdraft............................................ $ 299
Current portion of long-term debt......................... 2,270
Accounts payable.......................................... 1,143
Accrued liabilities....................................... 1,746
Customer deposits and deferred revenue.................... 2,567
-------
Total current liabilities............................... 8,025
LONG-TERM DEBT, net of current portion...................... 1,943
-------
Total liabilities....................................... 9,968
-------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized
Series A-1--1,795,300 shares outstanding at September 30,
1999 (aggregate liquidation preference of $4,722); no
pro forma shares outstanding............................ 2 $ --
Series B--120,000 shares outstanding at September 30, 1999
(aggregate liquidation preference of $1,440); no pro
forma shares outstanding................................ -- --
Common stock, $0.001 par value, 6,666,666 shares authorized;
3,922,325 shares outstanding at September 30, 1999;
4,665,750
pro forma shares outstanding............................ 4 5
Additional paid-in capital.................................. 26,911 26,912
Accumulated deficit......................................... (7,590) (7,590)
------- -------
Total stockholders' equity.............................. 19,327 19,327
------- -------
Total liabilities and stockholders' equity.............. $29,295 $29,295
======= =======
</TABLE>
The accompanying notes are an integral part of these statements
F-27
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Software and systems...................................... $ 2,591 $ 5,751
Customer support and electronic services.................. 3,452 6,709
---------- ----------
Total revenues.......................................... 6,043 12,460
OPERATING COSTS AND EXPENSES:
Software and systems...................................... 1,427 2,603
Customer support and electronic services.................. 2,355 4,462
Selling, general and administrative....................... 2,951 6,213
Product development....................................... 1,015 2,797
Depreciation and amortization............................. 976 2,578
---------- ----------
Total operating costs and expenses...................... 8,724 18,653
---------- ----------
LOSS FROM OPERATIONS........................................ (2,681) (6,193)
---------- ----------
INTEREST INCOME (EXPENSE):
Interest income........................................... 35 23
Interest expense.......................................... (192) (442)
---------- ----------
Total interest income (expense)......................... (157) (419)
---------- ----------
LOSS BEFORE INCOME TAXES.................................... (2,838) (6,612)
BENEFIT FOR INCOME TAXES.................................... (218) (3,284)
---------- ----------
Net loss................................................ $ (2,620) $ (3,328)
---------- ----------
Basic and diluted loss per share............................ $ (1.25) $ (1.16)
---------- ----------
Weighted-average shares--basic and diluted.................. 2,088,741 2,877,173
---------- ----------
Pro forma basic and diluted loss per share.................. $ (1.16) $ (0.92)
---------- ----------
Pro forma weighted-average shares--basic and diluted........ 2,253,482 3,604,815
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
VANTAGEMED CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,620) $(3,328)
Adjustments to reconcile net loss to net cash used for
operating activities-
Depreciation and amortization........................... 976 2,577
Bad debt expense........................................ 126 128
Provision for deferred income taxes..................... (438) (3,305)
Changes in assets and liabilities, net of effects from
acquisitions-
Accounts receivable................................... (162) (176)
Inventories........................................... 2 (151)
Prepaid expenses and other............................ (47) (366)
Book overdraft........................................ 0 (1,333)
Accounts payable and accrued liabilities.............. 286 (371)
Customer deposits and deferred revenue................ 277 (316)
------- -------
Net cash used for operating activities.............. (1,600) (6,641)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (61) (262)
Cash received from businesses acquired, net............... 270 4,202
------- -------
Net cash provided by investing activities........... 209 3,940
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 580 633
Proceeds from issuance of preferred stock................. -- 3,000
Proceeds from issuance long-term debt..................... 967 374
Payments on long-term debt................................ (364) (551)
Distributions to shareholders............................. (74) --
------- -------
Net cash provided by financing activities........... 1,109 3,456
------- -------
Net change in cash and cash equivalents............. (282) 755
CASH AND CASH EQUIVALENTS, beginning of period.............. 680 435
------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 398 $ 1,190
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 176 $ 404
Cash paid for income taxes................................ $ 1 $ 7
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
VANTAGEMED CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION AND BASIS OF PRESENTATION:
The information presented at September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited, but includes all adjustments
which the management of VantageMed Corporation and Subsidiaries (the Company)
believes to be necessary for a fair presentation of the financial condition,
results of operations and cash flows for the periods presented. Historical
results may not be indicative of the results to be expected in the future.
Certain footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These unaudited consolidated financial statement notes
should be read in conjunction with the remainder of this document.
OPERATIONS
The Company was incorporated in California on June 11, 1995. On April 9,
1997, the Company reincorporated in Delaware. The Company began operations in
July 1997 with its first acquisition. The Company is a diversified healthcare
information systems supplier headquartered in Sacramento, California with
regional offices in Walnut Creek and San Francisco, California; Honolulu,
Hawaii; Seattle, Washington; Kansas City, Missouri; Pittsburgh, Pennsylvania;
Flint, Michigan; Pompton Plains, New Jersey; Detroit, Michigan; Boston,
Massachusetts; Springfield, Illinois; Boulder, Colorado; Salt Lake City, Utah
and Houston, Texas. The Company develops, sells, installs and supports software
products and services that assist physicians, dentists, physician organizations
and other healthcare providers in the operation of their practices and
organizations. The Company is building a national distribution network by
acquiring established regional healthcare practice management systems companies
to sell and support its new generation software and services.
The practice management software products offered by the Company provide
physicians, dentists and other healthcare professionals with comprehensive
office management software designed to automate the administrative, financial,
practice management and clinical requirements of a practice. These systems range
in capacity from one to approximately one hundred users. The Company also
provides software, network and hardware support, training, electronic claims
processing, electronic statement printing and mailing and electronic remittance
advices.
RISKS AND UNCERTAINTIES
The Company has suffered recurring losses from operations since its
inception and does not currently have a substantial amount of operating
reserves. The Company operates with a negative cash flow primarily because of
acquisition expenses, prior debt incurred by the acquired companies, and the
costs of building infrastructure for future growth. In order to make
acquisitions and pay for the startup losses, the Company must raise additional
capital. The Company is also subject to a number of additional risks, including,
but not limited to, risks associated with acquisitions (successful integration
and operation of new products, technologies and businesses), uncertainties in
the healthcare industry, and dependence on the medical and dental market. There
can be no assurance that the Company will successfully integrate acquired
subsidiaries.
F-30
<PAGE>
VANTAGEMED CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
2. BUSINESS COMBINATIONS:
Business acquisitions listed below were accounted for under the purchase
method of accounting, applying the provisions of Accounting Principles Board
Opinion No. 16 and, as a result, the Company recorded the assets and liabilities
of the acquired companies at their estimated fair values with the excess of the
purchase price over these amounts being recorded as goodwill. The financial
statements reflect the operations of the acquired businesses for the periods
after their respective dates of acquisition.
During the nine months ended September 30, 1999, the Company acquired
substantially all of the assets, subject to the assumptions of certain
liabilities, of Civitec Healthcare Computers, On-Call Medical Systems, Medical
Software Solutions, Inc., Metropolitan Information Services, Inc., Brand
Software, Care Information Systems, Mariner Systems, Logos Systems, and Health
Information Network. Aggregate consideration for these acquisitions was
1,421,773 common shares, 20,000 Series B preferred shares, $152,000 in cash, and
$1,315,000 in debt for an approximate aggregate value of $16,627,000.
3. STOCKHOLDERS' EQUITY:
On November 22, 1999, the board of directors approved a one-for-three
reverse stock split which is subject to shareholders' approval. The split would
be effective upon the completion of an IPO and would affect all outstanding
shares of common stock. All common share and per share data in these financial
statements have been retroactively adjusted to give effect to the reverse stock
split. In addition, the conversion and exercise provisions of the outstanding
shares of preferred stock, stock options and warrants have been adjusted
accordingly.
During the nine months ended June 30, 1999, in addition to the shares issued
in connection with acquisitions, the Company issued the following shares:
- 76,933 common shares for $627,000 cash
- 16,666 common shares converted from a note for $125,000
- 955 common shares for $6,000 cash in accordance with stock option
agreements
- 1,184,654 Series A-1 preferred shares for $3,000,000 cash
- 197,628 Series A-1 preferred shares from a note for $500,000
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
In November 1999, the Company filed a registration statement with the
Securities and Exchange Commission that would permit the Company to sell shares
of the Company's common stock in connection with a proposed initial public
offering (IPO). If the IPO is consummated under the terms presently anticipated,
all of the currently outstanding shares of Series A-1 and Series B preferred
stock will be automatically converted into shares of common stock upon the
closing of the IPO. The effect of this transaction has been reflected as
unaudited pro forma stockholders' equity in the accompanying balance sheet as of
September 30, 1999.
F-31
<PAGE>
VANTAGEMED CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
4. EARNINGS PER SHARE:
Basic loss per share is computed using the weighted-average number of shares
of common stock outstanding while diluted loss per share reflects the potential
dilution that would occur if preferred stock had been converted and stock
options and warrants had been exercised. Common equivalent shares from preferred
stock, stock options and convertible notes have been excluded from the
computation of diluted loss per share, as their effect is antidilutive.
Pro forma basic and diluted loss per share has been calculated assuming the
conversion of Series A-1 and Series B preferred stock into common shares, as if
the shares had been converted on the dates of their issuance.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of VantageMed Corporation:
We have audited the accompanying balance sheet of ATEK COMPUTER
DISTRIBUTORS, INC. (a Delaware Corporation) as of March 31, 1997, and the
related statements of operations, stockholders' deficit and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ATEK Computer
Distributors, Inc. as of March 31, 1997 and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Sacramento, California
October 22, 1999
F-33
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 12,833 $ 36,154
Accounts receivable, net of allowance of $38,250 and
$7,909 for March 31, 1997 and June 30, 1997,
respectively............................................ 45,050 54,825
Inventories............................................... 40,852 42,485
Prepaid expenses and other................................ 3,390 3,390
--------- ---------
Total current assets.................................... 102,125 136,854
NOTE RECEIVABLE............................................. 25,000 0
PROPERTY AND EQUIPMENT, net................................. 86,827 75,382
--------- ---------
Total assets............................................ $ 213,952 $ 212,236
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 112,656 $ 106,717
Accrued liabilities....................................... 68,003 110,901
Customer deposits and deferred revenue.................... 297,799 323,006
Current portion of long-term debt......................... 377,549 363,792
--------- ---------
Total current liabilities............................... 856,007 904,416
LONG-TERM DEBT, net of current portion...................... 79,846 79,537
--------- ---------
Total liabilities....................................... 935,853 983,953
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 7)
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 2,000 shares authorized, 1,369
shares outstanding...................................... 166,900 166,900
Accumulated deficit....................................... (888,801) (938,617)
--------- ---------
Total stockholders' deficit............................. (721,901) (771,717)
--------- ---------
Total liabilities and stockholders' deficit............. $ 213,952 $ 212,236
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------------
YEAR ENDED THREE MONTHS ENDED
MARCH 31, 1997 JUNE 30, 1996 JUNE 30, 1997
-------------- ------------- -------------
<S> <C> <C> <C>
REVENUES.............................................. $1,912,523 $510,625 $304,194
OPERATING COST AND EXPENSES:
Cost of revenues.................................... 979,603 260,497 144,018
Selling, general and administrative................. 1,127,836 226,652 195,432
---------- -------- --------
Income (loss) from operations..................... (194,916) 23,476 (35,256)
OTHER INCOME (EXPENSE):
Interest, net....................................... (61,884) (16,593) (14,600)
Other, net.......................................... 0 112 40
---------- -------- --------
Net income (loss)................................. $ (256,800) $ 6,995 $(49,816)
========== ======== ========
</TABLE>
ATEK COMPUTER DISTRIBUTORS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996............................ 1,369 $166,900 $(632,001) $(465,101)
Net loss........................................... 0 0 (256,800) (256,800)
----- -------- --------- ---------
BALANCE AT MARCH 31, 1997............................ 1,369 166,900 (888,801) (721,901)
Net loss (for three months)........................ 0 0 (49,816) (49,816)
----- -------- --------- ---------
BALANCE AT JUNE 30, 1997 (UNAUDITED)................. 1,369 $166,900 $(938,617) $(771,717)
===== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 31, -------------------------------
1997 JUNE 30, 1996 JUNE 30, 1997
---------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $(256,800) $ 6,995 $(49,816)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities--
Depreciation and amortization........................ 31,173 7,408 9,267
Bad debt expense..................................... 38,250 12,766 7,909
Changes in assets and liabilities, net of effects
from acquisitions--
Accounts receivable................................ 164,446 (38,965) (17,684)
Inventories........................................ 14,127 7,688 (1,633)
Prepaid expenses and other......................... (3,390) 0 0
Accounts payable and accrued liabilities........... (117,624) (12,006) 36,959
Customer deposits and deferred revenue............. (78,368) (47,323) 25,207
--------- -------- --------
Net cash provided by (used for) operating
activities..................................... (208,186) (63,437) 10,209
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................... (24,160) 0 0
Proceeds from sale of property and equipment........... 0 0 2,178
--------- -------- --------
Net cash provided by (used for) investing
activities..................................... (24,160) 0 2,178
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt............... 217,264 40,000 0
Payments on long-term debt............................. 0 (4,471) (14,066)
Issuance of notes receivable........................... (25,000) 0 0
Settlement of notes receivable......................... 0 0 25,000
--------- -------- --------
Net cash provided by financing activities........ 192,264 35,529 10,934
--------- -------- --------
Net change in cash............................... (40,082) (27,908) 23,321
CASH, beginning of period................................ 52,915 52,915 12,833
--------- -------- --------
CASH, end of period...................................... $ 12,833 $ 25,007 $ 36,154
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ 38,317 $ 11,674 $ 10,369
Cash paid for income taxes............................. $ 800 $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
F-36
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. ORGANIZATION:
ATEK Computer Distributors, Inc. (the Company) is a Delaware corporation.
The Company is a healthcare information systems supplier that operates in
California. The Company sells, installs, and supports computerized practice
management systems, and provides related services to medical and dental
practices. The Company was acquired by VantageMed Corporation (VantageMed) on
July 15, 1997 under an agreement in which ATEK's owners exchanged their total
1,369 shares of common stock for 558,721 shares of VantageMed's common stock.
All ATEK shares purchased by VantageMed were immediately retired. Under this
agreement, VantageMed then contributed $50,000 to pay certain notes payable of
ATEK. Also under the agreement VantageMed has the right to redeem up to 47.5% of
the VantageMed common shares held by ATEK's previous owners for a price ranging
between $2.76 and $5.52 per share, depending upon the time redeemed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying consolidated balance sheets are not
materially different from their fair values.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of computer equipment purchased to fill customer
orders.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, which are generally three to seven years. Leasehold improvements are
amortized over the term of the lease. Maintenance and repairs are expensed as
incurred.
REVENUE RECOGNITION
Revenue is generated primarily from new software installations, software
conversions and upgrades for existing customers, sales of hardware manufactured
by other companies, hardware maintenance, software support and electronic
transaction services. Revenue from software product sales is recognized upon
delivery to the customer. Other revenue, including hardware sales, maintenance,
licensing and support activities, is generally recognized as hardware is shipped
or as services are provided. Deferred revenue primarily consists of revenue
deferred under annual maintenance and annual license agreements on which amounts
have been received from customers and for which the earnings process has not
been completed.
F-37
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" under which deferred income taxes are provided
based upon enacted tax laws and rates applicable to the periods in which taxes
become payable. A valuation allowance is provided against the future benefits of
deferred tax assets if it is determined that it is more likely than not that the
future tax benefits associated with the deferred tax asset will not be realized.
USE OF ESTIMATES
The preparation of the 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.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1997
--------- -----------
(UNAUDITED)
<S> <C> <C>
Office and computer equipment......................... $ 71,468 $ 117,382
Furniture and fixtures................................ 177,566 177,566
Vehicles.............................................. 88,450 88,450
Leased equipment...................................... 48,092 0
--------- ---------
385,576 383,398
Less: Accumulated depreciation........................ (298,749) (308,016)
--------- ---------
$ 86,827 $ 75,382
========= =========
</TABLE>
Depreciation expense was $31,173, $7,408 (unaudited) and $9,267 (unaudited),
for the year ending March 31, 1997 and for the three months ending June 30, 1996
and 1997, respectively.
F-38
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
4. LONG-TERM DEBT:
The Company's long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31,
1997 JUNE 30, 1997
---------- --------------
(UNAUDITED)
<S> <C> <C>
Note payable to individual, secured by accounts
receivable, interest at 10%, payable on demand..... $ 130,208 $ 125,000
Note payable to financing companies, secured by
vehicles, interest ranging from 6.75% to 7.75%,
payable in monthly installments through June
2000............................................... 23,840 20,554
Note payable to shareholder, secured by vehicle,
interest at 15%, due on demand..................... 3,594 3,683
Note payable to shareholder, secured by software,
interest at 11%, payable in monthly installments
through January 1998............................... 5,160 3,661
Note payable to shareholder, unsecured, interest at
12%, due on demand................................. 50,000 51,515
Notes payable to shareholders, unsecured, interest
ranging from 10% to 12%, due in monthly
installments through July 1999..................... 198,941 203,186
Note payable to third party, unsecured, interest at
10%, payable in monthly installments through April
1997............................................... 500 0
Capital leases payable, secured by equipment or
vehicles, payable in monthly installments through
August 1998........................................ 45,152 35,730
--------- ---------
Total.............................................. 457,395 443,329
Current portion.................................... (377,549) (363,792)
--------- ---------
Notes payable, less current portion................ $ 79,846 $ 79,537
========= =========
</TABLE>
Future minimum payments under all debt obligations excluding capital lease
obligations, during the 12 month periods subsequent to June 30, 1997, are as
follows:
<TABLE>
<S> <C>
1998........................................................ $363,792
1999........................................................ 79,067
2000........................................................ 470
--------
$443,329
========
</TABLE>
F-39
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
5. OPERATING LEASE OBLIGATION:
The Company leases facilities under a non-cancellable operating lease
arrangement. The minimum future lease payments required under the Company's
operating lease at June 30, 1997 is as follows:
<TABLE>
<S> <C>
1998........................................................ $ 72,972
1999........................................................ 72,972
2000........................................................ 72,972
2001........................................................ 72,972
2002........................................................ 72,972
Thereafter.................................................. 36,486
--------
$401,346
========
</TABLE>
Rent expense for this lease was $30,405, $0 (unaudited), and $18,243
(unaudited) for the year ending March 31, 1997 and the three months ending
June 30, 1996 and 1997, respectively.
6. INCOME TAXES:
The provision (benefit) for income taxes is included in selling, general and
administrative expenses and consists of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED -----------------------------
MARCH 31, 1997 JUNE 30, 1996 JUNE 30, 1997
-------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Federal............................. $ (82,176) $2,238 $(15,942)
State............................... (23,112) 630 (4,483)
--------- ------ --------
Total current..................... (105,288) 2,868 (20,425)
Deferred:
Federal............................. (2,804) 306 (2,176)
State............................... (789) 85 86
--------- ------ --------
Total deferred.................... (3,593) 391 (2,090)
--------- ------ --------
Change in valuation allowance......... 108,881 0 22,515
--------- ------ --------
Net income tax provision
(benefit)....................... $ 0 $3,259 $ 0
========= ====== ========
</TABLE>
F-40
<PAGE>
ATEK COMPUTER DISTRIBUTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
6. INCOME TAXES: (CONTINUED)
Deferred taxes result from temporary differences between the bases of assets
and liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations. The sources of the temporary differences and their
effect of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1997 JUNE 30, 1997
---------- -------------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves............................... $ 27,881 $ 45,469
Depreciation........................................ 7,817 7,695
-------- --------
35,698 53,164
Valuation allowance................................... (35,698) (53,164)
-------- --------
Net deferred tax asset............................ $ 0 $ 0
======== ========
</TABLE>
The following table accounts for the differences between the actual tax
provision and amounts obtained by applying the Statutory U.S. Federal rate to
the income (loss) before income taxes.
<TABLE>
<CAPTION>
MARCH 31, 1997 JUNE 30, 1996 JUNE 30, 1997
-------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Expected tax benefit.................. $(89,880) $2,448 $(17,436)
Increase (decrease) in income taxes
resulting from:
State income benefit................ (15,408) 420 (2,989)
Change in deferred tax asset
valuation allowance............... 108,881 0 22,515
Other, net.......................... (3,593) 391 (2,090)
-------- ------ --------
Net income tax provision (benefit).... $ 0 $3,259 $ 0
======== ====== ========
</TABLE>
7. CONTINGENCIES:
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
June 30, 1997, the Company was not a party to any legal proceedings, which, if
decided adversely to the Company, would, individually or in the aggregate, have
a material adverse effect on the Company's business, financial condition or
results of operations.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Brand Software, Inc.:
We have audited the accompanying balance sheet of Brand Software, Inc. (a
New York corporation) as of March 31, 1999, and the related statements of
operations, stockholders' deficit and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brand Software, Inc. as of
March 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Boston, Massachusetts
October 18, 1999
F-42
<PAGE>
BRAND SOFTWARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1999
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 75,280 $ 55,522
PROPERTY AND EQUIPMENT, AT COST:
Computer hardware and software............................ 89,553 98,198
Office equipment.......................................... 46,061 48,908
Equipment under capital lease............................. 27,702 27,702
Furniture and fixtures.................................... 5,899 7,484
--------- ---------
Total assets............................................ 169,215 182,292
Less--Accumulated depreciation.............................. 103,130 107,164
--------- ---------
66,085 75,128
--------- ---------
DEPOSITS.................................................... 1,359 13,258
--------- ---------
Total assets............................................ $ 142,724 $ 143,908
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit............................................ $ 47,250 $ 47,250
Current portion of capital lease obligations.............. 3,579 4,652
Current portion of notes payable.......................... 9,547 10,914
Accounts payable.......................................... 167,324 137,718
Accrued expenses.......................................... 116,413 109,674
Deferred maintenance revenue.............................. 500,179 546,000
--------- ---------
Total current liabilities............................... 844,292 856,208
--------- ---------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION............. 20,873 18,991
NOTES PAYABLE, LESS CURRENT PORTION......................... 19,376 15,717
COMMITMENTS (Note 6)
STOCKHOLDERS' DEFICIT:
Common stock, no par value--
Authorized--5,000 shares
Issued and outstanding--2,364 shares.................... 81,520 81,520
Accumulated deficit....................................... (823,337) (828,528)
--------- ---------
Total stockholders' deficit............................. (741,817) (747,008)
--------- ---------
Total liabilities and stockholders' deficit............. $ 142,724 $ 143,908
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
BRAND SOFTWARE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30,
MARCH 31, -------------------------
1999 1998 1999
---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES:
License.................................................. $1,030,702 $213,785 $340,099
Service and other........................................ 465,068 117,197 201,224
---------- -------- --------
1,495,770 330,982 541,323
OPERATING EXPENSES:
Cost of revenues......................................... 72,119 14,670 24,579
Selling, general and administrative...................... 1,484,135 325,009 472,495
Product development...................................... 128,435 32,070 42,323
Depreciation............................................. 12,589 3,056 4,034
---------- -------- --------
Total operating expenses............................... 1,697,278 374,805 543,431
---------- -------- --------
Loss from operations................................... (201,508) (43,823) (2,108)
INTEREST EXPENSE........................................... (15,874) (2,996) (4,583)
GAIN ON SALE OF EQUIPMENT.................................. -- -- 1,500
---------- -------- --------
Net loss............................................... $ (217,382) $(46,819) $ (5,191)
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
BRAND SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED MARCH 31, 1999 AND THE
THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1998............................... 2,364 $81,520 $(605,955) $(524,435)
Net loss............................................ -- -- (217,382) (217,382)
----- ------- --------- ---------
BALANCE, MARCH 31, 1999............................... 2,364 81,520 (823,337) (741,817)
Net loss (unaudited)................................ -- -- (5,191) (5,191)
----- ------- --------- ---------
BALANCE, JUNE 30, 1999 (UNAUDITED).................... 2,364 $81,520 $(828,528) $(747,008)
===== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
BRAND SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30,
MARCH 31, -------------------
1999 1998 1999
---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(217,382) $(46,819) $ (5,191)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation............................................ 12,589 3,056 4,034
Gain on disposal of equipment........................... -- -- (1,500)
Changes in assets and liabilities--
Accounts payable...................................... 2,694 (8,046) (29,606)
Accrued expenses...................................... 77,512 12,758 (6,739)
Deferred maintenance revenue.......................... 192,179 31,000 45,821
--------- -------- --------
Net cash provided by (used in) operating
activities........................................ 67,592 (8,051) 6,819
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (30,797) (2,656) (13,077)
Proceeds from sales of equipment.......................... -- -- 1,500
Increase in deposits...................................... (1,359) -- (11,899)
--------- -------- --------
Net cash used in investing activities............... (32,156) (2,656) (23,476)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit.......................... 20,000 20,000 --
Principal payments on notes payable....................... (8,578) (2,060) (2,292)
Principal payments on capital lease obligations........... (3,250) -- (809)
--------- -------- --------
Net cash provided by (used in) financing
activities........................................ 8,172 17,940 (3,101)
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 43,608 7,233 (19,758)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 31,672 31,672 75,280
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 75,280 $ 38,905 $ 55,522
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 15,036 $ 2,996 $ 4,378
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING:
Equipment acquired under capital lease obligations........ $ 27,702 $ 22,456 $ --
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
BRAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Brand Software, Inc. (the Company) is a developer and distributor of billing
and practice management software for mental health professionals. The Therapist
Helper-TM- software is used by psychologists, professional counselors and social
workers nationwide.
Effective July 1, 1999, the Company was acquired by VantageMed Corporation
(VMC). To affect this acquisition, the shareholders of the Company agreed to
exchange substantially all of the assets and certain liabilities of the Company
for 482,412 shares of VMC Common Stock and 20,000 shares of VMC Preferred
Series B Stock. In addition, outstanding options of the Company were converted
into options exercisable for VMC Common Stock. It is anticipated that this
merger will be accounted for as a purchase, in accordance with Accounting
Principles Board (APB) Option No. 16, BUSINESS COMBINATIONS.
The Company is subject to a number of risks associated with emerging,
technology-oriented companies. Principal among these are the risks associated
with marketing the Company's products, dependence upon key individuals,
competition from larger, more financially independent competitors and the need
to obtain adequate financing to fund future operations. The Company has incurred
losses of $828,000 from inception through June 30, 1999. These losses have been
funded through bank and stockholder loans.
The accompanying financial statements reflect the application of certain
significant accounting policies, as described below and in the accompanying
notes to financial statements.
(a) INTERIM FINANCIAL STATEMENTS
The accompanying statements of operations and cash flows for the three
months ended June 30, 1999 and 1998 are unaudited, but in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of results for these interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted, although the Company believes that the disclosures included are
adequate to make the information presented not misleading. The results of
operations for the three months ended June 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the entire fiscal year.
(b) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) REVENUE RECOGNITION
The Company generally recognizes revenue from software licenses upon
delivery. Maintenance revenues are recognized ratably over the period to which
they relate.
F-47
<PAGE>
BRAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company receives payment for software licenses prior to shipment.
Maintenance contracts do not begin until payment has been received. As a result,
the Company does not have accounts receivable.
(d) DEPRECIATION
The Company provides for depreciation using the straight-line method and
charges to operations amounts estimated to allocate the cost of the assets over
their useful lives, as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
- -------------------- -------------
<S> <C>
Computer hardware and software.............................. 3 to 5 years
Office equipment............................................ 5 to 7 years
Equipment under capital leases.............................. Life of lease
Furniture and fixtures...................................... 5 to 7 years
</TABLE>
(e) SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, the Company will capitalize
software development costs incurred after technological feasibility of the
software development projects are established. To date, all of the Company's
costs for research and development of software products have been charged to
operations as incurred, since the amount of software development costs incurred
subsequent to the establishment of technological feasibility has been
immaterial.
(f) CONCENTRATIONS OF CREDIT RISK/SIGNIFICANT CUSTOMERS
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet risk, such as
foreign exchange contracts, option contracts or other foreign hedging
arrangements, or concentration of credit risk.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and equivalents,
line-of-credit loan, notes payable and accounts payable. The carrying amounts of
these financial instruments approximate fair value.
(h) ACCRUED EXPENSES
Accrued expenses consisted of payroll and vacation of $50,039 and other
accruals of $66,374 as of March 31, 1999.
F-48
<PAGE>
BRAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. The Company does not have any items of comprehensive income other than
net income.
(2) LINE OF CREDIT
The Company has up to a $50,000 line of credit with a bank that bears
interest at prime plus 4% (11.75% at March 31, 1999). The line of credit is due
on demand. At March 31, 1999, $47,250 was outstanding. The line is guaranteed by
a stockholder and the president of the Company.
As a result of the merger (Note 1), the Company is in default with certain
provisions of this agreement.
(3) NOTES PAYABLE
Notes payable at March 31, 1999 consist of the following:
<TABLE>
<S> <C>
Promissory note, stockholder, bearing interest at 10.75% per
annum. Due in monthly payments of $325 including interest
and maturing December 2001. Secured by assets of the
Company................................................... $ 9,235
Promissory note bearing interest at 10.75% per annum. Due in
monthly payments of $692 including interest and maturing
December 2001. Secured by assets of the Company........... 19,688
-------
Total notes payable....................................... 28,923
Less--Current portion....................................... 9,547
-------
$19,376
=======
</TABLE>
Future principal maturities on the above notes are $9,547 in 1999, $10,626
in 2000, and $8,750 in 2001.
(4) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 prescribes an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities.
F-49
<PAGE>
BRAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(4) INCOME TAXES (CONTINUED)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of March 31, 1999:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Deferred tax assets (liabilities)--
Net operating loss carryforwards.......................... $ 3,000
Cash to accrual........................................... 280,000
Depreciation.............................................. (10,000)
Valuation allowance....................................... (273,000)
---------
$ --
=========
</TABLE>
Due to the uncertainty surrounding the realization of this deferred tax
asset, the Company provided a full valuation reserve against this amount at the
time it was recorded.
At March 31, 1999, the Company had net operating loss carryforwards for
federal and Massachusetts income tax purposes of approximately $8,000. The net
operating loss carryforwards expire through 2018 and are subject to review and
possible adjustment by the Internal Revenue Service (IRS). The Tax Reform Act of
1986 contains provisions that may limit the net operating loss carryforwards
available to be used in any given year in the event of significant changes in
ownership interest, as defined.
(5) STOCK OPTION PLAN
On December 31, 1997, a stock option plan (the Plan) was approved by the
Company's Board of Directors and stockholders. The Plan provides for the award
of options to purchase up to 480 shares of the Company's common stock. Stock
options granted under the Plan may be either incentive stock options or
nonqualified stock options.
The Plan is administered by the Board of Directors, which has the authority
to designate participants and determine the number and type of options to be
granted, the time at which options are exercisable, the method of payment and
any other terms or conditions of the options. Options generally vest annually
over a five-year period and expire 10 years from the date of grant.
The Board of Directors determines the prices at which options may be
exercised under the Plan. To date, the Company has issued only incentive stock
options, the exercise price of which must be at least 100% (110% for incentive
stock options granted to a 10% stockholder) of the fair market value of the
Company's common stock on the date of grant.
F-50
<PAGE>
BRAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(5) STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock option activity for
the year ended March 31, 1999 and the three months ended June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, March 31, 1998.............................. 340 $144.95
Granted................................................ 120 181.33
--- -------
Outstanding, March 31, 1999.............................. 460 154.44
Granted................................................ -- --
--- -------
Outstanding, June 30, 1999............................... 460 $154.44
=== =======
</TABLE>
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
AT JUNE 30, CONTRACTUAL AT JUNE 30,
EXERCISE PRICE 1999 LIFE (YEARS) 1999
- -------------- ----------- ------------ -----------
<S> <C> <C> <C>
$135.33................................... 226 8.50 175
$164.03................................... 114 8.50 50
$181.33................................... 120 8.83 27
--- ---
460 252
=== ===
</TABLE>
As of June 30, 1999, the Company may issue future stock options to purchase
20 shares under the plan.
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants to be included in the statement of operations or disclosed
in the notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and will elect the disclosure-only alternative
under SFAS No. 123.
The Company has computed the pro forma disclosures required under SFAS
No. 123 for options granted in 1999 using the Black-Scholes option pricing model
prescribed by SFAS No. 123, using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................................... 6%
Expected dividend yield..................................... None
Expected lives.............................................. 5 years
Expected volatility......................................... None
Weighed average value of grants............................. $48.07
</TABLE>
F-51
<PAGE>
BRAND SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
(5) STOCK OPTION PLAN (CONTINUED)
Had compensation cost for the Company's stock option plan been determined
consistent with SFAS No. 123, the pro forma net loss for the year ended
March 31, 1999 would have been as follows:
<TABLE>
<S> <C>
Net loss--
As reported............................................... $(217,382)
Pro forma................................................. (221,090)
</TABLE>
(6) CAPITAL AND OPERATING LEASE OBLIGATIONS
The Company has operating lease commitments for its facilities, as well as
capital lease commitments for certain equipment, which expire through
June 2004. The approximate future minimum payments under these leases as of
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASE LEASE
- ---- --------- --------
<S> <C> <C>
2000..................................................... $ 69,000 $ 9,650
2001..................................................... 75,000 9,650
2002..................................................... 6,000 9,650
2003..................................................... -- 9,650
2004..................................................... -- 2,412
-------- -------
Total future minimum lease payments.................... $150,000 41,012
========
Less--Amount representing interest....................... 16,560
-------
Present value of future minimum lease payments......... 24,452
Less--Current portion of capital lease obligation........ 3,579
-------
Long-term portion...................................... $20,873
=======
</TABLE>
Rent expense included in the accompanying statements of operation for the
year ended March 31, 1999 and the three months ended June 30, 1998 and 1999 was
approximately $52,000, $12,000 and $14,000, respectively.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VantageMed Corporation:
We have audited the accompanying balance sheet of CIVITEC HEALTHCARE
COMPUTERS, INC. (a Michigan Corporation) as of March 31, 1999, and the related
statements of operations, stockholders' deficit and cash flows for the nine
months then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Civitec Healthcare
Computers, Inc. as of March 31, 1999, and the results of its operations and its
cash flows for the nine months then ended, in conformity with generally accepted
accounting principles.
Detroit, Michigan
October 14, 1999
F-53
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
BALANCE SHEET
AS OF MARCH 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 241,124
Accounts receivable....................................... 20,113
Inventories............................................... 3,018
Prepaid expenses and other................................ 8,453
---------
Total current assets.................................... 272,708
PROPERTY AND EQUIPMENT, net................................. 34,391
---------
Total assets............................................ $ 307,099
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 55,715
Accrued liabilities....................................... 57,892
Customer deposits and deferred revenue.................... 288,853
---------
Total current liabilities............................... 402,460
Long-term deferred tax liability.......................... 4,500
---------
Total liabilities....................................... 406,960
---------
COMMITMENTS
STOCKHOLDERS' DEFICIT:
Common stock, $1.00 par value, 100,000 shares authorized;
99,750 shares issued and outstanding.................... 99,750
Additional paid-in capital................................ 27,750
Accumulated deficit....................................... (227,361)
---------
Total stockholders' deficit............................. (99,861)
---------
Total liabilities and stockholders' deficit............. $ 307,099
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<S> <C>
NET REVENUES................................................ $1,056,994
COST OF REVENUES............................................ 512,054
----------
GROSS PROFIT............................................ 544,940
OPERATING COSTS AND EXPENSES................................ 549,467
----------
LOSS FROM OPERATIONS........................................ (4,527)
----------
INTEREST AND OTHER INCOME:
Interest income, net...................................... 1,808
Other income, net......................................... 1,421
----------
Total interest and other income......................... 3,229
----------
LOSS BEFORE INCOME TAXES.................................... (1,298)
PROVISION FOR INCOME TAXES.................................. 400
----------
NET LOSS.................................................... $ (1,698)
==========
NET LOSS PER COMMON SHARE
Basic net loss per share.................................. $ (0.02)
==========
Weighted average common shares outstanding................ 99,750
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1998.................... 99,750 $99,750 $27,750 $(225,663) $(98,163)
Net loss.................................. -- -- -- (1,698) (1,698)
------ ------- ------- --------- --------
BALANCE AT MARCH 31, 1999................... 99,750 $99,750 $27,750 $(227,361) $(99,861)
====== ======= ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (1,698)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation............................................ 8,975
Provision for deferred income taxes..................... 200
Changes in assets and liabilities--
Accounts receivable................................... 6,473
Inventories........................................... (1,655)
Prepaid expenses and other............................ 6,087
Accounts payable and accrued liabilities.............. 15,851
Customer deposits and deferred revenue................ (10,530)
--------
Net cash provided by operating activities........... 23,703
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 668
Purchases of property and equipment....................... (1,044)
--------
Net cash used for investing activities.............. (376)
--------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 23,327
CASH AND CASH EQUIVALENTS, beginning of year................ 217,797
--------
CASH AND CASH EQUIVALENTS, end of year...................... $241,124
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 347
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. ORGANIZATION:
Civitec Healthcare Computers, Inc. (the "Company") is incorporated in
Michigan and began operations in 1987. The Company is a healthcare information
systems supplier headquartered in Grand Blanc, Michigan. The Company develops,
sells, installs and supports computerized practice management systems and
provides related services to medical professionals.
The practice management software products offered by the Company provide
physicians and other medical industry professionals with comprehensive office
management software designed to automate the administrative, financial, practice
management and clinical requirements of a practice. These systems range in
capacity from one to approximately one hundred providers. The Company also
provides software, network and hardware support, training, electronic claims
processing, electronic statement printing and mailing and electronic remittance
advices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying balance sheet are not materially
different from their fair values.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of supplies, used computer equipment to service the
Company's customers pursuant to revenue producing service agreements and new
computer equipment purchased to fill customer orders.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, which are generally three to seven years. Leasehold improvements are
amortized over the term of the lease. Maintenance and repairs are expensed as
incurred.
REVENUE RECOGNITION
Revenue is generated primarily from the following sources: New software
installations, software conversions and upgrades for existing customers, sales
of hardware manufactured by other companies, hardware maintenance, software
support and electronic transaction services. In accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition", revenue from software product
sales is recognized upon delivery to the customer provided the collection of the
sales proceeds is deemed probable, the fee is
F-58
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
fixed and determinable and no significant vendor obligations remain. Other
revenue, including hardware sales, maintenance, licensing and support
activities, is generally recognized as hardware is shipped or as services are
provided. Deferred revenue primarily consists of revenue deferred under annual
maintenance and annual license agreements on which amounts have been received
from customers and for which the earnings process has not been completed.
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic product lives and changes in software and
hardware technology. Amounts that would have been capitalized under this
statement after consideration of the above factors were immaterial, and
therefore, no software development costs have been capitalized by the Company.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes", under which deferred income taxes
are provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. A valuation allowance is provided against the future
benefits of deferred tax assets if it is determined that it is more likely than
not that the future tax benefits associated with the deferred tax asset will not
be realized.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
F-59
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<S> <C>
Office and computer equipment............................... $ 65,666
Furniture and fixtures...................................... 26,752
Vehicles.................................................... 8,013
Leasehold improvements...................................... 27,256
--------
127,687
Less: Accumulated depreciation.............................. (93,296)
--------
$ 34,391
========
</TABLE>
Depreciation expense was approximately $9,000 for the nine months ended
March 31, 1999.
4. OPERATING LEASE OBLIGATION:
The Company leases its headquarters under a non-cancelable operating lease
that expires in March 2001. The minimum future lease payments required under the
Company's operating lease for the fiscal years ending June 30 are as follows:
<TABLE>
<S> <C>
1999........................................................ $11,700
2000........................................................ 46,900
2001........................................................ 35,200
-------
Total minimum payments.................................... $93,800
=======
</TABLE>
Rent expense was approximately $48,000 for the nine months ended March 31,
1999.
5. EMPLOYEE BENEFIT PLANS:
The Company maintains a 408(k) Savings Plan ("the Plan"). All eligible
employees can participate in the Plan. Under the terms of the Plan, employees
may elect to contribute up to 15% of their pre-tax compensation to the Plan.
Employee contributions are 100% vested at all times.
6. INCOME TAXES:
The provision for income taxes consists of:
<TABLE>
<S> <C>
Current provision........................................... $200
Deferred provision.......................................... 200
----
Provision for income taxes................................ $400
====
</TABLE>
F-60
<PAGE>
CIVITEC HEALTHCARE COMPUTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
6. INCOME TAXES: (CONTINUED)
Deferred taxes result from temporary differences between the bases of assets
and liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations. The sources of the temporary differences and the
related deferred tax assets and liabilities are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accruals and reserves..................................... $ 4,300
Deferred tax liabilities:
Depreciation.............................................. (4,500)
-------
Net deferred tax liability.............................. $ (200)
=======
</TABLE>
The following table accounts for the differences between the actual tax
provision and amounts obtained by applying the Statutory U.S. Federal rate to
the loss before income taxes.
<TABLE>
<S> <C>
Expected tax benefit........................................ $(195)
Increase in income taxes resulting from nondeductible
items..................................................... 595
-----
Net income tax provision.................................... $ 400
=====
</TABLE>
7. SUBSEQUENT EVENT:
Subsequent to March 31, 1999, the Company was acquired by VantageMed
Corporation. As consideration, the stockholders of the Company received
approximately 266,000 shares of VantageMed stock and a promissory note for
approximately $383,000 in exchange for the stock of the Company.
F-61
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VantageMed Corporation:
We have audited the accompanying balance sheet of CM Healthcare
Technologies, Inc. (a Washington corporation) as of December 31, 1997, and the
related statements of operations, stockholders' deficit and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CM Healthcare
Technologies, Inc. as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Seattle, Washington,
October 22, 1999
F-62
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 204,414 $ 191,087
Accounts receivable, net of allowance of $18,538 and
$25,924................................................. 102,200 94,327
Other..................................................... -- 3,628
--------- ---------
Total current assets.................................... 306,614 289,042
PROPERTY AND EQUIPMENT, at cost, net of $536,877 and
$551,877 of accumulated depreciation...................... 89,551 84,096
OTHER ASSETS................................................ 248 1,053
--------- ---------
Total assets............................................ $ 396,413 $ 374,191
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 122,779 $ 70,454
Accrued compensation and benefits......................... 66,832 82,767
Accrued expenses.......................................... 14,351 20,077
Deferred revenue.......................................... 19,710 --
Current portion of notes payable and other long-term
liabilities............................................. 84,446 91,729
--------- ---------
Total current liabilities............................... 308,118 265,027
NOTES PAYABLE AND OTHER LONG-TERM LIABILITIES, net of
current portion........................................... 249,621 221,272
--------- ---------
Total liabilities....................................... 557,739 486,299
--------- ---------
STOCKHOLDERS' DEFICIT:
Class A common stock and paid-in capital, $0.01 par value;
4,800,000 shares authorized; 1,421,956 and 1,320,279
issued and outstanding.................................. 395,580 494,207
Class B non-voting common stock, no par value; 200,000
shares authorized; 200,000 shares issued and
outstanding............................................. -- --
Accumulated deficit....................................... (556,906) (606,315)
--------- ---------
Total stockholders' deficit
(161,326) (112,108)
--------- ---------
Total liabilities and stockholders' deficit............. $ 396,413 $ 374,191
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS SIX MONTHS
DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30,
1997 1997 1998
------------ -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES:
System sales....................................... $ 628,592 $ 399,302 $ 279,320
Maintenance and other.............................. 608,463 236,582 293,994
Facility management services....................... 503,671 228,528 345,992
----------- ----------- -----------
Total revenues................................... 1,740,726 864,412 919,306
----------- ----------- -----------
OPERATING EXPENSES:
Cost of system sales............................... 398,253 251,561 175,972
Cost of maintenance and other...................... 437,756 170,339 211,676
Cost of facility management services............... 403,806 182,822 276,794
Selling, general and administrative................ 537,039 353,675 278,401
Depreciation....................................... 23,593 13,000 15,000
----------- ----------- -----------
Total operating expenses......................... 1,800,447 971,397 957,843
----------- ----------- -----------
LOSS FROM OPERATIONS................................. (59,721) (106,985) (38,537)
INTEREST EXPENSE, net................................ (16,376) (4,062) (10,872)
----------- ----------- -----------
NET LOSS............................................. $ (76,097) $ (111,047) $ (49,409)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS SIX MONTHS
DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30,
1997 1997 1998
------------ -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(76,097) $(111,047) $(49,409)
Adjustments to reconcile net loss to net cash from
operating activities--
Depreciation..................................... 23,593 13,000 15,000
Common stock issued to employees................. -- -- 98,627
Changes in assets and liabilities:
Accounts receivable............................ 35,278 68,427 7,873
Other assets................................... 575 (516) (4,433)
Accounts payable............................... (6,363) 30,167 (52,325)
Accrued compensation and accrued expenses...... 8,258 1,515 21,661
Deferred revenue............................... (58,706) (78,416) (19,710)
-------- --------- --------
Net cash from operating activities........... (73,462) (76,870) 17,284
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................ (23,574) (22,438) (9,545)
-------- --------- --------
Net cash from investing activities........... (23,574) (22,438) (9,545)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable........................ 76,621 -- --
Repayments of notes payable........................ (65,545) (15,673) (21,066)
-------- --------- --------
Net cash from financing activities........... 11,076 (15,673) (21,066)
-------- --------- --------
NET DECREASE IN CASH................................. (85,960) (114,981) (13,327)
CASH, beginning of period............................ 290,374 290,374 204,414
-------- --------- --------
CASH, end of period.................................. $204,414 $ 175,393 $191,087
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND
NONCASH ACTIVITIES:
Cash paid for interest............................. $ 14,657 $ 6,403 $ 3,373
Property and equipment acquired under notes
payable.......................................... 26,621 -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-65
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
--------- -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCES, December 31, 1996..................... 1,520,279 $395,580 $(480,809) $ (85,229)
Net loss...................................... -- -- (76,097) (76,097)
--------- -------- --------- ---------
BALANCES, December 31, 1997..................... 1,520,279 395,580 (556,906) (161,326)
Issuance of stock to employees................ 101,677 98,627 -- 98,627
Net loss...................................... -- -- (49,409) (49,409)
--------- -------- --------- ---------
BALANCES, June 30, 1998 (unaudited)............. 1,621,956 $494,207 $(606,315) $(112,108)
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-66
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND NATURE OF OPERATIONS:
CM Healthcare Technologies, Inc., a Washington corporation, was incorporated
under the name CM Computers, Inc. in 1978. In July 1996, in order to better
reflect its business focus, CM Computers, Inc. changed its name to CM Healthcare
Technologies, Inc. (CMHT). CMHT and its predecessors are collectively referred
to as the Company or CM. The Company provides and supports automated office
management support systems for the healthcare field. CM markets their products
and services to small and mid-sized medical offices in the United States.
2. SIGNIFICANT ACCOUNTING POLICIES:
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of June 30, 1998 and for the
six-month periods ended June 30, 1997 and 1998 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is generated primarily from the following sources: software and
hardware installations, software conversions and upgrades for existing
customers, sales of hardware manufactured by other companies, hardware
maintenance, software support and facility management services consisting of
billing and other services for small and mid-sized medical offices. The Company
has adopted American Institute of Certified Public Accountants (AICPA) Statement
of Position 97-2 (SOP 97-2), 'Software Revenue Recognition.' Revenue from the
services provided and the products delivered are recognized substantially at the
time the Company delivers the goods or provides the services and no longer has
remaining significant vendor obligations.
CASH
Cash consists of deposits in checking and savings accounts. The Company has
no cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and accounts receivable.
To date, accounts receivable have been derived from revenues earned from
customers located in the United States. The Company performs ongoing credit
evaluations of its customers and generally
F-67
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
requires no collateral. Historically, credit losses have been minor and within
management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Improvements and replacements
are capitalized. Maintenance and repairs are expensed when incurred.
Depreciation is computed using the straight-line method over lives as indicated
following. The accompanying balance sheet includes the following property and
equipment as of December 31, 1997:
<TABLE>
<CAPTION>
DEPRECIATION
BALANCE LIFE
--------- ------------
<S> <C> <C>
Computer equipment $ 104,255 5 years
Furniture and fixtures 143,289 7 years
Software 378,884 3 years
---------
$ 626,428
Less: Accumulated depreciation (536,877)
---------
$ 89,551
=========
</TABLE>
SOFTWARE DEVELOPMENT
Under the criteria set forth in Statement of Financial Accounting Standards
(SFAS) No. 86, 'Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed,' capitalization of software development costs
begins upon the establishment of technological feasibility of the product, which
the Company has defined as the completion of beta testing of a working product.
The establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by management with
respect to certain external factors, including, but not limited to, anticipated
future gross product revenues, estimated economic life and changes in software
and hardware technology. Amounts that could have been capitalized under this
statement after consideration of the above factors were immaterial and,
therefore, no software development costs have been capitalized by the Company to
date.
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryforwards. Deferred tax assets are then reduced, if deemed necessary, by
a valuation allowance for the amount of any future benefits which, more likely
than not based on current circumstances, are not expected to be realized.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist
primarily of salaries, travel, materials, supplies and contract services.
F-68
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. INCOME TAXES:
At December 31, 1997, for income tax reporting purposes, the Company had
federal net operating loss carryforwards of approximately $120,000, which will
expire at various dates through 2012. A valuation allowance has been recorded
for the entire deferred tax asset as a result of uncertainties regarding
realization of the asset, including the limited operating history of the
Company, the lack of profitability to date and the uncertainty over future
operating profitability. The Internal Revenue Code contains provisions which may
limit the net operating loss carryforwards available to be used in any given
year if certain events occur, including changes in ownership interests.
4. NOTES PAYABLE AND OTHER LONG-TERM LIABILITIES:
<TABLE>
<CAPTION>
<S> <C>
Notes payable and other long-term liabilities consisted of
the following at December 31, 1997:
Note payable to shareholder bearing interest at 8%; monthly
payments of interest only for six months, followed by
monthly principal and interest payments $131,127
Note payable to shareholder bearing interest at 8%,
principal and interest payable monthly 53,155
Note payable to shareholder bearing interest at 8%, monthly
payments of interest only for six months, followed by
monthly principal and interest payments 50,000
Non-interest bearing note payable to former officer; monthly
principal payments of $2,000; interest imputed at 8% 65,892
Note payable bearing interest at 8%, principal and interest
payable annually 8,000
Note payable bearing interest at 10%, principal and interest
payable monthly 25,893
--------
334,067
Less: Current portion (84,446)
--------
$249,621
========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Maturities of long-term debt are as follows:
1998 $ 84,446
1999 102,398
2000 82,896
2001 56,890
2002 and thereafter 7,437
--------
$334,067
========
</TABLE>
F-69
<PAGE>
CM HEALTHCARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. COMMITMENTS:
The Company leases its office space under an operating lease which expired
May 31, 1999. The lease provided for monthly lease payments of $4,884. Future
minimum lease payments were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $62,648
1999 21,556
</TABLE>
Rent expense under operating leases totaled $63,706 for the year ended December
31, 1997.
6. SUBSEQUENT EVENT:
On August 8, 1998, the Company was acquired by VantageMed Corporation.
F-70
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Computerized Doctors Systems, Inc.:
We have audited the accompanying balance sheet of COMPUTERIZED DOCTORS
SYSTEMS, INC. (an Alabama Corporation) as of September 30, 1999 and the related
statements of income and retained earnings and cash flows for the nine months
then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Computerized Doctors
Systems, Inc. as of September 30, 1999 and the results of its operations and its
cash flows for the nine months then ended in conformity with generally accepted
accounting principles.
Birmingham, Alabama
October 15, 1999
F-71
<PAGE>
COMPUTERIZED DOCTORS SYSTEMS, INC.
BALANCE SHEET
SEPTEMBER 30, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $276,557
Accounts receivable....................................... 171,015
Related party receivables................................. 4,900
Inventories............................................... 6,308
Prepaid expenses and other................................ 9,043
--------
Total current assets.................................... 467,823
--------
PROPERTY AND EQUIPMENT, NET................................. 19,694
--------
Total assets............................................ $487,517
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 5,322
Accounts payable.......................................... 27,900
Accrued liabilities....................................... 64,405
Income taxes payable...................................... 24,314
Customer deposits and deferred revenue.................... 201,576
--------
Total current liabilities............................... 323,517
--------
LONG-TERM DEBT.............................................. 13,754
--------
Total liabilities....................................... 337,271
--------
STOCKHOLDERS' EQUITY:
Common stock, $10 par value, 87 shares authorized, issued,
and outstanding......................................... 870
Retained earnings......................................... 149,376
--------
Total stockholders' equity.............................. 150,246
--------
Total liabilities and stockholders' equity.............. $487,517
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-72
<PAGE>
COMPUTERIZED DOCTORS SYSTEMS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C>
REVENUES:
Software licensing........................................ $ 453,467
Support services.......................................... 429,731
Hardware and supplies..................................... 218,177
Conversion................................................ 41,995
Other..................................................... 14,226
----------
Total revenues.......................................... 1,157,596
----------
OPERATING EXPENSES:
Software licenses......................................... 56,971
Support services.......................................... 95,420
Hardware and supplies..................................... 128,183
Selling, general, and administrative...................... 789,992
Depreciation.............................................. 6,531
----------
Total operating expenses................................ 1,077,097
----------
OPERATING INCOME............................................ 80,499
----------
INTEREST INCOME (EXPENSE):
Interest income........................................... 6,896
Interest expense.......................................... (570)
----------
Total interest income................................... 6,326
----------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 86,825
PROVISION FOR INCOME TAXES.................................. 24,314
----------
NET INCOME.................................................. 62,511
RETAINED EARNINGS AT BEGINNING OF PERIOD.................... 86,865
----------
RETAINED EARNINGS AT END OF PERIOD.......................... $ 149,376
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-73
<PAGE>
COMPUTERIZED DOCTORS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 62,511
--------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 6,531
Changes in assets and liabilities:
Accounts receivable..................................... (118,265)
Inventories............................................. 400
Prepaid expenses and other.............................. (2,140)
Accounts payable........................................ 6,639
Accrued liabilities..................................... 26,353
Income taxes payable.................................... 24,114
Customer deposits and deferred revenue.................. 130,513
--------
Total adjustments..................................... 74,145
--------
Net cash provided by operating activities............. 136,656
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (403)
--------
Net cash used in investing activities................. (403)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments received on related party receivables............ 3,300
Payments on long-term debt................................ (3,312)
--------
Net cash used in financing activities................. (12)
--------
Net change in cash and cash equivalents............... 136,241
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 140,316
--------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $276,557
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 570
========
NONCASH INVESTING ACTIVITY:
Purchase of property and equipment financed with long-term
debt.................................................... $ 13,993
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-74
<PAGE>
COMPUTERIZED DOCTORS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BUSINESS
Computerized Doctors Systems, Inc. (the "Company") was incorporated in
Alabama on March 8, 1982. The Company is a diversified healthcare information
systems supplier headquartered in Birmingham, Alabama. The Company develops,
sells, installs, and supports computerized practice management systems, and
provides related services to medical practices.
The practice management software products offered by the Company provide
physicians with comprehensive office management software designed to automate
the administrative, financial, practice management and clinical requirements of
a practice. These systems range in capacity from one to approximately one
hundred providers. The Company also provides software, network and hardware
support, training, electronic claims processing, electronic statement printing
and mailing and electronic remittance advices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the 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.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of supplies, used computer equipment to service the
Company's customers pursuant to revenue producing service agreements and new
computer equipment purchased to fill customer orders.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, which are generally three to seven years.
Leasehold improvements are amortized over the term of the lease. Maintenance and
repairs are charged to expense as incurred. Upon sale, retirement, or other
disposition of these assets, the cost and related accumulated depreciation are
removed from the respective accounts, and the related gain or loss is credited
or charged to income.
REVENUE RECOGNITION
Revenue is generated primarily from the following sources: New software
installations, software conversions and upgrades for existing customers, sales
of hardware manufactured by other companies, hardware maintenance, software
support and electronic transaction services. In accordance with the American
Institute of Certified Public Accountants' Statement of Position ("SOP")
No. 97-2, SOFTWARE REVENUE RECOGNITION, the Company recognizes revenue from
software product sales upon delivery to the
F-75
<PAGE>
COMPUTERIZED DOCTORS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customer provided the collection of the sales proceeds is deemed probable, the
fee is fixed and determinable and no significant vendor obligations remain.
Other revenue, including hardware sales, maintenance, licensing and support
activities, is generally recognized as hardware is shipped or as services are
provided. Deferred revenue primarily consists of revenue deferred under annual
maintenance and annual license agreements on which amounts have been received
from customers and for which the earnings process has not been completed.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, ACCOUNTING FOR INCOME TAXES, under which deferred income taxes are
provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. A valuation allowance is provided against the future
benefits of deferred tax assets if it is determined that it is more likely than
not that the future tax benefits associated with the deferred tax asset will not
be realized.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Office and computer equipment............................... $ 79,638
Furniture and fixtures...................................... 88,892
Vehicles.................................................... 21,057
Less accumulated depreciation............................... (169,893)
---------
$ 19,694
=========
</TABLE>
Depreciation expense was $6,531 for the nine months ended September 30,
1999.
4. OPERATING LEASE
The Company leases its corporate office under an operating lease which
expires December 31, 2000. The minimum future lease payments required under the
Company's operating lease is $86,436 and $21,609 for the twelve months ended
September 30, 2000 and 2001, respectively.
Rent expense was $64,827 for the nine months ended September 30, 1999.
5. RELATED PARTY TRANSACTIONS
The Company has receivables from related parties as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Due from stockholder........................................ $4,750
Due from employees.......................................... 150
------
$4,900
======
</TABLE>
F-76
<PAGE>
COMPUTERIZED DOCTORS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
5. RELATED PARTY TRANSACTIONS (CONTINUED)
The receivables from the stockholder and the employees are noninterest
bearing and no formal agreements exist. The Company has these amounts classified
as current as the stockholder and the employees make payments sporadically
throughout the year.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a Simplified Employee Pension Plan (the "Plan") on
behalf of its employees. All employees are eligible to participate in the Plan
upon attaining age 21 and performing one year of service. The Company makes
discretionary contributions to the Plan. Employer contributions are 100% vested
upon eligibility. As of September 30, 1999, no employer contribution amount had
been approved by the Board of Directors.
7. PROVISION FOR INCOME TAXES
A summary of the components of the provision for income is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
FEDERAL:
Current..................................................... $20,994
Deferred.................................................... (1,213)
-------
19,781
-------
STATE:
Current..................................................... 4,811
Deferred.................................................... (278)
-------
4,533
-------
Provision for income taxes................................ $24,314
=======
</TABLE>
The provision for income taxes differs from the amounts computed by applying
federal statutory rates due to the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
-------------
<S> <C>
Tax provision computed at the blended federal statutory rate
(20.5%)................................................... $21,706
Effect of state income taxes................................ 3,604
Other, net.................................................. (996)
-------
$24,314
=======
</TABLE>
Temporary differences which create net deferred tax assets, which are
included in prepaid expenses and other in the accompanying balance sheet at
September 30, 1999, include payroll-related accrued expenses and amount to
$5,709.
F-77
<PAGE>
COMPUTERIZED DOCTORS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
8. CONTINGENCIES
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
September 30, 1999, the Company was not a party to any legal proceedings, which,
if decided adversely to the Company, would, individually or in the aggregate,
have a material adverse effect on the Company's business, financial condition or
results of operations.
9. PENDING MERGER
On October 1, 1999, the Company entered into a definitive merger agreement
with VantageMed Corporation ("VantageMed") providing for the acquisition of the
Company by VantageMed. The consideration to be given to the Company by
VantageMed will be 340,239 shares of VantageMed common stock, 53,270 stock
options, and $500,000 in cash.
F-78
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF CSS, INC.:
We have audited the accompanying balance sheet of CSS, Inc. (a North
Carolina Corporation) as of September 30, 1999, and the related statements of
income, shareholders' equity and cash flows for the period from January 1, 1999,
through September 30, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CSS, Inc. as of
September 30, 1999, and the results of its operations and its cash flows for the
period from January 1, 1999, through September 30, 1999, in conformity with
generally accepted accounting principles.
Greensboro, North Carolina,
October 20, 1999.
F-79
<PAGE>
CSS, INC.
BALANCE SHEET SEPTEMBER 30, 1999
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash...................................................... $ 12,629
Accounts receivable, net of allowance for doubtful
accounts of $15,500..................................... 57,027
Inventories............................................... 101,807
Prepaid expenses and other................................ 3,651
--------
Total current assets.................................... 175,114
PROPERTY AND EQUIPMENT, net................................. 11,026
--------
$186,140
========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 40,630
Accrued liabilities....................................... 10,343
Deferred revenue.......................................... 61,685
Current portion of capital lease obligation............... 2,217
--------
Total current liabilities............................... 114,875
--------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY:
Class A voting common stock, $1 par value, 50,000 shares
authorized, 250 shares issued and outstanding........... 250
Class B nonvoting common stock, $1 par value, 50,000
shares authorized, 250 shares issued and outstanding.... 250
Additional paid-in capital................................ 8,250
Retained earnings......................................... 62,515
--------
Total shareholders' equity.............................. 71,265
--------
$186,140
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
CSS, INC.
STATEMENT OF INCOME
FOR THE PERIOD FROM JANUARY 1, 1999, THROUGH SEPTEMBER 30, 1999
<TABLE>
<S> <C>
REVENUES:
Software licensing........................................ $ 63,686
Hardware and software maintenance......................... 406,917
Hardware and supplies..................................... 164,788
Installation and other support services................... 79,709
--------
Total revenues.......................................... 715,100
--------
OPERATING COSTS AND EXPENSES:
Software licensing........................................ 11,780
Hardware and software maintenance......................... 31,002
Hardware and supplies..................................... 108,981
Installation and other support services................... 11,478
Selling, general and administrative....................... 480,392
--------
Total operating costs and expenses...................... 643,633
--------
INCOME FROM OPERATIONS...................................... 71,467
--------
INTEREST EXPENSE AND OTHER INCOME:
Interest expense.......................................... (1,298)
Other income.............................................. 371
--------
Total interest expense and other income................. (927)
--------
Net income.................................................. $ 70,540
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE>
CSS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1999, THROUGH SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998................... $250 $250 $8,250 $ 17,975 $ 26,725
Net income................................. 0 0 0 70,540 70,540
Distributions to shareholders.............. 0 0 0 (26,000) (26,000)
---- ---- ------ -------- --------
BALANCE, September 30, 1999.................. $250 $250 $8,250 $ 62,515 $ 71,265
==== ==== ====== ======== ========
</TABLE>
CSS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1999, THROUGH SEPTEMBER 30, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 70,540
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation............................................ 3,287
Changes in assets and liabilities:
Accounts receivable................................... 34,207
Inventories........................................... (11,992)
Prepaid expenses and other............................ (401)
Accounts payable and accrued liabilities.............. (8,298)
Deferred revenue...................................... (4,411)
--------
Net cash provided by operating activities........... 82,932
--------
CASH FLOWS FROM INVESTING ACTIVITIES--Purchases of property
and equipment............................................. (4,771)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of loan from stockholder.......................... (10,000)
Payments on line-of-credit................................ (30,000)
Payments on capital lease obligation...................... (1,859)
Distributions to shareholders............................. (26,000)
--------
Net cash used in financing activities............... (67,859)
--------
NET INCREASE IN CASH........................................ 10,302
CASH, as of December 31, 1998............................... 2,327
--------
CASH, as of September 30, 1999.............................. $ 12,629
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Cash paid
for interest.............................................. $ 1,078
========
</TABLE>
The accompanying notes are an integral part of these statements.
F-82
<PAGE>
CSS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. DESCRIPTION OF BUSINESS:
CSS, Inc. (the Company) was incorporated in North Carolina in 1983. The
Company develops, sells, installs and supports computerized practice management
systems and provides related services to medical practices.
The practice management software products offered by the Company provide
physicians with comprehensive office management software designed to automate
the administrative, financial and practice management requirements of a
practice. The Company also provides software and hardware support, training
services and sales of computer supplies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of computer systems, parts and supplies.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
which are generally three to seven years. Leasehold improvements are amortized
over the term of the related lease. Maintenance and repairs are expensed as
incurred.
REVENUE RECOGNITION
Revenue is generated primarily from the following sources: new software
installations, software conversions and upgrades for existing customers, sales
of hardware manufactured by other companies, hardware maintenance and software
support services and system installation and training services. Effective
January 1, 1998, the Company adopted American Institute of Certified Public
Accountants (AICPA) Statement of Position 97-2 (SOP 97-2), "Software Revenue
Recognition." Revenue from software licensing is recognized upon delivery to the
customer provided the collection of the sales proceeds is deemed probable, the
fee is fixed and determinable and no significant vendor obligations remain.
Other revenue, including hardware and supplies sales and maintenance and other
support services (system installation and training services), is generally
recognized as the hardware or supplies are shipped or as services are provided.
Deferred revenue primarily consists of revenue deferred under hardware and
software maintenance contracts on which amounts have been billed to customers on
a monthly or quarterly basis and for which the earnings process has not been
completed.
INCOME TAXES
For income tax purposes, the Company has elected S Corporation status under
the Internal Revenue Code. In general, the corporate income or loss of a S
Corporation is allocated to its shareholders for inclusion in their personal
federal income tax returns and, accordingly, no provision for federal income
taxes is required. North Carolina recognizes S Corporation status for state
income tax purposes, accordingly, no provision for state income taxes is
required.
F-83
<PAGE>
CSS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
USE OF ESTIMATES
The preparation of the 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.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at September 30, 1999:
<TABLE>
<S> <C>
Furniture and equipment..................................... $ 107,576
Leasehold improvements...................................... 23,606
---------
131,182
Less--Accumulated depreciation.............................. (120,156)
---------
$ 11,026
=========
</TABLE>
Depreciation expense related to property and equipment was $3,287 for the
period from January 1, 1999, through September 30, 1999.
4. LINE OF CREDIT:
At September 30, 1999, the Company has a line of credit in the amount of
$30,000 with a bank, with interest at the prime rate plus 1%. There were no
outstanding borrowings against this line at September 30, 1999.
5. EMPLOYEE BENEFIT PLANS:
The Company maintains a retirement plan for the benefit of eligible
employees. Employees can make tax-deferred contributions to the plan under
Section 408 of the Internal Revenue Code. The Company does not make any matching
contributions under the plan. The Company has the option to contribute a
discretionary amount to the plan. No discretionary contributions were made for
the period from January 1, 1999, through September 30, 1999.
6. COMMITMENTS:
OPERATING LEASES
The Company leases its business premises on a month-to-month basis. A
portion of the Company's premises is subleased on a month-to-month basis to
Computer Assistance, Inc., a related party. Lease expense, and sublease income,
was $18,630 and $5,733, respectively, for the period from January 1, 1999,
through September 30, 1999.
F-84
<PAGE>
CSS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
6. COMMITMENTS: (CONTINUED)
CAPITAL LEASE OBLIGATION
The Company leases office equipment under a capital lease arrangement. The
minimum future lease payments required under the Company's capital lease at
September 30, 1999, are as follows:
<TABLE>
<S> <C>
September 30, 2000.......................................... $ 2,310
Less--Interest at 9.0%...................................... (93)
-------
Net minimum principal payments.............................. 2,217
Less--Current portion....................................... (2,217)
-------
Long-term portion........................................... $ 0
=======
</TABLE>
7. SUBSEQUENT EVENTS:
Subsequent to September 30, 1999, the owners' of the Company finalized an
agreement to sell all outstanding shares of the Company to VantageMed
Corporation in exchange for cash and common stock of VantageMed Corporation. The
sale was effective October 1, 1999.
F-85
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Data Decisions, Inc.:
We have audited the accompanying balance sheet of DATA DECISIONS, INC. (an
Arkansas corporation, the "Company") as of June 30, 1999, and the related
statements of operations, stockholders' deficit and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Data Decisions, Inc. as of
June 30, 1999, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
Little Rock, Arkansas,
October 15, 1999.
F-86
<PAGE>
DATA DECISIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30, 1999
------------- ------------------
UNAUDITED
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 68,407 $ 16,437
Accounts receivable....................................... 146,028 126,192
Inventories............................................... 40,073 40,717
Other..................................................... 1,306 --
-------- --------
Total current assets.................................... 255,814 183,346
PROPERTY AND EQUIPMENT, NET................................. 82,277 27,072
SOFTWARE, NET............................................... 58,603 55,377
-------- --------
Total assets............................................ $396,694 $265,795
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 48,309 $ 52,345
Accounts payable.......................................... 62,466 85,184
Accrued liabilities....................................... 36,679 30,767
Deferred revenue.......................................... 174,661 42,873
Due to stockholders....................................... 47,099 65,094
Income taxes payable...................................... 5,940 8,440
-------- --------
Total current liabilities............................... 375,154 284,703
-------- --------
LONG-TERM LIABILITIES:
Long-term debt, net of current portion.................... 114,684 63,265
Deferred taxes............................................ 14,854 13,987
-------- --------
Total liabilities....................................... 504,692 361,955
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)...................... -- --
STOCKHOLDERS' DEFICIT:
Common stock.............................................. 8,068 8,068
Accumulated deficit....................................... (116,066) (104,228)
-------- --------
Total stockholders' deficit............................. (107,998) (96,160)
-------- --------
Total liabilities and stockholders' deficit............. $396,694 $265,795
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
DATA DECISIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE FOR THE THREE
ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------- ------------------ ------------------
UNAUDITED
<S> <C> <C> <C>
REVENUES:
Support service fees......................... $ 569,282 $171,139 $128,773
Software licensing fees...................... 195,152 81,106 40,579
Hardware sales............................... 189,030 175,685 43,097
Statement and claims processing.............. 303,954 70,419 64,094
--------- -------- --------
Total revenues............................. 1,257,418 498,349 276,543
--------- -------- --------
COSTS AND EXPENSES:
Compensation and benefits.................... 654,128 211,310 127,342
Hardware cost of sales....................... 132,189 125,254 29,613
Materials and supplies....................... 133,064 40,929 32,518
Selling, general and administrative.......... 254,138 84,848 55,143
Depreciation and amortization................ 56,929 17,415 14,202
--------- -------- --------
Total expenses............................. 1,230,448 479,756 258,818
--------- -------- --------
INTEREST AND OTHER INCOME (EXPENSE):
Interest expense, net........................ (20,711) (3,697) (5,231)
Lease income................................. 16,800 4,200 5,600
Other income (expense), net.................. 143 (4,561) 1,277
--------- -------- --------
Total interest and other income
(expense)................................ (3,768) (4,058) 1,646
--------- -------- --------
INCOME BEFORE INCOME TAXES..................... 23,202 14,535 19,371
--------- -------- --------
INCOME TAX EXPENSE............................. 4,388 2,697 3,506
--------- -------- --------
NET INCOME..................................... $ 18,814 $ 11,838 $ 15,865
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
DATA DECISIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
-------- ----------- -------------
<S> <C> <C> <C>
Balance, June 30, 1998 $8,068 $(134,880) $(126,812)
Net income................................................ -- 18,814 18,814
------ --------- ---------
Balance, June 30, 1999 8,068 (116,066) (107,998)
Net income (Unaudited).................................... -- 11,838 11,838
------ --------- ---------
Balance, September 30, 1999 (Unaudited)..................... $8,068 $(104,228) $ (96,160)
====== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
DATA DECISIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS MONTHS
FOR THE YEAR ENDED ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1999 1999 1998
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 18,814 $ 11,838 $ 15,865
Adjustments to reconcile net income to net cash
provided by (used for) operating activities--
Depreciation and amortization...................... 56,929 17,415 14,202
Provision for bad debts............................ 13,011 -- --
Deferred tax expense (benefit)..................... (1,552) 197 844
Other, net......................................... 3,534 (622) 1,727
Changes in assets and liabilities--
Accounts receivable.............................. (61,256) 19,836 (21,103)
Inventories...................................... (38,008) (644) (3,979)
Prepaid expenses and other....................... 200 1,306 --
Accounts payable and accrued liabilities......... (5,175) 16,806 (18,778)
Deferred revenue................................. 126,757 (131,788) --
Income taxes payable............................. 5,337 2,500 3,265
-------- -------- --------
Net cash provided by (used for) operating
activities................................... 118,591 (63,156) (7,957)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (47,598) -- --
Capitalized software................................. (31,913) (3,707) (1,837)
-------- -------- --------
Net cash used for investing activities......... (79,511) (3,707) (1,837)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt......................... 22,765 -- --
Payments on long-term debt........................... (53,974) (10,102) (13,793)
Increase in amounts due to stockholders.............. 32,099 24,995 --
-------- -------- --------
Net cash provided by (used for) financing
activities................................... 890 14,893 (13,793)
-------- -------- --------
NET CHANGE IN CASH..................................... 39,970 (51,970) (23,587)
CASH, beginning of period.............................. 28,437 68,407 28,437
-------- -------- --------
CASH, end of period.................................... $ 68,407 $ 16,437 $ 4,850
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................... $ 26,551 $ 3,937 $ 5,242
Cash paid for income taxes........................... $ 603 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE>
DATA DECISIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
1. ORGANIZATION AND BUSINESS:
Data Decisions, Inc. (the "Company"), an Arkansas corporation incorporated
on July 13, 1981, develops and markets medical office management software for
OB/GYN doctors and clinics. The Company also provides related information
systems products and services, including hardware, non-proprietary software,
training and support, as well as billing statement and medical insurance claims
processing for users of the Company's proprietary software products.
During fiscal year 1999, the Company signed a letter of intent to be
acquired by VantageMed Corporation of Sacramento, California. The acquisition is
expected to close in November, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
INVENTORIES--
Inventories are stated at the lower of cost (specific identification method)
or market and consist primarily of new computer equipment purchased to fill
customer orders.
PROPERTY AND EQUIPMENT--
Property and equipment are recorded at cost. Depreciation expense related to
certain assets is provided on a tax basis using statutory rates and does not
materially differ from depreciation under methods acceptable for financial
reporting purposes. Other depreciable assets are depreciated over their
estimated useful lives which range from 5 to 10 years. Maintenance and repairs
are expensed as incurred.
DEVELOPED SOFTWARE--
The Company capitalizes the costs associated with its software products upon
establishing product technological feasibility. Amortization is computed on a
straight-line basis over the economic life of the product, which is estimated to
be three years. Amortization expense totaled $24,564 for the year ended
June 30, 1999, and $7,918 (unaudited) and $6,141 (unaudited) for the three
months ended September 30, 1999 and 1998, respectively.
Costs related to research, design and development of computer software prior
to establishing product technological feasibility are charged to expense as
incurred. Such amounts were not significant in any of the periods presented.
REVENUE RECOGNITION--
In accordance with American Institute of Certified Public Accountants
Statement of Position 97-2, "Software Revenue Recognition," as amended by
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," revenue from software
product sales is recognized upon delivery to the customer, provided the
collection of the sales proceeds is deemed probable, the fee is fixed and
determinable and no significant vendor obligations remain. Other revenue,
including hardware sales, maintenance, training and support activities, is
generally recognized as hardware is shipped or as services are provided.
Deferred revenue primarily consists of revenue deferred under periodic
maintenance agreements and new software installations on which
F-91
<PAGE>
DATA DECISIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
amounts have been received from customers and for which the earnings process has
not been completed.
INCOME TAXES--
The Company utilizes the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under this method, deferred income taxes are provided by
applying statutory tax rates to the differences between the book bases and tax
bases of assets and liabilities.
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 reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods
reported. The estimates and assumptions used in preparing the accompanying
financial statements were based on management's evaluation of the relevant facts
and circumstances as of the date of the financial statements. However, actual
results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS--
The accompanying interim financial statements and related disclosures have
not been audited by independent accountants. However, they have been prepared in
conformity with the accounting principles stated in the audited financial
statements for the year ended June 30, 1999, and include all adjustments of a
normal, recurring nature which, in the opinion of management, are necessary to
present fairly the financial position of the Company and the results of
operations and cash flows for each of the periods presented. The operating
results for the interim periods presented are not necessarily indicative of
results for the full year.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1999
-------- -------------
UNAUDITED
<S> <C> <C>
Office and computer equipment........................ $167,328 $167,328
Furniture and fixtures............................... 2,677 2,677
Vehicles............................................. 83,500 40,006
-------- --------
253,505 210,011
Less: Accumulated depreciation....................... 171,228 182,939
-------- --------
$ 82,277 $ 27,072
======== ========
</TABLE>
F-92
<PAGE>
DATA DECISIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
3. PROPERTY AND EQUIPMENT: (CONTINUED)
Depreciation expense was $29,744, for the year ended June 30, 1999 and
$9,497 (unaudited) and $8,061 (unaudited) for the three months ended
September 30, 1999 and 1998, respectively.
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1999
-------- -------------
UNAUDITED
<S> <C> <C>
Promissory note payable to a bank, accruing interest
at 9.75%. Interest and principal are due in monthly
installments with the final payment due on
November 15, 2001. Promissory note is
collateralized by accounts receivable, fixtures,
equipment, inventory and developed software........ $125,712 $115,610
Promissory notes payable to banks, collateralized by
vehicles. Interest rates range from 7.00% to
10.00%. Interest and principal are due in monthly
payments with the final payment due on March 28,
2004............................................... 37,281 --
-------- --------
162,993 115,610
Less current portion................................. (48,309) (52,345)
-------- --------
$114,684 $ 63,265
======== ========
</TABLE>
Future minimum payments under term debt obligations during the fiscal years
subsequent to June 30, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 48,309
2001........................................................ 51,572
2002........................................................ 51,170
2003........................................................ 7,059
2004........................................................ 4,882
Thereafter.................................................. --
--------
$162,992
========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
The Company leases office facilities under an operating lease which expires
October 31, 1999. Management expects to renew this lease under terms not
materially different than those currently in effect. The minimum future lease
payments required under this operating lease totaled $15,960 at June 30, 1999.
Rent expense was approximately $51,254 for the year ended June 30, 1999 and
$11,970 (unaudited) and $11,508 (unaudited) for the three months ended
September 30, 1999 and 1998, respectively.
F-93
<PAGE>
DATA DECISIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company has received a written notice of dispute from one of its
customers which alleges that software licensed by the Company has not performed
satisfactorily resulting in unspecified damages. Management contends that the
software has performed satisfactorily, has met with representatives of the
customer and is continuing to work toward resolution of the dispute. Management
believes that the matter will be resolved without further legal actions.
However, in the event legal actions are undertaken by the customer related to
this dispute, management intends to vigorously defend such actions.
6. COMMON STOCK:
The Company is authorized to issue 2,000 shares of its common stock, which
has no par value. During all periods presented, 459 shares were issued and
outstanding.
7. EMPLOYEE BENEFIT PLAN:
The Company maintains a contributory, defined contribution plan ("the
Plan"). All employees can participate in the Plan. Under the terms of the Plan,
employees may elect to contribute up to $6,000 of their pre-tax compensation to
the Plan. Employee contributions are 100% vested at all times. The Company is
required to make a matching contribution of up to 3% of employee pre-tax
compensation one year out of every five and can also make discretionary
contributions to the Plan. Contributions made to the Plan were $18,516 for the
year ended June 30, 1999 and $12,456 (unaudited) and $2,061 (unaudited) for the
three months ended September 30, 1999 and 1998, respectively.
8. INCOME TAXES:
Income tax expense consists of:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
FOR THE YEAR MONTHS ENDED MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1999 1999 1998
------------- ------------- -------------
UNAUDITED
<S> <C> <C> <C>
Current:
Federal............................. $ 4,094 $1,875 $1,704
State............................... 1,846 625 958
------- ------ ------
Total current..................... 5,940 2,500 2,662
------- ------ ------
Deferred:
Federal............................. (1,164) 148 633
State............................... (388) 49 211
------- ------ ------
Total deferred.................... (1,552) 197 844
------- ------ ------
$ 4,388 $2,697 $3,506
======= ====== ======
</TABLE>
F-94
<PAGE>
DATA DECISIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
8. INCOME TAXES: (CONTINUED)
Deferred tax liabilities result from differences between the bases of
developed software and certain property and equipment for financial reporting
purposes and such amounts for tax reporting purposes. The effects of these
differences are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30, 1999
------------- ------------------
UNAUDITED
<S> <C> <C>
Developed software.............................. $11,720 $11,075
Property and equipment.......................... 3,134 2,912
------- -------
$14,854 $13,987
======= =======
</TABLE>
The following table accounts for the differences between reported income tax
expense and amounts expected by applying a U.S. Federal statutory rate of 34% to
the income before income taxes.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
FOR THE YEAR MONTHS ENDED MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1999 1999 1998
------------- ------------- -------------
UNAUDITED
<S> <C> <C> <C>
Expected income tax expense........... $ 7,889 $ 4,942 $ 6,586
Increase (decrease) in income tax
expense resulting from:
State income benefit................ (277) (94) (144)
Impact of graduated U.S. Federal tax
rate scale........................ (4,409) (2,762) (3,680)
Nondeductible expenses.............. 1,284 611 744
Other, net.......................... (99) -- --
------- ------- -------
$ 4,388 $ 2,697 $ 3,506
======= ======= =======
</TABLE>
9. RELATED PARTY TRANSACTIONS:
The amounts reported as due to stockholders in the accompanying balance
sheets represent accrued compensation payments net of certain amounts due from
stockholders related to the sale of vehicles disclosed below.
During the three months ended September 30, 1999, the Company sold vehicles
to the stockholders for $7,000 and the assumption of associated promissory notes
totaling $37,281. Management believes that the fair value of the vehicles
approximated the consideration received, and the transaction did not result in a
material gain or loss. The Company remains an obligor on the assumed promissory
notes, and accordingly, would be liable on these notes in the event the
stockholders do not satisfy these obligations.
F-95
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Mariner Systems, Inc.:
We have audited the accompanying balance sheets of MARINER SYSTEMS, INC.
(the "Company") as of September 30, 1997 and 1998 and June 30, 1999, and the
related statements of operations, shareholders' equity, and cash flows for the
years ended September 30, 1997 and 1998 and the nine-month period ended
June 30, 1999. 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 financial position of Mariner Systems, Inc. as of
September 30, 1997 and 1998 and June 30, 1999, and the results of its operations
and its cash flows for the years ended September 30, 1997 and 1998 and the
nine-month period ended June 30, 1999, in conformity with generally accepted
accounting principles.
Denver, Colorado,
September 10, 1999.
F-96
<PAGE>
MARINER SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------- JUNE 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 24,358 $ 2,525,358 $ 815,685
Accounts receivable.................................. 127,483 194,484 85,500
Prepaid expenses and other........................... 12,635 27,693 17,851
Current portion of note receivable (Note 10)......... -- -- 56,496
----------- ----------- -----------
Total current assets............................... 164,476 2,747,535 975,532
----------- ----------- -----------
PROPERTY AND EQUIPMENT, net............................ 219,587 452,037 340,985
NOTE RECEIVABLE, net of current portion (Note 10)...... -- -- 155,379
CAPITALIZED SOFTWARE DEVELOPMENT COST, net of
accumulated amortization of $0, $35,092 and $89,796,
respectively......................................... -- 165,700 145,472
OTHER ASSETS........................................... 28,177 49,557 52,812
----------- ----------- -----------
Total assets....................................... $ 412,240 $ 3,414,829 $ 1,670,180
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 145,907 $ 175,433 $ 95,757
Accrued salaries and other........................... 119,792 202,693 176,704
Deferred revenue..................................... 332,343 341,741 204,263
Debt to related parties.............................. 48,138 -- --
Current portion of capital leases.................... 120,558 187,448 156,334
----------- ----------- -----------
Total current liabilities.......................... 766,738 907,315 633,058
CAPITAL LEASES, net of current portion................. 77,045 255,321 180,144
CONVERTIBLE SUBORDINATED DEBENTURE (Note 4)............ 200,000 200,000 --
----------- ----------- -----------
Total liabilities.................................. 1,043,783 1,362,636 813,202
----------- ----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 6,000,000 shares
authorized, 896,755, 1,476,761 and 1,476,761 issued
and outstanding at September 30, 1997 and 1998 and
June 30, 1999, respectively 1,964,827 6,739,429 6,739,429
Warrants............................................. -- 143,205 143,205
Accumulated deficit.................................. (2,596,370) (4,830,441) (6,025,656)
----------- ----------- -----------
Total shareholders' (deficit) equity............... (631,543) 2,052,193 856,978
----------- ----------- -----------
Total liabilities and shareholders' equity......... $ 412,240 $ 3,414,829 $ 1,670,180
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-97
<PAGE>
MARINER SYSTEMS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------- ---------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE:
Software license fees.................... $ 1,148,997 $ 752,374 $ 731,173 $ 396,521
Services and maintenance................. 219,527 417,114 355,153 224,530
Hardware................................. 82,119 -- -- --
Litigation settlement (Note 10).......... -- -- -- 455,000
----------- ----------- ----------- -----------
Total revenue.......................... 1,450,643 1,169,488 1,086,326 1,076,051
COSTS OF REVENUE:
Software license fee..................... 32,351 58,450 26,588 17,343
Services and maintenance................. 106,095 113,591 79,651 99,718
Hardware................................. 41,948 -- -- --
----------- ----------- ----------- -----------
Total cost of revenue.................. 180,394 172,041 106,239 117,061
----------- ----------- ----------- -----------
GROSS PROFIT............................... 1,270,249 997,447 980,087 958,990
OPERATING EXPENSES:
Research and development................. 1,009,655 1,173,845 875,253 617,702
Selling, general and administrative...... 1,501,658 1,743,061 1,232,282 1,263,592
Depreciation and amortization............ 145,610 229,943 156,470 227,566
Litigation costs......................... -- 89,671 52,623 34,112
----------- ----------- ----------- -----------
Net loss from operations............... (1,386,674) (2,239,073) (1,336,541) (1,183,982)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income.......................... -- 90,905 58,361 47,563
Interest expense......................... (65,486) (85,903) (57,623) (58,796)
Gain on sale of product line (Note 1).... 477,976 -- -- --
----------- ----------- ----------- -----------
NET LOSS................................... $ (974,184) $(2,234,071) $(1,335,803) $(1,195,215)
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-98
<PAGE>
MARINER SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK STOCK
---------------------- SUBSCRIPTION ACCUMULATED
SHARES AMOUNT RECEIVABLE WARRANTS DEFICIT TOTAL
--------- ---------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, September 30, 1996 896,755 $1,489,375 $(39,500) $ -- $(1,622,186) $ (172,311)
Expense for modification of
stock option terms.......... -- 475,452 -- -- -- 475,452
Stock subscription payment
received.................... -- -- 39,500 -- -- 39,500
Net loss...................... -- -- -- -- (974,184) (974,184)
--------- ---------- -------- -------- ----------- -----------
BALANCES, September 30, 1997 896,755 1,964,827 -- -- (2,596,370) (631,543)
Stock issued in connection
with private placement-
Common stock................ 370,006 2,978,566 -- -- -- 2,978,566
Warrants.................... -- -- -- 104,584 -- 104,584
Offering costs.............. -- (402,517) -- (14,133) -- (416,650)
Stock issued in connection
with private placement-
Common stock................ 210,000 2,041,508 -- -- -- 2,041,508
Warrants.................... -- -- -- 58,492 -- 58,492
Offering costs.............. -- (200,262) -- (5,738) -- (206,000)
Expense for modification of
stock option terms.......... -- 357,307 -- -- -- 357,307
Net loss...................... -- -- -- -- (2,234,071) (2,234,071)
--------- ---------- -------- -------- ----------- -----------
BALANCES, September 30, 1998 1,476,761 6,739,429 -- 143,205 (4,830,441) 2,052,193
Net loss...................... -- -- -- -- (1,195,215) (1,195,215)
--------- ---------- -------- -------- ----------- -----------
BALANCES, June 30, 1999 1,476,761 $6,739,429 $ -- $143,205 $(6,025,656) $ 856,978
========= ========== ======== ======== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-99
<PAGE>
MARINER SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
----------------------- -------------------------
1997 1998 1998 1999
--------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $(974,184) $(2,234,071) $(1,335,803) $(1,195,215)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization................ 145,610 229,943 156,470 227,566
Note receivable from litigation settlement,
net........................................ -- -- -- (211,875)
Stock based compensation..................... 475,452 357,307 357,307 --
Increase in other long-term assets (6,020) (21,712) (19,034) (3,255)
(Increase) decrease in-
Accounts receivable........................ 185,377 (67,001) (144,781) 108,984
Prepaid expenses and other................. 13,045 (15,058) (39,447) 9,842
Increase (decrease) in-
Accounts payable........................... (120,837) 29,526 (661) (79,676)
Accrued salaries and other................. (79,532) 82,901 76,392 (25,989)
Deferred revenue........................... 168,687 9,398 (78,511) (137,478)
--------- ----------- ----------- -----------
Net cash used in operating activities.... (192,402) (1,628,767) (1,028,068) (1,307,096)
--------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..... (20,640) (17,964) (4,133) (12,086)
Capitalized software development costs......... -- (200,460) (183,674) (34,476)
--------- ----------- ----------- -----------
Net cash used in investing activities.... (20,640) (218,424) (187,807) (46,562)
--------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and warrants, net..... -- 4,560,500 4,560,500 --
Proceeds from issuance of debt................. 248,138 -- -- --
Repayment of debt.............................. -- (48,138) (48,138) (200,000)
Repayment of capital lease obligations......... (129,030) (164,171) (114,900) (156,015)
Stock subscription payments received........... 39,500 -- -- --
--------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. 158,608 4,348,191 4,397,462 (356,015)
--------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH.................. (54,434) 2,501,000 3,181,587 (1,709,673)
Cash, beginning of period...................... 78,792 24,358 24,358 2,525,358
--------- ----------- ----------- -----------
Cash, end of period............................ $ 24,358 $ 2,525,358 $ 3,205,945 $ 815,685
========= =========== =========== ===========
SCHEDULE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Property, plant and equipment acquired through
capital leases............................... $ 33,477 $ 409,337 $ 378,216 $ 49,723
========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest....... $ 65,486 $ 85,903 $ 57,623 $ 58,796
========= =========== =========== ===========
Cash paid during the period for taxes.......... $ -- $ -- $ -- $ --
========= =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-100
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) ORGANIZATION
Mariner Systems, Inc. ("MSI" or the "Company"), a Colorado Corporation, is a
software development company that markets software to physician groups involved
in the managed care industry. The Company develops, licenses and supports
proprietary software marketed under the name "eMCee-Registered Trademark-."
eMCee-Registered Trademark- provides a managed care information system that
automates the mission-critical activities of managed care entities that are
increasingly assuming the financial risks of health care. The
eMCee-Registered Trademark- system is comprised of a fully integrated suite of
applications designed to support a full range of risk management activities,
including capitation, referral management, custom reporting and claims
adjudication. The Company directly markets its software primarily to individual
practice associations, physician health organizations and managed services
organizations.
PRODUCT DEPENDENCE
The Company generated substantially all its revenue during the year ended
September 30, 1997 from the sale and license of two product lines, AccounTRAX,
LegalTRAX, InfoTRAX (referred to, collectively, as the "TRAX products") and
eMCee-Registered Trademark-. In February 1997, the Company sold the TRAX
products line for $759,000 and realized a gain on the sale of this product line
of $477,976. Pro forma operating results without the TRAX products line are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net revenue........................................ $ 747,836 $ 1,169,488
Costs of revenue................................... (112,294) (172,041)
----------- -----------
Gross profit..................................... 635,542 997,447
----------- -----------
Operating expenses................................. 2,364,197 3,236,520
----------- -----------
Operating loss..................................... $(1,728,655) $(2,239,073)
=========== ===========
</TABLE>
During the year ended September 30, 1998 and the nine-months ended June 30,
1998 and 1999, the Company generated all of its revenue from the sale, license,
service and maintenance of one product, eMCee-Registered Trademark-. A
significant decrease in the revenue for eMCee-Registered Trademark- could have a
material adverse effect on the Company's operations and financial condition.
LIQUIDITY
The Company has incurred significant losses in the past several years and
had a cumulative deficit of approximately $6.0 million at June 30, 1999. The
Company believes that available working capital and funds received subsequent to
June 30, 1999 (see Note 11) will be sufficient to fund operations during fiscal
2000; however, additional financing may be required to fund operations and
continue development of the Company's sales and marketing infrastructure. There
is no assurance that such financing will be available when needed. Operations of
the Company are subject to risks and uncertainties including, among others,
uncertainty of product development, inexperience in marketing and selling
developed products, technological uncertainty, competition and dependence on key
personnel.
F-101
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INFORMATION
The accompanying unaudited statement of operations and statement of cash
flows contain all adjustments consisting only of normal recurring items
necessary to present fairly the results of the Company for the nine-month period
ending June 30, 1998. The unaudited financial statements presented herein do not
include all information and note disclosures required by generally accepted
accounting principles. The unaudited statements should be read in conjunction
with the audited statements and notes thereto contained herein for the years
ended September 30, 1997 and 1998 and the nine-months ended June 30, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities as well as disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily accounts receivable and cash equivalents. The
Company performs initial and ongoing credit evaluations of its customers'
financial condition and generally requires that customers pay a 50% down payment
with new contracts and payments for maintenance one year in advance.
The Company's cash equivalents are primarily invested in money market
securities. The Company maintains most of its cash balances with a financial
institution in the form of demand deposits and money market accounts. Such
deposit accounts at times may exceed federally insured limits. The Company has
not experienced losses in such accounts.
The Company has no significant off-balance-sheet concentrations of credit
risk such as foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. If not fully recoverable,
impairment losses are recorded for the difference between the carrying value and
fair value of the long-lived assets.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers cash and all
highly liquid investments with original maturities of three months or less to be
cash and cash equivalents.
F-102
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generates revenue from three sources: (i) fees for the initial
license of the Company's proprietary software products, (ii) maintenance fees
paid by customers, in advance, on an annual basis which give the customer the
right to updates of the Company's software when issued by the Company and
telephone support and (iii) implementation, training and consulting services.
Revenue from the initial license fees of the Company's software products are
recognized upon receipt of an executed license agreement, delivery of the
software and acceptance by the customer, provided that the collection of the
license fee is probable and the Company has satisfied all significant
performance obligations. If the terms of the license agreement contain
non-standard customer acceptance criteria, revenue is deferred until all such
significant performance obligations and all significant acceptance criteria are
satisfied.
Revenue from annual maintenance agreements is deferred and recognized
ratably over the term of the agreements, which are typically one year.
Implementation, training, consulting and other services revenue is generally
recognized as the services are performed. Consulting services are typically
performed under separate service agreements and are performed on a time and
materials basis.
All costs associated with licensing of software products, support and update
services, and training and consulting services are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs commences upon the
establishment of technological feasibility of the product. Software development
costs incurred prior to achieving technological feasibility are expensed as
incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and include
salaries, supplies and other direct costs.
INCOME TAXES
The current provision for income taxes represents actual or estimated
amounts payable on tax returns filed or to be filed for each year. Deferred tax
assets and liabilities are recorded for the estimated future tax effects of
temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying balance sheets, and for operating loss and
tax credit carryforwards. The change in deferred tax assets and liabilities for
the period measures the deferred tax provision or benefit for the period.
Effects of changes in enacted tax laws on deferred tax assets and liabilities
are reflected as adjustments to the tax provision or benefit in the period of
enactment. The Company's deferred tax assets have been reduced by a valuation
allowance, to the extent it is deemed more likely than not, that some or all of
the deferred tax assets will not be realized.
F-103
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"), in accounting for its stock option and other
stock-based plans for employees and directors. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation for such options and
stock-based plans for employees and directors.
COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. The Company has not
had any material transactions that are required to be reported in comprehensive
income as compared to its net loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
provides guidance on accounting for the cost of such software. SOP No. 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998. The adoption of SOP No. 98-1 did not have a material impact
on the Company's financial statements.
In December 1998, the AICPA issued Statement of Position 98-9 ("SOP 98-9"),
"Modification of SOP 97-2 Software Revenue Recognition, with Respect to Certain
Transactions." SOP 98-9 amends Paragraphs 11 and 12 of SOP 97-2 to require
recognition of revenue using the "Residual Method." SOP 98-9 is effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company believes SOP 98-9 will not materially impact its financial statements.
(3) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based on estimated useful lives ranging from three to
five years.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- JUNE 30,
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Computer equipment and software............ $690,418 $1,113,938 $1,175,055
Furniture and fixtures..................... 23,462 29,202 29,894
-------- ---------- ----------
713,880 1,143,140 1,204,949
Less--Accumulated depreciation (494,293) (691,103) (863,964)
-------- ---------- ----------
$219,587 $ 452,037 $ 340,985
======== ========== ==========
</TABLE>
F-104
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(3) PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for the years ended September 30, 1997 and 1998 was
$145,610 and $194,851, respectively. Depreciation expense for the nine months
ended June 30, 1998 and 1999 was $137,848 and $172,862, respectively.
(4) CONVERTIBLE SUBORDINATED DEBENTURE
In connection with the sale of the TRAX product line (see Note 1), the
Company issued a $200,000 convertible debenture with an interest rate of 9.5%
and a term of approximately two years in the exchange for cash received from the
purchasers. The debenture required quarterly interest only payments and could be
redeemed at any time by the Company. The debenture was convertible at the option
of the holder at a conversion price of $8.00 per share. The debenture and
accrued interest were paid in full during fiscal 1999.
(5) CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital lease transactions with imputed
interest rates generally ranging from 8.2% to 29.4%. These leases are
collateralized by the leased assets which have a net book value of $157,922,
$412,721 and $311,490 at September 30, 1997 and 1998 and June 30, 1999,
respectively.
At June 30, 1999, future payments under capital lease obligations are as
follows:
<TABLE>
<S> <C>
Period ending September 30--
1999...................................................... $ 54,579
2000...................................................... 190,287
2001...................................................... 115,702
2002...................................................... 31,384
2003...................................................... 9,067
--------
401,019
Less: Amount representing interest........................ (64,541)
--------
$336,478
========
</TABLE>
(6) SHAREHOLDERS' EQUITY
FISCAL 1998 PRIVATE PLACEMENTS
In fiscal 1998, the Company completed two private placements. The first
offering was completed in November 1997. Gross proceeds to the Company were
$3,083,150 for 370,006 shares of the Company's common stock and a warrant to
purchase 35,000 shares of the Company's common stock at an exercise price of
$8.33. The fair value of the warrant was determined to be $104,584 using the
Black-Scholes option pricing model. Net proceeds to the Company were $2,666,500
after deducting offering costs of $416,650.
The second offering to the same investor group was completed in June 1998
for gross proceeds to the Company of $2,100,000. The Company issued 210,000
shares of its common stock and a warrant to
F-105
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(6) SHAREHOLDERS' EQUITY (CONTINUED)
purchase 20,000 shares of its common stock for an exercise price of $10.00. The
fair value of the warrant was determined to be $58,492 using the Black-Scholes
option pricing model. Net proceeds to the Company were $1,894,000 after
deducting offering costs of $206,000.
STOCK OPTIONS
The Company has granted nonqualified stock options to its employees from
time to time. Options are usually granted at fair market value and have a
vesting period of four years, however, the Board of Directors reserves the right
to modify option grants and to issue options with other than normal terms.
In fiscal 1997, the Company modified the terms of several option grants to
employees that left the Company when the TRAX product line was sold (see
Note 1). The option grants were modified to allow the employees to leave the
Company, but retain their rights to the options. The modification of these
option grants was treated the same as a grant of new options. The Company
recognized a charge in the amount of $475,452, equal to the intrinsic value of
the options at the date of modification.
In fiscal 1998, the Company modified the terms of several option grants to
employees who agreed to a reduction in their salary. The option grants were
modified to reduce the option price to $.01. The Company recognized a charge in
the amount of $357,307, equal to the intrinsic value of the options at the date
of modification.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")
SFAS No. 123 defines a fair-value based method of accounting for employee
stock options or similar equity instruments. However, SFAS No. 123 allows the
continued measurement of compensation costs for such plans using the intrinsic
value based method prescribed by APB No. 25 provided that pro forma disclosures
are made of net income or loss, assuming the fair value based method of SFAS
No. 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; accordingly, for purposes of the pro forma disclosures presented
below, the Company has computed the fair values of all options granted during
1997 and 1998, using the Black-Scholes pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Risk-fee interest rate.................................... 5.0% 5.0%
Expected lives............................................ 4 years 4 years
Expected volatility....................................... 0.001% 0.001%
Expected dividend yield................................... 0% 0%
</TABLE>
To estimate the expected lives of options for this valuation, it was assumed
that all options will be exercised at the end of the vesting period. Options
granted during the year ended September 30, 1998 vest over various periods
ranging from date of grant to a four year period from the date of grant.
Cumulative compensation cost recognized in pro forma net loss with respect to
options that are forfeited prior to vesting is adjusted as a reduction of pro
forma compensation expense in the period of forfeiture.
F-106
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(6) SHAREHOLDERS' EQUITY (CONTINUED)
The total fair value of options granted was computed to be $18,439 and
$26,239 for the years ended September 30, 1997 and 1998, respectively, and
$25,353 and $13,297 for the nine months ended June 30, 1998 and 1999,
respectively. These amount are amortized ratably over the vesting periods of the
options. Pro forma stock-based compensation, net of the effect of forfeitures,
was $11,735 and $18,197 for the years ended September 30, 1997 and 1998, and
$13,558 and $21,138 for the nine-months ended June 30, 1998 and 1999,
respectively. If the Company has accounted for its stock-based compensation
plans in accordance with SFAS 123, the Company's net income would have been
reported as follows.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
--------------------- ------------------------
1997 1998 1998 1999
-------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss:
As reported................... $974,184 $2,234,071 $1,335,803 $1,195,215
======== ========== ========== ==========
Pro forma..................... $985,919 $2,252,268 $1,349,361 $1,216,353
======== ========== ========== ==========
</TABLE>
A summary of option activity for the years ended September 30, 1997 and 1998
and the nine months ended June 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1998
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........ 469,830 $ .51 486,830 $ .71
Granted................................. 17,000 6.12 21,988 6.73
------- ----- ------- -----
Outstanding at end of year.............. 486,830 $ .71 508,818 $ .97
======= ===== ======= =====
Exercisable at end of year.............. 131,388 $ .96 472,693 $ .50
======= ===== ======= =====
Weighted average fair value at date of
grant................................. $1.08 $1.19
=================== ===================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
-----------------------------------------
1998 1999
------------------- -------------------
(UNAUDITED)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period...... 486,830 $ .71 508,818 $ .90
Granted................................. 21,988 6.65 8,000 10.00
------- ----- ------- -----
Outstanding at end of period............ 508,818 $ .90 516,818 $1.10
======= ===== ======= =====
Exercisable at end of period............ 456,881 $ .46 486,318 $ .63
======= ===== ======= =====
Weighted average fair value at date of
grant................................. $1.15 $1.77
=================== ===================
</TABLE>
F-107
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(7) INCOME TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, JUNE 30,
--------------------- -----------------------
1997 1998 1998 1999
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current--
Federal........................ $ -- $ -- $ -- $ --
State.......................... -- -- -- --
--------- --------- --------- ---------
Total current provision...... -- -- -- --
--------- --------- --------- ---------
Deferred--
Federal........................ (323,975) (748,278) (445,673) (399,573)
State.......................... (31,445) (72,627) (43,257) (38,782)
Valuation allowance............ 355,420 820,905 488,930 438,355
--------- --------- --------- ---------
Total deferred provision
(benefit).................. -- -- -- --
--------- --------- --------- ---------
Total provision.............. $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
The statutory federal income tax rate was 34% for the years ended
September 30, 1997 and 1998 and the nine-months ended September 30, 1998 and
1999.
Reasons for the difference between the income tax expense reported in the
statements of operations and the amount computed by applying the statutory
federal income tax rate to earnings before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, JUNE 30,
--------------------- -----------------------
1997 1998 1998 1999
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Benefit at statutory rate........................ $(331,223) $(759,584) $(454,174) $(406,373)
Increase (decrease) due to--
State income taxes............................. (32,148) (73,724) (44,081) (39,442)
Nondeductible expenses......................... 7,951 12,403 9,325 7,460
Valuation allowance............................ 355,420 820,905 488,930 438,355
--------- --------- --------- ---------
Income tax provision............................. $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
F-108
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(7) INCOME TAXES (CONTINUED)
Components of net deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- JUNE 30,
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Current--
Accrued liabilities.................... $ 44,682 $ 75,604 $ 65,911
Deferred revenue....................... 123,964 127,469 76,190
Valuation allowance.................... (168,646) (203,073) (142,101)
--------- ----------- -----------
Net current deferred tax assets.......... $ -- $ -- $ --
========= =========== ===========
Non-current--
Depreciation........................... $ (51,615) $ (119,315) $ (180,062)
Net operating losses................... 735,287 1,589,465 2,149,541
Valuation allowance.................... (683,672) (1,470,150) (1,969,479)
--------- ----------- -----------
Net non-current deferred tax assets $ -- $ -- $ --
========= =========== ===========
</TABLE>
For income tax reporting purposes, the Company has approximately
$5.7 million of net operating loss carryforwards that expire at various dates
through 2014. The Tax Reform Act of 1986 contains provisions that may limit the
net operating loss carryforwards available to be used in any given year in the
event of a significant change in ownership interests. Realization is dependent
on generating sufficient taxable income prior to the expiration dates of the
respective carryforward amounts.
During the years ended September 30, 1997 and 1998 and the nine months ended
June 30, 1998 and 1999, the Company increased its valuation allowance by
$355,420, $820,905, $488,930 and $438,355, respectively, due mainly to
uncertainty relating to the realizability of the net operating loss
carryforwards. The amount of the deferred tax assets considered realizable could
be adjusted in the near term if future taxable income materializes.
(8) PROFIT SHARING PLAN
The Company has established a 401(k) plan for its employees. Employees may
contribute up to 15% of gross compensation not to exceed the federal statutory
amount. The Company may make discretionary matching contributions. No matching
contributions have been made by the Company through June 30, 1999.
(9) LEASES
The Company leases office space under a lease that expires in
December 1999. Future minimum annual rental payments due under this lease are as
follows:
<TABLE>
<S> <C>
Period ended September 30--
1999...................................................... $24,755
2000...................................................... 24,755
-------
Total..................................................... $49,510
=======
</TABLE>
F-109
<PAGE>
MARINER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(9) LEASES (CONTINUED)
Rent expense totaled $55,634 and $70,437 for the year ended September 30,
1997 and 1998, respectively, and was $45,946 and $73,999 for the nine months
ended June 30, 1998 and 1999, respectively.
(10) LITIGATION SETTLEMENT
On May 6, 1999, the Company successfully settled a lawsuit against two
former employees, the companies they founded, and their shareholder for
misappropriation of trade secrets, breach of contract and breach of fiduciary
duty. The terms of the settlement included cash payments to the Company of
$229,000, two promissory notes totaling $226,000 secured by an irrevocable
letter of credit from a bank, an option to repurchase shares of the Company
owned by the two former employees and the cancellation of all future royalty
payments to the two former employees. The Company exercised its option to
repurchase the shares owned by the two former employees subsequent to June 30,
1999.
(11) SUBSEQUENT EVENTS
EQUITY INVESTMENT
Subsequent to June 30, 1999, the Company completed an equity offering to the
same investor group who purchased common stock and warrants in fiscal 1998 (see
Note 6). The Company issued 3,871,477 shares and received proceeds from the
offering of approximately $3.2 million, net of offering costs of $148,000. The
Company also cancelled all previous warrants issued to this investor group.
MERGER
On July 23, 1999, the Company entered into a merger agreement (the
"Agreement") with VantageMed Corporation ("VantageMed"). The merger has been
structured as a plan of reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986 and will qualify for tax free treatment. The
Company will exchange all of its shares and options for the shares and options
of VantageMed at an exchange ratio of approximately 0.48 shares of VantageMed
stock for each share of the Company's stock. The shareholders approved the
merger on August 2, 1999 and the merger was completed on August 6, 1999.
BUILDING LEASE
Subsequent to June 30, 1999, the Company entered into a new non-cancelable
lease for office space which commences on December 1, 1999. The initial term of
the lease is for five years and provides for escalating lease payments. Future
lease payments under this lease are as follows:
<TABLE>
<S> <C>
Year Ended September 30--
2000...................................................... $ 71,960
2001...................................................... 88,512
2002...................................................... 91,164
2003...................................................... 93,898
2004...................................................... 96,716
Thereafter................................................ 16,198
--------
$458,448
========
</TABLE>
F-110
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Medical Digital Technologies, Inc.:
We have audited the accompanying balance sheet of MEDICAL DIGITAL
TECHNOLOGIES, INC. (a California Corporation) as of September 30, 1999, and the
related statements of income, stockholders' equity (deficit) and cash flows for
the nine-month period then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medical Digital
Technologies, Inc. as of September 30, 1999, and the results of its operations
and its cash flows for the nine-month period then ended, in conformity with
generally accepted accounting principles.
Los Angeles, California
October 20, 1999
F-111
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
BALANCE SHEET--SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $320,656
Accounts receivable, net of allowance of $10,000.......... 132,306
Inventories............................................... 27,938
Deferred income taxes..................................... 56,026
--------
Total current assets.................................... 536,926
--------
PROPERTY AND EQUIPMENT, net................................. 37,095
OTHER ASSETS................................................ 4,264
--------
Total assets............................................ $578,285
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $138,983
Payable to related party.................................. 8,044
Accrued liabilities....................................... 73,429
Income tax payable........................................ 81,568
Customer deposits......................................... 137,186
Deferred revenue.......................................... 80,177
Other current liabilities................................. 13,840
--------
Total current liabilities............................... 533,227
========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value;
7,500 shares authorized,
3,330 shares outstanding................................ 33,330
Retained earnings......................................... 11,728
--------
Total stockholders' equity.............................. 45,058
--------
Total liabilities and stockholders' equity.............. $578,285
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-112
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
STATEMENT OF INCOME
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C>
NET SALES................................................... $1,292,817
COST OF SALES............................................... 862,812
----------
Gross Profit.............................................. 430,005
SELLING, GENERAL AND ADMINISTRATIVE......................... 267,908
----------
INCOME FROM OPERATIONS...................................... 162,097
INTEREST INCOME............................................. 5,617
----------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 167,714
PROVISION FOR INCOME TAXES.................................. 26,342
----------
NET INCOME.................................................. $ 141,372
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-113
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK STOCKHOLDERS' STOCKHOLDERS
------------------- EARNINGS EQUITY
SHARES AMOUNT (DEFICIT) (DEFICIT)
-------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Balance December 31, 1998............................. 3,330 $33,330 $(129,644) $(96,314)
Net Income............................................ -- -- 141,372 141,372
----- ------- --------- --------
Balance September 30, 1999............................ 3,330 $33,330 $ 11,728 $ 45,058
===== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-114
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $141,372
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 15,046
Deferred income taxes................................... (56,026)
Bad debt expense........................................ 7,632
Changes in assets and liabilities:
Accounts receivable................................... (50,500)
Inventories........................................... (27,938)
Accounts payable...................................... 78,779
Payable to related party.............................. 8,044
Income tax payable.................................... 81,568
Accrued liabilities................................... 9,270
Customer deposits..................................... (40,892)
Deferred revenue...................................... 53,299
Other current liabilities............................. 13,840
--------
Net cash provided by operating activities........... 233,494
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment....................... (7,468)
--------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 226,026
CASH AND CASH EQUIVALENTS, beginning of period.............. 94,630
--------
CASH AND CASH EQUIVALENTS, end of period.................... $320,656
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ --
========
Cash paid for income taxes................................ $ 800
========
</TABLE>
The accompanying notes are an integral part of this statement.
F-115
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION AND BUSINESS
Medical Digital Technologies, Inc. (the "Company") provides physicians and
other healthcare professionals in the United States, with office management
software designed to automate the administrative, financial, and practice
management requirements of medical practices. The Company also provides
software, network and hardware support, training, forms and supplies and
interfaces for EDI including claims, electronic remittance advice and electronic
statement printing services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying balance sheet is not materially
different from their fair values.
CONCENTRATIONS OF CREDIT RISK
The Company's accounts receivable are unsecured and the Company is at risk
to the extent such amounts become uncollectible. As of September 30, 1999, three
customers represented 46 percent of accounts receivable. For the nine-months
ended September 30, 1999, one customer represented 12 percent of net sales.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of supplies and new computer equipment purchased to
fill customer orders.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the double-declining balance method with the mid-year convention. The Company
depreciates property and equipment over the estimated useful lives of the
respective assets, which are generally three to seven years. Maintenance and
repairs are expensed as incurred.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", under which deferred income taxes are provided
based upon enacted tax laws and rates applicable to the periods in which taxes
become payable. A valuation allowance is provided against the future benefits of
deferred tax assets if it is determined that it is more likely than not that the
future tax benefits associated with the deferred tax assets will not be
realized.
F-116
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
REVENUE RECOGNITION
The Company records revenue when the configured system is shipped or is
installed by Company personnel. When systems are sold through a distributor, the
Company records revenue when the system is encoded for use. Revenue from service
contracts is deferred and recognized over the term of the contract. All other
revenue is recognized during the period in which services are performed. Post
customer support obligations are insignificant and are accrued at the time of
the sale.
SOFTWARE DEVELOPMENT INCOME
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", development costs related to
software products are expensed as incurred until the technological feasibility
of the product has been established. Technological feasibility in the Company's
circumstances occurs when a working model is completed. After technological
feasibility is established, additional costs would be capitalized. The Company
believes its process for developing software is essentially completed concurrent
with the establishment of technological feasibility, and, accordingly, no
software development costs have been capitalized to date.
USE OF ESTIMATES
The preparation of the 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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 1999:
<TABLE>
<S> <C>
Software.................................................... $ 8,006
Office and computer equipment............................... 184,944
Furniture and fixtures...................................... 26,740
---------
219,690
Less: Accumulated depreciation.............................. (182,595)
---------
$ 37,095
=========
</TABLE>
Depreciation expense was $15,046 for the nine-month period ended
September 30, 1999 and is included in cost of goods sold.
F-117
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office space under an operating lease. The minimum
future lease payments at September 30, 1999 are as follows:
For the period ending December 31,
<TABLE>
<S> <C>
1999........................................................ $10,662
2000........................................................ 42,648
2001........................................................ 31,986
-------
$85,296
=======
</TABLE>
Rent expense was $36,057 for the nine-month period ended September 30, 1999.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
September 30, 1999, the Company was not involved in any legal proceedings,
which, according to management in consultation with its legal counsel, would
individually or in the aggregate, have a material adverse effect on the
Company's business, financial condition or results of operations.
5. RELATED PARTY TRANSACTIONS
The Company sells certain products to its stockholders at cost. During 1999,
the Company sold products to the physician practices of two of the Company's
stockholders. Sales to these two physician practices during the nine-month
period ended September 30, 1999 totaled $33,104. Another company owned by one of
these stockholders received commissions of $11,389 relating to current period
sales. After deducting commissions, the net sales price equaled the cost to the
Company. At September 30, 1999, $8,044 was due to this company.
During 1999, the Company subcontracted some internal training to a company
owned by another stockholder. Services by this company totaled $1,700 for the
nine-month period ended September 30, 1999.
6. INCOME TAXES
The Company has recorded a net deferred tax asset of $56,026 at
September 30, 1999. Realization is dependent on generating sufficient taxable
income in the future. Although realization is not assured, management believes
it is more likely than not that all of the deferred tax asset will be realized.
F-118
<PAGE>
MEDICAL DIGITAL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
6. INCOME TAXES (CONTINUED)
The provision for income taxes for the nine-month period ended
September 30, 1999 consists of the following:
<TABLE>
<S> <C>
Current:
Federal................................................... $ 63,871
State..................................................... 18,497
--------
Total current............................................... 82,368
Deferred:
Federal................................................... (11,207)
State..................................................... (3,653)
--------
Total deferred.............................................. (14,860)
--------
Change in valuation allowance............................... (41,166)
--------
Provision for income taxes.................................. $ 26,342
========
</TABLE>
Differences between the provision for income taxes and income tax computed
at the federal statutory income tax rate for the nine-months ended
September 30, 1999 are as follows:
<TABLE>
<S> <C>
Income tax at statutory
federal rate.............................................. $ 57,023
State income tax, net of federal tax benefit................ 9,818
Other....................................................... 667
Change in valuation allowance............................... (41,166)
--------
$ 26,342
========
</TABLE>
The components of the net deferred tax asset at September 30, 1999 are as
follows:
<TABLE>
<S> <C>
Allowance for bad debts..................................... $ 3,983
Vacation accrual............................................ 7,974
Deferred service revenue.................................... 35,917
State income taxes.......................................... 6,289
Other....................................................... 1,863
-------
$56,026
=======
</TABLE>
7. SUBSEQUENT EVENT
On October 1, 1999, the Company's stockholders' entered into a sales
agreement with VantageMed Corporation ("VMC"). All shares of the Company's
common stock outstanding at October 1, 1999 will be exchanged for 289,473 shares
of VMC common stock, $600,000 in cash and $500,000 in promissory notes.
F-119
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VantageMed Corporation:
We have audited the accompanying balance sheet of MEDICAL SOFTWARE
SOLUTIONS, INC. (a Michigan Corporation) as of January 31, 1999, and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medical Software
Solutions, Inc. as of January 31, 1999, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Detroit, Michigan,
October 19, 1999
F-120
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
BALANCE SHEET
AS OF JANUARY 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 725
Accounts receivable, net of allowance of $29,350.......... 118,814
Accrued interest receivable............................... 20,083
Deferred tax asset........................................ 6,464
--------
Total current assets.................................... 146,086
PROPERTY AND EQUIPMENT, net................................. 13,009
OFFICERS/STOCKHOLDERS LOANS................................. 199,906
OTHER ASSETS................................................ 10,000
--------
Total assets............................................ $369,001
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 61,473
Accrued liabilities....................................... 19,453
Outstanding drafts........................................ 20,600
Customer deposits and deferred revenue.................... 56,187
--------
Total current liabilities............................... 157,713
--------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 50,000 shares authorized;
1,000 shares issued and outstanding..................... 1,000
Accumulated earnings...................................... 210,288
--------
Total stockholders' equity.............................. 211,288
--------
Total liabilities and stockholders' equity.............. $369,001
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-121
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<S> <C>
NET REVENUES................................................ $1,022,668
COST OF REVENUES............................................ 588,068
----------
GROSS PROFIT.............................................. 434,600
OPERATING COSTS AND EXPENSES................................ 543,959
----------
LOSS FROM OPERATIONS...................................... (109,359)
----------
INTEREST AND OTHER INCOME:
Interest income........................................... 22,690
Other income, net......................................... 8,591
----------
Total interest and other income......................... 31,281
----------
LOSS BEFORE INCOME TAXES.................................... (78,078)
BENEFIT FOR INCOME TAXES.................................... (12,701)
----------
NET LOSS.................................................... $ (65,377)
==========
NET LOSS PER COMMON SHARE
Basic net loss per share.................................. $ (65.38)
==========
Weighted-average common shares outstanding................ 1,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-122
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ACCUMULATED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1998............................ 1,000 $1,000 $275,665 $276,665
Net loss............................................. -- -- (65,377) (65,377)
----- ------ -------- --------
BALANCE AT JANUARY 31, 1999............................ 1,000 $1,000 $210,288 $211,288
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-123
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANURARY 31, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(65,377)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation............................................ 8,103
Credit for deferred income taxes........................ (19,365)
Changes in assets and liabilities--
Accounts receivable................................... 70,316
Prepaid expenses and other............................ 251
Accounts payable and accrued liabilities.............. 18,001
Outstanding drafts.................................... 20,600
Customer deposits and deferred revenue................ 7,700
--------
Net cash provided by operating activities........... 40,229
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities............... 26,333
Accrued interest receivable............................... (2,657)
Net borrowings of officers/stockholders................... (85,676)
Purchases of property and equipment....................... (6,963)
--------
Net cash used in investing activities............... (68,963)
--------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (28,734)
CASH AND CASH EQUIVALENTS, beginning of year................ 29,459
--------
CASH AND CASH EQUIVALENTS, end of year...................... $ 725
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 8,825
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-124
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1999
1. ORGANIZATION AND BASIS OF PRESENTATION:
Medical Software Solutions, Inc. (the "Company") was incorporated in
Michigan on February 1, 1985. The Company develops and sells practice management
software and related services to physicians and other healthcare professionals.
The practice management software products offered by the Company provide
physicians and other professionals with comprehensive office management software
designed to automate the administrative, financial, practice management and
clinical requirements of a practice. These systems range in capacity from one to
approximately twenty-five providers. The Company also provides software, network
and hardware support, training, electronic claims processing and electronic
statement printing and mailing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying balance sheet are not materially
different from their fair values.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
accelerated methods over the estimated useful lives of the respective assets,
which are generally three to seven years. Leasehold improvements are amortized
over the term of the related lease. Maintenance and repairs are expensed as
incurred.
REVENUE RECOGNITION
Revenue is generated primarily from the following sources: new software
installations, software conversions and upgrades for existing customers, sales
of hardware manufactured by other companies, hardware maintenance, software
support and electronic transaction services. In accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2
("SOP 97-2"), "Software Revenue Recognition", revenue from software product
sales is recognized upon delivery to the customer provided the collection of the
sales proceeds is deemed probable, the fee is fixed and determinable and no
significant vendor obligations remain. Other revenue, including hardware sales,
maintenance, licensing and support activities, is generally recognized as
hardware is shipped or as services are provided. Deferred revenue primarily
consists of revenue deferred under annual maintenance and annual license
agreements on which amounts have been received from customers and for which the
earnings process has not been completed.
F-125
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", capitalization of software development costs begins upon
the establishment of technological feasibility of the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability of
these costs require considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic product lives and changes in software and
hardware technology. Amounts that would have been capitalized under this
statement after consideration of the above factors were immaterial, and
therefore, no software development costs have been capitalized by the Company.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income Taxes", under which deferred income taxes
are provided based upon enacted tax laws and rates applicable to the periods in
which taxes become payable. A valuation allowance is provided against the future
benefits of deferred tax assets if it is determined that it is more likely than
not that the future tax benefits associated with the deferred tax asset will not
be realized.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<S> <C>
Office and computer equipment............................... $ 52,159
Furniture and fixtures...................................... 7,063
Leasehold improvements...................................... 1,200
--------
60,422
Less: Accumulated depreciation.............................. (47,413)
--------
$ 13,009
========
</TABLE>
Depreciation expense was approximately $8,000 for 1999.
F-126
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999
4. OPERATING LEASE OBLIGATIONS:
The Company leases two autos under non-cancelable operating leases. The
minimum future lease payments required under the Company's operating leases for
the fiscal years ending January 31 are as follows:
<TABLE>
<S> <C>
2000...................................................... $ 8,700
2001...................................................... 5,400
2002...................................................... 500
-------
Total minimum payments.................................... $14,600
=======
</TABLE>
Total rent expense was approximately $29,000 for fiscal 1999.
5. RELATED PARTY TRANSACTIONS:
OFFICERS/STOCKHOLDERS LOANS
The Company has outstanding loans receivable from officers/stockholders of
approximately $200,000 at January 31, 1999. The loans earn interest at a rate of
9.25% and repayment terms are unspecified. Total related party interest income
on these loans was approximately $20,000 for 1999.
ROYALTIES
The Company has a contractual agreement with the officers/stockholders of
the Company and a related third party to pay royalties for product development
and inventions, whose value is determined on a periodic basis. Royalties under
this agreement of $190,000 were charged to operating expenses in 1999.
6. EMPLOYEE BENEFIT PLANS:
The Company maintains an employee retirement plan under which leased
employees may defer a portion of their annual compensation, pursuant to
Section 401(k) of the Internal Revenue Code. Substantially all leased employees
who have completed at least 90 days of service are eligible to participate in
the plan. The company has no contributory obligations with respect to this plan,
nor did it incur any significant plan expense during the year.
7. INCOME TAXES:
The benefit for income taxes consists of:
<TABLE>
<S> <C>
Current provision........................................... $ 6,664
Deferred benefit............................................ (19,365)
--------
Benefit for income taxes.................................. $(12,701)
========
</TABLE>
Deferred taxes result from temporary differences between the bases of assets
and liabilities for financial reporting purposes and such amounts as measured by
tax laws and regulations. The Company
F-127
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999
7. INCOME TAXES: (CONTINUED)
is a cash basis taxpayer therefore the sources of the temporary differences and
the related deferred tax assets and liabilities are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Accrued expenses.......................................... $ 26,187
Deferred tax liabilities:
Accrued revenue........................................... (19,723)
--------
Net deferred tax asset...................................... $ 6,464
========
</TABLE>
The following table accounts for the differences between the actual tax
benefit and amounts obtained by applying the Statutory U.S. Federal rate to the
loss before income taxes.
<TABLE>
<S> <C>
Expected tax benefit........................................ $(16,178)
Increase in income taxes resulting from nondeductible
items..................................................... 3,477
--------
Benefit for income taxes.................................... $(12,701)
========
</TABLE>
8. SUBSEQUENT EVENT:
Subsequent to January 31, 1999, the Company was acquired by VantageMed
Corporation. As consideration, the stockholders of the Company received
approximately 255,000 shares of VantageMed Corporation stock and a promissory
note for approximately $460,000 in exchange for the stock of the Company.
F-128
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
BALANCE SHEET
AS OF APRIL 30, 1999
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,977
Accounts receivable, net of allowance of $29,350.......... 139,884
Accrued interest receivable............................... 24,706
Deferred tax asset........................................ 990
--------
Total current assets.................................... 175,557
PROPERTY AND EQUIPMENT, net................................. 11,495
OFFICERS/STOCKHOLDERS LOANS................................. 224,616
OTHER ASSETS................................................ 10,000
--------
Total assets............................................ $421,668
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 57,951
Accrued liabilities....................................... 17,894
Customer deposits and deferred revenue.................... 62,317
--------
Total current liabilities............................... 138,162
--------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 50,000 shares authorized;
1,000 shares issued and outstanding..................... 1,000
Accumulated earnings...................................... 282,506
--------
Total stockholders' equity.............................. 283,506
--------
Total liabilities and stockholders' equity.............. $421,668
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET REVENUES................................................ $427,445 $294,346
COST OF REVENUES............................................ 209,976 122,629
-------- --------
GROSS PROFIT............................................ 217,469 171,717
OPERATING COSTS AND EXPENSES................................ 134,821 114,841
-------- --------
INCOME FROM OPERATIONS.................................. 82,648 56,876
INTEREST INCOME............................................. 4,633 4,279
-------- --------
INCOME BEFORE INCOME TAXES.................................. 87,281 61,155
PROVISION FOR INCOME TAXES.................................. 15,063 10,503
-------- --------
NET INCOME.................................................. $ 72,218 $ 50,652
======== ========
NET INCOME PER COMMON SHARE
Basic net earnings per share.............................. $ 72.22 $ 50.65
======== ========
Weighted average common shares outstanding................ 1,000 1,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 72,218 $ 50,652
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation............................................ 1,514 2,026
Provision (credit) for deferred income taxes............ 5,474 (15,831)
Changes in assets and liabilities--
Accounts receivable................................... (21,070) 40,850
Accounts payable and accrued liabilities.............. (25,681) 85,669
Customer deposits and deferred revenue................ 6,130 (5,616)
-------- ---------
Net cash provided by operating activities........... 38,585 157,751
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Accrued interest receivable............................... (4,623) (4,025)
Proceeds from sale of marketable securities............... -- 26,333
Net borrowings of officers/stockholders................... (24,710) (119,622)
Purchases of property and equipment....................... -- (103)
-------- ---------
Net cash used in investing activities............... (29,333) (97,417)
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 9,252 60,334
CASH AND CASH EQUIVALENTS, beginning of year................ 725 29,459
-------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 9,977 $ 89,793
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 1,896 $ 4,580
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-131
<PAGE>
MEDICAL SOFTWARE SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
1. BASIS OF PRESENTATION:
The interim financial statements are unaudited and reflect all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results for the interim periods. The results of operations for the current
interim period are not necessarily indicative of results to be expected for the
current year or any other period.
These interim financial statements should be read in conjunction with the
Company's financial statements for the year ended January 31, 1999.
2. ROYALTIES:
The Company has a contractual agreement with the officers/stockholders of
the Company and a related third party to pay royalties for product development
and inventions, whose value is determined on a periodic basis. Royalties under
this agreement of $50,000 and $35,000 were charged to operating expenses during
the three months ended April 30, 1999 and 1998, respectively.
3. INCOME TAXES:
The following table accounts for the differences between the actual tax
benefit and amounts obtained by applying the Statutory U.S. Federal rate to the
loss before income taxes.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Expected tax provision................................ $14,489 $10,152
Increase in income taxes resulting from nondeductible
items............................................... 574 351
------- -------
Provision for income taxes............................ $15,063 $10,503
======= =======
</TABLE>
4. SUBSEQUENT EVENT:
Subsequent to April 30, 1999, the Company was acquired by VantageMed
Corporation. As consideration, the stockholders of the Company received
approximately 255,000 shares of VantageMed Corporation stock and a promissory
note for approximately $460,000 in exchange for the stock of the Company.
F-132
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Medicom Corporation:
We have audited the accompanying balance sheet of Medicom Corporation (a
California corporation) as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medicom Corporation as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
San Francisco, California,
October 15, 1999
F-133
<PAGE>
MEDICOM CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1997, AND JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 56,432 $ 44,029
Accounts receivable....................................... 68,652 75,495
Prepaid expenses and other................................ 4,351 9,900
--------- --------
Total current assets.................................... 129,435 129,424
PROPERTY AND EQUIPMENT, net................................. 89,398 68,640
OTHER ASSETS.............................................. 3,416 3,897
--------- --------
Total assets............................................ $ 222,249 $201,961
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 45,215 $ 28,681
Accrued liabilities....................................... 49,494 15,834
Capital lease obligation.................................. 4,255 0
--------- --------
Total current liabilities............................... 98,964 44,515
DEFERRED INCOME TAXES....................................... 9,447 17,646
STOCKHOLDERS' EQUITY:
Common stock, no par value, 5,000,000 shares authorized;
871,278 shares outstanding as of December 31, 1997, and
June 30, 1998........................................... 258,670 258,670
Accumulated deficit....................................... (144,832) (118,870)
--------- --------
Total stockholders' equity.................................. 113,838 139,800
--------- --------
Total liabilities and stockholders' equity.................. $ 222,249 $201,961
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-134
<PAGE>
MEDICOM CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
DECEMBER 31, -------------------
1997 1997 1998
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
On-line revenue........................................... $ 701,106 $360,525 $326,538
Full-service revenue...................................... 721,340 421,034 239,726
Other..................................................... 53,970 24,547 13,777
---------- -------- --------
Total revenues.......................................... 1,476,416 806,106 580,041
OPERATING COSTS AND EXPENSES:
Cost of revenue........................................... 1,203,171 605,377 456,077
Selling, general and administrative....................... 202,008 116,405 68,657
Depreciation.............................................. 51,014 25,577 21,861
---------- -------- --------
Income from operations.................................. 20,223 58,747 33,446
INTEREST INCOME, net........................................ 2,075 1,222 715
---------- -------- --------
Income before income taxes.............................. 22,298 59,969 34,161
PROVISION FOR INCOME TAXES.................................. 5,352 14,201 8,199
---------- -------- --------
Net income.............................................. $ 16,946 $ 45,768 $ 25,962
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-135
<PAGE>
MEDICOM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997, AND
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996..................... 1,102,443 $327,300 $ 12,315 $ 339,615
Repurchase of common stock..................... (231,165) (68,630) (174,093) (242,723)
Net income..................................... 0 0 16,946 16,946
--------- -------- --------- ---------
BALANCE AT DECEMBER 31, 1997..................... 871,278 258,670 (144,832) 113,838
Net income..................................... 0 0 25,962 25,962
--------- -------- --------- ---------
BALANCE AT JUNE 30, 1998 (unaudited)............. 871,278 $258,670 $(118,870) $ 139,800
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-136
<PAGE>
MEDICOM CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
DECEMBER 31, --------------------
1997 1997 1998
------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 16,946 $ 45,768 $ 25,962
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation............................................ 51,014 25,577 21,861
Changes in assets and liabilities:
Accounts receivable................................... 3,730 (50,473) (6,843)
Prepaid expenses and other............................ 14,551 9,145 (5,549)
Other assets.......................................... 1,548 1,548 (481)
Accounts payable...................................... (9,088) (8,886) (16,534)
Accrued liabilities................................... (34,444) (22,264) (33,660)
Deferred income taxes................................. 2,052 (5,580) 8,199
--------- --------- --------
Net cash provided by (used for) operating
activities........................................ 46,309 (5,165) (7,045)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property
and equipment............................................. (16,060) (1,350) (1,103)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock................................ (242,723) (242,723) 0
Repayment of capital lease obligation..................... (667) 0 (4,255)
--------- --------- --------
Net cash used for financing activities................ (243,390) (242,723) (4,255)
--------- --------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (213,141) (249,238) (12,403)
--------- --------- --------
CASH AND CASH EQUIVALENTS, beginning of period.............. 269,573 269,573 56,432
--------- --------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 56,432 $ 20,335 $ 44,029
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 191 $ 111 $ 96
Cash paid for income taxes................................ 800 800 800
</TABLE>
The accompanying notes are an integral part of these statements.
F-137
<PAGE>
MEDICOM CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Medicom Corporation (the Company) was incorporated in May 1981 in the state
of California. The Company develops, implements, and supports computerized
practice management systems and provides related services to medical and dental
practices. The practice management software products offered by the Company
provide physicians, dentists, and other professionals with comprehensive office
management software designed to automate the administrative, financial, practice
management, and clinical requirements of a practice. The Company also provides
software, network and hardware support, training, electronic claims processing,
electronic statement printing and mailing, and electronic remittance advices.
CONCENTRATION OF BUSINESS RISKS
The market for the Company's products and services is characterized by rapid
technological developments, the need to update products and services due to
changing regulatory requirements, intense competition, and changing consumer
preferences. Accordingly, the Company will be required to continually improve
the performance, features, and reliability of its products and services to meet
consumer demand and maintain its competitive advantage. Additional risks include
development of an effective marketing and sales strategy, retention of qualified
personnel, and the Company's ability to grow its client base.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial information included herein as of June 30, 1998, and
for the six months ended June 30, 1997 and 1998, has been prepared in accordance
with generally accepted accounting principles for interim financial statements.
In the opinion of the Company, these unaudited financial statements reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The results of operations for interim periods are not
necessarily indicative of the results expected for a full year.
REVENUE RECOGNITION
The Company primarily generates revenues from two types of clients: on-line
and full service. On-line clients are granted remote access to the Company's
software, perform most data entry functions, and are the primary users of the
software. Full-service clients essentially outsource their practice management
function to the Company. The types of revenue generated from on-line and
full-service clients are primarily set-up/installation fees, monthly base
recurring charges, and monthly variable charges based on the services used.
Other revenues consist primarily of hardware sales and performance of one-time
services.
Revenues from set-up/installation services are recognized ratably over the
contract period, while all other types of revenue are recognized as services are
rendered or hardware is shipped.
F-138
<PAGE>
MEDICOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that may potentially subject the Company to
concentration of credit risk consist principally of accounts receivable. The
Company has experienced minimal losses due to write-offs of uncollectible
accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying the applicable statutory tax
rate to the differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date based on the applicable tax rate.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, which are generally five to seven years. Maintenance and repairs are
expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility. The ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life, and changes in software and hardware
technology. After considering the above factors, the Company has expensed
software development costs incurred for the year ended December 31, 1997.
F-139
<PAGE>
MEDICOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Office and computer equipment........................ $ 450,131 $ 451,233
Furniture and fixtures............................... 54,703 54,704
--------- ---------
504,834 505,937
Less: Accumulated depreciation....................... (415,436) (437,297)
--------- ---------
$ 89,398 $ 68,640
========= =========
</TABLE>
Depreciation expense for the year ended December 31, 1997, was $51,014.
3. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at December 31, 1997, and June
30, 1998 (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Payroll and related.................................. $30,590 $12,090
Deferred revenue..................................... 6,616 975
Other................................................ 12,288 2,769
------- -------
$49,494 $15,834
======= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases office space for its headquarters and on-line operations
pursuant to a month-to-month operating lease. The Company also leases its
full-service operating facility pursuant to an operating lease, which expires in
May 1999. The lease payments for this operating facility are consistent over the
lease period and are therefore charged to expense over the lease terms as they
become payable. Future minimum payments under the full-service operating lease
are $52,376 and $40,446 in 1998 and 1999, respectively.
The Company has entered into a capital lease agreement for its telephone
system. The capital lease expires in June 1998. The minimum future capital lease
payments due through the expiration of this lease total $4,255.
Rent expense for the year ended December 31, 1997, was approximately
$106,000.
F-140
<PAGE>
MEDICOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. STOCKHOLDERS' EQUITY:
COMMON STOCK
During 1997, the Company repurchased 231,165 shares from various
stockholders at $1.05 per share. The difference between the cash paid to
repurchase the stock and the original proceeds received is included in
accumulated deficit in the accompanying balance sheets.
6. INCOME TAXES:
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. The Company's primary temporary differences
relate to expense items deductible for financial reporting purposes but not for
income tax purposes, primarily differences between depreciation for financial
reporting purposes and income tax purposes. Other than state income taxes, there
are no significant differences between effective and statutory income tax rates.
As of December 31, 1997, the Company had a net operating loss (NOL)
carryforward of approximately $7,000 for California purposes. The California NOL
begins expiring in 2002. SFAS No. 109 requires that the tax benefit of such net
operating loss be recorded as an asset. However, SFAS No. 109 also requires that
a valuation allowance be provided to the extent uncertainty surrounds the
realizability of the deferred tax assets. Accordingly, the Company has recorded
a full valuation allowance against the California NOL.
7. SIGNIFICANT CLIENTS:
The Company earned approximately 20 percent of its revenue from sales made
to one client during the year ended December 31, 1997.
8. SUBSEQUENT EVENTS:
Effective July 15, 1998, the Company entered into an agreement and plan of
merger with VantageMed Corporation. The 871,278 shares of Company common stock
were converted into the right to receive an aggregate of 104,554 shares of
VantageMed Series B preferred stock.
F-141
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of VantageMed Corporation:
We have audited the accompanying balance sheet of TREND SIERRA (a California
Proprietorship) as of December 31, 1996, and the related statements of
operations, owner's deficit and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Trend Sierra as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Sacramento, California
October 22, 1999
F-142
<PAGE>
TREND SIERRA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 JUNE 30, 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 7,769 $ 0
Accounts receivable, net of allowance of $40,160 and
$23,740 for December 31, 1996, and June 30, 1997,
respectively............................................ 192,755 123,722
Inventories............................................... 18,472 21,616
Other current assets...................................... 2,695 2,695
---------- ----------
Total current assets.................................... 221,691 148,033
PROPERTY AND EQUIPMENT, net................................. 15,548 21,286
---------- ----------
Total assets............................................ $ 237,239 $ 169,319
========== ==========
LIABILITIES AND OWNER'S DEFICIT
CURRENT LIABILITIES:
Bank overdraft............................................ $ 0 $ 17,281
Accounts payable.......................................... 57,440 15,633
Accrued liabilities....................................... 70,496 72,442
Customer deposits......................................... 56,547 12,562
Deferred revenue.......................................... 67,417 64,249
Loan from affiliate....................................... 787,883 835,592
---------- ----------
Total current liabilities............................... 1,039,783 1,017,759
COMMITMENTS AND CONTINGENCIES (NOTE 5)
OWNER'S DEFICIT
Total owner's deficit................................... (802,544) (848,440)
---------- ----------
Total liabilities and owner's deficit................... $ 237,239 $ 169,319
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-143
<PAGE>
TREND SIERRA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
----------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.......................................... $ 1,922,848 $ 892,298 $ 852,225
OPERATING COST AND EXPENSES:
Cost of revenues................................ 1,118,211 536,783 509,994
Selling, general and administrative............. 688,246 365,679 322,657
------------ ------------ -----------
Income (loss) from operations............... 116,391 (10,164) 19,574
OTHER EXPENSE:
Interest........................................ (166,490) (73,920) (64,288)
Other........................................... 0 0 (1,182)
------------ ------------ -----------
(166,490) (73,920) (65,470)
------------ ------------ -----------
Net loss.................................... $ (50,099) $ (84,084) $ (45,896)
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-144
<PAGE>
TREND SIERRA
STATEMENTS OF OWNER'S DEFICIT
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1995................................ $ (752,445)
Net loss.................................................. (50,099)
----------
BALANCE AT DECEMBER 31, 1996................................ (802,544)
Net loss (for six months)................................. (45,896)
----------
BALANCE AT JUNE 30, 1997 (UNAUDITED)........................ $ (848,440)
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-145
<PAGE>
TREND SIERRA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, -----------------------------
1996 JUNE 30, 1996 JUNE 30, 1997
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (50,099) $(84,084) $(45,896)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities--
Depreciation and amortization......................... 6,413 3,206 3,518
Interest added to principal balance on loan from
affiliate........................................... 156,694 58,639 47,709
Bad debt expense...................................... 40,160 24,092 23,740
Loss on disposal of property and equipment............ 0 0 1,182
Changes in assets and liabilities--
Accounts receivable................................. (180,066) (39,492) 45,293
Inventories......................................... (1,206) (6,129) (3,144)
Bank overdraft, accounts payable, and accrued
liabilities....................................... 1,571 51,095 (22,580)
Customer deposits and deferred revenue.............. 20,950 (20,679) (47,153)
--------- -------- --------
Net cash provided by (used for) operating
activities...................................... (5,583) (13,352) 2,669
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................... (10,411) (10,411) (10,438)
--------- -------- --------
Net cash used for investing activities............ (10,411) (10,411) (10,438)
--------- -------- --------
Net change in cash................................ (15,994) (23,763) (7,769)
CASH, beginning of period................................. 23,763 23,763 7,769
--------- -------- --------
CASH, end of period....................................... $ 7,769 $ 0 $ 0
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-146
<PAGE>
TREND SIERRA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION:
Trend Sierra (the Company) is a sole proprietorship in the state of
California. The Company is a healthcare information systems supplier that
operates in California. The Company sells, installs and supports computerized
practice management systems and provides related services to medical and dental
practices. The Company was acquired by VantageMed Corporation (VantageMed) on
August 28, 1997 under an agreement in which the sole proprietor of Trend Sierra
exchanged all of his ownership interest for $75,000 in cash and a note from
VantageMed for $1,525,000. The note is payable over eight years at prime plus
1.5% (not to exceed 10.5%). No principal is paid in the first two years.
VantageMed pledged 100 shares of stock as collateral for the note.
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES:
FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying balance sheets are not materially
different from their fair values.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of new computer equipment purchased to fill
customer orders.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over five years, the estimated useful life of the
office and computer equipment.
REVENUE RECOGNITION
Revenue is generated primarily from new software installations, software
conversions and upgrades for existing customers, sales of hardware manufactured
by other companies, hardware maintenance, software support and electronic
transaction services. Revenue from software product sales is recognized upon
delivery to the customer. Other revenue, including hardware sales, maintenance,
licensing and support activities, is generally recognized as hardware is shipped
or as services are provided. Deferred revenue primarily consists of revenue
deferred under monthly maintenance and license agreements on which amounts have
been received from customers and for which the earnings process has not been
completed.
INCOME TAXES
The Company is a sole proprietorship. All income tax is assessed to the
Company owner on his personal tax return.
F-147
<PAGE>
TREND SIERRA
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES: (CONTINUED)
USE OF ESTIMATES
The preparation of the 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.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
(UNAUDITED)
<S> <C> <C>
Office and computer equipment........................ $ 32,880 $ 39,952
Less: accumulated depreciation....................... (17,332) (18,666)
-------- --------
$ 15,548 $ 21,286
======== ========
</TABLE>
Depreciation expense was $6,413, $3,206 (unaudited), and $3,518 (unaudited)
for the year ending December 31, 1996, and the six month periods ending June 30,
1996 and 1997, respectively.
4. LOAN FROM AFFILIATE:
Loan from affiliate represents a loan from an entity in which the Company's
proprietor has a partial interest. Interest is paid monthly at 18% and no
maturity date is set.
5. CONTINGENCIES:
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
June 30, 1997, the Company was not a party to any legal proceedings, which, if
decided adversely to the Company, would, individually or in the aggregate, have
a material adverse effect on the Company's business, financial condition or
results of operations.
F-148
<PAGE>
VANTAGEMED CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
BASIS OF PRESENTATION
The unaudited pro forma financial statements present the balance sheet and
results of operations data from the consolidated financial statements of
VantageMed Corporation ("VantageMed" or the "Company") and give effect to the
acquisitions by VantageMed including Medsoft, Inc., American Voice
Computer, Inc., Pacific Software, Inc., DOT Medical, Inc., Medicom Corporation
and CM Healthcare Technologies, Inc. (the "1998 Acquisitions"), Civitec
Healthcare Computers, Inc., Acrotrex Corporation, Medical Software
Solutions, Inc., Metropolitan Information Services, Inc., Brand Software, Inc.,
Care Information Systems, Inc., Mariner Systems, Inc., Logos Systems, Inc. and
Health Information Network, L.L.C. (the "1999 Acquisitions"), and CSS, Inc.,
Pep-ware Software, Inc., Data Decisions, Inc., Computerized Doctors
Systems, Inc., and Medical Digital Technologies, Inc. (the "Recent
Acquisitions"). The unaudited pro forma balance sheet also gives effect to
proceeds from issuance and conversion of a $3.0 million promissory note and this
offering.
The unaudited pro forma consolidated statements are based on the historical
financial statements of VantageMed and other historical financial statements
included elsewhere in this Prospectus, and other financial statements not
included in this Prospectus, and the estimates and assumptions set forth below
and in the notes to the unaudited pro forma consolidated financial statements.
The unaudited pro forma consolidated statements of operations have been
prepared for the year ended December 31, 1998, and the nine months ended
September 30, 1999. These statements give effect to the 1998 Acquisitions, the
1999 Acquisitions and the Recent Acquisitions as if such transactions had
occurred as of January 1, 1998. The unaudited pro forma consolidated balance
sheet gives effect to the Recent Acquisitions and the issuance and conversion of
a $3.0 million promissory note into common stock and the offering as if such
transactions had occurred as of September 30, 1999.
The pro forma adjustments are based on estimates, available information and
certain assumptions that management deems appropriate. The unaudited pro forma
consolidated financial data presented herein do not purport to represent the
results of operations or the financial position that would have occurred had the
transactions which were the subject of the pro forma adjustments occurred as of
January 1, 1998, or September 30, 1999, respectively, as assumed. The unaudited
pro forma consolidated financial statements should be read in conjunction with
the other financial statements and notes thereto included elsewhere in the
Prospectus. See also the "Risk Factors" included elsewhere in this Prospectus.
F-149
<PAGE>
VANTAGEMED CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUBTOTAL
VANTAGEMED PRO FORMA VANTAGEMED
HISTORICAL EFFECTS OF AND ALL OFFERING
CONSOLIDATED ACQUISITIONS ACQUISITIONS ADJUSTMENTS REF PRO FORMA ADJUSTMENTS
------------ ------------ ------------ ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents... $ 1,190 $ 253 $ 1,443 $3,000 (A) $ 4,443 $26,500
Accounts receivable, net.... 1,773 510 2,283 2,283
Notes receivable, current
portion................... 64 5 69 69
Inventories................. 273 177 450 450
Prepaid expenses and
other..................... 546 73 619 619
------- ------ ------- ------ ------- -------
Total current assets...... 3,846 1,018 4,864 3,000 7,864 26,500
NOTE RECEIVABLE, net of
current portion............. 141 -- 141 141
PROPERTY AND EQUIPMENT, net... 2,573 150 2,723 2,723
INTANGIBLES, net.............. 22,735 7,830 30,565 30,565
------- ------ ------- ------ ------- -------
Total assets.............. $29,295 $8,998 $38,293 $3,000 $41,293 $26,500
======= ====== ======= ====== ======= =======
LIABILITIES AND STOCKHOLDLERS' EQUITY
CURRENT LIABILITIES:
Book overdraft.............. $ 299 $ -- $ 299 $ -- $ 299 $ --
Current portion of long-term
debt...................... 2,270 57 2,327 3,000 (A) 5,327 (3,000)
Accounts payable............ 1,143 306 1,449 1,449
Accrued liabilities......... 1,746 330 2,076 2,076
Customer deposits and
deferred revenue.......... 2,567 524 3,091 3,091
------- ------ ------- ------ ------- -------
Total current
liabilities............. 8,025 1,217 9,242 3,000 12,242 (3,000)
LONG-TERM DEBT, net of current
portion..................... 1,943 852 2,795 2,795
Total liabilities......... 9,968 2,069 12,037 3,000 15,037 (3,000)
STOCKHOLDERS' EQUITY:
Preferred
Stock--Series A-1......... 2 2 2 (2)
Preferred
Stock--Series B........... -- -- --
Common stock................ 4 -- 4 4 5
Additional paid-in
capital................... 26,911 6,929 33,840 33,840 29,497
Accumulated deficit......... (7,590) (7,590) (7,590)
------- ------ ------- ------ ------- -------
Total stockholders'
equity.................. 19,327 6,929 26,256 -- 26,256 29,500
------- ------ ------- ------ ------- -------
Total liabilities and
stockholders' equity.... $29,295 $8,998 $38,293 $3,000 $41,293 $26,500
======= ====== ======= ====== ======= =======
<CAPTION>
PRO FORMA
REF AS ADJUSTED
-------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents... (B) $30,943
Accounts receivable, net.... 2,283
Notes receivable, current
portion................... 69
Inventories................. 450
Prepaid expenses and
other..................... 619
-------
Total current assets...... 34,364
NOTE RECEIVABLE, net of
current portion............. 141
PROPERTY AND EQUIPMENT, net... 2,723
INTANGIBLES, net.............. 30,565
-------
Total assets.............. $67,793
=======
LIABILITIES AND
STOCKHOLDLERS'
EQUITY
CURRENT LIABILITIES:
Book overdraft.............. $ 299
Current portion of long-term
debt...................... (C) 2,327
Accounts payable............ 1,449
Accrued liabilities......... 2,076
Customer deposits and
deferred revenue.......... 3,091
-------
Total current
liabilities............. 9,242
LONG-TERM DEBT, net of current
portion..................... 2,795
Total liabilities......... 12,037
STOCKHOLDERS' EQUITY:
Preferred
Stock--Series A-1......... --
Preferred
Stock--Series B........... --
Common stock................ (B)(C) 9
Additional paid-in
capital................... (B)(C) 63,337
Accumulated deficit......... (7,590)
-------
Total stockholders'
equity.................. 55,756
-------
Total liabilities and
stockholders' equity.... $67,793
=======
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
F-150
<PAGE>
VANTAGEMED CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA SUBTOTAL PRO FORMA SUBTOTAL
VANTAGEMED EFFECTS OF VANTAGEMED EFFECTS OF ALL VANTAGEMED
HISTORICAL MARINER AND OTHER AND ALL ACQUISITION
CONSOLIDATED ACQUISITION MARINER ACQUISITIONS ACQUISITIONS ADJUSTMENTS
------------ ----------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Software and systems............. $ 3,943 $ 648 $ 4,591 $ 5,462 $10,053 $ --
Customer support and electronic
services....................... 5,430 360 5,790 7,545 13,335
------- -------- ------- -------- ------- -------
Total revenues................. 9,373 1,008 10,381 13,007 23,388 --
OPERATING COSTS AND EXPENSES:
Software and systems............. 2,146 37 2,183 2,281 4,464
Customer support and electronic
services....................... 3,606 33 3,639 3,715 7,354
Selling, general and
administrative................. 4,706 2,065 6,771 6,403 13,174
Product development.............. 1,500 1,267 2,767 563 3,330
Depreciation and amortization.... 1,472 231 1,703 221 1,924 4,019
------- -------- ------- -------- ------- -------
Total operating costs and
expenses..................... 13,430 3,633 17,063 13,183 30,246 4,019
LOSS FROM OPERATIONS............... (4,057) (2,625) (6,682) (176) (6,858) (4,019)
INTEREST INCOME AND EXPENSE:
Interest income.................. 45 12 57 5 62
Interest expense................. (252) (53) (305) (31) (336)
------- -------- ------- -------- ------- -------
Total interest income
(expense).................... (207) (41) (248) (26) (274)
LOSS BEFORE INCOME TAXES........... (4,264) (2,666) (6,930) (202) (7,132) (4,019)
PROVISION (BENEFIT) FOR INCOME
TAXES............................ (343) -- (343) 10 (333) (1,054)
------- -------- ------- -------- ------- -------
Net loss....................... $(3,921) $ (2,666) $(6,587) $ (212) $(6,799) $(2,965)
======= ======== ======= ======== ======= =======
Basic and diluted loss per share...
Weighted-average shares--basic and
diluted..........................
<CAPTION>
REF PRO FORMA
-------- ----------
<S> <C> <C>
REVENUES:
Software and systems............. $ 10,053
Customer support and electronic
services....................... 13,335
----------
Total revenues................. 23,388
OPERATING COSTS AND EXPENSES:
Software and systems............. 4,464
Customer support and electronic
services....................... 7,354
Selling, general and
administrative................. 13,174
Product development.............. 3,330
Depreciation and amortization.... (D) 5,943
----------
Total operating costs and
expenses..................... 34,265
LOSS FROM OPERATIONS............... (10,877)
INTEREST INCOME AND EXPENSE:
Interest income.................. 62
Interest expense................. (336)
----------
Total interest income
(expense).................... (274)
LOSS BEFORE INCOME TAXES........... (11,151)
PROVISION (BENEFIT) FOR INCOME
TAXES............................ (E) (1,387)
----------
Net loss....................... $ (9,764)
==========
Basic and diluted loss per share... $ (2.95)
Weighted-average shares--basic and
diluted.......................... 3,313,664
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
F-151
<PAGE>
VANTAGEMED CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA SUBTOTAL
VANTAGEMED EFFECTS EFFECTS VANTAGEMED
HISTORICAL OF MARINER OF ALL OTHER AND ALL ACQUISITION
CONSOLIDATED ACQUISITION ACQUISITIONS ACQUISITIONS ADJUSTMENTS REF PRO FORMA
------------ ----------- ------------ ------------ ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Software and systems........... $ 5,751 $ 308 $ 3,595 $ 9,654 $ 9,654
Customer support and electronic
services..................... 6,709 175 3,973 10,857 10,857
------- -------- -------- ------- ------- ----------
Total revenues............... 12,460 483 7,568 20,511 20,511
OPERATING COSTS AND EXPENSES:
Software and systems........... 2,603 13 1,187 3,803 3,803
Customer support and electronic
services..................... 4,462 78 1,416 5,956 5,956
Selling, general and
administrative............... 6,213 619 4,275 11,107 11,107
Product development............ 2,797 481 265 3,543 3,543
Depreciation and
amortization................. 2,578 177 103 2,858 $ 1,681 (D) 4,539
------- -------- -------- ------- ------- ----------
Total operating costs and
expenses................... 18,653 1,368 7,246 27,267 1,681 28,948
INCOME (LOSS) FROM OPERATIONS.... (6,193) (885) 322 (6,756) (1,681) (8,437)
INTEREST INCOME AND EXPENSE:
Interest income................ 23 10 4 37 37
Interest expense............... (442) (55) (24) (521) (521)
------- -------- -------- ------- ------- ----------
Total interest income
(expense).................. (419) (45) (20) (484) (484)
INCOME (LOSS) BEFORE INCOME
TAXES.......................... (6,612) (930) 302 (7,240) (1,681) (8,921)
PROVISION (BENEFIT) FOR INCOME
TAXES.......................... (3,284) -- 70 (3,214) (438) (E) (3,652)
------- -------- -------- ------- ------- ----------
Net income (loss)............ $(3,328) $ (930) $ 232 $(4,026) $(1,243) $ (5,269)
======= ======== ======== ======= ======= ==========
Basic and diluted loss per
share.......................... $ (1.27)
Weighted-average shares--basic
and diluted.................... 4,157,999
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
F-152
<PAGE>
VANTAGEMED CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL:
VantageMed Corporation (the Company) was incorporated in California on
June 11, 1995. On April 9, 1997, the Company was reincorporated in Delaware. The
basis of presentation includes Northern Health Solutions, Inc. and Healthcare
Information Systems, Inc., two business combinations effected in 1998 accounted
for as poolings and included for all periods presented. The Company is a
diversified healthcare information systems supplier headquartered in Sacramento,
California with regional offices in Walnut Creek and San Francisco, California;
Honolulu, Hawaii; Seattle, Washington; Kansas City, Missouri; Flint, Michigan;
Pompton Plains, New Jersey; Detroit, Michigan; and Pittsburgh, Pennsylvania. The
Company develops, sells, installs, and supports computerized practice management
software systems and provides related services to medical and dental practices.
The Company is building a national distribution network by acquiring established
regional healthcare practice management systems companies to sell and support
its new generation software and services.
Subsequent to September 30, 1999, the Company executed agreements to acquire
the following companies: (i) Pep-ware, based in Utah, (ii) Computerized Doctors
Systems, based in Alabama, (iii) Medical Digital Technologies, Inc., based in
California, (iv) CSS, Inc., based in North Carolina and (v) Data
Decisions, Inc., based in Arkansas. The acquisitions were accounted for using
the purchase method of accounting. The aggregate consideration paid was 439,935
shares of common stock valued at $6,929,234, $772,000 in notes payable and
$378,000 in cash. The pro forma effects of these acquisitions have been included
in the accompanying pro forma consolidated financial statements.
In November 1999, the Company filed a registration statement with the
Securities and Exchange Commission that would permit the Company to sell shares
of the Company's common stock in connection with a proposed initial public
offering (IPO).
2. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS:
ISSUANCE OF SECURED CONVERTIBLE PROMISSORY NOTE
(A) Records the October issuance of a secured convertible promissory note to
a private investor in the amount of $3.0 million. The note is automatically
convertible into shares of the Company's common stock at 50% of the IPO price
upon completion of the IPO.
OFFERING ADJUSTMENTS
(B) Records the proceeds from the issuance of 3,000,000 shares of common
stock, net of estimated offering costs. Offering costs consist primarily of
underwriting discounts and commissions, legal fees, accounting fees and printing
expenses.
(C) Records (i) the conversion of a $3.0 million secured convertible
promissory note into 611,441 shares of common stock at the applicable conversion
price, and (ii) the conversion of 1,795,300 share of Series A-1 preferred stock
into 599,425 shares of common stock or the applicable conversion price, and
(iii) the conversion of 120,000 shares of Series B preferred stock into 144,000
shares of common stock at the applicable conversion price.
F-153
<PAGE>
VANTAGEMED CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS:
ACQUISITION ADJUSTMENTS
(D) Records adjustment to amortization expense for the intangible assets
identified as part of the acquisitions and for goodwill which is the excess of
the purchase price over the identifiable intangible assets and the tangible
assets. Intangible assets include acquired software, covenants not to compete,
assembled workforce, customer lists and goodwill. Software is amortized over two
to four years depending on the estimated continued use of the software product
acquired. Covenants not to compete are amortized over two to five years, which
represents the life of such agreements. Assembled workforce is amortized over
one to ten years, depending upon the average length of employment for the
employees of those companies we have acquired. Customer lists and goodwill are
amortized over two to ten years, representing the estimated future life of
customer relationships.
Total intangible assets net of accumulated amortization were $7.3 million
and $22.7 million at December 31, 1998 and September 30, 1999, respectively.
(E) Adjusts the benefit for income taxes based on other pro forma audit
adjustments.
4. UNAUDITED PRO FORMA EARNINGS PER SHARE:
Proforma basic and diluted loss per share has been calculated as if all of
the acquisitions had occurred as of the beginning of the immediately preceding
period and as if the conversion of Series A-1 and Series B preferred stock into
common shares had occurred on the dates of their issuance.
F-154
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered are:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 10,551
----------
National Association of Securities Dealers, Inc. filing
fee....................................................... $ 4,295
----------
Nasdaq National Market listing fee.......................... *
Accountants' fees and expenses.............................. *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
Transfer Agent's fees and expenses.......................... *
Printing and engraving expenses............................. *
Miscellaneous............................................... *
Total Expenses.......................................... $1,400,000
==========
</TABLE>
- ------------------------
* To be filed by amendment. In each case estimated, except SEC, NASD and
Nasdaq fees
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
by a company of any director, officer, employee or agent of the company or
person who is serving or was serving at the company's request as a director,
officer, employee or agent of another corporation or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him in connection with the
defense of any threatened, pending or completed action (whether civil, criminal,
administrative or investigative), to which he is or may be a party by reason of
having been such director, officer, employee or agent provided that he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the company, and, with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful. We also
has the power under Section 145 to indemnify persons set forth above from
threatened, pending or completed actions or suits by or in the right of the
company to procure a judgment in its favor by reason of the fact that such
person was a director, officer, employee or agent of the company or is or was
serving at the request of the company as a director, officer, employee or agent
of another corporation or enterprise against expenses actually and reasonably
incurred by him in connection with the defense or settlement of the action if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the company, except that no indemnification can
be made with regard to any claim, issue or matter as to which the person has
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the company unless and only to the extent that the Delaware Court of
Chancery or the court in which the action was brought determines that the person
was fairly and reasonably entitled to indemnity. Any indemnification (unless
ordered by a court) must be made by us only as authorized in the specific case
upon a determination that indemnification of the person is proper in the
circumstances because he has met the applicable standards of conduct. The
determination must be made by the Board of Directors by a majority vote of a
quorum consisting of directors who are not parties to the action, or if a quorum
is not obtainable or, even if obtainable, a quorum of disinterested directors so
directs, by independent counsel in a written opinion, or by the stockholders.
The Company may pay the expenses of an action in advance of final disposition if
authorized by the Board of Directors in a specific case, upon receipt
II-1
<PAGE>
of an undertaking by the person to be indemnified to repay any such advances
unless it shall ultimately be determined that such person is entitled to be
indemnified as authorized by law.
We have entered into Indemnification Agreements with each of our directors
to give such directors additional contractual assurances regarding the scope of
the indemnification set forth in our Amended and Restated Certificate of
Incorporation and to provide additional procedural protections. At present,
there is no pending litigation or proceeding involving a director, officer or
employee of the company regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by us from our inception in
April 9, 1997 through the date hereof involving sales of our securities that
were not registered under the Securities Act:
(1) In May 1997, the Registrant effected a migratory merger from California
to Delaware and issued an aggregate of 2,840,100 shares of Common Stock
in connection therewith.
(2) On July 15, 1997, in connection with a Series A Preferred Stock
Financing, the Registrant issued 600,000 shares of Series A Preferred
Stock.
(3) On July 15, 1998, in connection with the acquisition of Medicom
Corporation, the Registrant issued 100,000 shares of Series B Preferred
Stock.
(4) On January 4, 1999, in connection with a Series A-1 Preferred Stock
Financing, Registrant issued 1,795,300 shares of Series A-1 Preferred
Stock.
(5) On June 30, 1999, in connection with the acquisition of Brand Software,
Inc., the Registrant issued 20,000 shares of Series B Preferred Stock.
(6) Between December 1, 1997 and July 7, 1999 Registrant issued an
aggregate of 868,058 shares to accredited investors for cash at prices
ranging from $1.50 to $2.78 per share.
(7) On November 23, 1998 Registrant issued a convertible promissory note in
an aggregate principal amount of $300,000 to John Hunkeler.
(8) On August 6, 1999, Registrant issued a convertible promissory note in
an aggregate principal amount of $180,000 to Friedli Corporate Finance,
Inc.
(9) On August 6, 1999 Registrant issued warrants for 90,000 shares
exercisable at a price of $3.70 per share to Friedli Corporate Finance,
Inc. in consideration for assistance with the acquisition of Mariner
Systems, Inc.
(10) On October 7, 1999, Registrant issued warrants for 40,000 shares
exercisable at a price equal to 60% of the initial price of shares of
our common stock sold in this offering to Friedli Corporate Finance,
Inc. in consideration for assistance with placement of a secured
convertible promissory note.
(11) On October 7, 1999 Registrant issued a secured convertible promissory
note in an aggregate principal amount of $3 million to Friedli
Corporate Finance Inc.
(12) Registrant has granted options to purchase an aggregate of 545,978
shares of common stock to directors, employees and consultants with
exercise prices ranging from $.02 to $20.94 per share pursuant to
VantageMed's 1998 Stock Option/Stock Issuance Plan.
(13) On October 7, 1999 Registrant issued a convertible promissory note in
an aggregate principal amount of $190,000 to Friedli Corporate Finance,
Inc.
II-2
<PAGE>
(14) Between July 15, 1997 and November 1, 1999 Registrant issued 9,246,786
shares to the stockholders of various companies as part of the purchase
consideration for the acquisition of such companies at prices varying
from $1.38 to $5.25 per share which reflected the fair market value of
such shares at the time they were issued.
(15) On November 22, 1999, Registrant's Board of Directors approved a
1-for-3 reverse stock split of its outstanding Common Stock, which is
not reflected in items (1) through (14).
The issuances of securities in the above transactions were deemed to be
exempt from registration under the Securities Act of 1933 (the "Act") in
reliance on (i) Section 4(2) thereof and in Rules 505 or 506 of Regulation D
promulgated thereunder as transactions not involving a public offering,
(ii) Regulation S or (iii) Rule 701 under the Act. Registrant sold (or otherwise
issued) its Common Stock to a limited number of investors in isolated, private
transactions, to off shore investors or to employees, directors and consultants
under a written plan. Neither Registrant nor any person acting on Registrant's
behalf offered or sold such Common Stock by any form of general solicitation or
general advertising.
Registrant took reasonable care to assure, including through the use of
investor questionnaires and subscription agreements, (i) that purchasers were
acquiring the capital stock for their own account, for investment purposes only,
and not with a view to resale, (ii) that purchasers received written disclosure
that such capital stock was not registered under the Securities Act and could
not be resold without registration (or an available exemption therefrom), and
(iii) that all certificates representing shares of Registrant's capital stock
included a legend setting forth the above restrictions on transfer.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- ------------------------------------------------------------
<S> <C> <C>
1.1* -- Form of Underwriting Agreement by and among Registrant,
Advest, Inc. and J.C. Bradford & Co.
2.1 -- Merger Agreement with Mariner Systems, Inc.
2.2 -- Assignment and Assumption Agreement (Mariner Systems, Inc.)
by and between VM1 Acquisition Corp. (Assignor) and VM4
Acquisition Corp. (Assignee).
3.1* -- Registrant's Amended and Restated Form of Certificate of
Incorporation.
3.2* -- Registrant's Amended and Restated Bylaws.
4.1* -- Form of Registrant's Specimen Stock Certificate.
5.1* -- Legal Opinion of Gray Cary Ware & Freidenrich LLP, counsel
for Registrant.
10.1 -- Lease Agreement, dated November 1, 1996 between Registrant
and Dr. Jun Hasegawa and Noriko Hasegawa, as Trustees for
the Hasegawa Family Trust, dated June 8, 1999.
10.2 -- Lease Agreement between Registrant and Jun and Noriko
Hasegawa, as Trustees for the Hasegawa Family Trust dated
January 18, 1999.
10.3 -- Lease Agreement between Registrant and Jun and Noriko
Hasegawa, as Trustees for the Hasegawa Family Trust dated
August 20, 1999.
10.4 -- Employment Agreement entered into between Registrant and
James Seiler.
10.5 -- Secured Convertible Promissory Note, dated October 7, 1999,
issued to Friedli Corporate Finance, Inc.
10.6 -- Convertible Promissory Note issued to Friedli Corporate
Finance, Inc.
10.7* Convertible Promissory Note issued to Friedli Corporate
Finance.
10.8* Warrant issued to Peter Friedli.
10.9* Warrant issued to Peter Friedli.
10.10 -- Warrant, dated October 7, 1999, issued to Peter Friedli.
10.11 -- Promissory Note, dated July 15, 1997, issued to Richard
Pendleton.
10.12 -- Consulting Agreement entered into between Registrant and
Peter Friedli.
10.13* -- VantageMed's Amended and Restated 1998 Stock Option/Stock
Issuance Plan.
10.14 -- Form of Indemnity Agreement entered into by Registrant with
each of its officers and directors.
21.1 -- Subsidiaries.
23.2 -- Consent of Independent Public Accountants.
23.3* -- Consent of Counsel (see Exhibit 5.1).
24.4 -- Power of Attorney (included on signature page).
27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by Amendment.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
(a) 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.
(b) 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 as been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
the 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 the registration statement as of the time it was declared
effective.
(ii) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sacramento, State of
California, on the 24th day of November, 1999.
<TABLE>
<S> <C> <C>
VANTAGEMED CORPORATION
By: /s/ JAMES L. SEILER
/s/ -----------------------------------------
James L. Seiler,
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James L. Seiler, Joel Harris, and Thomas McCreery
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post- effective amendments) to this Registration Statement, and any subsequent
registration statements pursuant to Rule 462 of the Securities Act of 1933, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each said
attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has exercised this power of
attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chief Executive Officer
/s/ JAMES L. SEILER and Director
- ------------------------------------------- (Principal Executive November 24, 1999
James L. Seiler Officer)
/s/ RICHARD PENDLETON
- ------------------------------------------- Chairman of the Board November 24, 1999
Richard Pendleton
/s/ JOEL HARRIS
- ------------------------------------------- President and Director November 24, 1999
Joel Harris
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ PETER FRIEDLI
- ------------------------------------------- Director November 24, 1999
Peter Friedli
/s/ JOHN STEVENS
- ------------------------------------------- Director November 24, 1999
John Stevens
Chief Financial Officer
/s/ THOMAS MCCREERY (Principal Financial
- ------------------------------------------- and Accounting November 24, 1999
Thomas McCreery Officer)
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- --------------------- ------------------------------------------------------------
<C> <S> <C>
1.1* Form of Underwriting Agreement by and among Registrant,
Advest, Inc. and J.C. Bradford.
2.1 Merger Agreement with Mariner Systems, Inc.
2.2 Assignment and Assumption Agreement (Mariner Systems, Inc.)
by and between VM1 Acquisition Corp. (Assignor) and VM4
Acquisition Corp. (Assignee).
3.1* Registrant's Amended and Restated Form of Certificate of
Incorporation.
3.2* Registrant's Amended and Restated Bylaws.
4.1* Form of Registrant's Specimen Stock Certificate.
5.1* Legal Opinion of Gray Cary Ware & Freidenrich LLP, counsel
for Registrant.
10.1 Lease Agreement, dated November 1, 1996 between Registrant
and Dr. Jun Hasegawa and Noriko Hasegawa, as Trustees for
the Hasegawa Family Trust, dated June 8, 1999.
10.2 Lease Agreement between Registrant and Jun and Noriko
Hasegawa, as Trustees for the Hasegawa Family Trust, dated
January 18, 1999.
10.3 Lease Agreement between Registrant and Jun and Noriko
Hasegawa, as Trustees for the Hasegawa Family Trust, dated
August 20, 1999.
10.4 Employment Agreement entered into between Registrant and
James Seiler.
10.5 Secured Convertible Promissory Note, dated October 7, 1999,
issued to Friedli Corporate Finance, Inc.
10.6 Convertible Promissory Note, dated October 7, 1999, issued
to Friedli Corporate Finance, Inc.
10.7* Convertible Promissory Note issued to Friedli Corporate
Finance.
10.8* Warrant issued to Peter Friedli.
10.9* Warrant issued to Peter Friedli.
10.10 Warrant, dated October 7, 1999, issued to Peter Friedli.
10.11 Promissory Note, dated July 15, 1997, issued to Richard
Pendleton.
10.12 Consulting Agreement entered into between Registrant and
Peter Friedli
10.13* VantageMed's Amended and Restated 1998 Stock Option/Stock
Issuance Plan.
10.14 Form of Indemnity Agreement entered into by Registrant with
each of its officers and directors.
21.1 Subsidiaries.
23.2 Consent of Independent Public Accountants.
23.3* Consent of Counsel (see Exhibit 5.1)
24.4 Power of Attorney (included on signature page).
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment.
<PAGE>
EXHIBIT 2.1
MERGER AGREEMENT
VantageMed Corporation
VM1 Acquisition Corp.
Mariner Systems, Inc.
This Merger Agreement (this "Agreement"), dated July 23, 1999 (the
"Signature Date"), is among VantageMed Corporation, a company incorporated in
the State of Delaware ("VMC"); VM1 Acquisition Corp., a company incorporated
in the State of Delaware and wholly-owned subsidiary of VMC ("VMAC"); and
Mariner Systems, Inc., a company incorporated in the State of Colorado (the
"Company"), with all of the foregoing collectively termed the "parties."
BACKGROUND
The Board of Directors of each of VMC, VMAC and the Company have determined
that it is advisable and in the best interests of their respective
corporations and the shareholders thereof to cause the Company to merge with
and into VMAC (the "Merger"), upon the terms and conditions set forth in this
Agreement.
The parties intend, by signing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and to cause the Merger to qualify as a
tax-free ("type A") reorganization under the provisions of Section
368(a)(1)(A) of the Code. Therefore, in consideration of the mutual
representations, warranties and agreements set forth in this Agreement
(including the schedules prepared by the Company, and the schedules and
exhibits prepared by VMC and VMAC), the parties hereby agree as follows:
ARTICLE 1 - THE MERGER
1.1 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the General Corporation Law of the State of
Delaware (the "Delaware Corporation Law"), and the Colorado Business
Corporations Act applicable to the Company (the "CBCA"), at the effective
time described in Section 1.2 below (the "Effective Time"), the Company shall
be merged with and into VMAC. At the Effective Time, the separate corporate
existence of the Company shall cease, and VMAC shall continue as the
surviving corporation of the Merger.
1.2 EFFECTIVE TIME OF THE MERGER. As soon as practicable after the
satisfaction or waiver of the conditions set forth in Article V below, the
parties shall cause the Merger to be consummated by filing (i) a properly
signed certificate of merger in the form attached as Exhibit 1.2 with the
Secretary of State of the State of Delaware, as provided in the Delaware
Corporation Law ("Delaware Certificate of Merger"), and (ii) properly signed
certificate of merger in the form attached as Schedule 1.2 with the Secretary
of State of the State of Colorado, as provided in the CBCA ("Colorado
Certificate of Merger"), as soon as practicable on or after the "Time of
Closing" referred to in Section 4.1 below (the "Time of Closing"). The
MSI - MERGER AGREEMENT - PAGE 1
<PAGE>
Merger shall become effective upon the latest to occur of the filing of the
Delaware Certificate of Merger by the Secretary of State of the State of
Delaware, and of the filing of the Colorado Certificate of Merger by the
Secretary of State of the State of Colorado, or at such later time thereafter
as is provided in such certificates of merger.
1.3 EFFECTS OF THE MERGER. The Merger shall have the effects provided by
applicable law, including the provisions of the Delaware Corporation Law and
the CBCA. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the properties, rights, privileges,
immunities, powers and franchises of the Company shall vest in VMAC, and all
debts, liabilities and duties of the Company shall become the debts,
liabilities and duties of VMAC.
1.4 DIRECTORS AND OFFICERS OF VMAC AFTER THE MERGER. The directors and
officers of VMAC shall continue as the directors and officers of VMAC at and
after the Effective Time, except that James L. Seiler have been duly elected
to the Board of Directors of VMAC and shall have been appointed as the Chief
Executive Officer of VMAC.
1.5 CERTIFICATE OF INCORPORATION, BYLAWS AND NAME OF SURVIVING CORPORATION.
The certificate of incorporation of VMAC in effect immediately prior to the
Effective Time shall be amended to change the name of VMAC to "Mariner
Systems, Inc." as provided in, and by the filing with the Delaware Secretary
of State of, the Delaware Certificate of Merger. Such certificate of
incorporation, as so amended, shall continue to be the certificate of
incorporation of VMAC at and after the Effective Time, and shall continue as
such until thereafter duly amended in accordance with applicable law. The
bylaws of VMAC in effect immediately prior to the Effective Time shall be
the bylaws of VMAC, and shall continue as such until thereafter duly amended
in accordance with applicable law.
1.6 CONVERSION OF CAPITAL STOCK. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holders of shares of common
stock of the Company (the "Company's Common Stock"), each share of the
Company's Common Stock which is issued and outstanding immediately prior to
the Merger shall be converted into shares of the common stock, par value
$.001 per share, of VMC ("VMC's Common Stock"), in accordance with Section
1.7(a) below. VMC shall not issue any fractional shares of VMC's Common
Stock. Any fractional shares of VMC's Common Stock resulting from the
application of the conversion ratios set forth in Section 1.7(a) shall be
rounded up to the nearest whole number. As of the Effective Time, all such
shares of the Company's Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration in accordance with Section 1.7 below, upon the surrender of
such certificates in accordance with Section 1.8 below.
MSI - MERGER AGREEMENT - PAGE 2
<PAGE>
1.7 MERGER CONSIDERATION.
(a) At the Effective Time, and subject to Section 1.8 below, the
holders of the Company's Common Stock shall receive the following
consideration (the "Merger Consideration"):
(1) An aggregate of two million five hundred seventy two thousand
six hundred thirty nine (2,572,639) (subject to adjustment at the Time of
Closing to take into account any changes in the issued and outstanding shares
of the Company's Common Stock) shares of VMC's Common Stock shall be issued
by VMC to the Company's shareholders in respect of the five million three
hundred eighty six thousand two hundred thirty eight (5,386,238) shares of
issued and outstanding shares of the Company's Common Stock, and in the
amounts, set forth on Exhibit 1.7(a)(1) (the "Stock Payment"); and
(2) VMC shall assume all outstanding and unexercised options to
purchase shares of the Company's Common Stock pursuant to the terms and
conditions under which such options were granted, and any amendments thereto,
subject to conversion as set forth in Exhibit 1.7(a)(2). These are current
outstanding and unexercised options to purchase five hundred six thousand
three hundred eighteen (506,318) shares of the Company's Common Stock which
shall result in the issuance of options to purchase two hundred forty one
thousand eight hundred thirty four (241,834) shares of VMC's Common Stock, as
provided on Exhibit 1.7(a)(2).
(b) The Company acknowledges and agrees that the shares issued by VMC
to the Company's shareholders as the Stock Payment are characterized as
"restricted securities" under the federal securities laws inasmuch as they are
being acquired in a transaction not involving a public offering, and that
under such laws and applicable regulations such securities may be resold
without registration under the Act (as defined in Section 3.8(a) below) only
in certain limited circumstances.
(c) VMC hereby discloses to the Company as follows:
(1) There shall be no disposition of all or any portion of the
shares to be issued to the Company's shareholders other than that identified
in this Section 1.7(b), unless and until the transferee has agreed in writing
for the benefit of VMC to be bound by the restrictions set forth in this
Section 1.7(b), provided and to the extent such restrictions are then
applicable, and: (i) there is then in effect a Registration Statement under
the Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or (ii) the transferor of any
such securities shall have notified VMC of the proposed disposition and shall
have furnished VMC with a detailed statement of the circumstances surrounding
the proposed disposition, and, if reasonably requested by VMC, the transferee
shall have furnished VMC with an opinion of counsel, reasonably satisfactory
to VMC, that such disposition will not require registration of such shares
under the Act; provided, it is agreed that VMC will not require opinions of
counsel for transactions made pursuant to SEC Rule 144 except in unusual
circumstances.
MSI - MERGER AGREEMENT - PAGE 3
<PAGE>
(2) The following legend will be placed on any certificate(s) or
other document(s) evidencing the shares of VMC Common Stock: (1) "The
securities represented by this certificate have not been registered and may
not be transferred unless (i) the stockholder wishing to transfer such
securities provides an opinion of counsel reasonably concurred in by counsel
for VantageMed Corporation stating that the proposed transfer of VantageMed
Corporation's securities is exempt from the registration provisions of all
applicable federal and state securities laws; or (ii) said securities have
been registered pursuant to the Securities Act of 1933, as amended."; and (2)
Any legend required by the laws of the State of Colorado or the State of
California, including any legend required by the California Department of
Corporations and Sections 417 and 418 of the California Corporations Code.
THE SALE OF THE SECURITIES THAT ARE THE SUBJECT OF THIS AGREEMENT HAS NOT
BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF
ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION
IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY
SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS
OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH
QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
1.8 SURRENDER OF CERTIFICATES; EXCHANGE FOR MERGER CONSIDERATION. To the
extent practical, the Company shall use its best efforts to cause to be
surrendered to VMAC at the Time of Closing all certificates and other
instruments evidencing all shares of the Company's Common Stock owned by all
shareholders of the Company (collectively, the "Company's Share Documents").
VMC will not require a bond for lost Company Share Documents. VMC may require
that the record owner of any Company Share Documents which have been lost or
destroyed execute a lost instrument affidavit. Following the Time of Closing,
VMC shall escrow the certificates evidencing the Stock Payment and shall
deliver to each former shareholder of the Company a stock certificate of VMC
evidencing such shareholder's portion of the Stock Payment, conditioned upon
such shareholder providing to VMC investor representations and related
documentation as VMC may reasonably require for purposes of compliance with
applicable state and federal securities laws.
1.9 STATUS OF VMAC SHARES. At the Effective Time, by virtue of the Merger
and without any action on the part of any holder of any capital stock of VMAC,
each issued and outstanding share of common stock of VMAC shall continue
unchanged and remain outstanding as a share of common stock of VMAC.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to VMAC and VMC, as of the date of this Agreement and
as of the Time of Closing, to the truth, accuracy and completeness of each
statement as set forth in Sections 2.1(a) through 2.1(q) below including the
exceptions to such statements set forth on a schedule of
MSI - MERGER AGREEMENT - PAGE 4
<PAGE>
exceptions to each such Section, and attached to and made part of this
Agreement ("Company's Exceptions Schedule"). For the purposes of this
Agreement, the term "knowledge" with respect to (i) an individual means that
such person will be deemed to have "knowledge" of a particular fact or other
matter if: (a) such individual is actually aware of such fact or other
matter; or (b) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of
conducting a reasonably comprehensive investigation concerning the existence
of such fact or other matter; and (ii) a person (other than an individual)
means that such person will be deemed to have "knowledge" of a particular fact
or other matter if any individual who is serving as a director, officer,
partner, executor or trustee of such person (or in any similar capacity) has,
or at any time had, knowledge of such fact or other matter.
(a) ORGANIZATION AND STANDING. The Company is a corporation duly
organized, validly existing and in good standing, all under the laws of the
State of Colorado, and has all requisite power and authority to own, operate
or lease the properties and assets now owned, operated or leased by it and to
conduct its business in the place and in the manner as it has been and is
currently conducted. The Company is duly qualified or licensed to do business
in each of the jurisdictions in which the operation of the Company's business
requires such qualification or licensing, and where the failure to be so
qualified would have a material adverse effect on the Company or its
business.
(b) AUTHORITY OF THE COMPANY. The Company has the full legal right,
power, capacity and authority to enter into this Agreement and all other
agreements, instruments and documents to be signed and delivered by the
Company in connection herewith (the "Company's Documents"), and to carry out
its obligations hereunder and thereunder. The Company has taken, or prior to
the Time of Closing, will have taken, all actions necessary to authorize it
to enter into and perform its obligations under this Agreement and the
Company's Documents, and to consummate the transactions contemplated hereby
and thereby. This Agreement has been duly signed and delivered by the
Company, and this Agreement and the Company's Documents constitute the legal,
valid and binding obligations of the Company enforceable against the Company
in accordance with their respective terms.
(c) CAPITAL STOCK OF THE COMPANY; OWNERSHIP OF THE COMPANY COMMON
STOCK. The authorized capital stock of the Company consists of six million
(6,000,000) shares of common stock, no par value per share. As of the date
hereof, 1,514,761 shares of the Company's Common Stock are issued and
outstanding. All such shares are validly issued, fully paid and
non-assessable, and they constitute all of the issued and outstanding shares
of the capital stock of the Company. None of the issued and outstanding
shares of the Company's stock was issued in violation of any preemptive
rights. Except as otherwise set forth in the Company's Exceptions Schedule,
there are (a) no options, warrants, convertible securities or other rights,
agreements, arrangements or commitments of any character obligating the
Company to issue or sell any shares of the Company's Common Stock, or other
interest in the Company; (b) no outstanding contractual obligations
requiring the Company to repurchase, redeem or otherwise acquire any shares
of the Company's Common Stock or to provide funds to, or make any investment
(in the form of a loan, capital contribution, or
MSI - MERGER AGREEMENT - PAGE 5
<PAGE>
otherwise) in, any other person; or (c) no voting trusts, stockholder
agreements, proxies or other agreements or understandings in effect with
respect to the voting or transfer of any of the shares of the Company's Common
Stock and to which the Company is a party or is aware. Schedule 2.1(c)(2)
accurately sets forth the name and address of each person owning shares of
the Company's Common Stock, the certificate number of each certificate
evidencing shares of the Company's Common Stock, the number of shares
evidenced by each such certificate, the date of issuance thereof, and, in the
case of cancellations, the date of cancellation.
(d) FINANCIAL STATEMENTS. The Company has delivered to VMAC and VMC
the unaudited balance sheet (the "Balance Sheet") of the Company as of
June 30, 1999 (the "Balance Sheet Date"), and the unaudited income statement
of the Company for the fiscal year then ended (together with the Balance
Sheet, the "Financial Statements"). The Financial Statements are not
prepared in accordance with generally accepted accounting principles. Subject
to the foregoing qualification, the Financial Statements (i) are in
accordance with the books and records of the Company, and (ii) fairly and
accurately present the financial condition of the Company at the respective
dates therein indicated and the results of operations for the respective
periods therein specified. The Company has no material debt, liability or
obligation of any nature, whether accrued, absolute, contingent or otherwise,
and whether due or to become due, that is not reflected, reserved against or
disclosed in the Financial Statements, except for those that may have been
incurred after the Balance Sheet Date in the ordinary course of its business
consistent with past practice, and which are disclosed by the Company on the
Company's Exceptions Schedule. Since the Balance Sheet Date, and except as set
forth on the Company's Exceptions Schedule, there has not been:
(1) Any material adverse change in the financial condition,
results of operation, assets or liabilities of the Company or any occurrence,
circumstance or combination thereof which reasonably could be expected to
result in such a material adverse change;
(2) Any change, other than in the ordinary course of business,
made by the Company in its method of operating its business or its accounting
practices relating thereto;
(3) Any sale, lease, or disposition of, or any agreement to
sell, lease or dispose of any of the Company's assets or properties, other
than sales, leases or dispositions in the usual and ordinary course of its
business and other than pursuant to this Agreement;
(4) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect to,
any term, condition or provision of any material contract relating to or
affecting the Company, its business, assets or properties, other than any
satisfaction by performance in accordance with the terms thereof in the usual
and ordinary course of the operations of the Company;
(5) Any adverse relationships or conditions with vendors,
suppliers or customers that may have a material adverse effect on the
Company, its business, assets or properties;
MSI - MERGER AGREEMENT - PAGE 6
<PAGE>
(6) Any return of any of the Company's products by a purchaser
or user thereof, and the Company is not aware of any (i) pending warranty
claims for such products (other than for minor nonrecurring warranty
problems), (ii) right to return such products (other than units under
customary evaluation terms), or (iii) evaluation units expected to be
returned after their evaluation period;
(7) Any borrowing or lending of money by the Company, but
excluding for this purpose sales made on ordinary trade terms;
(8) Any sale or issuance of any capital stock, notes, bonds,
or other securities, or any option, warrant or other right to acquire same,
of the Company;
(9) Any redemption of any of the capital stock or declaration
or payment of any dividends, distributions, bonuses or fees (whether in cash,
securities or property) to the holders of the shares of the Company's Common
Stock;
(10) Any other event or condition of any character that has had
a material adverse effect, or could reasonably be expected to have a material
adverse effect, on the Company, its assets or properties and/or the operation
of its business; or
(11) Any agreement by the Company to do, cause or effect any
of the foregoing events, set forth in sections (1) through (10) above.
(e) UNDISCLOSED LIABILITIES. There are no material debts, claims,
liabilities or obligations of the Company or to which the Company, its
business, assets or properties are subject, liquidated, unliquidated,
accrued, absolute, contingent or otherwise, that are not identified and
quantified in the Financial Statements or on the Company's Exceptions Schedule.
(f) COMPLIANCE WITH LAW. The Company has materially complied, and is
in material compliance, with all applicable federal, state and local laws,
statutes, licensing requirements, rules and regulations, and judicial or
administrative decisions applicable to the Company for the operation of its
business and the use of its properties as presently operated or used, except
where failure to be in compliance therewith would not have a material adverse
affect upon the Company and/or such operation of its business and/or use of
its properties. To the best knowledge of the Company, the Company has been
granted all permits from federal, state, and local government regulatory
bodies necessary to carry on its business and own its properties, all of
which are currently valid and in full force and effect. Schedule 2.1(f)
contains a complete and accurate list of all claims and rights under all
franchises, licenses, permits, consents, authorizations, certificates and
approvals of any federal, state, or local regulatory, administrative, or
other governmental agency or body issued to or held by the Company to the
extent they are necessary, related or incidental to the Company and/or the
operation of its business and/or the use of its properties (collectively,
the "Permits"). There is no order issued, investigation or proceeding pending
or, to the best of
MSI - MERGER AGREEMENT - PAGE 7
<PAGE>
the Company's knowledge, threatened, or notice served with respect to any
violation of any law, ordinance, order, writ, decree, rule or regulation
issued by any federal, state, local or foreign court or governmental or
regulatory agency or instrumentality applicable to the Company, the conduct
of its business and/or the ownership of its properties.
(g) REQUIRED APPROVALS, NOTICES AND CONSENTS. Except for (i) the
required approval of the Merger by the Board of Directors and the
shareholders of the Company, (ii) the filing of the Colorado Certificate of
Merger with and acceptance thereof by the Secretary of State of the State of
Colorado, (iii) the filing of the Delaware Certificate of Merger with and
acceptance thereof by the Secretary of State of the State of Delaware, and
(iv) as set forth on the Company's Exceptions Schedule, no consent or approval
of, other action by, or notice to, any governmental body or agency, domestic
or foreign, or any third party is required in connection with the
consummation of the transactions contemplated by this Agreement.
(h) INTELLECTUAL PROPERTY.
(1) Except as set forth in the Company's Exceptions Schedule,
the Company is licensed or is otherwise entitled to exercise, without
restriction, all rights, title and interest to all patents, trademarks,
patent applications, trademark rights, trade secrets, information,
proprietary rights, license rights, service marks, inventions, tradenames,
fictitious business names, copyrights, and any applications therefor,
processes, technical information, software, licenses, designs and
confidentiality agreements, logos, and customer and supplier lists, and all
other tangible and intangible information or material in any form
(collectively, the "Intellectual Property"), as used or are currently
proposed to be used in the business of the Company as currently conducted or
as proposed to be conducted by the Company within the United States, without
any conflict with or infringement of the rights of others.
(2) Listed on Schedule 2.1(h)(2) are all trade or service marks
and business or fictitious names owned, claimed or used by the Company,
whether registered or not;
(3) Listed on Schedule 2.1(h)(3) are: (i) all software
(including source code and object code), copyright registrations,
applications to register copyrights, patents, patent applications, patent
disclosures, trademarks, service marks, trade names, trademark and service
mark registrations, applications to register trademarks or service marks, and
other company, product or service identifiers owned by or exclusively
licensed to the Company (collectively, the "Company's Intellectual Property
Rights"); (ii) the jurisdiction(s) in which an application for patent or
application for registration of each of the Company's Intellectual Property
Rights has been made, including the respective application numbers and dates;
(iii) the jurisdiction(s) in which each of the Company's Intellectual
Property Rights has been patented or registered, including the respective
patent or registration numbers and dates; (iv) for each piece of software,
whether such software has been published and whether such software has a
copyright notice; (v) all licenses, sublicenses and other agreements to which
the Company is a party and pursuant to which any other party is authorized to
use, exercise, or receive any benefit from any of the Company's Intellectual
Property Rights; and (vi) all parties to whom the Company has delivered
copies of the Company's source code or object
MSI - MERGER AGREEMENT - PAGE 8
<PAGE>
code material to the current business of the Company, whether pursuant to an
escrow arrangement or otherwise, or parties who have the right to receive
such source code or object code. The Company has delivered to VMC or VMC's
counsel copies of all licenses, sublicenses and other agreements identified
pursuant to clause (v) of this section.
(4) The Company is the owner or exclusive licensee of, with all
right, title and interest in and to, free and clear of any Liens (as such
term is defined in Section 2.1(j)(5) hereof), the Company's Intellectual
Property Rights, and has the exclusive rights to use, sell, license, assign,
transfer, convey or dispose thereof or the products, processes and materials
covered thereby.
(5) All patents and unregistered and registered trademarks,
service marks, and other company, product or service identifiers and all
registered copyrights held by the Company are valid and enforceable in the
United States.
(6) Except as set forth in the Company's Exceptions Schedule,
there has not been, and there is not now, any unauthorized use, infringement
or misappropriation of any of the Company's Intellectual Property Rights by
any third party service provider of the Company or by any other third party.
(7) Except as set forth on the Company's Exceptions Schedule,
no person has asserted or threatened to assert any claims with respect to any
of the Company's Intellectual Property Rights (i) contesting the right of the
Company to use, exercise, sell, license, transfer or dispose of any of the
Company's Intellectual Property Rights or any products, processes or
materials covered thereby, or (ii) challenging the ownership, validity or
enforceability of any of the Company's Intellectual Property Rights. None of
the Company's Intellectual Property Rights is subject to any outstanding
order, judgment, decree, stipulation or agreement related to or restricting
in any manner the licensing, assignment, transfer or conveyance thereof by
the Company.
(8) Schedule 2.1(h)(8) separately lists: (i) all software
(including all computer source code and computer object code), copyright
registrations, applications to register copyright, patents, patent
applications, patent disclosures, trademarks, service marks, trade names,
trademark and service mark registrations, applications to register trademarks
or service marks, and other company, product or service identifiers
non-exclusively licensed to the Company, or that the Company has otherwise
been granted permission to use (collectively, the "Licensed Intellectual
Property Rights"), and which are material to the operations of the Company's
business, and (ii) all material licenses, sublicenses and other agreements to
which the Company is a party and pursuant to which the Company is authorized
to use, exercise, or receive any benefit from any of the Licensed
Intellectual Property Rights. The Company has delivered to VMC or VMAC's
counsel copies of all licenses, sublicenses, and other agreements identified
pursuant to clause (ii) above. The Company is in material compliance with
the terms and conditions of all such licenses, sublicenses and other
agreements. The Company has no knowledge of any assertion, claim or
threatened claim that the Company has breached any terms or conditions of
such licenses, sublicenses or other agreements.
MSI - MERGER AGREEMENT - PAGE 9
<PAGE>
(9) To the knowledge of the Company, none of the Licensed
Intellectual Property Rights is subject to any outstanding order, judgment,
decree, stipulation or agreement related to or restricting in any manner the
use by or licensing thereof to the Company.
(10) The Company is not, nor will it, as a result of the signing
and delivery of this Agreement or the performance of its obligations
hereunder, be in violation of, nor shall it lose or in any way impair, any
material rights pursuant to any license, sublicense or agreement described on
Schedule 2.1(h)(3). If required by the terms of any material licenses,
sublicenses or other agreements with respect to the Licensed Intellectual
Property Rights, the Company has secured or shall promptly secure valid
written consents from the licensors of such Licensed Intellectual Property
Rights to the Merger pursuant to this Agreement and the consummation of the
transactions contemplated hereby with respect to such Licensed Intellectual
Property Rights and the licenses, sublicenses or other agreements governing
such Licensed Intellectual Property Rights.
(11) Except as set forth in the Company's Exceptions Schedule,
the Company knows of no claims to the effect that the manufacture, marketing,
license, sale or use of any product or service as now used or offered or
proposed for use or sale by the Company infringes any copyright, patent,
trademark, service mark, trade secret or other intellectual property right of
any third party or violates any license or agreement with any third party.
The Company has not been sued or charged in writing as a defendant in any
claim, suit, action or proceeding which involves a claim of infringement of
any patents, trademarks, service marks, trade secret rights, copyrights or
other intellectual property rights and which has not been finally terminated
prior to the date hereof; there are no such charges or claims outstanding;
and the Company does not have any known outstanding restrictions or
infringement liability with respect to any patent, trade secret, trademark,
service mark, copyright or other intellectual property right of another.
(12) Other than reseller agreements, licensee agreements,
associate agreements, and agreements with commissioned sales agents entered
into by the Company in the ordinary course of business, the Company has not
entered into any agreement to indemnify any other person against any charge
of infringement of any third party intellectual property right, the Company's
Intellectual Property Rights or the Licensed Intellectual Property Rights.
(13) The Company has taken all reasonably necessary and
appropriate steps to protect and preserve the confidentiality of all
inventions, algorithms, formulas, schematics, technical drawings, ideas,
know-how, all other processes not otherwise protected by patents or patent
applications, source code, object code, program listings and trade secrets
related to the Company and which are material to the conduct of its business
(collectively, the "Confidential Information"), including, where possible,
the marking of all such Confidential Information with appropriate
"Proprietary" or "Confidential" legends, the establishment of policies for
the handling, disclosure and use of Confidential Information, and the
acquisition
MSI - MERGER AGREEMENT - PAGE 10
<PAGE>
of valid written nondisclosure agreements from any party receiving
Confidential Information. All Confidential Information is presently and as of
the Time of Closing will be located at the Company's address as set forth in
this Agreement. All use, disclosure or appropriation of Confidential
Information owned by the Company by or to a third party has been pursuant to
the terms of a written agreement between the Company and such third party.
All use, disclosure or appropriation of Confidential Information not owned by
the Company has been pursuant to the terms of a written agreement between the
Company and the owner of such Confidential Information, or is otherwise
lawful. The Company has delivered to VMAC or VMAC's counsel copies of all
nondisclosure agreements or other agreements relating to the handling,
disclosure and use of Confidential Information, and the Company knows of no
breaches or claims relating to such agreements.
(i) CONTRACTS AND COMMITMENTS.
(1) Schedule 2.1(i)(1) lists all outstanding agreements,
contracts, contract rights, licenses, purchase and sale orders, quotations,
and other executory commitments (oral or written), related to the Company
(collectively, the "Contracts"), excluding routine purchase orders, setting
forth the parties thereto and the dates thereof, whether or not in writing,
to which the Company is a party.
(2) The Company has performed all of its obligations under the
terms of each material Contract, and is not in default thereunder. No event
or omission has occurred which, but for the giving of notice or lapse of time
or both, would constitute a default by any party thereto under any such
Contract, where such default by any party could have a material adverse
effect on the Company, its business or its assets. Each such Contract is in
full force and effect and valid and binding on all parties thereto. The
Company has not received any notice of default, cancellation or termination
in connection with any such Contract, and is not aware that any such action
is currently contemplated or threatened.
(3) Schedule 2.1(i)(3) lists all Contracts that require a
consent to the transactions contemplated by this Agreement prior to the Time
of Closing (the "Contracts Requiring Consent to Merger"). Such listing is
complete, accurate and includes every Contract of which the failure to obtain
such consent to merger would have a material adverse effect on VMAC's ability
to conduct the business of the Company in the same manner as operated by the
Company prior to the Time of Closing.
(j) ASSETS AND PROPERTIES.
(1) Schedule 2.1(j)(1) contains a complete and accurate list of
all software developed or used by and material to the business of the Company
(the "Products").
(2) Schedule 2.1(j)(2) contains a complete and accurate list of
all equipment, instruments, computer hardware and software documentation and
manuals (whether stored on a computer or in written form), software tools,
furniture, fixtures, motor vehicles, production supplies, spare parts, other
miscellaneous supplies, tools and stores, repair and
MSI - MERGER AGREEMENT - PAGE 11
<PAGE>
maintenance parts and fixed assets used by and material to the Company and
its business (collectively, the "Related Property").
(3) The Company owns no real property. Schedule 2.1(j)(3)
contains a complete and accurate list of all leases for personal or real
property or other interest in real or personal property held by the Company.
The Company has previously delivered to VMAC true and correct copies of all
leases relating to such personal or real property.
(4) All assets and properties (real and personal) that the
Company purports to own on its books and records are in good working order
and condition (ordinary wear and tear and retirement excepted), are used or
usable in the current conduct of the Company's business and constitute all of
the assets and properties necessary to conduct the Company's business in
substantially the same manner as such business was operated by the Company
prior to the Time of Closing.
(5) Except as set forth on the Company's Exceptions Schedule,
the Company has good and marketable title to all assets and properties
(whether real, personal, or mixed and whether tangible or intangible) that it
purports to own on its books and records, free and clear of any pledges,
liens, encumbrances, security interests, equities, charges and restrictions
of any nature whatsoever (collectively, the "Liens").
(k) LITIGATION. Except as set forth on the Company's Exceptions
Schedule, there is no claim, litigation, action, suit or proceeding,
administrative or judicial, pending or, to the Company's knowledge,
threatened against or affecting the Company, the business of the Company or
any of the Company's properties, assets or rights, at law or in equity,
before any federal, state, local or foreign court, regulatory agency, other
governmental authority or any arbitration or mediation forum, including any
unfair labor practice or grievance proceedings or otherwise.
(l) NO CONFLICT OR DEFAULT. Neither the signing and delivery of this
Agreement nor compliance with the terms and provisions hereof, including the
consummation of the transactions contemplated hereby, will conflict with or
result in the breach of any term, condition or provision of either the
Company's articles of incorporation or bylaws, or any agreement, deed,
contract, mortgage, indenture, writ, order, decree, legal obligation or
instrument to which the Company is a party or by which the Company or any of
the Company's assets or properties are or may be bound or constitute a
default (or an event which, with the lapse of time or the giving of notice,
or both, would constitute a default) thereunder or, to the Company's
knowledge, violate any statute, regulation or ordinance of any governmental
authority.
(m) BROKERS' AND FINDERS' FEES. Except as set forth in the Company's
Exceptions Schedule, the Company is not obligated to pay any fees or expenses
of any broker or finder in connection with the origin, negotiation or signing
of this Agreement or in connection with any transactions contemplated hereby.
MSI - MERGER AGREEMENT - PAGE 12
<PAGE>
(n) CUSTOMERS. Schedule 2.1(n) lists all customers of the Company.
Prior to the date of this Agreement, the Company has furnished VMAC with
complete and accurate copies or descriptions of all current agreements with
such customers. The Company is not aware of any event, happening or fact
which would lead it to believe that any significant customer of the Company
has ceased, or shall cease, to use the products, equipment, goods or services
of the Company, or has substantially reduced, or shall substantially reduce,
the use of such products, equipment, goods or services.
(o) BOOKS AND RECORDS. The books and records of the Company to which
VMC and VMAC and its accountants and attorneys have been given access are the
true books and records of the Company, and truly and fairly reflect the
underlying facts and transactions in all respects.
(p) YEAR 2000 COMPLIANCE. The products sold and/or licensed by the
Company in the conduct of its business will be capable of accurately
processing date data between the 20th and 21st centuries including the years
1999 and 2000, and February 29, 2000, provided that all other products (e.g.
Microsoft operating system software, third party hardware and firmware) used
in combination with the products sold and/or licensed by the Company properly
exchange date data. The Company does not make any representations about other
products used with the products sold and/or licensed by the Company such as
the Solomon IV for Windows Accounting System and Seagate Crystal Reports for
Windows.
(q) TAXES. All Tax returns, statements, reports and forms (including
estimated Tax returns and reports and information returns and reports)
required to be filed with any Tax authority with respect to any Taxable
period ending on or before the Time of Closing by or on behalf of the Company
(collectively, the "Company Returns"), have been or will be completed and
filed when due (including any extensions of such due date), and all amounts
shown due thereon have been or will be paid on or before such due date. To the
best knowledge of the Company, the Company has withheld and paid to the
applicable financial institution or Tax authority all amounts required to be
withheld. To the best knowledge of the Company, there is no material claim,
audit, action, suit, proceeding or investigation now pending or threatened
against or with respect to the Company in respect of any Tax or assessment
nor is there any basis therefor. No notice of deficiency or similar document
of any Tax authority has been received by the Company for any material amount.
2.2 REPRESENTATIONS AND WARRANTIES OF VMAC AND VMC. VMAC and VMC hereby
represent and warrant to the Company, as of the date of this Agreement and as
of the Time of Closing, to the truth, accuracy and completeness of each
statement as set forth in Sections 2.2(a) through 2.2(m) below, except as set
forth on an exhibit of exceptions, dated as of the date set forth on that
exhibit ("VMAC Exceptions Exhibit"):
(a) ORGANIZATION AND STANDING. Each of VMAC and VMC is a corporation
duly organized, validly existing and in good standing, all under the laws of
the State of Delaware, and has all requisite power and authority to conduct
its business in the place where that business is now being conducted, to own
or use the properties and assets that it purports to
MSI - MERGER AGREEMENT - PAGE 13
<PAGE>
own or use. VMAC amd VMC is each duly qualified or licensed to do business in
each of the jurisdictions in which the nature of its business or location of
its assets requires such qualification or licensing, and where the failure to
be so qualified would have a material adverse effect on its business. True
and correct copies of VMAC's certificate of incorporation filed on October
14, 1997 with the Delaware Secretary of State, and bylaws dated October 14,
1997 have been provided to the Company by VMAC, and each continues to be in
effect on the date of this Agreement. True and correct copies of VMC's
certificate of incorporation dated July 15, 1997, as amended and restated,
and bylaws dated April 9, 1997 have been provided to the Company by VMC, and
each continues to be in effect on the date of this Agreement.
(b) AUTHORITY OF VMAC AND VMC. Each of VMAC and VMC has the full
legal right, power, capacity and authority to enter into this Agreement,
together with all other agreements, instruments and documents to be signed
and delivered by either in connection herewith (the "VMAC Documents"), and to
carry out its obligations hereunder and thereunder. VMAC and VMC has taken,
or will prior to the Time of Closing have taken, all actions necessary to
authorize it to enter into and perform its obligations under this Agreement
and the VMAC Documents, and to consummate the transactions contemplated
hereby. This Agreement has been duly signed and delivered by VMAC and VMC,
and this Agreement and the VMAC Documents constitute legal, valid and binding
obligations of VMAC and VMC enforceable against both in accordance with their
terms.
(c) CAPITAL STOCK OF VMC. The authorized capital stock of VMC
consists of 20,000,000 shares of common stock, par value $.001 per share (the
"VMC Common Stock"), and 5,000,000 shares of preferred stock, par value $.001
per share (the "VMC Preferred Stock"). The VMAC Exceptions Exhibit sets
forth the number of shares of VMC Common Stock, and of VMC Preferred Stock,
that are issued and outstanding, as of the effective date of that exhibit.
All such shares are validly issued, fully paid and non-assessable, and they
constitute all of the issued and outstanding shares of the capital stock of
VMC, as of the date of the VMAC Exceptions Exhibit. None of the issued and
outstanding shares of VMC stock was issued in violation of any preemptive
rights. Except as set forth on the VMAC Exception Exhibit, as of the
effective date of that exhibit, there are (i) no options, warrants,
convertible securities or other rights, agreements, arrangements or
commitments of any character obligating VMAC or VMC to issue or sell any
shares of VMC Common Stock or VMC Preferred Stock, or other interest in VMC;
(ii) no outstanding contractual obligations requiring VMC to repurchase,
redeem or otherwise acquire any shares of VMC Common Stock or to provide
funds to, or make any investment (in the form of a loan, capital contribution
or otherwise) in, any other person; or (iii) no voting trusts, stockholder
agreements, proxies or other agreements or understandings in effect with
respect to the voting or transfer of any of the shares of VMC Common Stock or
VMC Preferred Stock and to which VMC is a party. A true and correct copy of
VMC's Disclosure Statement dated July 9, 1999 (the "VMC Disclosure
Statement") has been provided to the Company, and by this reference is made
part of, and shall be deemed to be set forth on, the VMAC Exceptions Exhibit.
Notwithstanding anything to the contrary in this Agreement, the parties
acknowledge that VMC's Disclosure
MSI-MERGER AGREEMENT-PAGE 14
<PAGE>
Statement is not intended to modify or supercede the representations and
warranties by VMC and VMAC made herein, as qualified by the VMAC Exceptions
Exhibit.
(d) VMC FINANCIAL STATEMENTS. VMAC has previously furnished the
Company with the unaudited balance sheet of VMC for the year ended December
31, 1998, and the unaudited balance sheet for the six (6) months ended June
30, 1999, and the related statements of income and retained earnings for the
periods then ended (collectively, the "VMC Financial Statements"). The VMC
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied, are true and correct in all
material respects, and fairly and accurately present the financial condition
and results of operations of VMAC as of the date thereof. Except as set forth
on the VMAC Exceptions Exhibit, and as of the date of that exhibit, (i) the
VMC Financial Statements reflect all claims against and all debts and
liabilities of VMC, fixed or contingent, required to be shown on the VMC
Financial Statements; and (ii) since the date of the VMC Financial
Statements, there have been no material adverse changes in the assets or
liabilities, or in the condition (financial or otherwise), or in the results
of operations, or in the prospects of VMC and, to the best knowledge of VMC,
no fact or condition exists which might cause a material adverse change in
the future.
(e) NO UNDISCLOSED LIABILITIES. There are no material liabilities of
VMAC or VMC other than liabilities (i) reflected or reserved against in the
VMC Financial Statements, (ii) disclosed in the VMAC Exceptions Exhibit, or
(iii) incurred by VMAC or VMC since the date of this Agreement in the
ordinary course of business, consistent with past practice, and which do not
and are not reasonably likely to have a material adverse effect on VMAC or
VMC.
(f) TAXES. All Tax returns, statements, reports and forms (including
estimated Tax returns and reports and information returns and reports)
required to be filed with any Tax authority with respect to any Taxable
period ending on or before the Time of Closing by or on behalf of VMC
(collectively, the "VMC Returns"), have been or will be completed and filed
when due (including any extensions of such due date), and Taxes thereon have
been or will be paid on or before such due date. To the best knowledge of
VMC, VMC has withheld and paid to the applicable financial institution or Tax
authority all amounts required to be withheld. To the best knowledge of VMAC
and VMC, there is no material claim, audit, action, suit, proceeding or
investigation now pending or threatened against or with respect to VMAC or
VMC in respect of any Tax or assessment nor is there any basis therefor. No
notice of deficiency or similar document of any Tax authority has been
received by VMAC or VMC for any material amount.
(g) COMPLIANCE WITH LAWS. Each of VMAC and VMC has materially
complied, and is in material compliance, with all applicable federal, state
and local laws, statutes, licensing requirements, rules and regulations, and
judicial or administrative decisions applicable to its business, except where
failure to be in compliance therewith would not have a material adverse
effect upon VMAC or VMC. To the best knowledge of VMAC or VMC, VMAC and VMC
has been granted all permits from federal, state, and local government
regulatory bodies necessary to carry on its business, all of which are
currently valid and in full force and effect.
MSI-MERGER AGREEMENT-PAGE 15
<PAGE>
There is no order issued, investigation or proceeding pending or, to the best
knowledge of VMAC or VMC, threatened, or notice served with respect to any
violation of any law, ordinance, order, writ, decree, rule or regulation
issued by any federal, state, local or foreign court or governmental or
regulatory agency or instrumentality applicable to VMAC or VMC.
(h) REQUIRED APPROVALS, NOTICES AND CONSENTS. Except for (i) the
required approval of the Merger by the shareholder of VMAC, (ii) the filing
of the Colorado Certificate of Merger with and acceptance thereof by the
Secretary of State of the State of Colorado, (iii) the filing of the Delaware
Certificate of Merger with and acceptance thereof by the Secretary of State
of the State of Delaware, and (iv) as set forth on the VMAC Exceptions
Exhibit, no consent or approval of, other action by, or notice to, any
governmental body or agency, domestic or foreign, or any third party is
required in connection with the consummation of the transactions contemplated
by this Agreement.
(i) INTELLECTUAL PROPERTY. To the best knowledge of VMAC and VMC,
(i) VMAC or VMC owns, or is licensed or otherwise possesses legally
enforceable rights to use, all material Intellectual Property that is used
in the business of VMAC or VMC; (ii) there is no material unauthorized use,
disclosure, infringement or misappropriation of any Intellectual Property
rights of VMAC or VMC, any trade secret material to VMAC or VMC, or any
Intellectual Property right of any third party to the extent licensed by or
through VMAC or VMC, and VMAC and VMC has not entered into any agreement to
indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions contained in
sales invoices arising in the ordinary course of business; and (iii) VMAC and
VMC are not, nor will they be as a result of the signing and delivery of this
Agreement or the performance of its obligations hereunder, in breach of any
license, sublicense or other agreement relating to their Intellectual
Property.
(j) LITIGATION. Except as set forth on the VMAC Exceptions Exhibit,
there is no claim, litigation, action, suit or proceeding, administrative or
judicial, pending or, to VMAC's or VMC's knowledge, threatened against VMAC
or VMC relating to this Agreement or the transactions contemplated hereunder,
at law or in equity, before any federal, state, local or foreign court,
regulatory agency, or other governmental authority, which could result in the
institution of legal proceedings to prohibit or restrain the consummation or
performance of this Agreement or the transactions contemplated hereby, or
claim damages as a result of this Agreement or the transactions contemplated
hereby.
(k) NO CONFLICT OR DEFAULT. Neither the signing and delivery of this
Agreement, nor compliance with the terms and provisions hereof, including the
consummation of the transactions contemplated hereby, will conflict with or
result in the breach of any term, condition or provision of either VMAC's or
VMC's certificate of incorporation or bylaws, or of any agreement, deed,
contract, mortgage, indenture, writ, order, decree, legal obligation or
instrument to which VMAC or VMC is a party, constitute a default (or an event
which, with the lapse of time or the giving or notice, or both, would
constitute a default) thereunder, or to VMAC's or VMC's knowledge, violate
any statute, regulation or ordinance of any governmental authority. VMC and
VMAC are in compliance in all material respects with all
MSI-MERGER AGREEMENT-PAGE 16
<PAGE>
applicable terms and requirements of each material contract under which VMAC
or VMC has any obligation or liability or by which VMAC or VMC or any asset
owned or used by VMAC or VMC is bound.
(l) BROKERS' AND FINDERS' FEES. Neither VMAC nor VMC is obligated to
pay any fees or expenses of any broker or finder in connection with the
origin, negotiation or signing of this Agreement or in connection with any
transactions contemplated hereby.
(m) YEAR 2000 COMPLIANCE. The "Ridgemark" and the "DentalMate"
products sold and/or licensed by VMC in the conduct of its business will be
capable of accurately processing date data between the 20th and 21st
centuries including the years 1999 and 2000, and February 29, 2000, provided
that all other products (e.g. Microsoft operating system software, third
party hardware and firmware) used in combination with the "Ridgemark" and the
"DentalMate" products sold and/or licensed by VMC properly exchange date
data. VMC does not make any representations about other products used with
the "Ridgemark" and the "DentalMate" products sold and/or licensed by VMC
such as the Solomon IV for Windows Accounting System and Seagate Crystal
Reports for Windows.
ARTICLE III - COVENANTS
3.1 APPROVAL OF MERGER.
(a) VMC, as the sole shareholder of VMAC, hereby approves the Merger
and the consummation of all of the transactions contemplated by this
Agreement.
(b) The Company shall use its best efforts to effect approval of the
Merger and the consummation of all of the transactions contemplated by this
Agreement by the outstanding shareholders holding all of the outstanding
shares of the Company.
3.2 REORGANIZATION. The parties shall each use their best efforts to cause
the business combination to be effected by the Merger to be qualified as a
"reorganization" described in Section 368(a)(1)(A) of the Code and shall not
take or cause to be taken any actions inconsistent with such qualification.
3.3 CONFIDENTIALITY.
(a) Each party agrees that it shall not (i) disclose to any person,
association, firm, corporation or other entity in any manner, directly or
indirectly, any Confidential Information or data relevant to the operation of
the business of the other party, whether of a technical or commercial nature,
or (ii) use, or permit or assist, by acquiescence or otherwise, any person,
association, firm, corporation or other entity to use, directly or
indirectly, any such Confidential Information or data in any manner which
reasonably would be deemed to be competitive with the operation of the
business of the other party prior to the Time of Closing. Each Party agrees
that it shall take reasonable precautions to keep such information
MSI - MERGER AGREEMENT - PAGE 17
<PAGE>
confidential. Each party agrees that it shall maintain the confidentiality of
this Agreement, and all discussions and negotiations regarding the Merger. If
the Merger does not close as provided herein, all Confidential Information
and all copies thereof will be promptly returned to the disclosing party.
(b) Prior to the Time of Closing, neither party shall disseminate any
press release or announcement concerning the transactions contemplated by
this Agreement, or identifying the parties, without the prior written consent
of the other party.
3.4 ACCESS TO INFORMATION.
(a) After signing this Agreement, the Company shall give VMAC and VMC
and their "Representatives" (as such term is defined below) full access,
during normal business hours, to all of the properties, books, contracts,
commitments and records relating to the Company, its assets and properties,
provided that such access shall not unreasonably interfere with the normal
operations of the business of the Company. Further, the Company shall furnish
to VMAC and VMC and its officers, directors, employees, agents and/or
representatives (collectively, the "Representatives") all such information
concerning the Company, its business or its assets and/or properties as VMC
may reasonably request; provided, however, that any furnishing of such
information pursuant hereto or any investigation by VMAC or VMC shall not
affect VMAC's and VMC's right to rely on the representations, warranties,
agreements and covenants made by the Company in this Agreement.
(b) After signing this Agreement, VMAC and VMC shall give the Company
and their "Representatives" (as such term is defined below) full access,
during normal business hours, to all of the properties, books, contracts,
commitments and records relating to VMAC and VMC, its assets and properties,
provided that such access shall not unreasonably interfere with the normal
operations of the business of VMAC or VMC. Further, VMAC and VMC shall
furnish to the Company and its officers, directors, employees, agents and/or
representatives (collectively, the "Representatives") all such information
concerning VMAC and/or VMC, its business or its assets and/or properties as
the Company may reasonably request; provided, however, that any furnishing of
such information pursuant hereto or any investigation by the Company shall
not affect the Company's right to rely on the representations, warranties,
agreements and covenants made by VMAC and VMC in this Agreement.
3.5 CONSENTS TO MERGER. The Company agrees to use all reasonable efforts
with VMAC and VMC to obtain consents to Merger, as necessary, for all
Contracts Requiring Consent to Merger prior to or as soon as practicable
after the Time of Closing.
3.6 TAX RETURNS. If necessary, the Company shall properly file all returns,
statements, reports, forms or other documents (collectively, the "Tax
Returns") that are required by any applicable law to file with respect to
Taxes arising in or related to periods ending on or prior to the Time of
Closing or related to transactions or events occurring prior to the Time of
Closing and shall pay all such Taxes when due; provided, however, that VMAC
shall be responsible for all filings with respect to, and the payment of any
transfer tax related to, the
MSI - MERGER AGREEMENT - PAGE 18
<PAGE>
issuance of its Common Stock. Any payment of Taxes due from one party to the
other pursuant to this Section 3.6 shall be paid at the Time of Closing.
Following the Time of Closing, VMAC shall properly file all Tax Returns that
VMAC is required by any applicable law to file with respect to Taxes arising
in or related to periods commencing on Time of the Closing or related to
transactions or events occurring subsequent to the Time of Closing, and
shall pay all such Taxes when due.
3.7 NOTICES TO COMPANY'S SHAREHOLDERS AND OPTION HOLDERS.
(a) In connection with obtaining approval of the Company's shareholders
to the Merger, the Company shall disclose to such shareholders the
restrictions and qualifications applicable to the Stock Payment as
described in Section 1.7(b) and Section 1.7(c) above and shall take such
actions as may be reasonably required to assure that such shareholders
maintain the confidentiality of the information included in the VMC
Disclosure Statement.
(b) VMC will provide to the Company a notice to be sent by the Company
to all holders of unexpired options of the Company's stock that, conditioned
upon closing of the Merger as provided herein, VMC will assume such options
as described in Section 1.7(a)(2) above.
3.8 PIGGYBACK REGISTRATION RIGHTS.
(a) For purposes of this Section 3.8:
(1) The term "Act" means the Securities Act of 1933, as amended.
(2) The term "Form S-3" means such form under the Act as in effect
on the date hereof or any registration form under the Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by VMC with the SEC.
(3) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.
(4) The term "Holder" or "Holders" shall mean the recipients of
the Stock Payment and any successor or assign thereof who holds Registrable
Securities.
(5) The term "Initial Public Offering" shall mean the closing of a
firm-commitment underwritten public offering pursuant to an effective
registration statement under the Act, covering the offer and sale of VMC
Common Stock to the public with aggregate gross proceeds to VMC of at least
Ten Million Dollars ($10,000,000).
(6) The term "register", "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement or
similar document in compliance
MSI - MERGER AGREEMENT - PAGE 19
<PAGE>
with the Act, and the declaration or ordering of effectiveness of such
registration statement or document.
(7) The term "Registrable Securities" shall mean (A) any and all
VMC Common Stock held by Holder, and (B) any VMC Common Stock issuable upon
conversion or exercise of any warrant, right or other security that is issued
as a dividend or other distribution with respect to, or in exchange for or in
replacement of the shares referenced in the preceding clause (A), excluding
in all cases, however, any Registrable Securities sold by a person in a
transaction in which such person's rights were not assigned. The rights
granted hereunder to the Holders shall be freely assignable, in whole or in
part, by the Holders.
(8) The term "SEC" shall mean the United States Securities and
Exchange Commission.
(b) If (but without any obligation to do so) VMC proposes to register
(including for this purpose a registration effected by VMC for stockholders
other than the Holders) any of its stock or other securities under the Act in
connection with the public offering of such securities solely for cash (other
than a registration statement on Form S-4 or S-8 or any successor form), VMC
shall, at such time, promptly give Holders written notice of such
registration. Upon the written request of Holders given within forty (40)
days after mailing of such notice by VMC in accordance with the notice
provisions of this agreement, VMC shall, subject to the provisions of Section
3.8, cause to be registered under the Act all of the shares of Registrable
Securities that Holders have requested to be registered.
(c) VMC shall use its best efforts to qualify for registration on Form
S-3 or any successor form thereto. After VMC has qualified for the use of
Form S-3, the Holder of the outstanding Registrable Securities shall have the
right to request two registrations on Form S-3. The number of shares of
Registrable Securities that may be included on the Form S-3 shall be
allocated among all Holders in proportion to the respective amount of
Registrable Securities entitled to inclusion in such registration at the time
of filing the registration statement. Notwithstanding the foregoing:
(1) VMC shall not be required to effect a registration statement
pursuant to this section (c) within one hundred eighty (180) days of the
effective date of any registration statement filed pursuant to section (b)
hereof; and
(2) VMC shall not be required to effect a registration statement
pursuant to this section (c) unless the shares of Registrable Securities for
which the Holder is requesting registration demonstrate to VMC a reasonably
anticipated aggregate price to the public (before deduction of any
underwriting discounts and expenses) of at least One Million Dollars
($1,000,000).
(d) VMC shall promptly give written notice to all Holders of
Registrable Securities of the receipt of a request for registration pursuant
to section (c) above and shall provide a reasonable opportunity for other
Holders to participate in the registration, provided that if the
MSI - MERGER AGREEMENT - PAGE 20
<PAGE>
registration is for an underwritten offering, the terms of section (g) shall
apply to all participants in such offering. Subject to the foregoing, VMC
shall use its best efforts to file a registration statement on Form S-3
covering the Registrable Securities so requested to be registered as soon as
reasonably practicable after receipt of the written request from the Holders.
(e) Whenever required under this Section 3.8 to effect the registration
of any shares of VMC Common Stock, VMC shall, as expeditiously as reasonably
possible:
(1) prepare and file with the SEC a registration statement with
respect to such shares of VMC Common Stock and use its best efforts to cause
such registration statement to become effective and keep such registration
effective for a period of up to one hundred eighty (180) days or until the
distribution contemplated in the Registration Statement has been completed;
provided, however, that (i) such 180-day-period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
VMC Common Stock (or other securities) of VMC; and (ii) in the case of any
registration of shares of VMC Common Stock on Form S-3 which are intended to
be offered on a continuous or delayed basis, such 180-day period shall be
extended, if necessary, to keep the registration statement effective until
all such shares of VMC Common Stock are sold;
(2) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
the Act with respect to the disposition of all securities covered by such
registration statement;
(3) furnish to the Holders of shares of VMC Common Stock such numbers
of copies of a prospectus, including a preliminary prospectus, in conformity
with the requirements of the Act, and such other documents as they may
reasonably request in order to facilitate the disposition of shares of VMC
Common Stock owned by them;
(4) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Company;
provided that VMC shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, except as may be
required by the Act or such Blue Sky laws;
(5) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering;
(6) notify each Holder of shares of VMC Common Stock covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a
result of which the prospectus
MSI - MERGER AGREEMENT - PAGE 21
<PAGE>
included in such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing;
(7) cause all such shares of VMC Common Stock registered pursuant
hereunder to be listed on each securities exchange or market on which similar
securities issued by VMC are then listed; and
(8) provide a transfer agent and registrar for all shares of VMC
Common Stock registered pursuant hereto and a CUSIP number for all such
shares of VMC Common Stock, in each case not later than the effective date of
such registration.
(f) VMC shall bear and pay all reasonable expenses incurred in
connection with any registration, filing or qualification of shares of VMC
Common Stock with respect to the registrations pursuant to Section 3.8(b) for
each Holder, including (without limitation) all registration, filing, and
qualification fees, reasonable printers and accounting fees relating or
apportionable thereto, but excluding underwriting discounts and commissions
relating to shares of Common Stock.
(g) In connection with any offering involving an underwriting of shares
of VMC's capital stock, VMC shall not be required under this Section 3.8 to
include a Holder's securities in such underwriting unless such Holder accepts
the terms of the underwriting applicable to such Holder as agreed upon
between VMC and the underwriters selected by it, which terms shall be the
usual and customary terms applicable to selling shareholders. Notwithstanding
any other provision of this Section, if the managing underwriter of a
proposed public offering shall advise VMC in writing that, in its opinion,
marketing factors require a limitation on the number of shares to be
underwritten, the managing underwriter may (subject to the limitations set
forth below) exclude all of the Holders share and all shares of other holders
having registration rights from, or limit the number of such shares to be
included in, the registration and underwriting. The Company shall so advise
all holders of securities requesting registration, and the number of shares
of securities that are entitled to be included in the registration and
underwriting shall be allocated first to the Company for securities being
sold for its own account and thereafter among all such Holders and other
holders having equivalent registration rights on a pro rata basis. For
purposes of the preceding sentence concerning apportionment, for any selling
shareholder which is a Holder of shares of VMC Common Stock and which is a
partnership or corporation, the partners, retired partners and shareholders
of such Holder, or the estates and family members of any such partners and
retired partners and any trusts for the benefit of any of the foregoing
persons shall be deemed to be a single "selling shareholder," and any
pro-rata reduction with respect to such "selling shareholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling shareholder," as defined
in this sentence.
(h) With a view to making available to the Holders the benefits of Rule
144 promulgated under the Act ("SEC Rule 144") and any other rule or
regulation of the SEC that
MSI - MERGER AGREEMENT - PAGE 22
<PAGE>
may at any time permit the Company to sell securities of VMC to the public
without registration or pursuant to a registration on Form S-3, VMC agrees to:
(1) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by VMC for
the offering of its securities to the general public;
(2) file with the SEC in a timely manner all reports and other
documents required of VMC under the Act and the 1934 Act; and
(3) furnish to the Holders, so long as the Holders own any shares
of VMC Common Stock, forthwith upon request (i) a written statement by VMC
that it has complied with the reporting requirements of SEC Rule 144 (at any
time after ninety (90) days after the effective date of the first
registration statement filed by VMC), the Act and the 1934 Act (at any time
after it has become subject to such reporting requirements) or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of VMC and such other reports and documents so filed by VMC
and (iii) such other information as may be reasonably requested in availing
the Holders of any rule or regulation of the SEC which permits the selling of
any such securities without registration or pursuant to such form.
(i) VMC agrees to indemnify and hold harmless each Holder, and each of
its officers and directors and partners, and such Holder's legal counsel and
independent accountants, if any, and any underwriter (as defined in the Act)
for such Holder and each person, if any, who controls any such persons within
the meaning of Section 15 of the Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement,
against any losses, claims, damages or liabilities, joint or several, to
which any of such persons may be subject, under the Act or otherwise,
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, and to reimburse any of such persons for any
reasonable legal or other expenses incurred in connection with investigating
or defending against any such losses, claims, damages, or liabilities,
insofar as such losses, claims, damages or liabilities are caused by any
untrue statement or alleged untrue statement of a material fact contained in
any registration statement under which such securities were registered under
the Act pursuant to this Agreement, any prospectus contained therein, or any
amendment or supplement thereto, or arising out of or based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statement therein not misleading or any
violation by VMC of any rule or regulation promulgated under the Act or any
state securities laws applicable to VMC and relating to action or inaction by
VMC in connection with any such registration, qualification or compliance,
except insofar as such losses, claims, damages or liabilities arise out of or
are based upon information included in the prospectus in reliance upon and in
conformity with information furnished to VMC in writing by such Holder
expressly for use therein or are based on the authority of an expert within
the meaning of that term as defined in the Act or are based on (i) the
failure of such Holder or underwriter to furnish a copy of the preliminary
MSI - MERGER AGREEMENT - PAGE 23
<PAGE>
prospectus or the prospectus after receipt thereof as required by the Act or
the rules and regulations promulgated thereunder, or (ii) the use of a
preliminary prospectus or a prospectus by such Holder after receipt from VMC
of notice that such prospectus should no longer be used. Such indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of such Holder, and shall survive transfer of such securities by
such Holder.
(j) Each Holder agrees, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification
or compliance is being effected, to indemnify and hold harmless VMC, each of
its officers and directors, and VMC's legal counsel and independent
accountants, if any, against any expenses, losses, claims, damages or
liabilities, several and not joint, to which VMC or such persons may be
subject, under the Act or otherwise, and to reimburse VMC or such persons for
any reasonable legal or other expenses incurred in connection with
investigating or defending against any such expenses, losses, claims, damages
or liabilities, insofar as such expenses, losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue statement of
a material fact furnished by such Holder to VMC for inclusion in a
registration statement, if such untrue statement was made in reliance upon
and in conformity with written information furnished by such Holder and is
contained in any registration statement under which VMC Common Stock is held
by such Holder was registered under the Act pursuant to this Agreement, any
prospectus contained therein, or any amendment or supplement thereto.
Notwithstanding the foregoing, however, no representation, warranty,
acknowledgment or agreement made herein by Holder shall in any manner be
deemed to constitute a waiver of any rights granted to Holder under federal
or state securities laws; and, provided further, that the obligations of such
Holders hereunder shall be limited to an amount equal to the net proceeds to
each such Holder of Registrable Securities sold pursuant to such registration
statement.
(k) In the event VMC or any Holder receives a complaint, claim or other
notice of any loss, claim or damage, liability or action, giving rise to a
claim for indemnification under sections (h) or (l), the person claiming
indemnification under any such section shall promptly notify the person
against whom indemnification is sought of such complaint, notice, claim,
damage, liability or action, and such indemnifying person shall have the
right to investigate and defend any such loss, claim, damage, liability or
action. The person claiming indemnification shall have the right to employ
separate counsel in any such action and to participate in the defense thereof
but the fees and expenses of such counsel shall not be at the expense of the
person against whom indemnification is sought; provided, however, that if
there exists or shall exist a material conflict of interest that would make
it inappropriate for the same counsel to represent both the indemnified
person and such indemnifying person or any affiliate or associate thereof,
the indemnified person shall be entitled to retain its own counsel at the
expense of such indemnifying person, provided that VMC shall not be liable
for the fees and expenses of more than one such counsel for all the Holders.
In no event shall a person against whom indemnification is sought be obligated
to indemnify any person for any settlement of any claim or action effected
without the indemnifying person's consent, which consent may not be
unreasonably withheld. The failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its
obligations under
MSI - MERGER AGREEMENT - PAGE 24
<PAGE>
this Agreement, unless such failure is prejudicial to the ability of the
indemnifying party to defend the action.
(l) In any event, VMC's undertakings under this Section 3.8 shall
expire seven (7) years after the date of this Agreement.
(m) Each Holder hereby agrees that it shall not, without the prior
written consent of the managing underwriter selected by VMC, during the
period commencing on the date of the final prospectus relating to VMC's
Initial Public Offering, if any, and ending on the date specified by VMC and
the managing underwriter (such period not to exceed one hundred eighty (180)
days or such shorter period as is imposed on the officers and/or directors of
VMC) (i) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of VMC Common Stock or any securities convertible into
or exercisable or exchangeable for VMC Common Stock (whether such shares or
any such securities are then owned by the Holder or are thereafter acquired),
or (ii) enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of VMC
Common Stock, whether any such transaction described in clauses (i) or (ii)
above is to be settled by delivery of VMC Common Stock or such other
securities, in cash or otherwise. The underwriters in connection with VMC's
Initial Public Offering are intended third party beneficiaries of this
section (m) and shall have the right, power and authority to enforce the
provisions hereof as though they were parties hereto. In order to enforce
the foregoing covenant, VMC may impose stop-transfer instructions with
respect to the Registrable Securities of each Holder (and the shares or
securities of every other person subject to the foregoing restriction) until
the end of such period, or such other shorter period as is commensurate with
that imposed upon other members of senior management.
3.9 POST CLOSING COVENANT OF VMC. Following the finalization of the Merger,
VMC shall use its best efforts to obtain directors' and officers' liability
insurance provided that such insurance is available to VMC at commercially
reasonable rates.
ARTICLE IV - CLOSING
4.1 SCHEDULING.
(a) The "Closing" shall mean the deliveries to be made by the parties
in accordance with this Article IV. The Closing shall take place by mail at
the offices of Murphy Austin Adams Schoenfeld LLP, 1000 G Street, 3rd Floor,
Sacramento, California 95814, at a date and time specified by that firm, or
at such other place or date as may be agreed to by VMC and the Company, but
in no event later than thirty (30) business days after the Signature Date.
(b) The transactions contemplated by this Agreement shall be completed,
as between the parties, on the first VMAC business day on which the last of
the deliveries
MSI - MERGER AGREEMENT - PAGE 25
<PAGE>
referenced in Sections 4.2 and 4.3 below occurs or is fulfilled or waived
(the "Time of Closing"), with the expectation that the Time of Closing shall
occur within thirty (30) business days of the Signature Date.
4.2 DELIVERIES BY THE COMPANY. At the Closing, the Company shall make, or
cause to be made, the following deliveries:
(a) Colorado Certificate of Merger, duly signed by the Company, for
filing with the Colorado Secretary of State in accordance with Section 1.2
above;
(b) The Company's Share Documents in the possession of the Company;
(c) All written consents or waivers of all parties required pursuant to
Section 2.1(i)(3);
(d) All the relevant books and records of the Company related to the
Company's business and/or assets and properties;
(e) A legal opinion addressed to VMC and VMAC from the Company's
counsel, Chrisman, Bynum & Johnson, P.C., dated as of the Closing, and which
shall include the opinions described in Exhibit 4.2(e) and shall otherwise be
in form and substance satisfactory to VMC and VMAC;
(f) A certificate of the Company in the form of that attached as
Exhibit 4.2(f) certifying (i) that the conditions specified in sections (a)
through (d) and (f) through (p) of Section 5.1 have been satisfied, (ii) that
there shall have been no material adverse change in the Company, its
business, assets or properties, or the financial condition of the Company,
since the date of this Agreement, (iii) that the representations and
warranties of the Company are still valid as of the Time of Closing; (iv)
that the Financial Statements fairly reflect the financial condition and
results of operations of the Company as of such dates and for the periods
indicated in the respective Financial Statements; and (v) that the Company
has received copies of VMC's certificate of incorporation and bylaws, as
referenced in Section 2.2(a), and a copy of VMC's Disclosure Statement, as
referenced in Section 2.2(c);
(g) A certificate of the Company, dated as of the Time of Closing, as
to (i) the incumbency and signatures of those of its officers or individuals,
as the case may be, authorized to act on its behalf with respect to any
exhibit or schedule or any certificate, financial statement or report or
other document delivered pursuant to this Agreement or in connection with the
transactions contemplated hereby (collectively, the "Merger Documents") to
which it is a party, (ii) resolutions then in full force and effect
authorizing the appropriate officer(s) of the Company to sign, deliver and
perform each Merger Document to which it is a party, (iii) its articles of
incorporation certified as to their accuracy by its Secretary and the
Colorado Secretary of State; (iv) its bylaws certified as to their accuracy
by its Secretary; (v) a good standing certificate from the Colorado Secretary
of State, dated not more than thirty
MSI - MERGER AGREEMENT - PAGE 26
<PAGE>
(30) days prior to the Time of Closing, showing that the Company is in
good standing in the State of Colorado; and
(h) Employment agreement and Employee Proprietary Information and
Invention Agreement in the form attached hereto as Exhibit 4.2(h) for the
employment of James L. Seiler as Chief Executive Officer of VMC
(collectively, the "Employment Agreement"), duly signed by James L. Seiler;
(i) Non-competition agreement and related documents in form and
substance reasonably acceptable to the Company and VMC duly signed by James
L. Seiler (the "Seiler Non-Competition Agreement");
(j) Non-competition agreement and related documents in form and
substance reasonably acceptable to the Company and VMC duly signed by Richard
J. Steele (the "Steele Non-Competition Agreement");
(k) Evidence of the Additional Investment (as defined below);
(l) The Canceled Warrants (as defined below); and
(m) Consulting Agreement in form and substance reasonably acceptable to
the Company and VMC, duly signed by Peter Friedli of Friedli Corporate
Finance (the "Consulting Agreement").
4.3 DELIVERIES BY VMC AND VMAC. At the Closing, VMAC and/or VMC shall make,
or cause to be made, the following deliveries:
(a) In accordance with Section 1.2 above, (i) Delaware Certificate of
Merger, duly signed by VMAC, for filing with the Delaware Secretary of State,
and (ii) Colorado Certificate of Merger, duly signed by VMAC, if required by
the Colorado Secretary of State;
(b) To legal counsel for the Company, the Stock Payment from VMC,
together with written instructions to hold such certificates in trust until
the Effective Time;
(c) A legal opinion addressed to the Company from VMAC's and VMC's
counsel, Murphy Austin Adams Schoenfeld LLP of Sacramento, California and/or
Brobeck Phleger & Harrison LLP of Palo Alto, California, dated as of the
Closing, and which shall include the opinions described in Exhibit 4.3(c) and
shall otherwise be in form and substance satisfactory to the Company;
(d) An Officer's Certificate signed by the President of VMC in the form
of that attached as Exhibit 4.3(d) certifying (i) that the conditions
specified in sections (a) through (c) of Section 5.2 have been satisfied;
(ii) that there shall have been no material adverse change in the business of
VMC or VMAC since the date of this Agreement, and (iii) that the
representations and warranties of VMC and VMAC are still valid as of the Time
of Closing;
MSI - MERGER AGREEMENT - PAGE 27
<PAGE>
(e) A certificate of each of VMAC and VMC, dated as of the Time of
Closing, as to (i) the incumbency and signatures of those of its officers or
individuals, as the case may be, authorized to act on its behalf with respect
to each Merger Document to which it is a party, (ii) resolutions then in full
force and effect authorizing the appropriate officer(s) of such company to
sign, deliver and perform each Merger Document to which it is a party, (iii)
its certificate of incorporation certified as to their accuracy by its
Secretary and the Delaware Secretary of State; (iv) its bylaws certified as
to their accuracy by its Secretary; (v) a good standing certificate from the
Delaware Secretary of State, dated not more than thirty (30) days prior to
the Time of Closing, showing that such company is in good standing in the
State of Delaware;
(f) The Employment Agreement, duly signed by VMC;
(g) The Consulting Agreement, duly signed by VMC;
(h) The VMC Warrants (as defined below); and
(i) Termination of VMC Shareholder Agreements (as defined below).
4.4 FURTHER ASSURANCES. After the Time of Closing, each party shall each
prepare, sign and deliver, at the preparer's expense, such further
instruments or cause to be taken such other or further action as any party
shall reasonably request of any other party at any time or from time to time
in order to consummate, in any manner, the terms and provisions of this
Agreement.
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS
5.1 CONDITIONS TO OBLIGATIONS OF VMAC AND VMC. Each and every obligation of
VMAC and VMC to be performed at the Closing shall be subject to the
satisfaction as of or before the Time of Closing of the following conditions
(unless waived in writing by VMC and VMAC):
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of the Company set forth in Section 2.1 of this Agreement shall
have been true and correct when made and shall be true and correct as updated
at and as of the Time of Closing as if such representations and warranties
were made as of such date and time other than such representations and
warranties made as of a set date, which shall be true and correct as of such
date; the covenants and agreements contained in this Agreement to be complied
with by the Company on or before the Time of Closing shall have been complied
with in all material respects; and VMAC and VMC shall have received a
certificate from the Company to such effect signed by a duly authorized
officer of the Company.
(b) PERFORMANCE OF AGREEMENT. All covenants, conditions and other
obligations under this Agreement which are to be performed or complied with
by the Company shall
MSI - MERGER AGREEMENT - PAGE 28
<PAGE>
have been fully performed and complied with at or prior to the Time of Closing,
including the delivery of the instruments and documents in accordance with
Section 4.2 above.
(c) NO MATERIAL ADVERSE CHANGE. There shall have been no material
adverse change in the financial condition, the business of the Company, the
Intellectual Property or properties of the Company which materially adversely
affects the conduct of the business of the Company, as currently being
conducted.
(d) ABSENCE OF GOVERNMENTAL OR OTHER OBJECTION. There shall be no pending
or threatened investigation, action, suit or proceeding challenging the
transaction by any body or agency of the federal, state or local government or
by any third party, and the consummation of the transaction shall not have been
enjoined by a court of competent jurisdiction as of the Time of Closing and any
applicable waiting period under any applicable federal law shall have expired.
(e) APPROVAL OF DOCUMENTATION. The form and substance of all
certificates, instruments and other documents delivered or to be delivered to
VMAC under this Agreement shall be reasonably satisfactory to VMAC and VMC and
their counsel in all respects.
(f) CONSENTS. The Company shall have received all material consents and
approvals of all lenders, lessors and other third parties whose consent or
approval is required in order for the Company to consummate the transactions
contemplated by this Agreement.
(g) OPERATION OF BUSINESS. Since June 30, 1999, the Company shall have
operated the business of the Company in the ordinary course consistent with
past practices.
(h) CHANGES. Since June 30, 1999, there shall not have been any material
adverse change in the assets or the financial condition, results of operations,
prospects, properties or business of the Company, except as disclosed on the
Company's Exceptions Schedule.
(i) EMPLOYMENT AGREEMENT. VMC and James Seiler shall have executed and
delivered the Employment Agreement.
(j) SEILER NON-COMPETITION AGREEMENT. VMC shall have received the
executed Seiler Non-Competition Agreement.
(k) STEELE NON-COMPETITION AGREEMENT. VMC shall have received the
executed Steele Non-Competition Agreement.
(l) CONSULTING AGREEMENT WITH FRIEDLI CORPORATE FINANCE. VMC and Friedli
Corporate Finance shall have executed and delivered the Consulting Agreement.
(m) APPROVAL OF COMPANY SHAREHOLDERS. The Company shall have received
approval of the shareholders holding such percentage of the outstanding shares
as may be satisfactory to VMC in its sole and absolute discretion.
MSI - MERGER AGREEMENT - PAGE 29
<PAGE>
(n) ADDITIONAL INVESTMENT BY VENTURETEC IN THE COMPANY. Venturetec shall
have made an additional investment in the Company in cash in an amount not less
than Three Million Three Hundred Thirty Thousand Dollars ($3,330,000) (the
"Additional Investment") and VMC shall have received evidence reasonably
satisfactory to it that such Additional Investment has been received.
(o) CANCELED WARRANTS. VMC shall have received evidence reasonably
satisfactory to it that all of the fifty five thousand (55,000) outstanding
warrants for purchase of the Company's stock (twenty thousand (20,000) of which
such outstanding warrants are held by Joyce Ltd. and thirty five thousand
(35,000) of which are held by Pine Inc.) have been canceled (the "Canceled
Warrants").
(p) SUBSCRIPTION AGREEMENTS. Not less than two (2) business days prior to
the Time of Closing, VMC shall have received subscription agreements and
investor representation letters in forms(s) reasonably satisfactory to VMC from
shareholders of the Company owning in the aggregate no less than seventy five
percent (75%) of the issued and outstanding stock of the Company.
(q) DUE DILIGENCE. Each of VMAC and VMC shall have completed to their
satisfaction, and in their sole and absolute discretion be satisfied with the
results of, all due diligence with respect to the Company that they deem
necessary in their sole and absolute discretion.
(r) TAX-FREE REORGANIZATION. Each of VMAC and VMC shall be satisfied that
the Merger qualifies as a tax-free reorganization under Section 368(a)(1)(A) of
the Code.
5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. Each and every obligation of
the Company to be performed at the Time of Closing shall be subject to the
satisfaction as of or before such time of the following conditions (unless
waived in writing by the Company):
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
VMAC and VMC set forth in Section 2.2 of this Agreement shall have been true and
correct when made and shall be true and correct at and as of the Time of Closing
as if such representations and warranties were made as of such date and time,
other than such other representations and warranties as are made as of another
date, which shall be true and correct in all material respects as of such other
date; and the covenants and agreements contained in this Agreement to be
complied with by VMAC or VMC on or before the Time of Closing shall have been
complied with in all material respects.
(b) PERFORMANCE OF AGREEMENT. All covenants, conditions and other
obligations under this Agreement which are to be performed or complied with by
VMAC or VMC shall have been fully performed and complied with at or prior to
the Time of Closing, including the delivery of the instruments and documents in
accordance with Section 4.3 hereof.
MSI - MERGER AGREEMENT - PAGE 30
<PAGE>
(c) ABSENCE OF GOVERNMENTAL OR OTHER OBJECTION. There shall be no
pending or threatened lawsuit challenging the transaction by any body or
agency of the federal, state or local government or by any third party, and
the consummation of the transaction shall not have been enjoined by a court
of competent jurisdiction as of the Time of Closing and any applicable
waiting period under any applicable federal law shall have expired.
(d) APPROVAL OF DOCUMENTATION. The form and substance of all
certificates, instruments, opinions and other documents delivered or to be
delivered to the Company under this Agreement shall be reasonably satisfactory
to the Company and its counsel in all respects.
(e) MERGER CONSIDERATION. VMC shall have delivered the Stock Payment to
legal counsel for the Company.
(f) COMPOSITION OF VMC BOARD OF DIRECTORS. The number of directors on
VMC's Board of Directors shall have been set at five (5), any necessary
resignations of directors on VMC's Board of Directors shall have been received
by the Board of Directors of VMC, and James L. Seiler and Peter Friedli shall
have been duly elected to the Board of Directors of VMC.
(g) EMPLOYMENT OF JAMES L. SEILER. VMC shall employ James L. Seiler as
its Chief Executive Officer.
(h) EMPLOYMENT AGREEMENT. VMC and James Seiler shall have executed and
delivered the Employment Agreement.
(i) CONSULTING AGREEMENT WITH FRIEDLI CORPORATE FINANCE. VMC and Friedli
Corporate Finance shall have executed and delivered the Consulting Agreement.
(j) VMC WARRANTS. VMC shall have delivered to legal counsel for the
Company warrants for the purchase by Friedli Corporate Finance of ninety
thousand (90,000) of VMC Common Stock at a price equal to $3.70 per share for a
term of four (4) years following the Time of Closing (the "VMC Warrants").
(k) TERMINATION OF SHAREHOLDER AGREEMENTS. The Company shall have
received evidence reasonably satisfactory to it that all shareholder agreements
between VMC and any of its shareholders have been terminated ("Termination of
VMC Shareholder Agreements").
(l) DUE DILIGENCE. The Company shall have completed to its satisfaction,
and in its sole and absolute discretion be satisfied with the results of, all
due diligence with respect to VMC and its subsidiaries that it deems necessary
in its sole and absolute discretion.
(m) TAX-FREE REORGANIZATION. The Company shall be satisfied that the
Merger qualifies as a tax-free reorganization under Section 368(a)(1)(A) of the
Code.
MSI - MERGER AGREEMENT - PAGE 31
<PAGE>
(n) SHAREHOLDER APPROVAL. The Merger and this Agreement shall have been
approved by holders of a majority of the outstanding Company's Common Stock.
5.3 TERMINATION. This Agreement may be terminated as provided herein at any
time prior to the Effective Time of the Merger, whether before or after
approval of the shareholders of VMAC and the Company.
ARTICLE VI - LIMITATION ON REMEDIES
6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained in this Agreement, along with all exhibits, schedules
and certificates delivered pursuant hereto, shall survive only to the Time of
Closing, and shall thereafter terminate and be of no further force and effect.
ARTICLE VII - CONCLUDING PROVISIONS
7.1 NOTICE. All notices and other communications required or permitted under
this Agreement shall be delivered to the parties at the address set forth
below their respective signature blocks, or at such other address that they
hereafter designate by notice to all other parties in accordance with this
Section 7.1. Any party delivering notice to the Company shall deliver a copy
to Chrisman, Bynum & Johnson, P.C. (Attn: G. James Williams, Jr.), 1900
Fifteenth Street, Boulder, Colorado 80302. Any party delivering notice to
VMAC or VMC shall deliver a copy to VantageMed Corporation (Attn: Joel
Harris), 3017 Kilgore Road, Suite 180, Rancho Cordova, California 95670, with
a copy to Murphy Austin Adams Schoenfeld LLP (Attn: Russell Austin), 1000 G
Street, Third Floor, Sacramento, California 95814. All notices and
communications shall be deemed to be received in accordance with the
following: (i) in the case of personal delivery, on the date of such
delivery; (ii) in the case of facsimile transmission, on the date on which
the sender receives confirmation by facsimile transmission that such notice
was received by the addressee, provided that a copy of such transmission is
additionally sent by mail as set forth in (iv) below; (iii) in the case of
overnight air courier, on the second business day following the day sent,
with receipt confirmed by the courier; and (iv) in the case of mailing by
first class certified mail, postage prepaid, return receipt requested, on the
fifth business day following such mailing.
7.2 ASSIGNMENT. This Agreement and the various rights and obligations
arising hereunder shall inure to the benefit of and be binding upon the
Company, their successors and permitted assigns, and VMAC, VMC and their
respective successors and permitted assigns. VMC and VMAC may assign the
rights and obligations of VMAC hereunder to any other wholly owned subsidiary
of VMC. Except as otherwise provided in this Section 7.2, neither this
Agreement nor any of the rights, interests, or obligations hereunder shall be
transferred or assigned (by operation of law or otherwise) by any of the
parties hereto without the prior written consent of the other parties.
MSI - MERGER AGREEMENT - PAGE 32
<PAGE>
7.3 EXPENSES. VMAC, VMC, and the Company shall each bear and pay all costs
and expenses respectively incurred by each of them on their behalf in
connection with this Agreement, including fees and expenses of their own
financial consultants, accountants and legal counsel. The Company shall pay
all applicable sales, use, excise, transfer, documentary and any other
similar taxes arising out the this Agreement, or in relation to the
transactions referenced herein.
7.4 WAIVER; CONSENT. This Agreement may not be changed, amended, terminated,
augmented, rescinded, or discharged (other than by performance), in whole or
in part, except by a writing signed by the parties hereto, and no waiver of
any of the provisions or conditions of this Agreement or any of the rights of
a party shall be effective or binding unless such waiver shall be in writing
and signed by the party claimed to have given or consented thereto. Except to
the extent that a party may have otherwise agreed in writing, no waiver by
that party of any condition of this Agreement or breach by the other party of
any of its obligations or representations hereunder or thereunder shall be
deemed to be a waiver of any other condition or subsequent or prior breach of
the same or any other obligation or representation by the other party, nor
shall any forbearance by the first party to seek a remedy for any
noncompliance or breach by the other party be deemed to be a waiver by the
first party of its rights and remedies with respect to such noncompliance or
breach.
7.5 COUNTERPARTS. This Agreement may be signed simultaneously in multiple
counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument. Facsimile
signatures will be considered the same as original signatures and will be
binding on the parties.
7.6 GOVERNING LAW AND SEVERABILITY. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of California. If one or
more provisions of this Agreement are held to be unenforceable under
applicable law, such provision shall be excluded from this Agreement to the
extent of its unenforceability, and the balance of the Agreement shall be
interpreted as if such unenforceable provision (to the extent of its
unenforceability) was so excluded, but shall otherwise be enforceable in
accordance with its terms.
7.7 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this
Agreement are intended, nor shall be interpreted, to provide or create any
third party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or employee of any party or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof shall be personal solely between
the parties to this Agreement. Notwithstanding the foregoing, and subject to
all of the other terms and conditions of this Agreement, the Holders and the
Company's option holders can enforce payment of the Merger Consideration
after the Effective Time.
7.8 COOPERATION AND TAX RECORDS RETENTION. The Company and VMAC shall (i)
each provide the other with such assistance as may reasonably be requested by
the other in connection with the preparation of any Tax Returns, or in
connection with any audit or other
MSI - MERGER AGREEMENT - PAGE 33
<PAGE>
examination by any taxing authority or any judicial or administrative
proceedings relating to liability for Taxes, (ii) each retain and provide the
other, with any records or other information which may be relevant to any
such Tax Return, audit or examination, proceeding or determination, and (iii)
each provide the other with any final determination of any such audit or
examination, proceeding or determination that affects any amount required to
be shown on any Tax Return of the other for any period. Without limiting the
generality of the foregoing, the Company and VMAC shall use reasonable
efforts to retain, until the applicable statute of limitations (including any
extensions) has expired, copies of all Tax Returns, supporting work schedules
and other records or information which may be relevant to such Tax Returns
for all tax periods or portions thereof ending before or including the Time
of Closing and shall not destroy or otherwise dispose of any such records
without first providing the other party with a reasonable opportunity to
review and copy the same. VMAC shall keep the original copies of the records
at its facilities in California and elsewhere, if applicable, and, at the
Company's expense, shall provide copies of the records to the Company upon
the Company's request.
7.9 VENUE AND LEGAL FEES. Any controversy, claim and/or dispute arising out
of or relating to this Agreement or the breach hereof or subject matter
hereof (including any action in tort) shall be finally and exclusively
settled by any court having applicable jurisdiction. If the proceedings are
commenced by VMC, venue shall be in Denver, Colorado, and if the proceedings
are commenced by the Company, venue shall be in Sacramento, California. Each
of the parties hereto hereby irrevocably and unconditionally waives any
objection to the laying of venue of any litigation arising out of this
Agreement or the transactions contemplated hereby in the courts of the state
in which the party against whom such claim is brought resides, and hereby
further irrevocably and unconditionally waives and agrees not to plead or
claim in any such court that any such litigation brought in any such court
has been brought in an inconvenient forum. The prevailing party shall be
entitled to its reasonable attorneys' fees, costs and disbursements in
addition to any other relief to which it may be entitled.
7.10 SPECIFIC PERFORMANCE. Notwithstanding Section 7.9, the parties agree
that irreparable damage would occur in the event any provision of this
Agreement is not performed in accordance with the terms hereof, and that the
Company and VMAC shall be permitted to access the court system to obtain
injunctive relief and/or specific performance of the terms hereof.
7.11 FURTHER ACTION. VMAC shall have the right to setoff sums due it
hereunder from sums due the Company hereunder. Each of the parties shall use
all reasonable efforts to take, or cause to be taken, all appropriate action,
do or cause to be done all things reasonably necessary, proper or advisable
under applicable laws, and sign and deliver such documents and other papers,
as may be reasonably required to carry out the provisions of this Agreement,
and consummate and make effective the transactions contemplated by this
Agreement.
7.12 INTERPRETATION. As used in this Agreement, the term "person" shall mean
and include any individual, partnership, joint venture, corporation, trust,
unincorporated organization,
MSI - MERGER AGREEMENT - PAGE 34
<PAGE>
and government or other department or agency thereof. Except to the extent
the context otherwise requires: (i) any reference to an Article, Section,
Schedule or Exhibit is a reference to an article, section, schedule or
exhibit of this Agreement; (ii) any reference to a section or a clause is,
unless otherwise stated, a reference to a section or a clause of the Section
or subsection in which the reference appears; (iii) the words "hereof",
"herein", "hereto" and the like mean and refer to this Agreement as a whole,
and not merely to the specific Article, Section, subsection, paragraph or
clause in which the respective word appears; (iv) the meaning of defined
terms shall be equally applicable to both the singular and plural forms of
the terms defined; (v) the words "including", "includes" and "include" shall
be deemed to always be followed by the words "without limitation"; (vi)
references to agreements and other contractual instruments shall be deemed to
include all subsequent amendments and other modifications thereto; (vii)
references to statutes or regulations are to be construed as including all
statutory and regulatory provisions consolidating, amending or replacing the
statute or regulation referred to; (viii) any table of contents, captions and
headings are for convenience of reference only, and shall not affect the
construction of this Agreement; and (ix) in the computation of periods of
time from a specified date to a later specified date, the word "from" means
"from and including"; the words "to" and "until" each mean "to but
excluding"; and the word "through" means "to and including". No provision of
this Agreement shall be construed against or interpreted to the disadvantage
of any of the parties by any court or other authority by reason of that party
having drafted or proposed such provision.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
MSI - MERGER AGREEMENT - PAGE 35
<PAGE>
7.13 ENTIRE AGREEMENT. This Agreement shall be deemed to include the
exhibits and schedules referred to herein. This Agreement, together with the
documents referred to herein, and the documents to be signed and delivered
hereunder contemporaneously with the Time of Closing embody the entire
agreement and understanding of the parties with respect to the subject matter
hereof, and supersede and extinguish all prior agreements, drafts,
representations and understandings, oral or written, relative to such subject
matter. Each of the parties hereby acknowledges that no representations,
inducements, promises or agreements, verbally or otherwise, have been made by
any of the parties, or anyone acting on behalf of any of the parties, which
are not embodied in this Agreement, and that no other agreement, statement or
promise not contained in this Agreement shall be valid or binding. Each of
the parties represents and warrants that it has fully familiarized itself
with this Agreement, and that such party has been fully authorized to sign
this Agreement, and all related documents. The parties agree that this
Agreement shall only be binding when signed by the parties in the blanks
immediately below. If the pages of this Agreement are initialed, such
initialing shall be solely for the purpose of identification. If initialing
is on some, but not all, of the pages of this Agreement, that absence of
initialing shall not affect the validity of this Agreement, to the extent it
is signed in the blanks immediately below.
* * *
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed and
delivered as of the day and year first above written.
VM1 Acquisition Corp. Mariner Systems, Inc.
/s/ Joel Harris /s/ James L. Seiler
- -------------------------------- ------------------------------
Joel Harris James L. Seiler
President and CEO President
3017 Kilgore Road, Suite 180 2336 Canyon Boulevard, Suite 201
Rancho Cordova, CA 95670 Boulder, Colorado 80302
VantageMed Corporation
/s/ Joel Harris
- --------------------------------
Joel Harris
President and CEO
3017 Kilgore Road, Suite 180
Rancho Cordova, CA 95670
MSI - MERGER AGREEMENT - PAGE 34
<PAGE>
7.13 ENTIRE AGREEMENT. This Agreement shall be deemed to include the
exhibits and schedules referred to herein. This Agreement, together with the
documents referred to herein, and the documents to be signed and delivered
hereunder contemporaneously with the Time of Closing embody the entire
agreement and understanding of the parties with respect to the subject matter
hereof, and supersede and extinguish all prior agreements, drafts,
representations and understandings, oral or written, relative to such subject
matter. Each of the parties hereby acknowledges that no representations,
inducements, promises or agreements, verbally or otherwise, have been made by
any of the parties, or anyone acting on behalf of any of the parties, which
are not embodied in this Agreement, and that no other agreement, statement or
promise not contained in this Agreement shall be valid or binding. Each of
the parties represents and warrants that it has fully familiarized itself
with this Agreement, and that such party has been fully authorized to sign
this Agreement, and all related documents. The parties agree that this
Agreement shall only be binding when signed by the parties in the blanks
immediately below. If the pages of this Agreement are initialed, such
initialing shall be solely for the purpose of identification. If initialing
is on some, but not all, of the pages of this Agreement, that absence of
initialing shall not affect the validity of this Agreement, to the extent it
is signed in the blanks immediately below.
* * *
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed and
delivered as of the day and year first above written.
VM1 Acquisition Corp. Mariner Systems, Inc.
_______________________________ __________________________________
Joel Harris James L. Seiler
President and CEO President
3017 Kilgore Road, Suite 180 2336 Canyon Boulevard, Suite 201
Rancho Cordova, CA 95670 Boulder, Colorado 80302
VantageMed Corporation
_______________________________
Joel Harris
President and CEO
3017 Kilgore Road, Suite 180
Rancho Cordova, CA 95670
MSI - MERGER AGREEMENT - PAGE 36
<PAGE>
EXHIBIT 2.2
ASSIGNMENT AND ASSUMPTION AGREEMENT
This ASSIGNMENT AND ASSUMPTION AGREEMENT ("Assignment"), dated August 2,
1999, is by and between VM1 ACQUISITION CORP., a Delaware corporation
("Assignor"), and VM4 ACQUISITION CORP., a Delaware corporation ("Assignee").
RECITALS
A. Each of Assignor and Assignee are wholly owned subsidiaries of
VantageMed Corporation, a Delaware corporation ("VMC").
B. Assignor entered into that certain Merger Agreement, dated July 23,
1999 (the "Merger Agreement") with VMC and Mariner Systems, Inc., a Colorado
corporation ("MSI"), pursuant to which the parties thereto have agreed that
MSI shall merge into and with Assignor (the "Merger").
C. Section 7.2 of the Merger Agreement provides that Assignor may
assign its rights and obligations under the Merger Agreement to another
wholly owned subsidiary of VMC.
D. Assignor desires to assign to Assignee all of Assignor's right,
title and interest in and to the Merger Agreement, and Assignee desires to
assume all of Assignor's obligations under the Merger Agreement, pursuant to
the terms and conditions of this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the above recitals, of the mutual
promises and covenants set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Assignor and Assignee hereby agree as follows:
1. ASSIGNMENT. Effective as of the Effective Date (as defined below),
Assignor hereby grants, conveys, assigns, transfers and sets over to Assignee
all of Assignor's right, title and interest in and to the Merger Agreement.
2. ACCEPTANCE OF ASSIGNMENT. Effective as of the Effective Date,
Assignee hereby accepts the assignment of the Merger Agreement as set forth
in Section 1 above, and hereby assumes, agrees and undertakes to perform all
of the obligations, liabilities, covenants and agreements of Assignor under
the Merger Agreement, arising from and after the Effective Date.
3. EFFECTIVE DATE. This Agreement shall be conditioned upon and
effective upon the date the parties execute and deliver this Assignment (the
"Effective Date").
4. REPRESENTATIONS AND WARRANTIES OF ASSIGNOR. Assignor hereby
represents and warrants to Assignee as follows:
1
<PAGE>
(a) Assignor has not previously assigned, pledged, hypothecated,
conveyed or otherwise transferred any of its rights under the Merger Agreement
to any other party; and
(b) As of the Effective Date, the Merger Agreement is in full
force and effect, no default exists under the Merger Agreement, and Assignor
has no notice of any prior assignment, hypothecation or other transfer of any
other interest under the Merger Agreement.
5. REPRESENTATIONS AND WARRANTIES OF ASSIGNEE. Assignee hereby
represents and warrants to Assignor as follows:
(a) Assignee is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
(b) This Assignment has been duly authorized, executed and
delivered by Assignee and constitutes the valid, legal and binding
obligations of Assignee, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other similar laws of general applicability
relating to or affecting creditors' rights, and to general equity principles.
6. MISCELLANEOUS.
(a) GOVERNING LAW. This Assignment shall be governed by and
construed in accordance with the laws of the State of California.
(b) ENTIRE AGREEMENT. This Assignment constitutes the entire
agreement between the parties relating to the rights assigned and the
obligations assumed hereunder. All prior and contemporaneous agreements,
representations and understandings of the parties, oral or written, are
hereby superseded and merged herein.
(c) FURTHER PERFORMANCE. Each party shall, whenever and as often
as it shall be requested by the other party, execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, such further
instruments and documents, as may be necessary in order to complete the
assignment and transfer herein provided and to do any and all things as may
be requested in order to carry out the intent and purpose of this Assignment.
(d) COUNTERPARTS. This Assignment shall be executed
simultaneously or in counterparts, each of which shall be deemed an original
(including copies sent to a party by telecopy or facsimile transmission), but
all of which together shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
(e) BINDING EFFECT. This Assignment shall be binding upon and
inure to the benefit of the parties and their respective successors and
assigns.
IN WITNESS WHEREOF, Assignor and Assignee have executed and delivered
this Assignment as set forth below.
ASSIGNOR:
VM1 ACQUISITION CORP., a Delaware
corporation
Dated: August 2, 1999 By: /s/ Joel Harris
------------------------------
Joel Harris
President and CEO
ASSIGNEE:
VM4 ACQUISITION CORP., a Delaware
corporation
Dated: August 2, 1999 By: /s/ Joel Harris
------------------------------
Joel Harris
President and CEO
3
<PAGE>
CONSENT OF MSI TO ASSIGNMENT AND ASSUMPTION AGREEMENT
The undersigned hereby consents to the foregoing Assignment and
Assumption Agreement, and the assignment transaction contemplated therein,
and confirms that as of the date of this Consent, the Merger Agreement is in
full force and effect and there are no defaults by any party under the Merger
Agreement, and to the knowledge of the undersigned no event has occurred which
with notice, or passage of time shall be a default under the Merger
Agreement. By this Consent, MSI does not release VMC or Assignor from any
liability or obligation under the Merger Agreement.
MARINER SYSTEMS, INC., a Colorado
corporation
Dated: 6 August, 1999 By: /s/ James L. Seiler
------------------------------
James L. Seiler
President
<PAGE>
Exhibit 10.1
STANDARD INDUSTRIAL LEASE -- NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. PARTIES. This Lease, dated, for reference purposes only, November 1, 1996,
is made by and between Dr. Jun Hasegawa (herein called "Lessor") and Atek
Computer Distributors, Inc., a California Corporation (herein called "Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein,
that certain real property situated in the County of Sacramento
State of California, commonly known as 3017 Kilgore Road, Suite 180,
Rancho Cordova and described as Approximately 8,783 square feet as measured
from the drip line of the building.
Said real property including the land and all improvements therein, is herein
called "the Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for 62 months commencing on
November 1, 1996 and ending on December 31, 2001 unless sooner terminated
pursuant to any provision thereof.
3.2 DELAY IN POSSESSION. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee
hereunder or extend the term hereof, but in such case, Lessee shall not be
obligated to pay rent until possession of the Premises is tendered to Lessee;
provided, however, that if Lessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date, Lessee may, at
Lessee's option, by notice in writing to Lessor within ten (10) days
thereafter, cancel this Lease, in which event the parties shall be discharged
from all obligations hereunder; provided further, however, that if such
written notice of Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease hereunder shall terminate and be
of no further force or effect.
3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions hereof,
such occupancy shall not advance the termination date, and Lessee shall pay
rent for such period at the initial monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly
payments of $5,881.00, in advance, on the ______ day of each month of the
term hereof. Lessee shall pay Lessor upon the execution hereof $ -0- as rent
for See amendment #48 for rent schedule
Rent for any period during the term hereof which is for less than one month
shall be a pro rata portion of the monthly installment. Rent shall be payable
in lawful money of the United States to Lessor at the address stated herein
or to such other persons or at such other places as Lessor may designate in
writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$ -0- as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may
use, apply or retain all or any portion of said deposit for the payment of
any rent or other charge in default or for the payment of any other sum to
which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor
in an amount sufficient to restore said deposit to the full amount
hereinabove stated and Lessee's failure to do so shall be a material breach of
this Lease. If the monthly rent shall, from time to time, increase during the
term of this Lease, Lessee shall thereupon deposit with Lessor additional
security deposit so that the amount of security deposit held by Lessor shall
at all times bear the same proportion to current rent as the original
security deposit bears to the original monthly rent set forth in paragraph 4
hereof. Lessor shall not be required to keep said deposit separate from its
general accounts. If Lessee performs all of Lessee's obligations hereunder,
said deposit, or so much thereof as has not theretofore been applied by
Lessor, shall be returned, without payment of interest or other increment for
its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of
Lessee's interest hereunder) at the expiration of the term hereof, and after
Lessee has vacated the Premises. No trust relationship is created herein
between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for Computer Sales
and Servicing or any other use which is reasonably comparable and for no
other purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its state existing
on the date that the Lease term commences, but without regard to the use for
which Lessee will use the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or
ordinance in effect on such Lease term commencement date. In the event it is
determined that this warranty has been violated, then it shall be the
obligation of the Lessor, after written notice from Lessee, to promptly, at
Lessor's sole cost and expense, rectify any such violation. In the event
Lessee does not give to Lessor written notice of the violation of this
warranty within six months from the date that the Lease term commences, the
correction of same shall be the obligation of the Lessee at Lessee's sole
cost. The warranty contained in this paragraph 6.2(a) shall be of no force or
effect if, prior to the date of this Lease, Lessee was the owner or occupant
of the Premises, and, in such event, Lessee shall correct any such violation
at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's
expense, comply promptly with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements
in effect during the term or any part of the term hereof, regulating the use
by Lessee of the Premises. Lessee shall not use nor permit the use of the
Premises in any manner that will tend to create waste or a nuisance or, if
there shall be more than one tenant in the building containing the Premises,
shall tend to disturb such other tenants.
6.3 CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on Lease commencement date (unless Lessee is already in possession) and
Lessor further warrants to Lessee that the plumbing, lighting, air
conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation. Lessee's failure to give such written
notice to Lessor within thirty (30) days after the Lease commencement date
shall cause the conclusive presumption that Lessor has complied with all of
Lessor's obligations hereunder. The warranty contained in this paragraph
6.3.(a) shall be of no force or effect if prior to the date of this Lease,
Lessee was the owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Lease commencement date or
the date that Lessee takes possession of the Premises, whichever is earlier,
subject to all applicable zoning, municipal, county and state laws, ordinances
and regulations governing and regulating the use of the Premises, and any
covenants or restrictions of record, and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto.
Lessee acknowledges that neither Lessor nor Lessor's agent has made any
representation or warranty as to the present or future suitability of the
Premises for the conduct of Lessee's business.
7. MAINTENANCE, REPAIRS AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order, condition and
repair the Premises and every part thereof, structural and non structural,
(whether or not such portion of the Premises requiring repair, or the means
of repairing the same are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises)
including, without limiting the generality of the foregoing, all plumbing,
heating, air conditioning, (Lessee shall procure and maintain, at Lessee's
expense, an air conditioning system maintenance contract) ventilating,
electrical, lighting facilities and equipment within the Premises, fixtures,
walls (interior and exterior), foundations, ceilings, roofs (interior and
exterior), floors, windows, doors, plate glass and skylights located within
the Premises, and all landscaping, driveways, parking lots, fences and signs
located on the Premises and sidewalks and parkways adjacent to the Premises.
7.2 SURRENDER. On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as when received, ordinary wear and tear expected, clean and free
of debris. Lessee shall repair any damage to the Premises occasioned
<PAGE>
by the installation or removal of Lessee's trade fixtures, furnishings and
equipment. Notwithstanding anything to the contrary otherwise stated in this
Lease, Lessee shall leave the air lines, power panels, electrical
distribution systems, lighting fixtures, space heaters, air conditioning,
plumbing and fencing on the premises in good operating condition.
7.3 LESSOR'S RIGHTS. If Lessee fails to perform Lessee's obligations
under this Paragraph 7, or under any other paragraph of this Lease, Lessor
may at its option (but shall not be required to) enter upon the Premises
after ten (10) days' prior written notice to Lessee (except in the case of an
emergency, in which case no notice shall be required), perform such
obligations on Lessee's behalf and put the same in good order, condition and
repair, and the cost thereof together with interest thereon at the maximum
rate then allowable by law shall become due and payable as additional rental
to Lessor together with Lessee's next rental installment.
7.4 LESSOR'S OBLIGATIONS. Except for the obligations of Lessor under
Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that
Lessor have no obligation, in any manner whatsoever, to repair and maintain
the Premises nor the building located thereon nor the equipment therein,
whether structural or non structural, all of which obligations are intended
to be that of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives
the benefit of any statute now or hereinafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate
this Lease because of Lessor's failure to keep the premises in good order,
condition and repair.
7.5 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, or Utility Installations in, on or
about the Premises, except for nonstructural alterations not exceeding $2,500
in cumulative costs during the term of this Lease. In any event, whether or
not in excess of $2,500 in cumulative cost, Lessee shall make no change or
alteration to the exterior of the Premises nor the exterior of the
building(s) on the Premises without Lessor's prior written consent. As used
in this Paragraph 7.5 the term "Utility Installation" shall mean carpeting,
window coverings, air lines, power panels, electrical distribution systems,
lighting fixtures, space heaters, air conditioning, plumbing, and fencing.
Lessor may require that Lessee remove any or all of said alterations,
improvements, additions or Utility Installations at the expiration of the
term, and restore the Premises to their prior condition. Lessor may require
Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and
completion bond in an amount equal-to and one-half times the estimated cost
of such improvements, to insure Lessor against any liability for mechanic's
and materialmen's liens and to insure completion of the work. Should Lessee
make any alterations, improvements, additions or Utility Installations
without the prior approval of Lessor, Lessor may require that Lessee remove
any or all of the same.
(b) Any alterations, improvements, additions or Utility Installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall
be deemed conditioned upon Lessee acquiring a permit to do so from
appropriate governmental agencies, the furnishing of a copy thereof to Lessor
prior to the commencement of the work and the compliance by Lessee of all
conditions of said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises of any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of
any work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall,
in good faith, contest the validity of any such lien, claim or demand, then
Lessee shall, at its sole expense defend itself and Lessor against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises,
upon the condition that if Lessor shall require, Lessee shall furnish to
Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs
in participating in such action if Lessor shall decide it is to its best
interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
7.5(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of
Lessee), which may be made on the Premises, shall become the property of
Lessor and remain upon and be surrendered with the Premises at the expiration
of the term. Notwithstanding the provisions of this Paragraph 7.5(d),
Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the
Premises, shall remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 7.2.
8. INSURANCE INDEMNITY.
8.1 INSURING PARTY. As used in this Paragraph 8, the term "insuring
party" shall mean the party who has the obligation to obtain the Property
Insurance required hereunder. The insuring party shall be designated in
Paragraph 46 hereof. In the event Lessor is the insuring party, Lessor shall
also maintain the liability insurance described in paragraph 8.2 hereof, in
addition to, and not in lieu of, the insurance required to be maintained by
Lessee under said paragraph 8.2, but Lessor shall not be required to name
Lessee as an additional insured on such policy. Whether the insuring party is
the Lessor or the Lessee, Lessee shall, as additional rent for the Premises,
pay the cost of all insurance required hereunder, except for that portion of
the cost attributable to Lessor's liability insurance coverage in excess of
$1,000,000 per occurrence. If Lessor is the insuring party Lessee shall,
within ten (10) days following demand by Lessor, reimburse Lessor for the
cost of the insurance so obtained.
8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and
keep in force during the term of this Lease a policy of Combined Single
Limit, Bodily Injury and Property Damage insurance insuring Lessor and Lessee
against any liability arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such
insurance shall be a combined single limit policy in an amount not less than
$500,000 per occurrence. The policy shall insure performance by Lessee of the
indemnity provisions of this Paragraph 8. The limits of said insurance shall
not, however, limit the liability of Lessee hereunder.
8.3 PROPERTY INSURANCE.
(a) The insuring party shall obtain and keep in force during the
term of this Lease a policy or policies of insurance covering loss or damage
to the Premises, in the amount of the full replacement value thereof, as the
same may exist from time to time, which replacement value is now $2,354.00,
but in no event less than the total amount required by lenders having liens
on the Premises, against all perils included within the classification of
fire, extended coverage, vandalism, malicious mischief, flood (in the event
same is required by a lender having a lien on the Premises), and special
extended perils ("all risk" as such term is used in the insurance industry).
Said insurance shall provide for payment of loss thereunder to Lessor or to
the holders of mortgages or deeds of trust on the Premises. The insuring
party shall, in addition, obtain and keep in force during the term of this
Lease a policy of rental value insurance covering a period of one year, with
loss payable to Lessor, which insurance shall also cover all real estate
taxes and insurance costs for said period. A stipulated value or agreed
amount endorsement deleting the coinsurance provision of the policy shall be
procured with said insurance as well as an automatic increase in insurance
endorsement causing the increase in annual property insurance coverage by 2%
per quarter. If the insuring party shall fail to procure and maintain said
insurance the other party may, but shall not be required to, procure and
maintain the same, but at the expense of Lessee. If such insurance coverage
has a deductible cause, the deductible amount shall not exceed $1,000 per
occurrence, and Lessee shall be liable for such deductible amount.
(b) If the Premises are part of a larger building, or if the
Premises are part of a group of buildings owned by Lessor which are adjacent
to the Premises, then Lessee shall pay for any increase in the property
insurance of such other building or buildings if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(c) If the Lessor is the insuring party the Lessor will not insure
Lessee's fixtures, equipment or tenant improvements unless the tenant
improvements have become a part of the Premises under paragraph 7, hereof.
But if Lessee is the insuring party the Lessee shall insure its fixtures,
equipment and tenant improvements.
8.4 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or
such other rating as may be required by a lender having a lien on the
Premises, as set forth in the most current issue of "Best's Insurance Guide".
The insuring party shall deliver to the other party copies of policies of
such insurance or certificates evidencing the existence and amounts of such
insurance with loss payable clauses as required by this paragraph 8. No such
policy shall be cancellable or subject to reduction of coverage or other
modification except after thirty (30) days' prior written notice to Lessor.
If Lessee is the insuring party Lessee shall, at least thirty (30) days prior
to the expiration of such policies, furnish Lessor with renewals or "binders"
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee upon demand. Lessee shall not
do or permit to be done anything which shall invalidate the insurance
policies referred to in Paragraph 8.3. If Lessee does or permits to be done
anything which shall increase the cost of the insurance policies referred to
in Paragraph 8.3, then Lessee shall forthwith upon Lessor's demand reimburse
Lessor for any additional premiums attributable to any act or omission or
operation of Lessee causing such increase in the cost of insurance. If Lessor
is the insuring party, and if the insurance policies maintained hereunder
cover other improvements in addition to the Premises. Lessor shall deliver to
Lessee a written statement setting forth the amount of any such insurance
cost increase and showing in reasonable detail the manner in which it has
been computed.
8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 8.3, which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance
carrier or carriers that the foregoing mutual waiver of subrogation is
contained in this Lease.
8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's, use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any negligence of the Lessee, or any of Lessee's agents,
contractors, or employees, and from and against all costs, attorney's fees,
expenses and liabilities incurred in the defense of any such claim or any
action or proceeding brought thereon; and in case any action or proceeding be
brought against Lessor by reason of any such claim, Lessee upon notice from
Lessor shall defend the same at Lessee's expense by counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons, in, upon or
about the Premises arising from any cause and Lessee hereby waives all
claims in respect thereof against Lessor.
8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or
about the Premises, nor shall Lessor be liable for injury to the person of
Lessee, Lessee's employees, agents or contractors, whether such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places
and regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant, if any, of
the building in which the Premises are located.
-2-
<PAGE>
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less
than 50% of the then replacement cost of the Premises. "Premises Building
Partial Damage" shall herein mean damage or destruction to the building of
which the Premises are a part to the extent that the cost of repair is less
than 50% of the then replacement cost of such building as a whole.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or
more of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 50% or more
of the then replacement cost of such building as a whole.
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the Insurance described in
paragraph 8.
9.2 PARTIAL DAMAGE--INSURED LOSS. Subject to the provisions of
paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is an Insured Loss and which falls into the
classification of Premises Partial Damage or Premises Building Partial
Damage, then Lessor shall, at Lessor's expense, repair such damage, but not
Lessee's fixtures, equipment or tenant improvements unless the same have
become a part of the Premises pursuant to Paragraph 7.5 hereof as soon as
reasonably possible and this Lease shall continue in full force and effect.
Notwithstanding the above, if the Lessee is the insuring party, and if the
insurance proceeds received by Lessor are not sufficient to effect such
repair, Lessor shall give notice to Lessee of the amount required in addition
to the insurance proceeds to effect such repair. Lessee shall contribute the
required amount to Lessor within ten days after Lessee has received notice
from Lessor of the shortage in the insurance. When Lessee shall contribute
such amount to Lessor, Lessor shall make such repairs as soon as reasonably
possible and this Lease shall continue in full force and effect. Lessee shall
in no event have any right to reimbursement for any such amounts so
contributed.
9.3. PARTIAL DAMAGE - UNINSURED LOSS. Subject to the provisions of
Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is not an Insured Loss and which falls within the
classification of Premises Partial Damage or Premises Building Partial
Damage, unless caused by a negligent or willful act of Lessee (in which event
Lessee shall make the repairs at Lessee's expense), Lessor may at Lessor's
option either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) given written notice to Lessee within thirty (30) days after
the date of the occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, as of the date of the occurrence of such damage. In the
event Lessor elects to give such notice of Lessor's intention to cancel and
terminate this Lease, Lessee shall have the right within ten (10) days after
the receipt of such notice to give written notice to lessor of Lessee's
intention to repair such damage at Lessee's expense, without reimbursement
from Lessor, in which event this Lease shall continue in full force and
effect, and Lessee shall proceed to make such repairs as soon as reasonably
possible. If Lessee does not give such notice within such 10-day period this
Lease shall be cancelled and terminated as of the date of the occurrence of
such damage.
9.4 TOTAL DESTRUCTION. If at any time during the term of this Lease
there is damage, whether or not an Insured Loss, (including destruction
required by any authorized public authority), which falls into the
classification of Premises Total Destruction or Premises Building Total
Destruction, this Lease shall automatically terminate as of the date of such
total destruction.
9.5 DAMAGE NEAR END OF TERM.
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an Insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option
cancel and terminate this Lease as of the date of occurrence of such damage
by giving written notice to Lessee of Lessor's election to do so within 30
days after the date of occurrence of such damage.
(b) Notwithstanding paragraph 9.5(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option
may be exercised has not yet expired, Lessee shall exercise such option, if
it is to be exercised at all, no later than 20 days after the occurrence of
an Insured Loss falling within the classification of Premises Partial Damage
during the last six months of the term of this Lease. If Lessee duly
exercises such option during said 20 day period, Lessor shall, at Lessor's
expense, repair such damage as soon as reasonably possible and this Lease
shall continue in full force and effect. If Lessee fails to exercise such
option during said 20 day period, then Lessor may at Lessor's option
terminate and cancel this Lease as of the expiration of said 20 day period by
giving written notice to Lessee of Lessor's election to do so within 10 days
after the expiration of said 20 day period, notwithstanding any term or
provision in the grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in paragraphs 9.2 or 9.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions
of this Paragraph 9, the rent payable hereunder for the period during which
such damage, repair or restoration continues shall be abated in proportion to
the degree to which Lessee's use of the Premises is impaired. Except for
abatement of rent, if any, Lessee shall have no claim against Lessor for any
damage suffered by reason of any such damage, destruction, repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence such repair
or restoration within 90 days after such obligations shall accrue, Lessee may
at Lessee's option cancel and terminate this Lease by giving Lessor written
notice of Lessee's election to do so at any time prior to the commencement of
such repair or restoration. In such event this Lease shall terminate as of
the date of such notice.
9.7 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.8 WAIVER. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree
that such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessee shall pay the real property tax, as
defined in paragraph 10.2, applicable to the Premises during the term of this
Lease. All such payments shall be made at least ten (10) days prior to the
delinquency date of such payment. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes paid
by Lessee shall cover any period of time prior to or after the expiration of
the term hereof, Lessee's share of such taxes shall be equitably prorated to
cover only the period of time within the tax fiscal year during which this
Lease shall be in effect, and Lessor shall reimburse Lessee to the extent
required. If Lessee shall fail to pay any such taxes, Lessor shall have the
right to pay the same, in which case Lessee shall repay such amount to Lessor
with Lessee's next rent installment together with interest at the maximum
rate then allowable by law.
10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Premises by any authority
having the direct or indirect power to tax, including any city, state or
federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, as against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, as against Lessor's right to rent or other income
therefrom, and as against Lessor's business of leasing the Premises. The term
"real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax," or (ii) the nature of which was hereinbefore included within
the definition of "real property tax," or (iii) which is imposed for a
service or right not charged prior to June 1, 1978, or, if previously
charged, has been increased since June 1, 1978, or (iv) which is imposed as a
result of a transfer, either partial or total, of Lessor's interest in the
Premises or which is added to a tax or charge hereinbefore included within the
definition of real property tax by reason of such transfer, or (v) which is
imposed by reason of this transaction, any modifications or changes hereto,
or any transfers hereof.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property
taxes for all of the land and improvements included within the tax parcel
assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information
as may be reasonably available. Lessor's reasonable determination thereof, in
good faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible,
Lessee shall cause said trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of Lessor.
(b) If any of Lessee's said personal property shall be assessed
with Lessor's real property, Lessee shall pay Lessor the taxes attributable
to Lessee within 10 days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor
of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the
Premises, without Lessor's prior written consent, which Lessor shall not
unreasonably withhold. Lessor shall respond to Lessee's request for consent
hereunder in a timely manner and any attempted assignment, transfer,
mortgage, encumbrance or subletting without such consent shall be void, and
shall constitute a breach of this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion
thereof, without Lessor's consent, to any corporation which controls, is
controlled by or is under common control with Lessee, or to any corporation
resulting from the merger or consolidation with Lessee, or to any person or
entity which acquires all the assets of Lessee as a going concern of the
business that is being conducted on the Premises, provided that said assignee
assumes, in full, the obligations of Lessee under this Lease. Any such
assignment shall not, in any way, affect or limit the liability of Lessee
under the terms of this Lease even if after such assignment or subletting the
terms of this Lease are materially changed or altered without the consent of
Lessee, the consent of whom shall not be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no subletting
or assignment shall release Lessee of Lessee's obligation or alter the
primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of
any provision hereof. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by any assignee of Lessee or any successor of Lessee, in the
performance of any of the terms hereof, Lessor may proceed directly against
Lessee without the necessity of exhausting remedies against said assignee.
Lessor may consent to subsequent assignments or subletting of this Lease or
amendments or modifications to this Lease with assignees
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of Lessee, without notifying Lessee, or any successor of Lessee, and without
obtaining its or their consent thereto and such action shall not relieve
Lessee of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable attorneys fees incurred in
connection therewith, such attorneys fees not to exceed $350.00 for each such
request.
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee, other than described in paragraph (b) above, where such failure
shall continue for a period of 30 days after written notice thereof from
Lessor to Lessee; provided, however, that if the nature of Lessee's default
is such that more than 30 days are reasonably required for its cure, then
Lessee shall not be deemed to be in default if Lessee commenced such cure
within said 30-day period and thereafter diligently prosecutes such cure to
completion.
(d)(i) The making by Lessee of any general arrangement or assignment
for the benefit of creditors; (ii) Lessee becomes a "debtor" as defined in 11
U.S.C. Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within 60 days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within 30
days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within 30 days.
Provided, however, in the event that any provision of this paragraph 13.1(d)
is contrary to any applicable law, such provision shall be of no force or
effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by
Lessor by reason of Lessee's default including, but not limited to, the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's
fees, and any real estate commission actually paid; the worth at the time of
award by the court having jurisdiction thereof of the amount by which the
unpaid rent for the balance of the term after the time of such award exceeds
the amount of such rental loss for the same period that Lessee proves could
be reasonably avoided; that portion of the leasing commission paid by Lessor
pursuant to Paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent
as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations of
Lessee under the terms of this Lease shall bear interest from the date due at
the maximum rate then allowable by law.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but
in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to
Lessee in writing, specifying wherein Lessor has failed to perform such
obligation; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days are required for performance then Lessor
shall not be in default if Lessor commences performance within such 30-day
period and thereafter diligently prosecutes the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such overdue amount,
nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of rent,
then rent shall automatically become due and payable quarterly in advance,
rather than monthly, notwithstanding paragraph 4 or any other provision of
this Lease to the contrary.
13.5 IMPOUNDS. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay
to Lessor, if Lessor shall so request, in addition to any other payments
required under this Lease, a monthly advance installment, payable at the same
time as the monthly rent, as estimated by Lessor, for real property tax and
insurance expenses on the Premises which are payable by Lessee under the
terms of this Lease. Such fund shall be established to insure payment when
due, before delinquency, of any or all such real property taxes and insurance
premiums. If the amounts paid to Lessor by Lessee under the provisions of
this paragraph are insufficient to discharge the obligations of Lessee to pay
such real property taxes and insurance premiums as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums
necessary to pay such obligations. All moneys paid to Lessor under this
paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a default in the obligations of Lessee to perform
under this Lease, then any balance remaining from funds paid to Lessor under
the provisions of this paragraph may, at the option of Lessor, be applied to
the payment of any monetary default of Lessee in lieu of being applied to the
payment of real property tax and insurance premiums.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than 10% of the
floor area of the building on the Premises, or more than 25% of the land area
of the Premises which is not occupied by any building, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing only
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the rent shall be reduced in the proportion that the floor area
of the building taken bears to the total floor area of the building situated
on the Premises. No reduction of rent shall occur if the only area taken is
that which does not have a building located thereon. Any award for the taking
of all or any part of the Premises under the power of eminent domain or any
payment made under threat of the exercise of such power shall be the property
of Lessor, whether such award shall be made as compensation for diminution in
value of the leasehold or for the taking of the fee, or as severance damages;
provided, however, that Lessee shall be entitled to any award for loss of or
damage to Lessee's trade fixtures and removable personal property. In the
event that this Lease is not terminated by reason of such condemnation,
Lessor shall to the extent of severance damages received by Lessor in
connection with such condemnation, repair any damage to the Premises caused
by such condemnation except to the extent that Lessee has been reimbursed
therefor by the condemning authority. Lessee shall pay any amount in excess
of such severance damages required to complete such repair.
15. BROKER'S FEE.
(a) Upon execution of this Lease by both parties, Lessor shall pay
to Triwest Asset Management, Inc. 4% of lease amount. Licensed real estate
broker(s), a fee as set forth in a separate agreement between Lessor and said
broker(s), or in the event there is no separate agreement between Lessor and
said broker(s), the sum of $______________, for brokerage services rendered
by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under
this Lease, or any subsequently granted option which is substantially similar
to an Option granted to Lessee under this Lease, or if Lessee acquires any
rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or if Lessee remains in possession of the
Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or if said broker(s) are the procuring cause of any
other lease or sale entered into between the parties pertaining to the
Premises and/or any adjacent property in which Lessor has an interest, then
as to any of said transactions, Lessor shall pay said broker(s) a fee in
accordance with the schedule of said broker(s) in effect at the time of
execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity
having an ownership interest in said real property or any part thereof, when
such fee is due hereunder. Any transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed
to have assumed Lessor's obligation under this Paragraph 15. Said broker
shall be a third party beneficiary of the provisions of this Paragraph 15.
16. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification
and certifying that this Lease, as so modified, is in full force and effect)
and the date to which the rent and other charges are paid in advance, if any,
and (ii) acknowledging that there are not, to Lessee's knowledge, any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if any
are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
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conclusive upon Lessee (i) that this Lease is in full force and effect,
without modification except as may be represented by Lessor, (ii) that there
are no uncured defaults in Lessor's performance, and (iii) that not more than
one month's rent has been paid in advance or such failure may be considered
by Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three years' financial statements of Lessee. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and
shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only
the owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and except as expressly provided
in Paragraph 15, in the event of any transfer of such title or interest,
Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed,
provided that any funds in the hands of Lessor or the then grantor at the
time of such transfer, in which Lessee has an interest, shall be delivered to
the grantee. The obligations contained in this Lease to be performed by
Lessor shall, subject as aforesaid, be binding on Lessor's successors and
assigns, only during their respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law from the date due. Payment of such interest shall
not excuse or cure any default by Lessee under this Lease, provided, however,
that interest shall not be payable on late charges incurred by Lessee nor on
any amounts upon which late charges are paid by Lessee.
20. TIME OF ESSENCE. Time is of the essence.
21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification. Except as otherwise stated in
this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in Paragraph 15 hereof nor any cooperating broker on this transaction
nor the Lessor or any employees or agents of any of said persons has made any
oral or written warranties or representations to Lessee relative to the
condition or use by Lessee of said Premises and Lessee acknowledges that
Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance
thereof with all applicable laws and regulations in effect during the term of
this Lease except as otherwise specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified mail, and
if given personally or by mail, shall be deemed sufficiently given if
addressed to Lessee or to Lessor at the address noted below the signature of
the respective parties, as the case may be. Either party may by notice to the
other specify a different address for notice purposes except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice purposes. A copy of all notices required or
permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision thereof or of any subsequent breach by Lessee
of the same or any other provision. Lessor's consent to, or approval of, any
act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to or approval of any subsequent act by Lessee. The acceptance of
rent hereunder by Lessor shall not be a waiver of any preceding breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such
preceding breach at the time of acceptance of such rent.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of
this Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions
of this Lease pertaining to the obligations of Lessee, but all options and
rights of first refusal, if any, granted under the terms of this Lease shall
be deemed terminated and be of no further effect during said month to month
tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions
of Paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State wherein the Premises are located.
30. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation or security
now or hereafter placed upon the real property of which the Premises are a
part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms.
If any mortgagee, trustee or ground lessor shall elect to have this Lease
prior to the lien of its mortgage, deed of trust or ground lease, and shall
give written notice thereof to Lessee, this Lease shall be deemed prior to
such mortgage, deed of trust, or ground lease, whether this Lease is dated
prior or subsequent to the date of said mortgage, deed of trust or ground
lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate
an attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure
to execute such documents within 10 days after written demand shall
constitute a material default by Lessee hereunder, or, at Lessor's option,
Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the
prevailing party in any such action, on trial or appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to
enter the Premises at reasonable times for the purpose of inspecting the same,
showing the same to prospective purchasers, lenders, or lessees, and making
such alterations, repairs, improvements or additions to the Premises or to
the building of which they are a part as Lessor may deem necessary or
desirable. Lessor may at any time place on or about the Premises any ordinary
"For Sale" signs and Lessor may at any time during the last 120 days of the
term hereof place on or about the Premises any ordinary "For Lease" signs,
all without rebate of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises without
Lessor's prior written consent except that Lessee shall have the right,
without the prior permission of Lessor to place ordinary and usual for rent
or sublet signs thereof.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent
shall not be unreasonably withheld.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
39. OPTIONS.
39.1 DEFINITION. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease
or to renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (2) the option or right of first refusal to lease
the Premises or the right of first offer to lease the Premises or the right
of first refusal to lease other property of Lessor or the right of first
offer to lease other property of Lessor; (3) the right or option to purchase
the Premises, or the right of first refusal to purchase the Premises, or the
right of first offer to purchase the Premises or the right or option to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor or the right of first offer to purchase other
property of Lessor.
-5-
<PAGE>
39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease are
personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate
as defined in paragraph 12.2 of this Lease. The Options herein granted to
lessee are not assignable separate and apart from this lease.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the
default alleged in said notice of default is cured, or (ii) during the period
to time commencing on the day after a monetary obligation to Lessor is due
from Lessee and unpaid (without any necessity for notice thereof to Lessee)
continuing until the obligation is paid, or (iii) at any time after an event
of default described in paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any
necessity of Lessor to give notice of such default to Lessee), or (iv) in
the event that Lessor has given to Lessee three or more notices of default
under paragraph 13.1(b), where a late charge has become payable under
paragraph 13.4 for each of such defaults, or paragraph 13.1(c), whether or
not the defaults are cured, during the 12 month period prior to the time that
Lessee intends to exercise the subject Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of 30 days after such obligation becomes due (without
any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee
fails to commence to cure a default specified in paragraph 13.1(c) within 30
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessee commits a default described in paragraph 13.1(a), 13.1(d) or
13.1(e) (without any necessity of Lessor to give notice of such default to
Lessee), or (iv) Lessor gives to Lessee three or more notices of default
under paragraph 13.1(b), where a late charge becomes payable under paragraph
13.4 for each such default, or paragraph 13.1(c), whether or not the defaults
are cured.
40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may
make from time to time for the management, safety, care, and cleanliness of
the building and grounds, the parking of vehicles and the preservation of
good order therein as well as for the convenience of other occupants and
tenants of the building. The violations of any such rules and regulations
shall be deemed a material breach of this Lease by Lessee.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
same. Lessee assumes all responsibility for the protection of Lessee, its
agents and invitees from acts of third parties.
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure
to do so shall constitute a material breach of this Lease.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment, and there shall survive
the right on the part of said party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said party to pay such sum or any part thereof, said party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution
of this Lease, deliver to Lessor evidence of such authority satisfactory to
Lessor.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. INSURING PARTY. The insuring party under this lease shall be the Lessor.
47. ADDENDUM. Attached hereto is an addendum or addenda containing paragraphs
48 through 51 which constitutes a part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY
THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT,
OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE ON THE DATES
SPECIFIED IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES.
Executed at 3017 Kilgore Road
-------------------------------- -----------------------------------
on By /s/ Jun Hasegawa
----------------------------------------- ---------------------------------
Dr. Jun Hasegawa
Address By
------------------------------------ --------------------------------
Rancho Cordova, Ca. 95670 "LESSOR" (Corporate seal)
- -------------------------------------------
Executed at Atek Computer Distributors, Inc.
-------------------------------- --------------------------------
on By /s/ Illegible
----------------------------------------- -------------------------------
Address By
------------------------------------ -------------------------------
"LESSEE" (Corporate seal)
- -------------------------------------------
<PAGE>
48. RENT SCHEDULE (ref. par. 4): LESSEE shall pay to LESSOR as rent for
premise, monthly payments as follows:
Nov 1, 1996-Dec 31, 1996 1-2 Free
Jan 1, 1997-Dec 31, 1997 $5,881.00 Plus CAM
Jan 1, 1998-Dec 31, 1998 6,057.00 Plus CAM
Jan 1, 1999-Dec 31, 1999 6,239.00 Plus CAM
Jan 1, 2000-Dec 31, 2000 6,426.00 Plus CAM
Jan 1, 2001-Dec 31, 2001 6,619.00 Plus CAM
49. Option to lease space 150.
Lessee shall have an option to lease 3017 Kilgore Road, Suite 150 which
is approximately 1815 square feet. The option must be exercised in
writing on or before April 30, 1997. If lessee exercises its option for
3017 Kilgore Road, Suite 150, the lease shall run 60 months, starting
August 1, 1997. The lease payments for Suites 150 and 180 shall be as
follows:
August 1, 1997-July 31, 1998 $7,079.00 Plus CAM
August 1, 1998-July 31, 1999 7,291.00 Plus CAM
August 1, 1999-July 31, 2000 7,510.00 Plus CAM
August 1, 2000-July 31, 2001 7,735.00 Plus CAM
August 1, 2001-July 31, 2002 7,967.00 Plus CAM
50. COMMON AREA MAINTENANCE:
In addition to the base rent to be paid by LESSEE under Paragraph 4,
LESSEE agrees to pay to LESSOR a prorata share of all common area
maintenance and operating expenses incurred by LESSOR. Said common area
to include all area commonly known as 3017 Kilgore Road, Rancho Cordova,
California. Common area maintenance and operating expenses shall include
all costs and expenses of maintaining and operating the common area in
such a manner as LESSOR may deem appropriate for the common areas
including, without limitation all utilities, water, electricity,
landscaping, exterior painting, cleaning, trash collection, and removal,
security protection and property management; and a reasonable allowance
to LESSOR for LESSOR'S supervision of said common areas at a cost not to
exceed 10% of the total of the aforesaid expenses.
51. PRORATA SHARE: LESSEE'S prorata share of the cost of the common area
maintenance and the prorata share of any increase in property taxes of
insurance premiums shall be 32.2%, which share is computed on the basis
of the ratio between the gross rentable area (approximately 27,239 sq ft)
of the premises and the total gross rentable area (approximately 8,784 sq
ft) constructed at Suite 180.
If lessee exercises its option to lease Suite 150 per paragraph 49 of
this lease, lessee's prorata share of the common area will increase to
39%.
<PAGE>
ACKNOWLEDGEMENT OF ASSIGNMENT OF LEASE
This Acknowledgement of Assignment of Lease is made on August 1, 1998,
between DR. JUN HASEGAWA AND NORIKO HASEGAWA, TRUSTEES FOR THE HASEGAWA
FAMILY TRUST ("Lessor"), and VANTAGEMED, INC., FORMERLY ATEK COMPUTER
DISTRIBUTORS, INC., ("Lessee"), who agree as follows:
RECITALS:
This Agreement is made with reference to the following facts and objectives:
1. Lessor and Atek Computer Distributors, Inc., entered into a written lease
(the "Lease"), dated November 1, 1996, in which Lessor leased to, and
ATEK Computer leased from Lessor, premises located in the City of Rancho
Cordova, California, consisting of approximately 8,783 sq. feet of
rentable space in the building located at 3017 Kilgore Road, Suite 180.
2. VantageMed, Inc., subsequently acquired all assets of ATEK Computer,
including the Lease.
Now, THEREFORE:
Upon receipt from Lessee of satisfactory documentation evidencing the
transfer of interest in the Lease from Atek Computer Distributors, Inc., to
VantageMed, Inc., Landlord agrees to accept VantageMed, Inc., as the assignee
and Lessee under the Lease. VantageMed, Inc., agrees to accept and perform all
duties and requirements of Lessee under the Lease.
LESSEE:
The Hasegawa Family Trust
By: /s/Jun Hasegawa
-------------------------
Jun Hasegawa, Trustee
By: /s/Noriko Hasegawa
-------------------------
Noriko Hasegawa, Trustee
LESSEE:
VantageMed, Inc.
By: /s/Rollie Morshead
-------------------------
Name: Rollie Morshead
Title: General Manager
<PAGE>
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("Amendment") is made on ______________,
1998, between DR. JUN HASEGAWA AND NORIKO HASEGAWA, TRUSTEES FOR THE HASEGAWA
FAMILY TRUST ("Lessor"), and VANTAGEMED, INC., FORMERLY ATEK COMPUTER
DISTRIBUTORS, INC. ("Lessee"), who agree as follows:
RECITALS
This Amendment is made with reference to the following facts and objectives:
A. Lessor and Atek Computer Distributors, Inc., entered into a written
lease (the "Lease"), dated November 1, 1996, in which Lessor leased to
Lessee, and Lessee leased from Lessor, premises located in the City of
Rancho Cordova, California, consisting of approximately 8,783 sq. feet
of rentable space in the building located at 3017 Kilgore Road, Suite
180.
B. VantageMed, Inc., subsequently acquired all assets of Atek Computer
Distributors, Inc., including the Lease. Concurrent with this Amendment,
Lessor and Lessee are executing an Acknowledgement of Assignment of
Lease recognizing VantageMed, Inc., hereafter as Lessee.
C. Lessee is currently not in default under the lease.
D. The parties desire to amend the Lease as set forth in this Amendment
Now, THEREFORE, the aforementioned Lease shall be amended as follows:
1. TEMPORARY SPACE- SUITE 150 OF 3039 KILGORE ROAD:
a) Lessee desires to rent the rear one half of Suite 150 of 3039 Kilgore
Road ("Temporary Space"), which Suite consists of approximately
-1-
<PAGE>
1889 total square feet, for the purpose of installing a temporary training
facility. Lessee acknowledges that such a use would not allow the front
half of Suite 150 to be separately leased to another Lessee. Lessor,
therefore agrees to rent Suite 150 to Lessee on a month-to-month basis
for the total sum of $500.00, effective August 1, 1998. Lessor shall not
be responsible for any improvements to Suite 150 prior to Lessee's
occupancy except that Lessor agrees to restore any existing, visible
water damage to the improvements in the area to be used by Lessee.
Lessee acknowledges that the Temporary Space will be shown to other
prospective parties and offered for lease at current market rents.
Either party may terminate this month to month tenancy by giving the
other 30 days prior written notice. All other Lease provisions shall
apply to Suite 150, including but not limited to the requirement that
Lessee maintain insurance and the HVAC equipment.
b) Lessee shall have a first right of refusal to convert its month to month
tenancy into a term lease on the Temporary Space above. Upon written
notification that Lessor has received a bonavide written offer to lease
Suite #150 from a qualified third party, Lessee shall have 72 hours to
notify Lessor in writing of its intent to lease the Suite at terms,
rates and commencement at least equal to the third party offer.
2) ADJACENT SPACE - SUITE 195 OF 3017 KILGORE:
a) Lessee shall further have a first right of refusal to lease Suite 195 in
3017 Kilgore Road ("Adjacent Space") in Rancho Cordova, California
containing approximately 2,000 sq. ft. Upon written notification that
Lessor has received a bonafide written offer to lease Suite #195 from a
qualified third party, Lessee shall have 72 hours to notify Lessor in
writing of its intent to lease the Suite at terms, rates and
commencement at least equal to the third party offer.
-2-
<PAGE>
3) Effectiveness of Lease. Except as set forth in this Amendment, all of
the provisions of the Lease shall remain unchanged and in full force and
effect.
LESSOR:
The Hasegawa Family Trust
By: /s/ Jun Hasegawa
-------------------------
Jun Hasegawa, Trustee
By:
-------------------------
Noriko Hasegawa, Trustee
Dated: /s/ Noriko Hasegawa
----------------------
LESSEE:
VantageMed, Inc.
By: /s/ Rollie Morshead
-------------------------
Name: Rollie Morshead
-----------------
Title: General Manager
-----------------
Dated: 8/4/98
----------------------
-3-
<PAGE>
[Letterhead]
June 30, 1998
Mr. Rollie Morshead, General Manager
VantageMed, Inc.
3017 Kilgore Road, Suite 180
Rancho Cordoba, California 95670
RE: LEASE AMENDMENT - TEMPORARY SPACE - FIRST RIGHTS OF REFUSAL
Dr. Mr. Morshead
Enclosed please find two documents regarding your lease. The first document
is an Acknowledgement of Assignment of Lease to recognize VantageMed as the
Tenant. We will need a copy of your transferring document to attach to it.
The second document is a Lease Amendment, which addresses rental on a
month-to-month basis the temporary space in Suite 150 3039 Kilgore Road. Also
provided is a first right of refusal on both that suite and Suite 195 of 3017
Kilgore.
Please review the enclosed and, if acceptable, have them signed by an
authorized officer. Again, we will need of copy of documentation evidencing
the VantageMed, Inc./Atek Computer transfer.
Sincerely,
/s/ C.L. McDowall-Ludwig
- --------------------------------
C.L. McDowall-Ludwig
Administrator
cc: Sharon Waller
<PAGE>
ACKNOWLEDGEMENT OF ASSIGNMENT OF LEASE
This Acknowledgment of Assignment of Lease is made on _______________,
1998, between DR. JUN HASEGAWA AND NORIKO HASEGAWA, TRUSTEES FOR THE HASEGAWA
FAMILY TRUST ("Lessor"), and VANTAGEMED, INC., FORMERLY ATEK COMPUTER
DISTRIBUTORS, INC., ("Lessee"), who agree as follows:
RECITALS:
This Agreement is made with reference to the following facts and objectives:
1. Lessor and Atek Computer Distributors, Inc., entered into a written lease
(the "Lease"), dated November 1, 1996, in which Lessor leased to, and
ATEK Computer leased from Lessor, premises located in the City of Rancho
Cordova, California, consisting of approximately 8,783 sq. feet of
rentable space in the building located at 3017 Kilgore Road, Suite 180.
2. VantageMed, Inc., subsequently acquired all assets of ATEK Computer,
including the Lease.
Now, THEREFORE:
Upon receipt from Lessee of satisfactory documentation evidencing the
transfer of interest in the Lease from Atek Computer Distributors, Inc., to
VantageMed, Inc., Landlord agrees to accept VantageMed, Inc., as the assignee
and Lessee under the Lease. VantageMed, Inc., agrees to accept and perform all
duties and requirements of Lessee under the Lease.
LESSEE:
The Hasegawa Family Trust
By:
-------------------------
Jun Hasegawa, Trustee
By:
-------------------------
Noriko Hasegawa, Trustee
LESSEE:
VantageMed, Inc.
By:
-------------------------
Name:
-------------------
Title:
-------------------
<PAGE>
GRUBB & ELLIS
EXCLUSIVE AUTHORIZATION OF SUBLEASE
SUBLESSOR hereby grants to GRUBB & ELLIS COMMERCIAL REAL ESTATE SERVICES, a
division of GRUBB & ELLIS COMPANY ("Broker"), the exclusive right to
negotiate a sublease or subleases with respect to the real property described
below (the "Property") for a period commencing on JUNE 8, 1999 and ending at
midnight on MARCH 7, 2000, (the "Listing Period"), unless this Authorization
is extended in writing and signed by both Sublessor and Broker. The Property
is located at 3017 KILGORE ROAD, SUITE 180, in the City of RANCHO CORDOVA,
County of SACRAMENTO, State of California, and further described as OFFICE
SPACE OF APPROXIMATELY 8,100 SQUARE FEET AND APPROXIMATELY 1,000 SQUARE FEET
OF WAREHOUSE WITH ONE (1) ROLL-UP DOOR.
The sublease(s) shall be for a rental of SEVENTY-FIVE CENTS (75 cents) per
SQUARE FOOT for the unexpired term specified in the master lease which term
expires on DECEMBER 31, 2001, and shall be subject to the same terms and
conditions as said master lease unless set forth otherwise in an addendum to
this Authorization. The term "sublease" as used, herein shall include an
assignment and any other transfer of Sublessors leasehold interests.
If during the Listing Period negotiations involving the subleasing of the
Property have commenced and are continuing, then the term of the Listing
Period shall be extended with respect to such transaction(s) and negotiations
for a period through the final termination of all efforts to complete a
transaction or the consummation of such transaction.
SEE ATTACHMENT.
Sublessor agrees to cooperate with Broker in effecting subleases of the
Property. All negotiations are to be through Broker. Broker is authorized to
accept a deposit and other funds from any prospective subtenant and upon the
execution of a sublease by Sublessor and such prospective subtenant to deduct
from such deposit and other funds the amount of the commission payable with
respect to such sublease. In the event a transaction is not consummated, any
deposits and other funds retained by Sublessor shall be equally divided
between Sublessor and Broker, except that Broker's portion thereof shall not
exceed the amount of the commission otherwise payable upon the consummation
of such transaction by the terms of this Authorization. Broker is further
authorized to advertise the Property and shall have the exclusive right to
place a sign or signs on the Property if, in Broker's opinion, such would
facilitate the subleasing thereof.
It is understood that it is illegal for either Sublessor or Broker to refuse
to present or sublease real property to any person because of race, color,
religion, national origin, sex, marital status, age or physical disability.
Except as disclosed in an addendum hereto signed by both Sublessor and an
officer of Broker, Sublessor hereby warrants and represents to Broker that
(1) Sublessor is the owner of the above-described leasehold interest in the
Property or has the legal authority to execute this Authorization on behalf
of the owner of such leasehold interest; (2) there is not any breach of or
default under any provision of the master lease; (3) Sublessor shall promptly
notify Broker in writing in the event that Sublessor is given any notice of
any breach of or default under the master lease; (4) no person or entity has
any right to sublease the Property or any portion thereof by virtue of any
agreement, option or right of first refusal; (5) the Property and Sublessor's
leasehold interest is not subject to the jurisdiction of any court in any
bankruptcy, insolvency, conservatorship or probate proceeding; and (6)
neither Broker nor any salesperson affiliated with Broker has made any
promises or representations to or agreements with Sublessor which in any manner
affect Sublessor's and Broker's rights and obligations under this
Authorization.
Sublessor agrees to defend, indemnify and hold Broker harmless from any
claims, demands, liabilities and damages arising from any incorrect
information supplied by Sublessor or any information which Sublessor fails to
supply.
NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES"
PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND
YOU ARE GIVING UP ANY RIGHTS YOU MAY POSSESS TO HAVE THE DISPUTE LITIGATED IN
A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP
YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE
SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU
REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE
COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE
READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF
MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL
ARBITRATION.
SUBLESSOR [illegible] BROKER [illegible]
---------- ----------
Arbitration of Disputes. In the event a claim or controversy arises
concerning any failure to pay Broker all or any portion of the amounts
provided herein, Sublessor and Broker hereby agree that such claim or
controversy shall be settled by final, binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association,
which rules are incorporated herein by reference, provided, however, that all
persons nominated to act as arbitrators of such claim or controversy shall be
attorneys at law duly licensed to practice before the courts of the state
where the arbitration is conducted. Judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
Depositions may be taken and other discovery may be obtained during such
arbitration proceedings to the same extent as authorized in civil judicial
proceedings. The unsuccessful party shall pay the costs of conducting the
arbitration. In the event any arbitration proceeding (or legal action to
enforce any arbitration award) is commenced to recover any compensation
hereunder, the prevailing party shall be entitled to recover its expenses and
reasonable attorneys' fees incurred therein from the unsuccessful party.
In the event that Sublessor and Broker have not elected to resolve commission
disputes by arbitration as provided above, if a claim or controversy arises
concerning any failure to pay Broker all or any portion of the amounts
provided herein, the prevailing party shall be entitled to its costs and
attorneys' fees in any legal action regarding the collection of a commission
due hereunder.
If there is a failure to make any payment to Broker at the time required
herein, the delinquent sum(s) shall bear interest at the rate of 18% per year
or the maximum rate permitted by law, whichever is lower.
- -------------------------------------------------------------------------------
1610 Arden Way, Suite 195 Sacramento, CA 916-418-6000 916-418-0231, fax
<PAGE>
Sublessor hereby authorizes Broker to represent and serve as agent for any
tenant or subtenant, or prospective tenant or subtenant of premises within the
Property, and Sublessor hereby waives any conflict of interests which might
arise as a result thereof.
In the event that any prospective tenant or subtenant is interested in
leasing premises within the Property for a term greater than the unexpired
term of the master lease, Broker is hereby authorized to solicit from the
master lessor and/or the prospective tenant or subtenant an agreement
authorizing Broker to represent the master lessor and/or
prospective tenant or subtenant in connection with such lease negotiations
and agreeing to pay Broker a commission with respect to such transaction.
Such commission shall be to compensate Broker with respect to the leasing of
the Property for a period extending beyond the term of the master lease and
shall not relieve Sublessor of its obligations hereunder.
The heirs, transferees, successors and assigns of the parties hereto are duly
bound by the provisions hereof.
NO AMENDMENTS TO OR MODIFICATIONS OF THIS AUTHORIZATION NOR THE TERMINATION
OF THIS AUTHORIZATION SHALL BE VALID OR BINDING UNLESS MADE IN WRITING AND
SIGNED BY BOTH SUBLESSOR AND AN OFFICER OF BROKER. SUBLESSOR HEREBY
ACKNOWLEDGES THAT SALESPERSONS AFFILIATED WITH BROKER ARE NOT AUTHORIZED
TO MAKE OR APPROVE ANY ADDITIONS TO, DELETIONS FROM OR ALTERATIONS OF THE
PRINTED PROVISIONS OF THIS AUTHORIZATION, OR TO TERMINATE THIS AUTHORIZATION,
AND THAT NO SUCH ADDITION, DELETION, ALTERATION OR TERMINATION SHALL BE VALID
OR BINDING ON BROKER UNLESS IN WRITING AND SIGNED BY AN OFFICER OF BROKER.
ANY PURPORTED AMENDMENT, MODIFICATION OR TERMINATION OF THIS AUTHORIZATION
WHICH IS ORAL, OR WHICH IS IN WRITING BUT NOT SIGNED BY BOTH SUBLESSOR AND AN
OFFICER OF BROKER, SHALL BE VOID AND OF NO EFFECT WHATSOEVER.
Sublessor hereby acknowledges that neither Broker nor any salesperson
associated with Broker is qualified or authorized to give legal or tax
advice; if Sublessor desires such advice, Sublessor shall consult with an
attorney or accountant.
Sublessor acknowledges receipt of a copy of this Authorization which
Sublessor has read and understands.
Other terms and conditions: PLEASE SEE ATTACHMENT.
---------------------------------------------------
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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DATED: _____________________, 19___ SUBLESSOR: VANTAGE MED
GRUBB & ELLIS COMMERCIAL REAL ESTATE By /s/ T.A. McCreery
SERVICES, a division of GRUBB & --------------------------------------
ELLIS COMPANY
Address 3017 Kilgore Road, Suite 180
---------------------------------
By: /s/ DAVE SMITH Rancho Cordova, California 95670
--------------------------------- ---------------------------------
DAVE SMITH
Telephone (916) 638-4744
-------------------------------
/s/ DAN CHAMBERLAIN
---------------------------------
DAN CHAMBERLAIN
<PAGE>
EXHIBIT 10.2
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: THIS LEASE ("LEASE"), dated for reference purposes only,
January 18, 1999, is made and between JUN AND NORIKO HASEGAWA, AS TRUSTEES FOR
THE HASEGAWA FAMILY TRUST ("LESSOR") and VANTAGEMED, INC. ("LESSEE")
(collectively the "PARTIES," or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease commonly known by the street address of 3039 Kilgore Road, Suite #150,
located in the City of Rancho Cordova, County of Sacramento, State of
California, with zip code 95670, as outlined on Exhibit ___ attached hereto
("PREMISES"). THE "BUILDING" IS THAT CERTAIN BUILDING CONTAINING THE PREMISES
AND GENERALLY DESCRIBED AS (DESCRIBE BRIEFLY THE NATURE OF THE BUILDING): AN
APPROXIMATE 1,889 SQUARE FOOT OFFICE SPACE IN PACIFIC SIERRA BUSINESS PARK.
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have
any rights to the roof, exterior walls or utility raceways of the Building or
to any other buildings in the Industrial Center. The Premises, the Building,
the Common Areas, the land upon which they are located, along with all other
buildings and improvements thereon, are herein collectively referred to as
the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: PRO-RATA unreserved vehicle parking spaces ("UNRESERVED
PARKING SPACES"); and 0 reserved vehicle parking spaces ("RESERVED PARKING
SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: One (1) years and 0 months ("ORIGINAL TERM") commencing
February 1, 1999 ("COMMENCEMENT DATE") and ending January 31, 2000
("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (Also see
Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $1,325.00 per month ("BASE RENT"), payable on the FIRST
(1st) day of each month commencing February 1999 (Also see Paragraph 4.)
[X] If this box is checked, this Lease for the Base Rent to be adjusted per
Addendum ---, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $1,665.00 as Base Rent for the
period February 1, 1999 (FIRST PAYING MONTH).
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: Pro-Rata percent
( %) ("LESSEE'S SHARE") as determined by
[X] pro rata square footage of the Premises as compared to the total square
footage of the Building or [ ] other criteria as described in Addendum ___.
1.7 SECURITY DEPOSIT: $1,700.00 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: GENERAL OFFICE ADMINISTRATION, DEVELOPMENT, ENGINEERING
AND SALES USES RELATED TO A SOFTWARE COMPANY AS ALLOWED UNDER CURRENT M-P
ZONING.("PERMITTED USE") (Also see Paragraph 6.)
1.9 INSURING PARTY. lESSOR IS THE "INSURING PARTY." (Also see Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] N/A represents Lessor exclusively ("LESSOR'S BROKER");
[ ] N/A represents Lessee exclusively ("LESSEE'S BROKER"); or
[X] Waller, Kaufman & Sutter represents both Lessor and Lessee
("DUAL AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum of $159.00 for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by _____________________________________________________________
___________________________________________________________________________
("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 59, and Exhibits A through A, all of
which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental and/or Common Area Operating Expenses,
is an approximation which Lessor and Lessee agree is reasonable and the
rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be in good operating condition
on the Commencement Date. If a non-compliance with said warranty exists as of
the Commencement Date, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any Improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction, shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement
Date. Lessor further warrants to Lessee that Lessor has no knowledge of any
claim having been made by any governmental agency that a violation or
violations of applicable building codes, regulations, or ordinances exist
with regard to the Premises as of the Commencement Date. Said warranties shall
not apply to any Alterations or Utility installations (defined in Paragraph
7.3(a)) made or to be made by Lessee. If the Premises do not comply with said
warranties, Lessor shall, except as otherwise provided in this Lease,
promptly after receipt of written notice from Lessee given within six (6)
months following the Commencement Date and setting forth with specificity the
nature and extent of such non-compliance, take such action, at Lessor's
expense, as may be reasonable or appropriate to rectify the non-compliance.
Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted
for the Premises under Applicable Laws (as defined in Paragraph 2.4).
2.4. ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record (collectively,
"APPLICABLE LAWS") and the present and future suitability of the Premises for
Lessee's intended use: (b) that Lessee has made such investigation as it
deems necessary with reference to such matters, is satisfied with reference
thereto. Subject to Lessor having the obligation to repair or remedy any of
the foregoing conditions to the extent necessary to comply with applicable
laws or correct defects not readily apparent, and (c) that neither Lessor,
nor any of Lessor's agents, has made any oral or written representations or
warranties with respect to said matters other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 LESSEE was the owner or occupant of the Premises.
In such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
<PAGE>
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said
number. Said parking spaces shall be used for parking by vehicles no larger
than full-size passenger automobiles or pick-up trucks, herein called
"PERMITTED SIZE VEHICLES." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as directed by Lessor in the Rules and
Regulations (as defined in Paragraph 40) issued by Lessor. (Also see
Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and interior utility raceways within the
Premises that are provided and designated by the Lessor from time to time for
the general non-exclusive use of Lessor, Lessee and other lessees of the
Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive
right to use, in common with others entitled to such use, the Common Areas as
they exist from time to time, subject to any rights, powers, and privileges
reserved by Lessor under the terms hereof or under the terms of any rules and
regulations or restrictions governing the use of the Industrial Center. Under
no circumstances shall the right herein granted to use the Common Areas be
deemed to include the right to store any property, temporarily or
permanently, in the Common Areas. Any such storage shall be permitted only by
the prior written consent of Lessor or Lessor's designated agent, which
consent may be revoked at any time. In the event that any unauthorized
storage shall occur then Lessor shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove the
property and charge the cost to Lessee, which cost shall be immediately
payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect
thereto in accordance with Paragraph 40. Lessee agrees to abide by and
conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas, walkways and utility
raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor
may, in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after
the Early Possession Date but prior to the Commencement Date, the obligation
to pay Base Rent shall be abated for the period of such early occupancy. All
other terms of this Lease, however, (including but not limited to the
obligations to pay Lessee's Share of Common Area Operating Expenses and to
carry the insurance required by Paragraph 8) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by
the Commencement Date, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease, or the obligations
of Lessee hereunder, or extend the term hereof, but in such case, Lessee
shall not, except as otherwise provided herein, be obligated to pay rent or
perform any other obligation of Lessee under the terms of this Lease until
Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days after the end of said sixty (60) day period, cancel this
Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect. Except as may be otherwise provided, and regardless of when the
Original Term actually commences, if possession is not tendered to Lessee
when required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of delivery of
possession and continue for a period equal to the period during which the
Lessee would have otherwise enjoyed under the terms hereof, but minus any
days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it
is due under the terms of this Lease. Base Rent and all other rent and
charges for any period during the term hereof which is for less than one full
month shall be prorated based upon the actual number of days of the month
involved. Payment of Base Rent and other charges shall be made to Lessor at
its address stated herein or to such other persons or at such other addresses
as Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified
in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter
defined, during each calendar year of the term of this Lease, in accordance
with the following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common
Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2) to be
paid by Lessor for the Building and the Common Areas under Paragraph 10
hereof.
(vi) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall
be allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not
specifically attributable to the Building or to any other building or to the
operation, repair and maintenance thereof, shall be equitably allocated by
Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to
provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement
of actual expenses is presented to Lessee by Lessor. At Lessor's option,
however, an amount may be estimated by Lessor from time to time of Lessee's
Share of annual Common Area Operating Expenses and the same shall be payable
monthly or quarterly, as Lessor shall designate, during each 12-month period
of the Lease term, on the same day as the Base Rent is due hereunder. Lessor
shall deliver to Lessee within sixty (60) days after the expiration of each
calendar year a reasonably detailed statement showing Lessee's Share of the
actual Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 4.2(d) during said preceding year
exceed Lessee's Share as indicated on said statement, Lessor shall be
credited the amount of such over-
-2-
<PAGE>
payment against Lessee's Share of Common, Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security
for Lessee's faithful performance of Lessee's obligations under this Lease.
If Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor
may use, apply or retain all or any portion of said Security Deposit for the
payment of any amount due Lessor or to reimburse or compensate Lessor for any
liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. Lessor uses or applies all or
any portion of said Security Deposit, Lessee shall within ten (10) days after
written request therefore deposit monies with Lessor sufficient to restore
said Security Deposit to the full amount required by this Lease. Any time the
Base Rent increases during the term of this Lease, Lessee shall, upon written
request from Lessor, deposit additional monies with Lessor as an addition to
the Security Deposit so that the total amount of the Security Deposit shall
at all times bear the same proportion to the then current Base Rent as the
Initial Security Deposit bears to the Initial Base Rent set forth in
Paragraph 1.5. Lessor shall not be required to keep all or any part of the
Security Deposit separate from its general accounts. Lessor shall, at the
expiration or earlier termination of the terms hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use
or permit the use of the Premises in a manner that is unlawful, creates waste
or a nuisance, or that disturbs owners and/or occupants of, or causes damage
to the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay
its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants of Lessee, its
assignees and subtenants, for a modification of said Permitted Use, so long
as the same will not impair the structural integrity of the improvements on
the Premises or in the Building or the mechanical or electrical systems
therein, does not conflict with uses by other Lessees, is not significantly
more burdensome to the Premises or the Building and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects
to withhold such consent, Lessor shall within five (5) business days after
such request give a written notification of same, which notice shall include
an explanation of Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or
effect, either by itself or in combination with other materials expected to
be on the Premises, is either: (i) potentially injurious to the public
health, safety or welfare, the environment, or the Premises; (ii) regulated
or monitored by any governmental authority; or (iii) a basis for potential
liability of Lessor to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substance shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any
products or by-products thereof. Lessee shall not engage in any activity in
or about the Premises which constitutes a Reportable Use (as hereinafter
defined) of Hazardous Substances without the express prior written consent of
Lessor and compliance in a timely manner (at Lessee's sole cost and expense)
with all Applicable Requirements (as defined in Paragraph 6.3). "REPORTABLE
USE" shall mean (i) the installation or use of any above or below ground
storage tank, (ii) the generation, possession, storage, use, transportation,
or disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is required
to be filed with, any governmental authority, and (iii) the presence in, on
or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the
foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary
and customary materials reasonably required to be used by Lessee in the
normal course of the Permitted Use, so long as such use is not a Reportable
Use and does not expose the Premises or neighboring properties to any
meaningful risk of contamination or damage or expose Lessor to any liability
therefor. In addition, Lessor may (but without any obligation to do so)
condition its consent to any Reportable Use of any Hazardous Substance by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in
its reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefor, including but not limited to the installation (and, at
Lessor's option, removal on or before Lease expiration or earlier
termination) of reasonably necessary protective modifications to the Premises
(such as concrete encasements) and/or the deposit of an additional Security
Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously
consented to by Lessor, Lessee shall immediately give Lessor written notice
thereof, together with a copy of any statement, report, notice,
registration, application, permit, business plan, license, claim, action, or
proceeding given to, or received from, any governmental authority or private
party concerning the presence, spill, release, discharge of, or exposure to,
such Hazardous Substance including but not limited to all such documents as
may be involved in any Reportable Use Involving the Premises. Lessee shall
not cause or permit any Hazardous Substance to be spilled or released in, on,
under or about the Premises (including, without limitation, through the
plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under
Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the
cost of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with
all "APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and groundwater conditions, and (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage,
spill, or release of any Hazardous Substance), now in effect or which may
hereafter come into effect. Lessee shall, within five (5) days after receipt
of Lessor's written request, provide Lessor with copies of all documents and
information, including but not limited to permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with
any Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving failure by Lessee or the Premises to comply with
any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall
have the right to enter the Premises at any time in the case of an
emergency, and otherwise at reasonable times, for the purpose of inspecting
the condition of the Premises and for verifying compliance by Lessee with
this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and
Lessor shall be entitled to employ experts and/or consultants in connection
therewith to advise Lessor with respect to Lessee's activities, including
but not limited to Lessee's installation, operation, use, monitoring,
maintenance, or removal of any Hazardous Substance on or from the Premises.
The costs and expenses of any such inspections shall be paid by the party
requesting same, unless a Default or Breach of this Lease by Lessee or a
violation of Applicable Requirements or a contamination, caused or materially
contributed to by Lessee, is found to exist or to be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result
of any such existing or imminent violation or contamination. In such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case
may be, for the costs and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2. (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall,
at Lessee's sole cost and expense and at all times, keep the Premises and
every part thereof in good order, condition and repair if the need for such
repairs occurs as a result of Lessee's use, including, without limiting the
generality of the foregoing, all equipment or facilities specifically serving
the Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired pressure vessels,
fire hose connections if within the Premises, fixtures, interior walls,
interior surfaces of exterior walls, ceilings, floors, windows, doors, plate
glass, and skylights, but excluding any items which are the responsibility of
Lessor pursuant to Paragraph 7.2 below, Lessee, in keeping the Premises in
good order, condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations, replacements or
renewals when necessary to keep the Premises and all improvements thereon or
a part thereof in good order, condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance
for and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation
system for the Premises. However, Lessor reserves the right, upon notice to
Lessee, to procure and maintain the contract for the heating, air
conditioning and ventilating systems, and if Lessor so elects, Lessee shall
reimburse Lessor, upon demand, for the reasonable cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case
no notice shall be required), perform such obligations on Lessee's behalf,
and put the Premises in good order, condition and repair, in accordance with
Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor,
subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order,
condition and repair the foundations, exterior walls, structural condition of
interior bearing walls, exterior roof, fire sprinkler and/or standpipe and
hose (if located in the Common Areas) or other automatic fire extinguishing
system including fire alarm and/or smoke
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detection systems and equipment, fire hydrants, parking lost, walkways,
parkways, driveways, landscaping , fences, signs and utility systems serving
the Common Areas and all parts thereof, as well as providing the services for
which there is a Common Area Operating Expense pursuant to Paragraph 4.2.
Lessor shall not be obligated to paint the exterior or interior surfaces of
exterior walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessee expressly waives the
benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate
this Lease because of Lessor's failure to keep the Building, Industrial
Center or Common Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning
equipment, plumbing, and fencing in, on or about the Premises. The term
"TRADE FIXTURES" shall mean Lessee's machinery and equipment which can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises which are
provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alterations and/or Utility Installations made
by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make nor cause to be made any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior
written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible
from the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering with the
fire sprinkler or fire detection systems and the cumulative cost thereof
during the term of this Lease as extended does not exceed $2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given
by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities; (ii) the furnishing
of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee shall
promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation
that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and
completion bond in an amount equal to one and one-half times the estimated
cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims, are or may be secured by
any mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on, or about the Premises, and Lessor shall
have the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend
and protect itself, Lessor and the Premises against the same and shall pay
and satisfy any such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises. If Lessor shall
require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor
in an amount equal to one and one-half times the amount of such contested
lien claim or demand, indemnifying Lessor against liability for the same, as
required by law for the holding of the Premises free from the effect of such
lien or claim. In addition, Lessor may require Lessee to pay Lessor's
attorneys' fees and costs in participating in such action if Lessor shall
decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal
and to cause Lessee to become the owner thereof as hereinafter provided in
this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but
considered a part of the Premises. Lessor may, at any time and at its option,
elect in writing to Lessee to be the owner of all or any specified part of
the Lessee-Owned Alterations and Utility Installations. Unless otherwise
instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and
Utility Installations shall, at the expiration or earlier termination of this
Lease, become the property of Lessor and remain upon the Premises and be
surrendered with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any
Alterations and Utility Installations made without the required consent of
Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintainence practice or by Lessee performing all of its obligations under
this Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable
Requirements and/or good practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation
to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy
periods commencing prior to, or extended beyond, the term of this Lease shall
be pro-rated to coincide with the corresponding Commencement Date or
Expiration Date.
8.2 LIABILITY INSURANCE
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee, Lessor and any Lender(s) whose names have been
provided to Lessee in writing (as additional insureds) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintainence of the Premises
and all areas appurtenant thereto. Such Insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $1,000,000
per occurrence with an "Additional Insured-Managers or Lessors of Premises"
endorsement and contain the "Amendment of the Pollution Exclusion"
endorsement for damage caused by heat, smoke or fumes from a hostile fire.
The policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an "Insured contract" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance required
by this Lease or as carried by Lessee shall not, however, limit the liability
of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be
carried by Lessee shall be primary to and not contributory with any similar
insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring against
loss or damage to the Premises. Such insurance shall be for full replacement
cost, as the same shall exist from time to time, or the amount required by
any Lender(s), but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age
of the improvements involved, such latter amount is less than full replacement
cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and
Lessee's personal property shall be insured by Lessee pursuant to Paragraph
8.4. If the coverage is available and commercially appropriate, Lessor's
policy shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender),
including coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance
clause, waiver of subrogation, and inflation guard protection causing an
increase in the annual property insurance coverage amount by a factor of not
less than the adjusted U.S. Department of Labor Consumer Price Index for All
Urban Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and any Lender(s), insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor for
one year (including all Real Property Taxes, Insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said insurance may
provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide
for one full year's loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income. Real Property Taxes. Insurance premium
costs and other expenses, if any, otherwise payable, for the next 12-month
period. Common Area Operating Expenses shall include any deductible amount in
the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property. Trade Fixtures and
Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such Insurance shall be full replacement cost
coverage with a deductible not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of
personal property and the restoration of Trade Fixtures and Lessee-Owned
Alterations and Utility Installations. Upon request from Lessor, Lessee shall
provide Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in
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this Paragraph 8. Lessee shall cause to be delivered to Lessor, within
seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the
existence and amounts of, the insurance required under Paragraph 8.2(a) and
8.4. No such policy shall be cancelable or subject to modification except
after thirty (30) days' prior written notice to Lessor. Lessee shall at least
fourteen (14) days prior to the expiration of such policies, furnish Lessor
with evidence of renewals or "insurance binders" evidencing renewal thereof,
or Lessor may order such insurance and charge the cost thereof to Lessee,
which amount shall be payable by Lessee to Lessor upon demand.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, loss of permits, attorneys' and
consultants' fees, expenses and/or liabilities arising out of, involving, or
in connection with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees to the extent caused by negligence of
Lessee or any Default or Breach by Lessee in the performance in a timely
manner of any obligation on Lessee's part to be performed under this Lease.
The foregoing shall include, but not be limited to, the defense or pursuit of
any claim or any action or proceeding involved therein, and whether or not
(in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by
reason of any of the foregoing matters, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need
not have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except for Lessor's negligence
and/or breach of express warranties Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property
of Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other lessee of Lessor nor from the failure by
Lessor to enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent
(50%) of the then Replacement Cost (as defined in Paragraph 9.1(d) of the
Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building) of the
Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE -- INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said (10) day period, Lessor shall
complete them as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
with ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within such ten (10) day period, and if
Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
receipt by Lessor of knowledge of the occurrence of such damage of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
date of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the right
within ten (10) days after the receipt of such notice to give written notice
to Lessor of Lessee's commitment to pay for the repair of such damage totally
at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof
within thirty (30) days following such commitment from Lessee. In such event
this Lease shall continue in full force and effect, and Lessor shall proceed
to make such repairs as soon as reasonably possible after the required funds
area available. If Lessee does not give such notice and provide the funds or
assurance thereof within the times specified above, this Lease shall terminate
as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by (a) exercising such option, and (b)
providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten (10) days after Lessee's receipt of Lessor's written
notice purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option during
such period and provides Lessor with funds (or adequate assurance thereof) to
cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
and provide such funds or assurance during such period, then this Lease shall
terminate as of the date set forth in the first sentence of this Paragraph
9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base
Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not in
excess of proceeds from insurance required to be carried under Paragraph
8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and
other charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after the receipt of such notice, this Lease shall continue in full force and
effect. "COMMENCE" as used in this Paragraph 9.6 shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but
subject
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to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense,
in which event this Lease shall continue in full force and effect, or (ii) if
the estimated cost to investigate and remediate such condition exceeds twelve
(12) times the then monthly Base Rent or $100,000 whichever is greater, give
written notification to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance Condition
of Lessor's desire to terminate this Lease as of the date sixty (60) days
following the date of such notice. In the event Lessor elects to give such
notice of Lessor's intention to terminate this Lease, the Lessee shall have
the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the excess of (a)
investigation and remediation of such Hazardous Substance Condition to the
extent required by Applicable Requirements, over (b) an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with the funds required of Lessee or
satisfactory assurance thereof within thirty (30) days following said
commitment by Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice or provide the required funds
or assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance
payments made by Lessee to Lessor and so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in
the calculation of Common Area Operating Expenses in accordance with the
provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general or special, ordinary or extraordinary, and any license fee,
commercial rental tax, improvement bond or bonds, levy or tax (other than
inheritance, personal income or estate taxes) imposed upon the Industrial
Center by any authority having the direct or indirect power to tax, including
any city, state or federal government, or school, agricultural, sanitary,
fire, street, drainage, or other improvement district thereof, levied against
any legal or equitable interest of Lessor in the Industrial Center or any
portion thereof, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "REAL PROPERTY TAX" shall
also include any tax, fee, levy, assessment or charge, or any increase
therein, imposed by reason of events occurring, or changes in Applicable Law
taking effect, during the term of this Lease, including but not limited to a
change in the ownership of the Industrial Center or in the improvements
thereon, the execution of this Lease, or any modification, amendment or
transfer thereof, and whether or not contemplated by the Parties, in
calculating Real Property Taxes for any calendar year, the Real Property
Taxes for any real estate tax year shall be included in the calculation of
Real Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such
other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however,
pay to Lessor at the time Common Area Operating Expenses are payable under
Paragraph 4.2, the entirety of any increase in Real Property Taxes if
assessed solely by reason of Alterations, Trade Fixtures or Utility
installations placed upon the Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of
the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee contained in the Premises or stored within the Industrial
Center. Whenever possible, Lessee shall cause its Lessee-Owned Alterations
and Utility Installations, Trade Fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor. If any of Lessee's said property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee's property within ten (10) days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with any
taxes thereon. If any such utilities or services are not separately metered
to the Premises or separately billed to the Premises, Lessee shall pay to
Lessor a reasonable proportion to be determined by Lessor of all such charges
jointly metered or billed with other premises in the Building, in the manner
and within the time periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to the
terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of fifty
percent (50%) or more of the voting control of Lessee shall constitute a
change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of full execution and delivery of this Lease or all the time of the
most recent assignment to which Lessor has consented, or as it exists
immediately prior to said transaction or transactions constituting such
reduction, at whichever time said Net Worth of Lessee was or greater, shall
be considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this
Lease shall be the net worth of Lessee (excluding any Guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be
in Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a non-curable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly
Base Rent for the Premises to the greater of the then fair market rental
value of the Premises, as reasonably determined by Lessor, or one hundred ten
percent (110%) of the Base Rent then in effect. Pending determination of the
new fair market rental value, if disputed by Lessee, Lessee shall pay the
amount set forth in Lessor's Notice, with any overpayment credited against
the next installment(s) of Base Rent coming due, and any underpayment for the
period retroactively to the effective date of the adjustment being due and
payable immediately upon the determination thereof. Further, in the event of
such Breach and rental adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment
to the then fair market value as reasonably determined by Lessor (without the
Lease being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and in
good condition) or one hundred ten percent (110%) of the price previously in
effect, (ii) any index-oriented rental or price adjustment formulas contained
in this Lease shall be adjusted to require that the base index be determined
with reference to the index applicable to the time of such adjustment, and
(iii) any fixed rental adjustments scheduled during the remainder of the
Lease term shall be increased in the same ratio as the new rental bears to
the Base Rent in effect immediately prior to the adjustment specified in
Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver of estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable under this Lease or the
sublease and without obtaining their consent, and such action shall not
relieve such persons from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, including any sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment or entering into such sublease, be deemed, for
the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed
or performed by Lessee during the term of said assignment or sublease, other
than such obligations as are contrary to or inconsistent with provisions of
an assignment or sublease to which Lessor has specifically consented in
writing.
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(g) The occurrence of a transaction described in Paragraph
12.2(c) shall give Lessor the right (but not the obligation) to require that
the Security Deposit be increased by an amount equal to six (6) times the
then monthly Base Rent, and Lessor may make the actual receipt by Lessor of
the Security Deposit increase a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment schedule
of the rent payable under this Lease be adjusted to what is then the market
value and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of the foregoing provision or any other assignment of such sublease
to Lessor, nor by reason of the collection of the rents from a sublessee, be
deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and
shall pay such rents and other charges to Lessor without any obligation or
right to inquire as to whether such Breach exists and notwithstanding any
notice from or claim from Lessee to the contrary. Lessee shall have no right
or claim against such sublessee, or, until the Breach has been cured, against
Lessor, for any such rents and other charges so paid by said sublessee to
Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said default. A "DEFAULT" by
Lessee is defined as a failure by Lessee to observe, comply with or perform
any of the terms, covenants, conditions or rules applicable to Lessee under
this Lease. A "BREACH" by Lessee is defined as the occurrence of any one or
more of the following Defaults, and, where a grace period for cure after
notice is specified herein, the failure by Lessee to cure such Default prior
to the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance or surety bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues
for a period of three (3) days following written notice thereof by or on
behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor to Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days;
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of Lessee
or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in cash of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The reasonable costs and expenses of any such performance by
Lessor shall be due and payable by Lessee to Lessor upon invoice therefor.
If any check given to Lessor by Lessee shall not be honored by the bank upon
which it is drawn, Lessor, at its own option, may require all future payments
to be made under this Lease by Lessee to be made only by cashier's check. In
the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1),
with or without further notice or demand, and without limiting Lessor in the
exercise of any right or remedy which Lessor may have by reason of such
Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (1%). Efforts by Lessor to mitigate damages caused
by Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall
have the right to recover in such proceeding the unpaid rent and damages as
are recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under Subparagraph 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such
case, the applicable grace period under the unlawful detainer statute shall
run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two (2) such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right
to sublet or assign, subject only to reasonable limitations. Lessor and
Lessee agree that the limitations on assignment and subletting in this Lease
are reasonable. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver to protect the Lessor's interest
under this Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
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(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3. INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for
the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS"
shall be deemed conditional upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by
Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of this Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering
the Premises. Accordingly, if any installment of rent or other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for the
taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise
agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option
subsequently granted, or (b) if Lessee acquires any rights to the Premises or
other premises in which Lessor has an interest, or (c) if Lessee remains in
possession of the Premises with the consent of Lessor after the expiration of
the term of this Lease after having failed to exercise an Option, or (d) if
said Brokers are the procuring cause of any other lease or sale entered into
between the Parties pertaining to the Premises and/or any adjacent property in
which Lessor has an interest, or (e) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then as to any of said
transactions, Lessor shall pay said Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this
Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation
of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of the
provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its
interest in any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent
and warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection with
the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such
unnamed broker, finder or other similar party by reason of any dealings or
actions of the Indemnifying Party, including any costs, expenses, and/or
attorneys' fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within
ten (10) days after written notice from the other Party (the "REQUESTING
PARTY") execute, acknowledge and deliver to the Requesting Party a statement
in writing in a form similar to the then most current "TENANCY STATEMENT"
form published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In
the event of a transfer of Lessor's title or interest in the Premises or in
this Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party. Each Broker shall be an intended
third party beneficiary of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with postage prepaid, or
by facsimile transmission during normal business hours, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may
by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the postmark thereon. If
sent by regular mail, the notice shall be deemed given forty-eight (48) hours
after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantees next day
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delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act to Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this
Paragraph 26 then the Base Rent payable from and after the time of the
expiration or earlier termination of this Lease shall be increased to two
hundred percent (200%) of the Base Rent applicable during the month
immediately preceding such expiration or earlier termination. Nothing
contained herein shall be construed as a consent by Lessor to any holding
over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have
no duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien or its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device,
and that in the event of such foreclosure, such new owner shall not: (i) be
liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets
or defenses which Lessee might have against any prior lessor, or (iii) be
bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document
any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by
compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fee award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in preparation and
service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with
such Default or resulting Breach. Broker(s) shall be intended third party
beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or Building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred eighty (180) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of rent or liability
to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions
of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures
and Alterations). Unless otherwise expressly agreed herein, Lessor reserves
all rights to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one
or all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects', attorneys', engineers' and other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises, including
but not limited to consents to an assignment a subletting or the presence or
use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt
of an invoice and supporting documentation therefor. In addition to the
deposit described in Paragraph 12.2(e), Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with
Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor
will incur in considering and responding to Lessee's request. Any unused
portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act, assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions
by Lessor at the time of consent of such further or other conditions as are
then reasonable with reference to the particular matter for which consent is
being given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the
same obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default
of the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the
Guarantor (and of the party signing on Guarantor's behalf) to obligate such
Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
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39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to lease
other property of Lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph
1.1, hereof, and cannot be voluntarily or involuntarily assigned
or exercised by any person or entity other than said original Lessee while
the original Lessee is in full and actual possession of the Premises
and without the intention of thereafter assigning or subletting. The Options,
if any, herein granted to Lessee are not assignable, either as a part of an
assignment of this Lease or separately or apart therefrom, and no Option may
be separated from this Lease in any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised
unless the prior Options to extend or renew this Lease have been validly
exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary:
(i) during the period commencing with the giving of any notice of Default
under Paragraph 13.1 and continuing until the noticed Default is cured, or
(ii) during the period of time any monetary obligation due Lessor from Lessee
is unpaid (without regard to whether notice thereof is given Lessee), or
(iii) during the time Lessee is in Breach of this Lease, or (iv) in the event
that Lessor has given to Lessee three (3) or more notices of separate Defaults
under Paragraph 13.1 during the twelve (12) month period immediately preceding
the exercise of the Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or
(ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants
or tenants of the Building and the Industrial Center and their Invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
same. Lessee assumes all responsibility for the protection of the Premises,
Lessee, its agents and invitees and their property from the acts of third
parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause
the recordation of parcel maps and restrictions, so long as such easements,
rights or way, utility raceways, dedications, maps and restrictions do not
reasonably interfere with the use of the Premises by Lessee. Lessee agrees to
sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount of sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If either party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute
and deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor or such authority.
45. CONFLICT. Any conflict between the printed provisions of the Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not
be deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT
THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE
OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR
OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF
THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY
FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at: /s/ Sebastopol, CA Executed at: /s/ Rancho Cordova
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on: 2/6/99 on: 2/1/99
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By LESSOR: By LESSEE:
THE HASEGAWA FAMILY TRUST VANTAGEMED, INC.
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By: /s/ Jun Hasegawa By: /s/ T.A. McCreery
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Name Printed: JUN HASEGAWA Name Printed: T. A. McCreery
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Title: OWNER Title: CFO
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By: /s/ Noriko Hasegawa By:
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Name Printed: NORIKO HASEGAWA Name Printed:
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Title: OWNER Title:
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Address: 3105 Burkhart Ln Address: 3017 KILGORE ROAD, SUITE 180
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Sebastopol, CA 95472 RANCHO CORDOVA, CA 95670
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Telephone: (707) 829-9561 Telephone: (916) 638-4744
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Facsimile: (707) 829-7940 Facsimile: (916) 638-0504
----------------------------- -------------------------
BROKER: BROKER:
Executed at: Executed at:
---------------------------- ------------------------
on: on:
------------------------------------- ---------------------------------
By: By:
------------------------------------- ---------------------------------
Name Printed: Name Printed:
--------------------------- -----------------------
Title: Title:
---------------------------------- ------------------------------
Address: Address:
-------------------------------- ----------------------------
- ---------------------------------------- ------------------------------------
Telephone: ( ) Telephone: ( )
----------------------------- --------------------------
Facsimile: ( ) Facsimile: ( )
----------------------------- --------------------------
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION,
345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777.
-11-
<PAGE>
LEASE ADDENDUM
--------------
(CONTINUED)
55. TOXIC MATERIALS:
A. Lessee shall not cause or permit to be discharged into the
plumbing or sewage system of the Premises or onto the and underlying
or adjacent to it, any hazardous, toxic or radioactive materials,
including, but not limited to, those materials identified in Section
6680 or Title 22 of the California Administrative Code, Division 4,
Chapter 30, as amended from time to time (collectively "Toxic
Materials"). Lessee shall, at its sole expense, comply with any and
all rules, regulations, codes, ordinances, statutes, and other
requirements of lawful governmental authority respecting to Toxic
Materials, pollution, harmful chemicals, and other materials in
connection with Lessee's activities on or about the Premises. Lessee
specifically agrees to comply with any such requirements relating to
the handling, use, storage, and disposal of Toxic Materials and other
materials which are considered by any such governmental authorities
as harmful, dangerous, toxic, flammable, or otherwise deserving of
special care. Lessee shall pay the full cost of any clean-up work
performed on or about the Industrial Center as required by any
governmental authority in order to remove, neutralize of otherwise
treat materials of any type whatsoever directly or indirectly placed
on or about the Premises by Lessee or its agents, employees,
contractors, or invitees.
B. Lessee shall be solely responsible for and shall indemnify,
defend, and hold Lessor harmless from any and all claims, judgements,
demands, causes or action, proceedings or hearings (collectively
"Claims") relating to the storage, placement or use of Toxic
Materials by Lessee, its agents or invitees on or about the Premises,
including, but not limited to, Claims resulting from the
contamination of subterranean water beneath, adjoining or in the
vicinity of the Industrial Center. Lessee agrees to defend all such
Claims on behalf of Lessor with counsel acceptable to Lessor, and to
pay all fees, costs, damages, or expenses relating to or arising out
of, or in connection with, any removal, clean-up, or restoration work
which is required by any governmental agency having jurisdiction and
which arises from Lessee's storage, use or disposal of Toxic
Materials on or about the Premises during the term of this Lease, or
Option Term, if exercised; provided, however, that Lessee shall not
be responsible for, and Lessor shall indemnify Lessee against Claims,
Toxics and Toxic Materials relating to the Building to the extent
they either (i) exist in or about the Building prior to the date of
this Lease, or (ii) were not caused by Lessee during the term of the
Lease.
56. DOCUMENT PREPARATION:
This Lease has been prepared merely as a service to Lessee and Lessor
by Waller, Kaufman & Sutter and makes no representations as to the
legal sufficiency or economic interpretation of this Lease. Lessee
and Lessor are hereby advised to consult their personal attorneys
regarding the legal aspects hereof.
57. THE AMERICANS WITH DISABILITIES ACT (ADA):
Please be advised that an owner or tenant of real property may be
subject to the Americans With Disabilities Act (the ADA). The Act
requires owners and tenants of "public accommodations" to remove
barriers to access by disabled persons and provide auxiliary aids and
services for hearing, vision or speech impaired persons. You are
advised to consult your attorney with respect to the application of
this Act to the Property. Waller, Kaufman & Sutter cannot give you
legal advice on this Act or its requirements.
58. BROKER REPRESENTATION:
Lessor and Lessee hereby acknowledge that Broker represents both
parties hereto; and both parties consent thereto.
59. BROKER DISCLOSURE:
The parties hereby expressly acknowledge that Broker has made no
independent determination or investigation regarding, but not limited
to, the following: present or future use of the property;
environmental matters affecting the Property; the condition of the
Property, including, but not limited to structural, mechanical and
soils conditions, as well as issues surrounding hazardous wastes or
substances as set out above; violations of the Occupational Safety and
Health Act or any other federal, state, county or municipal laws,
ordinances, or statutes; measurements of land and/or buildings.
Lessee agrees to make its own investigation and determination
regarding such items.
<PAGE>
LEASE ADDENDUM
(Continued)
Agreed and Acknowledged:
LESSOR: JUN AND NORIKO HASEGAWA, AS TRUSTEES FOR THE HASEGAWA FAMILY TRUST
BY: /s/ Jun Hasegawa DATE: 2/6/99
----------------------------------- ------------------
BY: /s/ Noriko Hasegawa DATE: 2/6/99
----------------------------------- ------------------
LESSEE: VANTAGEMED, INC.
BY: /s/ T.A. McCreery, CFO DATE: 2/1/99
----------------------------------- ------------------
<PAGE>
LEASE ADDENDUM
--------------
ADDENDUM TO LEASE
DATED JANUARY 18, 1999
BY AND BETWEEN
JUN AND NORIKO HASEGAWA,
AS TRUSTEES FOR THE HASEGAWA FAMILY TRUST,
AS LESSOR
AND
VANTAGEMED, INC., AS LESSEE
49. RENT SCHEDULE:
Months Base Rent
------ ---------
01-12 $1,325.00
50. RIGHT TO TERMINATE
Lessor and Lessee shall have the right to terminate this lease by
providing either party with thirty (30) days written notice to cancel
lease.
51. LEASE TYPE
Triple Net (NNN) with expenses estimated at Three Hundred and Forty and
00/100ths Dollars ($340.00) per month.
52. LESSOR'S IMPROVEMENTS:
Lessor to provide the following:
i Replace damaged or stained ceiling tiles.
ii Paint interior office wall surfaces.
53. OCCUPANCY TYPE:
Should any governmental authority require any additional improvements,
modifications, licenses and/or permits of any kind, including but not
limited to, a conditional use permit due to Lessee's use and/or occupancy
of the Premises, it shall be provided by Lessee, at Lessee's sole
expense. It is Lessor's understanding that Lessee will not be using
flammable solvents or utilizing the Premises in any way that would
cause Lessee's occupancy to be considered anything other than a B-1 or
B-2 type occupant.
In the event that Lessee is classified under any other occupancy type
(such as an H-2 or H-3 type for example) which requires any additional
improvements to the space (i.e. additional fire sprinkler drops,
ventilation equipment and/or ducting, additional sheetrock, and etc.),
or by Lessee's use of the Premises, increases the fire insurance
premiums on the building, Lessee shall be responsible to pay for and/or
provide the same.
54. TOXIC DISCLOSURE:
"Landlord and Tenant acknowledge that they have been advised that
numerous federal, state, and/or local laws, ordinances and regulations
("Laws") affect the existence and removal, storage, disposal, leakage
of and contamination by materials designated as hazardous or toxic
("Toxics"). Many materials, some utilized in everyday business
activities and property maintenance, are designated as hazardous or
toxic.
Some of the Laws require that Toxics be removed or cleaned up without
regard to whether the party required to pay for the "clean up" caused
the contamination, owned the property at the time of contamination
occurred or even knew about the contamination. Some items, such as
asbestos or PCB's, that were legal when installed, now are classified as
Toxics, and are subject to removal requirements. Civil lawsuits for
damages resulting from Toxics may be filed by third parties in certain
circumstances.
Waller, Kaufman & Sutter has recommended, and hereby recommends, that
each of the parties have competent professional environmental specialists
review the Property and make recommended tests so that a reasonably
informed assessment of these matters can be made by each of the parties.
Landlord and Tenant acknowledge that neither Waller, Kaufman & Sutter
nor its agents or salespersons, have been retained to investigate or to
arrange for investigation by others, and have not made any
recommendations or representations with regard to the presence or
absence of Toxics on, in or beneath the Property. Landlord and Tenant
agree that they will rely only on persons who are experts in this field
and will obtain such expert advice so each of them will be as fully
informed as possible with regard to Toxics in entering into this
Agreement.
<PAGE>
EXHIBIT 10.3
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
AUGUST 20, 1999, is made by and between JUN AND NORIKO HASEGAWA AS TRUSTEES FOR
THE HASEGAWA FAMILY TRUST ("LESSOR") and VANTAGEMED, INC. ("LESSEE"),
(collectively the "PARTIES," or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 3039 KILGORE ROAD, SUITE #190,
located in the City of RANCHO CORDOVA, County of SACRAMENTO, State of
CALIFORNIA, with zip code 95670, as outlined on Exhibit A attached hereto
("PREMISES"). The "BUILDING" is that certain building containing the Premises
and generally described as (describe briefly the nature of the Building): AN
APPROXIMATE 2,084 SQUARE FOOT OFFICE SPACE IN PACIFIC SIERRA BUSINESS PARK.
In addition to Lessee's rights to use and occupy the Premises as hereinafter
specified, Lessee shall have non-exclusive rights to the Common Areas (as
defined in Paragraph 2.7 below) as hereinafter specified, but shall not have
any rights to the roof, exterior walls or utility raceways of the Building or
to any other buildings in the Industrial Center. The Premises, the Building,
the Common Areas, the land upon which they are located, along with all other
buildings and improvements thereon, are herein collectively referred to as
the "INDUSTRIAL CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: A PRO-RATA SHARE OF unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and 0 reserved vehicle parking spaces ("RESERVED
PARKING SPACES"). (Also see Paragraph 2.6.)
1.3 TERM: 0 years and 1 months ("ORIGINAL TERM") commencing AUGUST
23, 1999 ("COMMENCEMENT DATE") and ending SEPTEMBER 30, 1999 ("EXPIRATION
DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE"). (Also see
Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $1,563.00 per month ("BASE RENT"), payable on the
FIRST (1ST) day of each month commencing SEPTEMBER 1, 1999 (Also see
Paragraph 4.)
[ ] If this box is checked, this Lease provides for the Base
Rent to be adjusted per Addendum ---, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $562.68 as Base Rent for the
period AUGUST 23, 1999 TO AUGUST 31, 1999.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: PRO-RATA percent
( %) ("LESSEE'S SHARE") as determined by [ ] prorata square footage of the
Premises as compared to the total square footage of the Building or [ ] other
criteria as described in Addendum ____.
1.7 SECURITY DEPOSIT: $1,950.00 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: GENERAL OFFICE ADMINISTRATION, DEVELOPMENT,
ENGINEERING AND SALES USES RELATIVE TO A SOFTWARE COMPANY AS ALLOWED BY
CURRENT ZONING ("PERMITTED USE") (Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] N/A represents Lessor exclusively ("LESSOR'S BROKER");
[ ] N/A represents Lessee exclusively ("LESSEE'S BROKER"); or
[x] WALLER, KAUFMAN & SUTTER represents both Lessor and Lessee
("DUAL AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), the
sum of $____) for brokerage services rendered by said Broker(s) in connection
with this transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by_____________________________
("GUARANTOR"). (Also see paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 60, and Exhibits A through A, all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon
is not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be in good operating condition
on the Commencement Date. If a non-compliance with said warranty exists as
of the Commencement Date, Lessor shall, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants that any improvements (other than those constructed by Lessee
or at Lessee's direction) on or in the Premises which have been constructed
or installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement
Date. Lessor further warrants to Lessee that Lessor has no knowledge of any
claim having been made by any governmental agency that a violation or
violations of applicable building codes, regulations, or ordinances exist
with regard to the Premises as of the Commencement Date. Said warranties
shall not apply to any Alterations or Utility Installations (defined in
paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not
comply with said warranties, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee given
within six (6) months following the Commencement Date and setting forth with
specificity the nature and extent of such non-compliance, take such action,
at Lessor's expense, as may be reasonable or appropriate to rectify the
non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph
1.8 is permitted for the Premises under Applicable Laws (as defined in
Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and
fire sprinkler systems, security, environmental aspects, seismic and
earthquake requirements, and compliance with the Americans with Disabilities
Act and applicable zoning, municipal, county, state and federal laws,
ordinances and regulations and any covenants or restrictions of record
(collectively, "APPLICABLE LAWS") and the present and future suitability of
the Premises for Lessee's intended use; (b) that Lessee has made such
investigation as it deems necessary with reference to such matters, is
satisfied with reference thereto, SUBJECT TO LESSOR HAVING THE OBLIGATION TO
REPAIR OR REMEDY ANY OF THE FOREGOING CONDITIONS TO THE EXTENT NECESSARY TO
COMPLY WITH APPLICABLE LAWS OR CORRECT DEFECTS NOT READILY APPARENT; and (c)
that neither Lessor, nor any of Lessor's agents, has made any oral or written
representations or warranties with respect to said matters other than as set
forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to
the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.
<PAGE>
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in
Paragraph 1.2(b) on those portions of the Common Areas designated from time to
time by Lessor for parking. Lessee shall not use more parking spaces than said
number. Said parking spaces shall be used for parking by Vehicles no larger
than full-size passenger automobiles or pick-up trucks, herein called
"Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as directed by Lessor in the Rules and
Regulations (as defined in Paragraph 40) issued by Lessor. (Also see
Paragraph 2.9)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary
line of the Industrial Center and Interior utility raceways within the
Premises that are provided and designated by the Lessor from time to time for
the general non-exclusive use of Lessor, Lessee and other lessees of the
Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive
right to use, in common with others entitled to such use, the Common Areas as
they exist from time to time, subject to any rights, powers, and privileges
reserved by Lessor under the terms hereof or under the terms of any rules and
regulations or restrictions governing the use of the Industrial Center. Under
no circumstances shall the right herein granted to use the Common Areas be
deemed to include the right to store any property, temporarily or
permanently, in the Common Areas. Any such storage shall be permitted only by
the prior written consent of Lessor or Lessor's designated agent, which
consent may be revoked at any time. In the event that any unauthorized
storage shall occur then Lessor shall have the right, without notice, in
addition to such other rights and remedies that it may have, to remove the
property and charge the cost to Lessee, which cost shall be immediately
payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect
thereto in accordance with Paragraph 40. Lessee agrees to abide by and
conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas,
ingress, egress, direction of traffic, landscaped areas, walkways and utility
raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Lessor
may, in the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after
the Early Possession Date but prior to the Commencement Date, the obligation
to pay Base Rent shall be abated for the period of such early occupancy. All
other terms of this Lease, however, (including but not limited to the
obligations to pay Lessee's Share of Common Area Operating Expenses and to
carry the Insurance required by Paragraph 8) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by
the Commencement Date, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease, or the obligations
of Lessee hereunder, or extend the term hereof, but in such case, Lessee
shall not, except as otherwise provided herein, be obligated to pay rent or
perform any other obligation of Lessee under the terms of this Lease until
Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days after the end of said sixty (60) day period, cancel this
Lease, in which event the parties shall be discharged from all obligations
hereunder; provided further, however, that if such written notice of Lessee
is not received by Lessor within said ten (10) day period, Lessee's right to
cancel this Lease hereunder shall terminate and be of no further force or
effect. Except as may be otherwise provided, and regardless of when the
Original Term actually commences, if possession is not tendered to Lessee
when required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any, that
Lessee would otherwise have enjoyed shall run from the date of delivery
of possession and continue for a period equal to the period during which the
Lessee would have otherwise enjoyed under the terms hereof, but minus any
days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges,
as the same may be adjusted from time to time, to Lessor in lawful money of
the United States, without offset or deduction, on or before the day on which
it is due under the terms of this Lease. Base Rent and all other rent and
charges for any period during the term hereof which is for less than one full
month shall be prorated based upon the actual number of days of the month
involved. Payment of Base Rent and other charges shall be made to Lessor at
its address stated herein or to such other persons or at such other addresses
as Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as specified
in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter
defined, during each calendar year of the term of this Lease, in accordance
with the following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes
of this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas,
loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems,
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of
Common Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2) to
be paid by Lessor for the Building and the Common Areas under Paragraph 10
hereof.
(vi) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes
that are specifically attributable to the Building or to any other building
in the Industrial Center or to the operation, repair and maintenance thereof,
shall be allocated entirely to the Building or to such other building.
However, any Common Area Operating Expenses and Real Property Taxes that are
not specifically attributable to the Building or to any other building or to
the operation, repair and maintenance thereof, shall be equitably allocated
by Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services
set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation
upon Lessor to either have said improvements or facilities or to provide
those services unless the Industrial Center already has the same, Lessor
already provides the services, or Lessor has agreed elsewhere in this Lease
to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be
payable by Lessee within ten (10) days after a reasonably detailed statement
of actual expenses is presented to Lessee by Lessor. At Lessor's option,
however, an amount may be estimated by Lessor from time to time of Lessee's
Share of annual Common Area Operating Expenses and the same shall be payable
monthly or quarterly, as Lessor shall designate, during each 12-month period
of the Lease term, on the same day as the Base Rent is due hereunder. Lessor
shall deliver to Lessee within sixty (60) days after the expiration of each
calendar year a reasonably detailed statement showing Lessee's Share of the
actual Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph 4.2(d) during said preceding year
exceed Lessee's Share as indicated on said statement, Lessor shall be
credited the amount of such over-
-2-
<PAGE>
payment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security
for Lessee's faithful performance of Lessee's obligations under this Lease.
If Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor
may use, apply or retain all or any portion of said Security Deposit for the
payment of any amount due Lessor or to reimburse or compensate Lessor for any
liability, cost, expense, loss or damage (including attorneys' fees) which
Lessor may suffer or incur by reason thereof. If Lessor uses or applies all
or any portion of said Security Deposit, Lessee shall within ten (10) days
after written request therefore deposit monies with Lessor sufficient to
restore said Security Deposit to the full amount required by this Lease. Any
time the Base Rent increases during the term of this Lease, Lessee shall,
upon written request from Lessor, deposit additional monies with Lessor as an
addition to the Security Deposit so that the total amount of the Security
Deposit shall at all times bear the same proportion to the then current Base
Rent as the initial Security Deposit bears to the Initial Base Rent set
forth in Paragraph 1.5. Lessor shall not be required to keep all or any part
of the Security Deposit separate from its general accounts. Lessor shall, at
the expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit
the use of the Premises in a manner that is unlawful, creates waste or a
nuisance, or that disturbs owners and/or occupants of, or causes damage to
the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants,
and by prospective assignees and subtenants of Lessee, its assignees and
subtenants, for a modification of said Permitted Use, so long as the same will
not impair the structural integrity of the improvements on the Premises or in
the Building or the mechanical or electrical systems therein, does not
conflict with uses by other lessees, is not significantly more burdensome to
the Premises or the Building and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days after such request give a
written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material
or waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises
which constitutes a Reportable Use (as hereinafter defined) of Hazardous
Substances without the express prior written consent of Lessor and compliance
in a timely manner (at Lessee's sole cost and expense) with all Applicable
Requirements (as defined in Paragraph 6.3). "REPORTABLE USE" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of
a Hazardous Substance that requires a permit from, or with respect to which a
report, notice, registration or business plan is required to be filed with,
any governmental authority, and (iii) the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Laws
require that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may,
without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may
(but without any obligation to do so) condition its consent to any Reportable
Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such
additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefor, including
but not limited to the installation (and, at Lessor's option, removal on or
before Lease expiration or earlier termination) of reasonably necessary
protective modifications to the Premises (such as concrete encasements)
and/or the deposit of an additional Security Deposit under paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application,
permit, business plan, license, claim, action, or proceeding given to, or
received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous
Substance including but not limited to all such documents as may be involved
in any Reportable Use involving the Premises. Lessee shall not cause or permit
any Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanity
sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all damages, liabilities,
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Lessee or by anyone under
Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall
include, but not be limited to, the effects of any contamination or injury to
person, property or the environment created or suffered by Lessee, and the
cost of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with
all "APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises
(including but not limited to matters pertaining to (i) industrial hygiene,
(ii) environmental conditions on, in, under or about the Premises, including
soil and groundwater conditions, and (iii) the use, generation, manufacture,
production, installation, maintenance, removal, transportation, storage,
spill, or release of any Hazardous Substance), now in effect or which may
hereafter come into effect. Lessee shall, within five (5) days after receipt
of Lessor's written request, provide Lessor with copies of all documents and
information, including but not limited to permits, registrations, manifests,
applications, reports and certificates, evidencing Lessee's compliance with
any Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving failure by Lessee or the Premises to comply
with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("LENDERS") shall have the
right to enter the Premises at any time in the case of an emergency, and
otherwise at reasonable times, for the purpose of inspecting the condition of
the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to
advise Lessor with respect to Lessee's activities, including but not limited
to Lessee's installation, operation, use, monitoring, maintenance, or removal
of any Hazardous Substance on or from the Premises. The costs and expenses of
any such inspections shall be paid by the party requesting same, unless a
Default or Breach of this Lease by Lessee or a violation of Applicable
Requirements or a contamination, caused or materially contributed to by
Lessee, is found to exist or to be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In such case, Lessee shall
upon request reimburse Lessor or Lessor's Lender, as the case may be, for the
costs and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall
at Lessee's sole cost and expense and at all times, keep the Premises and
every part thereof in good order, condition and repair. If the need for such
repairs occurs as a result of Lessee's use, including, without limiting the
generality of the foregoing, all equipment or facilities specifically serving
the Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired pressure vessels,
fire hose connections if within the Premises, fixtures, interior walls,
interior surfaces of exterior walls, ceilings, floors, windows, doors, plate
glass, and skylights, but excluding any items which are the responsibility of
Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in
good order, condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations, replacements or
renewals when necessary to keep the Premises and all improvements thereon or
part thereof in good order, condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance
for and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation
system for the Premises. However, Lessor reserves the right, upon notice to
Lessee, to procure and maintain the contract for the heating, air
conditioning and ventilating systems, and if Lessor so elects, Lessee shall
reimburse Lessor, upon demand, for the reasonable cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case
no notice shall be required), perform such obligations on Lessee's behalf,
and put the Premises in good order, condition and repair, in accordance with
Paragraph 13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to
reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition
and repair the foundations, exterior walls, structural condition of interior
bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if
located in the Common Areas) or other automatic fire extinguishing system
including fire alarm and/or smoke
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detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems serving
the Common Areas and all parts thereof, as well as providing the services for
which there is a Common Area Operating Expense pursuant to Paragraph 4.2
Lessor shall not be obligated to paint the exterior or interior surfaces of
exterior walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessee expressly waives the
benefit of any statute now or hereafter in effect which would otherwise
afford Lessee the right to make repairs at Lessor's expense or to terminate
this Lease because of Lessor's failure to keep the Building, Industrial
Center or Common Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning
equipment, plumbing, and fencing in, on or about the Premises. The term
"TRADE FIXTURES" shall mean Lessee's machinery and equipment which can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises which are
provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alterations and/or Utility Installations made
by Lessee that are not yet owned by Lessor pursuant to paragraph 7.4(a).
Lessee shall not make nor cause to be made any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior
written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible
from the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering with the
fire sprinkler or fire detection systems and the cumulative cost thereof
during the term of this Lease as extended does not exceed $2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent
specific consent, shall be deemed conditioned upon: (I) Lessee's acquiring
all applicable permits required by governmental authorities; (II) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (III) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation
that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and
completion bond in an amount equal to one and one-half times the estimated
cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanic's or materialman's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on, or about the premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense, defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises. If
Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the
amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorneys' fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter
provided in this Paragraph 7.4, all Alterations and Utility Installations
made to the Premises by Lessee shall be the property of and owned by Lessee,
but considered a part of the Premises. Lessor may, at any time and at its
option, elect in writing to Lessee to be the owner of all or any specified
part of the Lessee-Owned Alterations and Utility Installations. Unless
otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned
Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon the
Premises and be surrendered with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
that their Installation may have been consented to by Lessor. Lessor may
require the removal at any time of all or any part of any Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, clean and free of debris and in good operating order,
condition and state of repair, ordinary wear and tear excepted. Ordinary wear
and tear shall not include any damage or deterioration that would have been
prevented by good maintenance practice or by Lessee performing all of is
obligations under this Lease. Except as otherwise agreed or specified herein,
the Premises, as surrendered, shall include the Alterations and Utility
Installations. The obligation of Lessee shall include the repair of any damage
occasioned by the installation, maintenance or removal of Lessee's Trade
Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by
Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall
remain the property of Lessee and shall be removed by Lessee subject to its
obligation to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy
periods commencing prior to, or extending beyond, the term of this Lease
shall be prorated to coincide with the corresponding Commencement Date or
Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee, Lessor and any Lender(s) whose names have been
provided to Lessee in writing (as additional insureds) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount no less than $1,000,000
per occurrence with an ""Additional Insured Managers or Lessors of Premises''
endorsement and contain the ""Amendment of the Pollution Exclusion''
endorsement for damage caused by heat, smoke or fumes from a hostile fire.
The policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed
under this Lease as an ""insured contract'' for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance required
by this Lease or as carried by Lessee shall not, however, limit the liability
of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be
carried by Lessee shall be primary to and not contributory with any similar
insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring against
loss or damage to the Premises. Such insurance shall be for full replacement
cost, as the same shall exist from time to time, or the amount required by any
Lender(s), but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age of
the improvements involved, such latter amount to less than full replacement
cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and
Lessee's personal property shall be insured by Lessee pursuant to paragraph
8.4. If the coverage is available and commercially appropriate, Lessor's
policy or policies shall insure against all risks of direct physical loss or
damage (except the perils of flood and/or earthquake unless required by a
Lender), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement for any
ordinance or law regulating the reconstruction or replacement of any undamaged
sections of the Building required to be demolished or removed by reason of
the enforcement of any building, zoning, safety or land use laws as the
result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu
of any co-insurance clause, waiver of subrogation, and inflation guard
protection causing an increase in the annual property insurance coverage
amount by a factor of not less than the adjusted U.S. Department of Labor
Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and any Lender(s), insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor for
one year (including all Real Property Taxes, insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said insurance may
provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide
for one full year's loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually
to reflect projected rental income, Real Property Taxes, insurance premium
costs and other expenses, if any, otherwise payable, for the next 12-month
period. Common Area Operating Expenses shall include any deductible amount in
the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common
Areas or other buildings in the Industrial Center if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring
Party, Lessor shall not be required to insure Lessee-Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures and
Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insured Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost
coverage with a deductible not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of
personal property and the restoration of Trade Fixtures and Lessee-Owned
Alterations and Utility Installations. Upon request from Lessor, Lessee shall
provide Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in
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this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven
(7) days after the earlier of the Early Possession Date or the Commencement
Date, certified copies of, or certificates evidencing the existence and
amounts of, the insurance required under paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty
(30) days' prior written notice to Lessor. Lessee shall at least FOURTEEN
(14) DAYS prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, loss of permits, attorneys' and
consultants' fees, expenses and/or liabilities arising out of, involving, or
in connection with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees, TO THE EXTENT CAUSED BY NEGLIGENCE OF
LESSEE OR any Default or Breach by Lessee in the performance in a timely
manner of any obligation on Lessee's part to be performed under this Lease.
The foregoing shall include, but not be limited to, the defense or pursuit of
any claim or any action or proceeding involved therein, and whether or not
(in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by
reason of any of the foregoing matters, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need
not have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. EXCEPT FOR LESSOR'S NEGLIGENCE
AND/OR BREACH OF EXPRESS WARRANTIES Lessor shall not be liable for injury or
damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other lessee of Lessor nor from the failure by
Lessor to enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent
(50%) of the then Replacement Cost (as defined in paragraph 9.1(d)) of the
Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building) of the
Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds or
adequate assurance thereof within said ten (10) day period, Lessor shall
complete them as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within such ten (10) day period, and if
Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for any funds contributed by Lessee to repair
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
9.3 PARTIAL DAMAGE UNINSURED LOSS. If Premises Partial Damage that is
not an insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
receipt by Lessor of knowledge of the occurrence of such damage of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
date of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the right
within ten (10) days after the receipt of such notice to give written notice
to Lessor of Lessee's commitment to pay for the repair of such damage totally
at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof
within thirty (30) days following such commitment from Lessee. In such event
this Lease shall continue in full force and effect, and Lessor shall proceed
to make such repairs as soon as reasonably possible after the required funds
are available. If Lessee does not give such notice and provide the funds or
assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an Insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has any
exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by (a) exercising such option, and (b)
providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten (10) days after Lessee's receipt of Lessor's written
notice purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option during
such period and provides Lessor with funds (or adequate assurance thereof) to
cover any shortage in Insurance proceeds, Lessor shall, at Lessor's expense
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
and provide such funds or assurance during such period, then this Lease shall
terminate as of the date set forth in the first sentence of this Paragraph
9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base
Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not in
excess of proceeds from insurance required to be carried under Paragraph
8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses
and other charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue. Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice
to Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after the receipt of such notice, this Lease shall continue in full force and
effect. "Commence" as used in this Paragraph 9.6 shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but
subject
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to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense,
in which event this Lease shall continue in full force and effect, or (ii) if
the estimated cost to investigate and remediate such condition exceeds twelve
(12) times the then monthly Base Rent or $100,000 whichever is greater, give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
date of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the right
within ten (10) days after the receipt of such notice to give written notice
to Lessor of Lessee's commitment to pay for the excess costs of (a)
investigation and remediation of such Hazardous Substance Condition to the
extent required by Applicable Requirements, over (b) an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater. Lessee shall provide Lessor with the funds required of Lessee or
satisfactory assurance thereof within thirty (30) days following said
commitment by Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds
or assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance
payment made by Lessee to Lessor and so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in
the calculation of Common Area Operating Expenses in accordance with the
provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Industrial Center by any
authority having the direct or indirect power to tax, including any city,
state or federal government, or any school, agricultural, sanitary, fire,
street, drainage, or other improvement district thereof, levied against any
legal or equitable interest of Lessor in the Industrial Center or any portion
thereof, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including but not limited to a change
in the ownership of the Industrial Center or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer thereof,
and whether or not contemplated by the Parties. In calculating Real Property
Taxes for any calendar year, the Real Property Taxes for any real estate tax
year shall be included in the calculation of Real Property Taxes for such
calendar year based upon the number of days which such calendar year and tax
year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such
other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however,
pay to Lessor at the time Common Area Operating Expenses are payable under
Paragraph 4.2, the entirety of any increase in Real Property Taxes if
assessed solely by reason of Alterations, Trade Fixtures or Utility
Installations placed upon the Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of
the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee contained in the Premises or stored within the Industrial
Center. When possible, Lessee shall cause its Lessee-Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of Lessor. If any of Lessee's said property shall be assessed with Lessor's
real property, Lessee shall pay Lessor the taxes attributable to Lessee's
property within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with any
taxes thereon. If any such utilities or services are not separately metered to
the Premises or separately billed to the Premises, Lessee shall pay to Lessor
a reasonable proportion to be determined by Lessor of all such charges jointly
metered or billed with other premises in the Building, in the manner and
within the time periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis,
of fifty percent (50%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a
formal assignment or hypothecation of this Lease or Lessee's assets occurs,
which results or will result in a reduction of the Net Worth of Lessee, as
hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of full execution and delivery of this Lease or at the time of the
most recent assignment to which Lessor has consented, or as it exists
immediately prior to said transaction or transactions constituting such
reduction, at whichever time said Net Worth of Lessee was or is greater,
shall be considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this
Lease shall be the net worth of Lessee (excluding any Guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be
a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to
treat such unconsented to assignment or subletting as a non-curable Breach,
Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon
thirty (30) days' written notice ("LESSOR'S NOTICE"), increase the monthly
Base Rent for the Premises to the greater of the then fair market rental
value of the Premises, as reasonably determined by Lessor, or one hundred ten
percent (110%) of the Base Rent then in effect. Pending determination of the
new fair market rental value, if disputed by Lessee, Lessee shall pay the
amount set forth in Lessor's Notice, with any overpayment credited against
the next installments(s) of Base Rent coming due, and any underpayment for
the period retroactively to the effective date of the adjustment being due
and payable immediately upon the determination thereof. Further, in the event
of such Breach and rental adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar adjustment
to the then fair market value as reasonably determined by Lessor (without the
Lease being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and in
good condition) or one hundred ten percent (110%) of the price previously in
effect, (ii) any index-oriented rental or price adjustment formulas contained
in this Lease shall be adjusted to require that the base index be determined
with reference to the index applicable to the time of such adjustment, and
(iii) any fixed rental adjustments scheduled during the remainder of the
Lease term shall be increased in the same ratio as the new rental bears to
the Base Rent in effect immediately prior to the adjustment specified in
Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver of estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable under this Lease or the
sublease and without obtaining their consent, and such action shall not
relieve such persons from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors
or anyone else responsible for the performance of the Lessee's obligations
under this Lease, including any sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination
as to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base
Rent applicable to the portion of the Premises which is the subject of the
proposed assignment or sublease, whichever is greater, as reasonable
consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.
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(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment schedule of the
rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a
portion of the Premises heretofore or hereafter made by Lessee, and Lessor
may collect such rent and income and apply same toward Lessee's obligations
under this Lease; provided, however, that until a Breach (as defined in
Paragraph 13.1) shall occur in the performance of Lessee's obligations under
this Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of the foregoing provision or any other assignment of such sublease
to Lessor, nor by reason of the collection of the rents from a sublessee, be
deemed liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and the charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay to Lessor the rents and other charges due and to become due under the
sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by
said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH, LESSOR AND LESSEE AGREE that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said default. A "Default" by
Lessee is defined as a failure by Lessee to observe, comply with or perform
any of the terms, covenants, conditions or rules applicable to Lessee under
this Lease. A "Breach" by Lessee is defined as the occurrence of any one or
more of the following Defaults, and, where a grace period for cure after
notice is specified herein, the failure by Lessee to cure such Default prior
to the expiration of the applicable grace period, and shall entitle Lessor to
pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance or surely bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues
for a period of three (3) days following written notice thereof by or on
behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3 (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor to Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) the occurrence of any of the following events: (i) the making
by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days;
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed; (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such
event, to provide Lessor with written alternative assurances of security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
exists at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The reasonable costs and expenses of any such performance by
Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If
any check given to Lessor by Lessee shall not be honored by the bank upon
which it is drawn, Lessor, at its own option, may require all future payments
to be made under this Lease by Lessee to be made only by cashier's check. In
the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1),
with or without further notice or demand, and without limiting Lessor in the
exercise of any right or remedy which Lessor may have by reason of such
Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time of
award plus one percent (1%). Efforts by Lessor to mitigate damages caused by
Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall
have the right to recover in such proceeding the unpaid rent and damages as
are recoverable therin, or Lessor may reserve the right to recover all or any
part thereof in a separate suit for such rent and/or damages. If a notice and
grace period required under Subparagraph 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such
case, the applicable grace period under the unlawful detainer statute shall
run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two (2) such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right
to sublet or assign, subject only to reasonable limitations. Lessor and
Lessee agree that the limitations on assignment and subletting in this Lease
are reasonable. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver to protect the Lessor's interest
under this Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
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(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS"
shall be deemed conditioned upon Lessee's full and faithful performance of
all the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of this Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering
the Premises. Accordingly, if any installment of rent or other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for the
taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed
in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option
subsequently granted, or (b) if Lessee acquires any rights to the Premises or
other premises in which Lessor has an interest, or (c) if Lessee remains in
possession of the Premises with the consent of Lessor after the expiration of
the term of this Lease after having failed to exercise an Option, or (d) if
said Brokers are the procuring cause of any other lease or sale entered into
between the Parties pertaining to the Premises and/or any adjacent property
in which Lessor has an interest, or (e) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then as to any of said
transactions, Lessor shall pay Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this
Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation
of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of the
provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its
interest in any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm,
broker or finder other than as named in Paragraph 1.10(a) in connection
with the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such
unnamed broker, finder or other similar party by reason of any dealings or
actions of the Indemnifying Party, including any costs, expenses, and/or
attorneys' fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within
ten (10) days after written notice from the other Party (the "REQUESTING
PARTY") execute, acknowledge and deliver to the Requesting Party a statement
in writing in a form similar to the then most current "TENANCY STATEMENT"
form published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this
Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party. Each Broker shall be an intended
third party beneficiary of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger
or courier service) or may be sent by regular, certified or registered mail
or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission during normal business hours, and shall be deemed sufficiently
given if served in a manner specified in this Paragraph 23. The addresses
noted adjacent to a Party's signature on this Lease shall be that Party's
address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises
shall constitute Lessee's address for the purpose of mailing or delivering
notices to Lessee. A copy of all notices required or permitted to be given to
Lessor hereunder shall be concurrently transmitted to such party or parties
at such addresses as Lessor may from time to time hereafter designate by
written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail, the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein and
mailed with postage prepaid. Notices delivered by United States Express
Mail or overnight courier that guarantees next day
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delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this
Paragraph 26 then the Base Rent payable from and after the time of the
expiration or earlier termination of this Lease shall be increased to two
hundred percent (200%) of the Base Rent applicable during the month
immediately preceding such expiration or earlier termination. Nothing
contained herein shall be construed as a consent by Lessor to any holding
over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device,
and that in the event of such foreclosure, such new owner shall not: (i) be
liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets
or defenses which Lessee might have against any prior lessor, or (iii) be
bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document
any such subordination or non-subordination, attornment and/or non-disturbance
agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by
compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fee award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in preparation and
service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with
such Default or resulting Breach. Broker(s) shall be intended third party
beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or Building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred eighty (180) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of rent or liability
to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without
first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determing whether to grant such
consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions
of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures
and Alterations). Unless otherwise expressly agreed herein, Lessor reserves
all rights to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall in the event of any such
surrender, termination or cancellation, have the option to continue any one
or all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects', attorneys', engineers' and other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises, including
but not limited to consents to an assignment a subletting or the presence or
use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt
of an invoice and supporting documentation therefor. In addition to the
deposit described in Paragraph 12.2(e), Lessor may, as a condition to
considering any such request by Lessee, require that Lessee deposit with
Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor
will incur in considering and responding to Lessee's request. Any unused
portion of said deposit shall be refunded to Lessee without interest.
Lessor's consent to any act, assignment of this Lease or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no Default or
Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other
conditions as are then reasonable with reference to the particular matter for
which consent is being given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the
same obligations as Lessee under this lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or
refuses, upon reasonable request by Lessor to give: (a) evidence of the due
execution of the guaranty called for by this Lease, including the authority
of the Guarantor (and of the party signing on Guarantor's behalf) to obligate
such Guarantor on said guaranty, and resolution of its board of directors
authorizing the making of such guaranty, together with a certificate of
incumbency showing the signatures of the persons authorized to sign on its
behalf, (b) current financial statements of Guarantor as may from time to
time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to
all of the provisions of this Lease.
-9-
<PAGE>
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to lease
other property of Lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by
any person or entity other than said original Lessee while the original
Lessee is in full and actual possession of the Premises and without the
intention of thereafter assigning or subletting. The Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of
this Lease or separately or apart therefrom, and no Option may be separated
from this Lease in any manner, be reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary:
(i) during the period commencing with the giving of any notice of Default
under Paragraph 13.1 and continuing until the noticed Default is cured, or
(ii) during the period of time any monetary obligation due Lessor from Lessee
is unpaid (without regard to whether notice thereof is given Lessee), or
(ii) during the time Lessee is in Breach of this Lease, or (iv) in the event
that Lessor has given to Lessee three (3) or more notices of separate Defaults
under Paragraph 13.1 during the twelve (12) month period immediately
preceding the exercise of the Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the term
of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or
(ii) Lessor gives to Lessee three (3) or more notices of separate Defaults
under Paragraph 13.1 during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants
or tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
same. Lessee assumes all responsibility for the protection of the Premises,
Lessee, its agents and invitees and their property from the acts of third
parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause
the recordation of parcel maps and restrictions, so long as such easements,
rights of way, utility raceways, dedications, maps and restrictions do not
reasonably interfere with the use of the Premises by Lessee. Lessee agrees to
sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If either Party hereof is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute
and deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not
be deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
-10-
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE
OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION
TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE
OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA,
AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE
CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<CAPTION>
<S> <C>
Executed at: Sebastopol Executed at: Rancho Cordova
------------------------------------ ------------------------------------
on: 9/10/99 on: 9/13/99
--------------------------------------------- -----------------------------------------------
BY LESSOR: BY LESSEE:
THE HASEGAWA FAMILY TRUST VANTAGEMED, INC.
- ------------------------------------------------- -------------------------------------------------
- ------------------------------------------------- -------------------------------------------------
By: /s/ Jun Hasegawa By: /s/ T.A. McCreery
--------------------------------------------- ---------------------------------------------
Name Printed: JUN HASEGAWA Name Printed: T.A. McCreery
----------------------------------- -----------------------------------
Title: OWNER Title: CFO
------------------------------------------ ------------------------------------------
By: /s/ Noriko Hasegawa By: _____________________________________________
---------------------------------------------
Name Printed: NORIKO HASEGAWA Name Printed: ___________________________________
-----------------------------------
Title: OWNER Title: __________________________________________
------------------------------------------
Address:_________________________________________ Address: 3017 KILGORE ROAD, SUITE #180
----------------------------------------
_________________________________________________ RANCHO CORDOVA, CA 95670
---------------------------------------
Telephone: ( )_________________________________ Telephone: (916) 638-4744
--------------------------------------
Facsimile: ( )_________________________________ Facsimile: (916) 638-0504
--------------------------------------
BROKER: BROKER:
Executed at: ____________________________________ Executed at: ____________________________________
on: _____________________________________________ on: _____________________________________________
By: _____________________________________________ By: _____________________________________________
Name Printed: ___________________________________ Name Printed: ___________________________________
Title: __________________________________________ Title: __________________________________________
Address:_________________________________________ Address:_________________________________________
_________________________________________________ _________________________________________________
Telephone: ( )_________________________________ Telephone: ( )_________________________________
Facsimile: ( )_________________________________ Facsimile: ( )_________________________________
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071.
(213) 687-8777.
-11-
<PAGE>
LEASE ADDENDUM
ADDENDUM TO LEASE
DATED AUGUST 20, 1999
BY AND BETWEEN
JUN AND NORIKO HASEGAWA
AS TRUSTEES FOR THE HASEGAWA FAMILY TRUST,
AS LESSOR
AND
VANTAGEMED, INC., AS LESSEE
49. LEASE TERMINATION:
The premises shall be leased to Lessee on a month to month basis.
Upon written notification from Lessor, Tenant shall have 30 days to
vacate space. Upon vacating space, tenant shall clean space of any
debris.
50. LEASE TYPE
Triple Net (NNN) with expenses estimated at Three Hundred Seventy
Five and 12/100 Dollars ($375.12) per month.
51. LESSOR'S IMPROVEMENTS:
None.
52. MARKETING:
During the lease term, Lessor shall have right to market space and
enter into a lease with third party.
53. OCCUPANCY TYPE:
Should any governmental authority require any additional improvements,
modifications, licenses and/or permits of any kind, including but not
limited to, a conditional use permit due to Lessee's use and/or
occupancy of the Premises, it shall be provided by Lessee, at Lessee's
sole expense. It is Lessor's understanding that Lessee will not be using
flammable solvents or utilizing the Premises in any way that would
cause Lessee's occupancy to be considered anything other than a B-1 or
B-2 type occupant.
In the event that Lessee is classified under any other occupancy type
(such as an H-2 or H-3 type for example) which requires any
additional improvements to the space (i.e. additional fire sprinkler
drops, ventilation equipment and/or ducting, additional sheetrock, and
etc.), or by Lessee's use of the Premises, increases the fire
insurance premiums on the building, Lessee shall be responsible to
pay for and/or provide the same.
54. TOXICS DISCLOSURE:
"Landlord and Tenant acknowledge that they have been advised that
numerous federal, state, and/or local laws, ordinances and regulations
("Laws") affect the existence and removal, storage, disposal, leakage
of and contamination by materials designated as hazardous or toxic
("Toxics"). Many materials, some utilized in everyday business
activities and property maintenance, are designated as hazardous or
toxic.
Some of the Laws require that Toxics be removed or cleaned up without
regard to whether the party required to pay for the "clean up" caused
the contamination, owned the property at the time of contamination
occurred or even knew about the contamination. Some items, such as
asbestos or PCB's, that were legal when installed, now are classified
as Toxics, and are subject to removal requirements. Civil lawsuits for
damages resulting from Toxics may be filed by third parties in certain
circumstances.
Waller, Kaufman & Sutter has recommended, and hereby recommends, that
each of the parties have competent professional environmental
specialists review the Property and make recommended tests to that a
reasonably informed assessment of these matters can be made by each of
the parties. Landlord and Tenant acknowledge that neither Waller,
Kaufman & Sutter nor its agents or salespersons, have been retained to
investigate or to arrange for investigation by others, and have not
made any recommendations or representations with regard to the presence
or absence of Toxics on, in or beneath the Property. Landlord and Tenant
agree that they will rely only on persons who are experts in this field
and will obtain such expert advice so each of them will be as fully
informed as possible with regard to Toxics in entering into this
Agreement.
55. TOXIC MATERIALS:
A. Lessee shall not cause or permit to be discharged into the
plumbing or sewage system of the Premises or onto the and underlying
or adjacent to it, any hazardous, toxic or radioactive materials,
including, but not limited to, those materials identified in
Section 6680 or Title 22 of the California Administrative Code,
Division 4, Chapter 30, as amended from time to time (collectively
"Toxic Materials"). Lessee shall, at its sole expense, comply with any
and all rules,
<PAGE>
LEASE ADDENDUM
(CONTINUED)
regulations, codes, ordinances, statutes, and other requirements of
lawful governmental authority respecting to Toxic Materials,
pollution, harmful chemicals, and other materials in connection with
Lessee's activities on or about the Premises. Lessee specifically
agrees to comply with any such requirements relating to the handling,
use, storage, and disposal of Toxic Materials and other materials
which are considered by any such governmental authorities as harmful,
dangerous, toxic, flammable, or otherwise deserving of special care.
Lessee shall pay the full cost of any clean-up work performed on or
about the Industrial Center as required by any governmental authority
in order to remove, neutralize or otherwise treat materials of any
type whatsoever directly or indirectly placed on or about the
Premises by Lessee or its agents, employees, contractors, or invitees.
B. Lessee shall be solely responsible for and shall indemnify,
defend, and hold Lessor harmless from any and all claims, judgements,
demands, causes or action, proceedings or hearings (collectively
"Claims") relating to the storage, placement or use of Toxic Materials
by Lessee, its agents or invitees on or about the Premises, including,
but not limited to, Claims resulting from the contamination of
subterranean water beneath, adjoining or in the vicinity of the
Industrial Center. Lessee agrees to defend all such Claims on behalf
of Lessor with counsel acceptable to Lessor, and to pay all fees,
costs, damages, or expenses relating to or arising out of, or in
connection with, any removal, clean-up, or restoration work which is
required by any governmental agency having jurisdiction and which arises
from Lessee's storage, use or disposal of Toxic Materials on or about
the Premises during the term of this Lease, or Option Term, if
exercised: provided, however, that Lessee shall not be responsible for,
and Lessor shall indemnify Lessee against, claims, Toxics and Toxic
materials relating to the building to the extent they either (i) exist
in or about the building prior to the date of this lease, or (ii) were
not caused by Lessee during the term of the Lease.
56. BROKER WARRANTY
Lessee and Lessor hereby represent and warrant to each other that
Waller, Kaufman & Sutter is the only real estate broker involved in this
transaction. Furthermore, Lessee and Lessor hereby acknowledge that
Waller, Kaufman & Sutter represents both parties herein, and consent
thereto.
57. DOCUMENT PREPARATION:
This Lease has been prepared merely as a service to Lessee and Lessor
by Waller, Kaufman & Sutter and makes no representations as to the
legal sufficiency or economic interpretation of this Lease. Lessee and
Lessor are hereby advised to consult their personal attorneys regarding
the legal aspects hereof.
58. THE AMERICANS WITH DISABILITIES ACT (ADA):
Please be advised that an owner or tenant of real property may be
subject to the Americans With Disabilities Act (the ADA). The Act
requires owners and tenants of "public accommodations" to remove
barriers to access by disabled persons and provide auxiliary aids and
services for hearing, vision or speech impaired persons. You are advised
to consult your attorney with respect to the application of this Act to
the Property. Waller, Kaufman & Sutter cannot give you legal advice on
this Act or its requirements.
59. BROKER REPRESENTATION:
Lessor and Lessee hereby acknowledge that Broker represents both
parties hereto; and both parties consent thereto.
60. BROKER DISCLOSURE:
The parties hereby expressly acknowledge that Broker has made no
independent determination or investigation regarding, but not limited
to, the following: present or future use of the property; environmental
matters affecting the Property; the condition of the Property,
including, but not limited to structural, mechanical and soils
conditions, as well as issues surrounding hazardous wastes or substances
as set out above; violations of the Occupational Safety and Health Act
or any other federal, state, county, or municipal laws, ordinances, or
statutes; measurements of land and/or buildings. Lessee agrees to make
its own investigation and determination regarding such items.
<PAGE>
LEASE ADDENDUM
--------------
(CONTINUED)
AGREED AND ACKNOWLEDGED:
LESSOR: JUN AND NORIKO HASEGAWA, AS TRUSTEES FOR THE HASEGAWA FAMILY TRUST
BY: /s/ Jun Hasegawa DATE: 9/10/99
----------------------------------- ------------------
BY: /s/ Noriko Hasegawa DATE: 9/10/99
----------------------------------- ------------------
LESSEE: VANTAGEMED, INC.
BY: /s/ T.A. McCreery DATE: 8/23/99
----------------------------------- ------------------
<PAGE>
EXHIBIT 10.4
MANAGEMENT EMPLOYMENT AGREEMENT
(JAMES L. SEILER)
This MANAGEMENT EMPLOYMENT AGREEMENT (this "Agreement") is made as of
July _____, 1999, by and between VantageMed Corporation, a Delaware corporation
(the "Company"), and James L. Seiler ("Employee").
WHEREAS, the Company desires to employ the Employee to perform the
duties of Chief Executive Officer of the Company.
WHEREAS, the Company has informed Employee that it maintains a cap on
the base salary compensation of employees, which cap is currently set at
$120,000 (the "Compensation Cap").
WHEREAS, Employee has expressed, to the Company, his willingness to
adhere to the Compensation Cap, subject to his entitlement to an increase in his
compensation commensurate with any increases in the Compensation Cap which are
authorized by the Company.
WHEREAS, the Employee desires to be employed by the Company to perform
such duties upon the terms and conditions herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, the parties agree as follows:
1. SALARY. The Company shall employ the Employee as its Chief
Executive Officer to perform the above described duties on a three-year basis
starting on the Effective Date as defined in Section 18 and ending August 1,
2002, at an annual base salary of $120,000 per annum payable in accordance
with the customary practices of the Company, plus such salary increases and
bonuses as are approved by the Board of Directors from time to time. The
annual base salary, which excludes all benefits, paid and/or reimbursed
expenses and incentive and/or bonus plan payments, as in effect from time to
time, is referred to herein as the "Base Salary". After such three-year
period, this Agreement will continue on a month-to-month basis until
terminated as provided herein. Employee agrees to accept the above amount and
the benefits described in Section 5 in full payment for the services to be
rendered by him hereunder, provided, however, that the Board of Directors
Compensation Committee and Employee will meet no later than six (6) months
after the date of this Agreement, and at each anniversary of this Agreement,
and determine if an increase in Base Salary is appropriate, and if
appropriate agree upon the new Base Salary, with the view to setting
Employee's Base Salary to the base salary that would be paid to a similarly
skilled and experienced executive in similar companies performing at
comparable levels, taking into consideration the skills and experience of
Employee and the achievement of milestones, financial results, performance,
growth, and profits of the Company, as determined by the Board of Directors
(or its Compensation Committee) in its sole and absolute discretion, and
subject to the Company's Compensation Cap. At no time during the term of the
Agreement shall Employee receive a Base Salary of less than the greatest of
(1) $120,000 per annum; (2) the Company's Compensation Cap then in effect as
determined by the Board of Directors of the Company; or (3) the base salary
of the highest paid officer and/or employee of the Company at any given time.
2. DUTIES. The Employee shall during the term of his employment
hereunder:
A. devote his full normal working time, energies and attention
to the duties of his employment, as they may be reasonably established from time
to time by the Board of Directors consistent with the position and office
occupied by Employee, provided, however, that (1) Subject to
1
<PAGE>
disclosure to and approval by the Board of Directors, which approval shall not
be unreasonably withheld, Employee shall have the right, in his discretion, to
accept and carry out the duties associated with his membership on the Board of
Directors of other companies as consistent with the terms of this Agreement, as
well as on industry standard committees and similar organizations; (2) Employee
shall be responsible for direction of the overall affairs of the Company
(subject to general direction from the Board of Directors); and (3) all officers
and/or employees of the Company shall either report to Employee or to another
officer who shall then report to Employee;
B. comply with all reasonable rules, regulations and
administrative directions now or hereafter established by the Board of Directors
of the Company;
C. be reimbursed by the Company from time to time (but at
least monthly) for all reasonable and necessary business expenses incurred by
him in the performance of his duties hereunder, provided that Employee shall
render to the Company such accounts and vouchers covering expenditures as the
Company reasonably requires and as are necessary for tax purposes, and shall
follow normal Company policy on expenses; and
D. not engage in any activity or employment which would
reasonably be expected to materially conflict with or have a material adverse
affect on, the present or prospective business of the Company.
3. TERMINATION.
A. MUTUAL AGREEMENT. This Agreement may be terminated at any
time by the mutual agreement of the Company and Employee, expressed in writing.
B. VOLUNTARY. Employee may terminate this Agreement with or
without the consent of the Company by giving written notice of his intent to
terminate with the effective date of termination at least one hundred (100) days
after the effective date of the notice of termination. Subject to the Company's
payment of all compensation (including Base Salary and accrued benefits,
bonuses, and incentives) due to Employee through the end of the one hundred
(100) day notice period, the Company may accelerate the effective date of
termination without being in breach hereof.
C. WITHOUT CAUSE. Subject to the conditions set forth in
Section 4 of this Agreement, the Company may terminate this Agreement at any
time without Cause upon twenty (20) days prior written notice or upon Employee's
death.
D. DISABILITY. The Company may terminate this Agreement upon
the disability of Employee. For purposes of this Agreement, Employee shall be
considered disabled if he is unable to perform his duties under this Agreement
as a result of injury, illness or other disability for a period of one hundred
eighty (180) consecutive days, or one hundred eighty (180) days in a three
hundred sixty-five (365) day period, and the Board of Directors of the Company
reasonably determines that Employee has been unable to perform his duties for
the one hundred eighty (180) day period as a result of injury, illness or other
disability.
E. FOR CAUSE BY THE COMPANY.
The Company may terminate this Agreement for "Cause", as
defined below, immediately upon written notice to Employee. "Cause" shall mean:
2
<PAGE>
(i) If Employee materially violates any term of this
Agreement or his Employee Proprietary Information and Inventions Agreement, and
such action or failure is not substantially remedied or reasonable steps to
effect such substantial remedy are not commenced within twenty (20) days of
written notice from the Company to Employee.
(ii) A conviction or a final, nonappealable judgment by
a court of competent jurisdiction involving a charge or claim of dishonesty;
(iii) A conviction or a final, nonappealable judgment
by a court of competent jurisdiction involving a charge or claim of willful
misfeasance or nonfeasance of duty by Employee intended to injure or having the
effect of injuring in some material fashion the reputation, business or business
relationships of the Company or any of its subsidiaries or any of their
respective officers, directors or employees;
(iv) Conviction of Employee upon a felony charge.
(v) Willful or prolonged absence from work by the
Employee (other than by reason of disability due to physical or mental
illness) or failure, neglect or refusal by the Employee to perform his duties
and responsibilities without the same being corrected upon twenty (20) days
prior written notice.
F. FOR CAUSE BY THE EMPLOYEE. If the Company materially
violates any term of this Agreement and such failure is not remedied upon twenty
(20) days prior written notice, or if Employee is removed from the Company's
board of directors other than for Cause, Employee may terminate this Agreement
immediately upon a confirming written notice to the Company. Such termination is
a termination by Employee for Cause.
4. PAYMENTS AT TERMINATION.
A. Upon (i) termination of this Agreement by the Company under
Subsection 3.C. titled "Without Cause," (ii) termination of this Agreement by
Employee under Subsection 3.F. titled "For Cause by the Employee," or (iii)
termination of this Agreement by the Company or by the Employee under Subsection
13 of this Agreement, Employee shall receive monthly payments equal to his last
Base Salary prior to termination ("Applicable Base Salary") through August 1,
2002, beginning in the month next following such Employee termination. In
addition, Employee shall receive all accrued compensation, benefits, and
unreimbursed expenses to the date of termination as provided herein. The monthly
payments provided for in this Subsection shall be paid on a monthly basis on the
first of each month and shall not be reduced by compensation the Employee may
receive from other sources. In addition, in the event of such termination, all
unexercised stock options granted hereunder or otherwise granted to Employee
during the term of this Agreement, as well as any non-qualified stock options
assumed by the Company in connection with the merger (the "Merger") of Mariner
Systems, Inc. with a subsidiary of the Company (the "Assumed Options"), shall
vest and become exercisable on the date of termination. For any Assumed Options,
the period for exercise of such options shall continue for the greater of the
maximum length of time the options are exercisable under the terms of the
original option grant(s), as though the employment of Employee had not
terminated, and two (2) years after the date of termination of Employee's
employment.
B. If the Company terminates this Agreement due to disability,
pursuant to Subsection 3.D., Employee shall receive the disability payments
provided for by the Company's disability insurance policy. The Company shall
maintain a disability insurance policy providing for payments at the rate of
sixty percent (60%) of his Applicable Base Salary or the maximum legal amount,
whichever is
3
<PAGE>
less, until the earlier of the end of disability, Employee's death or the date
Employee attains 65 years of age. If the Company terminates this Agreement due
to disability, pursuant to Subsection 3.D., the Company shall also pay all
accrued compensation and unreimbursed expenses to the date of termination as
provided herein. The monthly payments provided for in this Subsection shall be
paid at such times payments are made under the disability policy provided for in
this Subsection. Except as required by such policy or applicable law, payments
shall not be reduced by compensation the Employee may receive from other
sources.
C. If Employee terminates this Agreement without cause under
Subsection 3.B., titled "Voluntary", or if this Agreement is terminated under
Subsection 3.A., titled "Mutual Agreement," or if this Agreement is terminated
by the Company under Subsection 3.E. titled "For Cause by the Company" or if
this Agreement is terminated for any reason following August 1, 2002, Employee
shall not be entitled to any further payments except unreimbursed expenses to
the date of termination as provided herein and any accrued benefits (including
vacation) and compensation, and the stock options granted by the Company to
Employee not fully vested will be canceled.
D. In each of the foregoing cases, termination is the date of
actual termination, not the date notice of termination is given. Other than
payments owing under a provision providing for payments at a different time, all
payments for accrued unpaid monthly compensation, including accrued benefits and
vacation, and for unreimbursed expenses, shall be made on the date of
termination.
E. Unless specified otherwise in an applicable bonus plan or
bonus agreement with Employee, if termination occurs during a specified bonus
period pursuant to Subsection 3.C. titled "Without Cause" or Subsection 3.F.
titled "For Cause by the Employee," or Subsection 3.D. titled "Disability," and
based upon the results of the full bonus period for which the bonus would have
been earned, the payment of any bonus which would have been earned shall be
calculated based upon the number of calendar days in such bonus period which
have elapsed at the date of termination. Unless specified otherwise in the bonus
plan or bonus agreement, if Employee is terminated "For Cause by the Company"
(Subsection 3.E.), or Employee terminates without Cause (Subsection 3.B.) or
Employee after termination violates a confidentiality, covenant not to compete,
or "no hire" or "no raid" agreement with the Company, its parent (if any) or a
direct or indirect Company subsidiary, then the Company shall have no obligation
to pay any earned or unearned bonus or the payments provided for in the first
sentence of Section 4.A. hereof.
F. If this Agreement is operating under the month-to-month
provision of Section 1, any payment for unpaid future compensation shall in any
case be limited to the remainder of the month in which termination occurs,
except as provided in Subsections 4.B. or 4.E.
G. The foregoing rights in this Section 4 are Employee's
exclusive rights to payment from the Company in the event of termination of this
Agreement except for amounts which the Company is required to pay under
applicable statute or regulation, payments under insurance policies, and
payments owing under other written agreement(s) (if any) between the Company and
Employee.
5. VACATION; BENEFITS; LOCATION.
A. Employee shall be entitled to accrual of vacation time in
accordance with the Company's vacation policy. For purposes of determining
accrual of benefits, Employee's beginning service date shall be made retroactive
to September 1, 1993.
B. In addition to the insurance provided for by Subsection
4.B., Employee will receive insurance (to the extent not redundant of the
insurance provided for by Subsection 4.B.), benefits,
4
<PAGE>
perquisites, and any other forms of compensation as are received by other
officers of the Company including, but not limited to, participation in stock
option plans (taking into account the aggregate of all options from time to time
granted to Employee and acknowledging the option grants to Employee on or about
the date hereof do not preclude future grants), and any cash and/or stock bonus
and/or incentive plans.
C. In connection with the execution of this Agreement, the
Company as of the Effective Date hereby grants 300,000 stock options to Employee
pursuant to the Company's Stock Option Plans (the "Option Plans"). Such stock
options shall vest on a monthly basis, as of the 1st day of each month, over a
period of three years from the date of this grant, in the amount of 8,333
options per month each month for 35 months and 8,345 for the 36th month, have a
term of ten years, and be exercisable for two years after the end of employment.
The exercise price for the stock options granted hereby is $3.70 per share. To
the maximum extent possible such options are incentive stock options with the
balance being non-qualified stock options.
D. The Company acknowledges and agrees that Employee shall
continue to reside in Boulder, Colorado. The Company shall maintain for Employee
an office in Boulder commensurate with normal Company business practices and
befitting Employee's executive position. All expenses for such office shall be
paid by Company and shall be considered business expenses of Company. It is
anticipated that Employee may travel to and from and spend extended periods of
time at various Company offices, customer sites and investor sites and may
travel for other business purposes and, therefore, will incur costs such as
travel, lodging, food, rental car and other miscellaneous expenses ("Travel
Expenses"). The Company will either pay for directly, or reimburse Employee for,
all Travel Expenses that Employee shall incur and shall consider these as normal
business expenses to Company in accordance with the Company's expense
reimbursement policies and procedures. Under no circumstances shall such Travel
Expenses be recorded as compensation to Employee; however, should any of these
expenses be deemed as taxable to Employee, the Company will gross up the
reimbursement to Employee for the taxes incurred.
E. Should the need arise for Employee to relocate outside of
Boulder, Colorado, and provided that such relocation is mutually agreeable
between the parties, Employee will negotiate in good faith for such a
relocation. Company agrees that such a relocation would be for the convenience
of Company and accordingly, Company would agree to negotiate with Employee for
payment of all expenses related to the relocation and personal income taxes
incurred by Employee in such a relocation. Should the parties not be able to
agree to the amount of the reimbursement, Employee would be under no requirement
to relocate.
6. NON-COMPETITION. Employee acknowledges that he has gained and will
gain extensive and valuable experience and knowledge in the business conducted
by the Company and will have extensive contacts with customers of the Company.
Accordingly, Employee covenants and agrees with the Company that, (a) during the
term of this Agreement and (b) in any event for the period ending on the earlier
of (i) one (1) year after the termination or expiration of his employment with
the Company or (ii) three (3) years after the date of this Agreement, he shall
not compete, directly or indirectly, with the Company in such business of the
Company as Employee is actively involved in (the "Business"). For the purposes
of Sections 6 and 7, the term "the Company" shall be deemed to include
subsidiaries and parents of the Company. Competing directly or indirectly with
the Company shall mean having a material interest, directly or indirectly, as a
shareholder, member, partner, officer, director, or employee, either alone or in
association with others, in the operation of any individual or entity engaged in
the Business within the continental United States. Competing directly or
indirectly with the Company, as used in this Agreement, shall be deemed not to
include an ownership interest as an inactive investor, which for purposes of
this Agreement shall mean the beneficial ownership of less than five (5) percent
of the
5
<PAGE>
outstanding shares of any series or class of securities of any direct competitor
of the Company, which shares are publicly traded in the securities markets. This
Section 6 shall no longer apply if both (A) (i) Employee has terminated this
Agreement for Cause pursuant to Section 3.F, or if the Company has terminated
this Agreement without Cause pursuant to Section 3.C. and (ii) the Company has
obligations to make post-termination payments under this Agreement and (B) after
twenty (20) days prior written notice by Employee to the Company that the
Company has failed to make such post-termination payments as provided for in
this Agreement the Company has not cured such failure to make payments.
7. NON-RAID. Employee acknowledges that he has had and will have
extensive contacts with employees and/or customers of the Company. Accordingly,
Employee covenants and agrees that, during the term of this Agreement and for
one year thereafter, he will not (i) solicit or encourage any employee of the
Company to leave the Company, (ii) interfere in the relationship of the Company
with any employee, or (iii) personally target or solicit, or assist another to
target or solicit, customers of the Company, for purposes which would compete
with the Business of the Company.
8. BLUE PENCIL PROVISION. Employee acknowledges that the periods, scope
and geographic area of restriction imposed by Section 6 and Section 7 are fair
and reasonable and are reasonably required for the protection of the Company. If
any part or parts of Section 6 or Section 7 shall be held to be unenforceable or
invalid, the remaining parts thereof shall nevertheless continue to be valid and
enforceable as though the invalid portion or portions were not a part hereof. If
any of the provisions of Section 6 or Section 7 relating to the scope, periods
of time or geographic area of restriction shall be deemed to exceed the maximum
scope, periods of time or geographic area which a court of competent
jurisdiction would deem enforceable, the scope, times and geographic area shall,
for the purposes of Section 6 and Section 7, be deemed to be the maximum scope,
time periods and geographic area which a court of competent jurisdiction would
deem valid and enforceable in any state in which such court of competent
jurisdiction shall be convened. The invalidity or unenforceability of any
provision of Section 6 or 7 in one jurisdiction shall not affect its validity or
enforceability in another jurisdiction.
9. RIGHT TO INJUNCTIVE RELIEF. Employee agrees and acknowledges that a
violation of the covenants contained in Sections 6 and 7 of this Agreement will
cause irreparable damage to the Company, and that it is and may be impossible to
estimate or determine the damage that will be suffered by the Company in the
event of a breach by Employee of any such covenant. Therefore, Employee further
agrees that in the event of any violation or threatened violation of such
covenants, the Company shall be entitled as a matter of course to an injunction
out of any court of competent jurisdiction restraining such violation or
threatened violation by Employee, such right to an injunction to be cumulative
and in addition to whatever other remedies the Company may have.
10. EXCEPTIONS. Employee may continue his current activities as a
shareholder, officer, director and/or member of certain companies and
industry-related organizations, and, subject to disclosure to and approval by
the Board of Directors of the Company, which approval shall not be unreasonably
withheld, may invest in and/or serve as an officer, director and/or member of
any other company or industry-related organization, provided that such
activities do not materially interfere with Employee's duties and
responsibilities hereunder and such activities do not otherwise violate this
Agreement.
11. DELIVERY OF FILES. At or immediately after termination hereof
Employee will deliver all files, records, disks, and other media with Company
information, to the Company.
12. INTEGRATION. This Agreement shall constitute the entire Agreement
relating to the employment of Employee. This Agreement shall be governed by the
laws of California, excluding laws on choice of law.
6
<PAGE>
13. UNENFORCEABILITY. If any paragraph or subparagraph of this
Agreement or any part thereof shall be unenforceable under any applicable laws,
notwithstanding such unenforceability the remainder of this Agreement shall
remain in full force and effect.
14. BINDING. This Agreement shall inure to the benefit of, and be
binding upon, the Company. It may be terminated by the Employee upon any merger,
consolidation, sale of 50% or more of the outstanding voting capital stock of
the Company to one other person and its affiliates, or a sale of 80% or more, by
fair market value, of the assets of the Company, and such termination shall be
considered to be a termination by the Company without Cause; provided, however,
that this Agreement shall not terminate upon a merger or consolidation, sale of
assets, sale of shares, or share exchange (i) pursuant to which shareholders of
the Company receive or hold in respect of their Company voting capital stock,
50% or more of the voting capital stock of the combined entities or purchaser,
and (ii) Employee assumes the position of CEO in the acquiring parent
organization.
15. NON-BINDING ARBITRATION. In the event a dispute arises in
connection with this Agreement, the parties hereto agree to submit the matter
for resolution to non-binding arbitration or mediation before the American
Arbitration Association offices in San Francisco, California. In the event
either party is dissatisfied with the decision reached by the arbitrators or
mediators, such party may pursue adjudication of the dispute in a court of law.
Each party shall be responsible for his or its own attorneys' fees and costs,
and the fees and costs of the arbitrator or mediator shall be paid equally by
each party.
16. ATTORNEYS' FEES. In the event of any legal or arbitration action or
proceeding to enforce or interpret the provisions hereof, each party shall be
responsible for his or its own attorneys' fees and costs.
17. SURVIVAL. Terms which by their terms or sense are to survive
termination hereof shall so survive.
18. NOTICE. Notices hereunder shall be in writing and sent to the
residence address of the Employee last provided to the Company, and to the then
current business address of the Company. Notices may be sent by first class U.S.
mail and shall be effective three (3) days after deposit. Notices sent by other
means shall be effective when actually delivered to the above-described address.
19. EFFECTIVE DATE. This Agreement and the grant of options
contemplated herein is conditioned upon the effectiveness of the Merger, the
date of such effectiveness being the "Effective Date."
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Management
Employment Agreement as of the date in 1999 first above written.
VantageMed Corporation
By: /S/ Joel Harris
-------------------------
Title: President
-------------------------
EMPLOYEE
/S/ James L. Seiler
- --------------------------------
James L. Seiler
8
<PAGE>
EXHIBIT 10.5
SECURED CONVERTIBLE PROMISSORY NOTE
Principal: $ 3,000,000 Issue Date: 10/07/99
Interest: 6 %, except as provided below
FOR VALUE RECEIVED, and in reliance upon that certain
Investment Representation Letter executed by Freidli Corporate Finance, Inc.
(the "Lender") of even date herewith, VantageMed Corporation, a Delaware
corporation (the "Company"), hereby promises to pay to the Lender, or its
registered transferee(s) or assign(s) (the "Holder") of this Secured Convertible
Promissory Note (the "Note"), in accordance with the terms hereof, the aggregate
principal sum of Three Million Dollars ($3,000,000), together with interest
thereon from the date of this Note on the unpaid principal balance. Simple
interest shall accrue at a rate equal to six percent (6%) per annum. If the note
is converted into the Company's Common Stock, par value $0.001 per share (the
"Common Stock") as set forth herein, the accrued interest shall convert as well.
Subject to the conversion provision set forth herein, principal and accrued
interest shall be due and payable in full on March 31, 2000 (the "Maturity
Date"), and in addition, the Company shall pay to the Holder a premium payment
equal to 10% of the outstanding principal amount of the Note if the Note is not
converted to Common Stock of the Company before the Maturity Date.
This Note may be transferred or assigned at any time upon
notice to the Company of such assignment. No such assignment shall be effective
until notice of such, including the name and address of the assignee, has been
received by the Company. Notwithstanding the foregoing, this Note may not be
transferred or assigned in violation of any laws, including United States
securities laws, and the Company shall refuse to recognize any such purported
transfer or assignment. This Note has not been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and has been issued in reliance
on the exemption from registration provided by Regulation S under the Securities
Act ("Regulation S"). Prior to the expiration of a 365-day restricted period
beginning on the Original Issue Date (the "Restricted Period"), this Note may
not be offered or sold, directly or indirectly, within the United States (as
defined in Regulation S under the Act), to a U.S. Person (as defined in
Regulation S under the Act) or for the account or benefit of a U.S. Person.
Neither the Company nor its transfer agent shall be obligated to remove this
legend unless it shall have received an opinion of counsel stating that such
removal complies with the requirements of Regulation S (under the Act).
provided, however, that as used in this Agreement and as reflected in such
legend, the term "Restricted Period," with respect to any security, shall mean
the Restricted Period then applicable to such security pursuant to Regulation S
(or any applicable successor thereto).
Subject to the conversion provision set forth below, all
payments shall be made in lawful money of the United States of America and in
immediately available funds at the principal office of the Lender, or at such
other place as the Lender or any Holder hereof may from time to time designate
in writing to the Company. Payment shall be credited first to the accrued
interest then due and payable and the remainder applied to principal. Prepayment
of principal, together with accrued interest, may be made at any time without
penalty.
<PAGE>
This Note shall be governed by and construed in accordance
with the laws of the State of California, without considering State of
California choice of law provisions.
The outstanding principal and interest balance on this Note
shall be automatically converted, on the effective date of the Company's first
public offering of its Common Stock of at least $15 million in gross funds
raised (the "IPO"), into shares of the Company's Common Stock, in the event that
the effective date of the IPO occurs prior to the Maturity Date. In the event of
such conversion, the shares of Common Stock issuable on such conversion will be
issued to the registered Holder of this Note. It shall be a condition to such
conversion that the Holder agrees that no shares acquired as a result of this
agreement shall be sold sooner that 180 days after the date of the IPO, and the
Company agrees that these shares may be resold upon the expiration of such 180
day period subject to compliance with applicable United States securities laws,
including Regulation S. Shares issued upon conversion of this Note will bear a
legend in substantially the form set forth below:
The securities represented by this certificate were issued
on September 29, 1999 (the "Original Issue Date") pursuant
to the provisions of a Promissory Note dated September 29,
1999 between VantageMed Corporation ("VantageMed") and
Freidli Corporate Finance, Inc. The securities represented
by this certificate have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"),
and have been sold in reliance on the exemption from
registration provided by Regulation S under the Securities
Act ("Regulation S"). Prior to the expiration of a 365-day
restricted period beginning on the Original Issue Date (the
"Restricted Period"), the securities represented by this
certificate may not be offered or sold, directly or
indirectly, within the United States (as defined in
Regulation S under the Act), to a U.S. Person (as defined in
Regulation S under the Act) or for the account or benefit of
a U.S. Person. Neither VantageMed nor its transfer agent
shall be obligated to remove this legend unless it shall
have received an opinion of counsel stating that such
removal complies with the requirements of Regulation S
(under the Act). provided, however, that as used in this
Agreement and as reflected in such legend, the term
"Restricted Period," with respect to any security, shall
mean the Restricted Period then applicable to such security
pursuant to Regulation S (or any applicable successor
thereto).
The number of shares of Common Stock to be issued upon such
conversion shall be equal to the quotient obtained by dividing the aggregate
outstanding principal due on the date of conversion by an amount equal to 50% of
the IPO share price. No fractional shares will be issued upon conversion of this
Note. In lieu of any fractional share to which Lender would otherwise be
entitled, the Company will pay to Holder in cash that amount of the unconverted
principal and interest balance of this Note. Upon conversion of this Note into
Common Stock, Holder shall surrender this Note, duly endorsed, at the principal
offices of the Company or any transfer agent for the Company, provided, however,
that, at the Company's sole expense, the Company shall have issued and delivered
to Holder (i) a certificate for the number of shares to which Holder is entitled
upon such conversion and (ii) a check payable to Holder for any cash amounts
payable as described above. Upon conversion of this Note into Common Stock and
delivery of a share certificate to Holder in compliance with the terms of this
Note, the Company
2
<PAGE>
will be forever released from all its obligations and liabilities under this
Note, including without limitation the obligation to pay the principal and
interest amounts.
This Note shall be secured with all tangible and intangible
assets of the Company and shall be senior to all other obligations, except for
the following two notes:
<TABLE>
<CAPTION>
PARTY/(COMMENTS) ORIGINAL AMOUNT BALANCE DUE: 31 MAR 2000
<S> <C> <C>
Former Shareholders of Civitec $ 383,040 $ 204,000
Mike Kipp (Trend Sierra former owner) $ 1,400,000 $ 1,100,000
</TABLE>
The Company shall take all reasonable and customary actions to
assist Lender in perfecting Lender's security interest as set forth above,
including filing appropriate UCC-1's within five (5) days after request therefor
by Lender, subject to Lender executing and delivering to the Company all
necessary documents.
No course of dealing and no delay on the part of any Lender in
exercising any right, power or remedy shall operate as a waiver thereof or
otherwise prejudice such person's rights, powers or remedies. No right, power or
remedy conferred by the Note shall be exclusive of any other right, power or
remedy referred to herein or hereafter accessible at law, in equity, by statute
or otherwise.
No waiver or modification of the terms of this Note shall be
valid unless in a writing referring to this Note and signed by the Lender.
LENDER: FREIDLI CORPORATE FINANCE, INC.
-------------------------------
Peter Friedli
VANTAGEMED CORPORATION:
-------------------------------
By: Richard W. Pendleton
Its: Chairman
3
<PAGE>
INVESTMENT REPRESENTATION LETTER
WITH RESPECT TO PROMISSORY NOTE
WHEREAS, VantageMed Corporation, a Delaware corporation (the
"Company"), has executed that certain Convertible Promissory Note (the "Note")
in aggregate principal amount of Three Million Dollars ($3,000,000) and promises
to pay to the order of Freidli Corporate Finance, Inc., or registered
transferees or assigns ("Lender"), in accordance with the terms thereof, such
amount together with interest thereon from the date of the Note on the unpaid
principal balance.
NOW, THEREFORE, Lender hereby represents and warrants that:
1. All action on the part of Lender necessary for the
authorization, execution, delivery and performance of the Note has been taken.
2. Lender believes it has received all the information it
considers necessary or appropriate for deciding whether to purchase the Note and
the underlying securities to be issued upon conversion of the Note. The Lender
further represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Note and the underlying securities upon conversion of the Note.
3. Lender acknowledges that it is able to fend for itself, can
bear the economic risk of its investment and has such knowledge and experience
in financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Note and the underlying securities to be issued
upon the conversion of the Note.
4. Lender understands that the underlying securities to be
issued upon conversion of the Note may be characterized as "restricted
securities" under the federal securities laws, and that under such laws and
applicable regulations, such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act"), only in certain limited
circumstances. In this connection, Lender represents that it is familiar with
Securities and Exchange Commission Rule 144 and Regulation S as presently in
effect and understands the resale limitations imposed thereby and by the Act.
5. Lender is neither a "U.S. Person" nor a "Distributor" each
as defined in Regulation S under the Act.
-----------------------------------------
Lender: FREIDLI CORPORATE FINANCE, INC.
-----------------------------------------
Date:
<PAGE>
EXHIBIT 10.6
THIS NOTE AND ANY COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL
SATISFACTORY TO VMC THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.
CONVERTIBLE PROMISSORY NOTE
Principal: $ 190,000 Issue Date: October 7, 1999
FOR VALUE RECEIVED, VantageMed Corporation, a Delaware
corporation (the "VMC"), hereby promises to pay to the order of Friedli
Corporate Finance ("Friedli"), in accordance with the terms hereof, the
principal sum of One Hundred Ninety Thousand Dollars ($190,000). Subject to the
conversion provision set forth herein, principal and accrued interest shall be
due and payable in full on October 6, 2002 (the "Maturity Date").
Subject to the conversion provision set forth below, all
payments shall be made in lawful money of the United States of America and in
immediately available funds at the principal office of Friedli, or at such other
place as the holder hereof may from time to time designate in writing to VMC.
This Note shall be governed by and construed in accordance
with the laws of the State of California, without respect to State of California
choice of law provisions.
Friedli shall have the right to convert the outstanding
principal balance on this Note, upon an Initial Public Offering, meaning the
closing of a firm-commitment underwritten public offering pursuant to an
effective registration statement under the Act, covering the offer and sale of
VMC Common Stock to the public with a minimum initial share price of less than
$7.00 (such per share price shall be adjusted for any stock dividends,
combinations, splits, and the like with respect to such shares), into 51,351
shares of VMC's Common Stock, par value $0.001 per share (the "Common Stock").
Upon conversion of this Note into Common Stock, Friedli shall
surrender this Note, duly endorsed, at the principal offices of VMC or any
transfer agent for VMC, provided, however, that, at VMC's sole expense, VMC
shall have issued and delivered to Friedli a certificate for the number of
shares to which Friedli is entitled upon such conversion. Upon conversion of
this Note into Common Stock and delivery of a share certificate to Friedli in
compliance with the terms of this Note, VMC will be forever released from all
its obligations
<PAGE>
and liabilities under this Note, including without limitation the obligation to
pay the principal and interest amounts.
This Note shall be extinguished and no payment or stock shall
be due under this Note, upon an Initial Public Offering, meaning the closing of
a firm-commitment underwritten public offering pursuant to an effective
registration statement under the Act, covering the offer and sale of VMC Common
Stock to the public with a minimum initial share price of at least $7.00 (such
per share price shall be adjusted for any stock dividends, combinations, splits,
and the like with respect to such shares).
This Note shall be binding upon and inure to the benefit of
Friedli and its successors and assigns.
No waiver or modification of the terms of this Note shall be
valid unless in a writing referring to this Note and signed by Friedli.
FRIEDLI CORPORATE FINANCE:
-------------------------------
VANTAGEMED CORPORATION:
-------------------------------
By: Joel M. Harris
Its: President & CEO
2
<PAGE>
EXHIBIT 10.10
WARRANT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT
OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT REQUIRED.
No. WB - 3 Warrant to Purchase 40,000 Shares of Common Stock
(subject to adjustment)
WARRANT TO PURCHASE COMMON STOCK
of
VANTAGEDMED CORPORATION
Void after October 6, 2002
This certifies that, for value received, the bearer ("Holder")
is entitled, subject to the terms set forth below, to purchase from VantageMed
Corporation (the "Company"), a Delaware corporation, forty thousand (40,000)
shares of Common Stock of the Company, as constituted on the date hereof (the
"Warrant Issue Date"), upon surrender hereof, at the principal office of the
Company referred to below, with the subscription form attached hereto duly
executed, and simultaneous payment therefore in lawful money of the United
States or otherwise as hereinafter provided, at the Exercise Price as set forth
in Section 2 below. The number, character and Exercise Price of such shares of
Common Stock are subject to adjustment as provided below. The term "Warrant" as
used herein shall include this Warrant, which is one of a Series of warrants
issued of the Common Stock of the Company, and any warrants delivered in
substitution or exchange therefore as provided herein.
1. TERM OF WARRANT. Subject to the terms and conditions set
forth herein, this Warrant shall be exercisable, in whole or in part, during the
term commencing on the Warrant Issue Date and ending at 5:00 p.m., Pacific
Standard Time, on October 6, 2002, and shall be void thereafter.
2. EXERCISE PRICE. The Exercise Price at which this Warrant
may be exercised shall be at 60% of the Company's initial public offering price,
as adjusted from time to time pursuant to Section 11 hereof.
3. EXERCISE OF WARRANT.
(a) The purchase rights represented by this Warrant
are exercisable by the Holder in whole or in part, but not for less than 100
shares at a time (or such lesser number of shares which may then constitute the
maximum number purchasable; such number being subject to adjustment as provided
in Section 11 below), at any time, for from time to time, during the
<PAGE>
Exercise annexed hereto duly completed and executed on behalf of the Holder, at
the office of the Company (or such other office or agency of the Company as it
may designate by notice in writing to the Holder at the address of the Holder
appearing on the books of the Company), upon payment (i) in cash or by check
acceptable to the Company, (ii) by cancellation by the Holder of indebtedness of
the Company to the Holder, or (iii) by a combination of (i) and (ii), of the
purchase price of the shares to be purchased.
(b) This Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
shares of Common Stock issuable upon such exercise shall be treated
for all purposes as the holder of record of such shares as of the close of
business on such date. As promptly as practicable on or after such date and in
any event within ten (10) days thereafter, the Company at its expense shall
issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of shares issuable upon such
exercise. In the event that this Warrant is exercised in part, the Company at
its expense will execute and deliver a new Warrant of like tenor exercisable for
the number of shares for which this Warrant may then be exercised.
4. NO FRACTIONAL SHARES OF SCRIP. No fractional shares of
scrip representing fractional shares shall be issued upon the exercise of this
Warrant. In lieu of any fractional share of which the Holder would otherwise be
entitled, the Company shall make a cash payment equal to the Exercise Price
multiplied by such fraction.
5. REPLACEMENT OF WARRANT. On receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of loss, theft, or destruction, on
delivery of an indemnity agreement reasonably satisfactory in form and substance
to the Company or, in the case of mutilation, on surrender and cancellation of
this Warrant, the Company at its expense shall execute and deliver, in lieu of
this Warrant, a new warrant of like tenor and amount.
6. RIGHTS OF STOCKHOLDERS. This warrant shall not entitle
its holder to any of the rights of a stockholder of the Company. Subject to
Sections 9 and 11 of this Warrant, the Holder shall not be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company that may at any time be issuable on the exercise
hereof for any purpose, nor shall anything contained herein be construed to
confer upon the Holder, as such, any of the right of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value, or change of stock to no par
value, consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until the
Warrant shall have been exercised and the shares of Common Stock purchasable
upon the exercise hereof shall have been issued, as provided herein.
2
<PAGE>
7. TRANSFER OF WARRANT.
(a) WARRANT REGISTER. The Company will maintain a
register (the "Warrant Register") containing the names and addresses of the
Holder or Holders. Any Holder of this Warrant or any portion thereof may change
his address as shown on the Warrant Register by written notice to the Company
requesting such change. Any notice or written communication required or
permitted to be given to the Holder may be delivered or given by mail to such
Holder as shown on the Warrant Register and at the address shown on the Warrant
Register. Until this Warrant is transferred on the Warrant Register of the
Company, the Company may treat the Holder as shown on the Warrant Register as
the absolute owner of this Warrant for all purposes, notwithstanding any notice
to the contrary.
(b) WARRANT AGENT. The Company may, by written
notice to the Holder, appoint an agent for the purpose of maintaining the
Warrant Register referred to in Section 7(a) above, issuing the Common Stock or
other securities then issuable upon the exercise of this Warrant, exchanging
this Warrant, replacing this Warrant, or any or all of the foregoing.
Thereafter, any such registration, issuance, exchange, or replacement, as the
case may be, shall be made at the office of such agent.
(c) TRANSFERABILITY AND NON-NEGOTIABILITY OF WARRANT.
This Warrant may not be transferred or assigned in whole or in part without
compliance with all applicable federal and state securities laws by the
transferor and the transferee (including the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, if such are requested by the Company). Subject to the provisions of
this Warrant with respect to compliance with the Securities Act of 1933, as
amended (the "Act"), title to this Warrant may be transferred by endorsement (by
the Holder executing the Assignment Form annexed hereto) and delivery in the
same manner as a negotiable instrument transferable by endorsement and delivery.
(d) EXCHANGE OF WARRANT UPON A TRANSFER. On
surrender of this Warrant for exchange, properly endorsed on the Assignment Form
and subject to the provisions of this Warrant with respect to compliance with
the Act and with the limitations on assignments and transfers and contained in
this Section 7, the Company at its expense shall issue to or on the order of the
Holder a new warrant or warrants of like tenor, in the name of the Holder or as
the Holder (on payment by the Holder of any applicable transfer taxes) may
direct, for the number of shares issuable upon exercise thereof.
(e) COMPLIANCE WITH SECURITIES LAWS.
(i) The Holder of this Warrant, by
acceptance hereof, acknowledges that this Warrant and the shares of Common Stock
to be issued upon exercise hereof or conversion thereof are being acquired
solely for the Holder's own account and not as a nominee for any other party,
and for investment, and that the Holder will not offer, sell, or otherwise
dispose of this Warrant or any shares of Common Stock to be issued upon exercise
hereof or conversion thereof except under circumstances that will not result in
a violation of the Act or any
3
<PAGE>
state securities laws. Upon exercise of this Warrant, the Holder shall, if
requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the shares of Common Stock so purchased are being acquired solely
for the Holder's own account and not as a nominee for any other party, for
investment, and not with a view toward distribution or resale.
(ii) This Warrant and all shares of Common
Stock issued upon exercise hereof or conversion thereof shall be stamped or
imprinted with a legend in substantially the following form (in addition to any
legend required by state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES
ISSUED HEREUNDER OR THEREUNDER MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM
UNDER SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE
OF THESE SECURITIES AND RESTRICTING THEIR TRANSFER OR SALE MAY
BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER
OF RECFORD HEREOF TO THE SECRETARY OF THE COMPANY AT THE
PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY.
8. RESERVATION OF STOCK. The Company covenants that during
the Term this Warrant is exercisable, the Company will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of Common Stock upon the exercise of this Warrant (and shares
of its Common Stock for issuance on conversion of such Common Stock) and, from
time to time, will take all steps necessary to amend its Certificate of
Incorporation (the "Certificate") to provide sufficient reserves of shares of
Common Stock issuable upon exercise of the Warrant (and shares of its Common
Stock for issuance on Conversion of such Common Stock). The Company further
covenants that all shares that may be issued upon the exercise of rights
represented by this Warrant, upon exercise of the rights represented by this
Warrant and payment of the Exercise Price, all as set forth herein, will be free
from all taxes, liens, and charges in respect of the issue thereof (other than
taxes in respect of any transfer occurring contemporaneously or otherwise
specified herein). The Company agrees that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
shares of Common Stock upon the exercise of this Warrant.
9. NOTICES.
(a) Whenever the Exercise Price or number of shares
purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the
Company shall issue a certificate signed by its Chief Financial Officer setting
forth, in reasonable detail, the event requiring the adjustment, the amount of
the adjustment, the method by which such adjustment was calculated and the
Exercise Price and number of shares purchasable hereunder after giving effect to
such
4
<PAGE>
adjustment, and shall cause a copy of such certificate to be mailed (by first
class mail, postage prepaid) to the Holder of this Warrant.
(b) In case:
(i) the Company shall take a record of the
holders of its Common Stock (or other stock or securities at the time receivable
upon the exercise of this Warrant) for the purpose of entitling them to receive
any dividend or other distribution, or any right to subscribe for or purchase
any shares of stock of any class or any other securities, or to receive any
other right, or
(ii) of any capital reorganization of the
Company, any reclassification of the capital stock of the Company, any
consolidation or merger of the Company with or into another corporation, or any
conveyance of all or substantially all of the assets of the Company to another
corporation, or
(iii) of any voluntary dissolution,
liquidation or winding-up of the Company, then, and in each such case, the
Company will mail or cause to be mailed to the Holder or Holders a notice
specifying, as the case may be (A) the date on which a record is to be taken for
the purpose of such dividend, distribution or right, and stating the amount and
character of such dividends, distribution or right, or (B) the date on which
such reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or such stock or
securities at the time receivable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other stock or
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up. Such notice shall be mailed at least 15
days prior to the date therein specified.
(c) All such notices, advices and communications
shall be deemed to have been received (i) in the case of personal delivery, on
the date of such delivery and (ii) in the case of mailing, on the third business
day following the date of such mailing.
10. AMENDMENTS. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought.
11. ADJUSTMENTS. The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as follows:
11.1 MERGER, SALE OF ASSETS, ETC.
(a) If at any time, while this Warrant, or any
portion thereof, is outstanding and unexpired there shall be (i) a
reorganization (other than a combination, reclassification, exchange or
subdivision of shares otherwise provided for herein), (ii) a merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a reverse triangular merger in which the
Company is the surviving entity
5
<PAGE>
but the shares of the Company's capital stock outstanding immediately prior to
the merger are converted by virtue of the merger into other property, whether in
the form of securities, cash, or otherwise, or (iii) a sale or transfer of the
Company's properties and assets as, or substantially as, an entirety to any
other person, then, as a part of such reorganization, merger, consolidation,
sale or transfer, lawful provision shall be made so that the holder of this
Warrant shall thereafter be entitled to receive upon exercise of this Warrant,
during the period specified herein and upon payment of the Exercise Price then
in effect, the number of shares of stock or other securities or property of the
successor corporation resulting from such reorganization, merger, consolidation,
sale or transfer which a holder of the shares deliverable upon exercise of this
Warrant would have been entitled to receive in such reorganization,
consolidation, merger, sale or transfer if this Warrant had been exercised
immediately before such reorganization merger, consolidation, sale or transfer,
all subject to further adjustment as provided in this Section 11. The foregoing
provisions of this Section 11.1 shall similarly apply to successive
reorganizations, consolidations, mergers, sales and transfers and to the stock
or securities of any other corporation which are at the time receivable upon the
exercise of this Warrant. If the per share consideration payable to the holder
hereof for shares in connection with any such transaction is in a form other tha
cash or marketable securities, then the value of such consideration shall be
determined in good faith by the Company's Board of Directors. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction, to
the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably may be, in relation to any shares or other property
deliverable after that event upon exercise of this
(b) NOTICES OF RECORD DATE. In the event that the
Company shall propose at any time to merge with or into any other corporation,
or sell, lease or convey all or substantially all its property or business, or
to liquidate, dissolve or wind up, then the company shall send to the holder of
this Warrant at least 20 days' prior written notice of the date on which a
record shall be taken for determining rights to vote in respect of such event.
11.2 RECLASSIFICATION, ETC. If the Company at any time while
this Warrant, or any portion thereof, remains outstanding and unexpired shall,
by reclassification of securities or otherwise, change any of the securities as
to which purchase rights under this Warrant exist into the same or a different
number of securities of any other class of classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the resul of such change with respect to the
securities which were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in Section 11.
11.3 SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the
Company at any time while this Warrant, or any portion thereof, remains
outstanding and unexpired shall split, subdivide or combine the securities as to
which purchase rights under this Warrant exist, into a different number of
securities of the same class, the Exercise Price for such securities shall be
proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.
6
<PAGE>
11.4 ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR
PROPERTY. If while this Warrant, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which purchase rights under this
warrant exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible Stockholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Warrant shall represent the right to acquire, in addition
to the number of shares of the security receivable upon exercise of this
Warrant, and without payment of any additional consideration therefor, the
amount of such other or additional stock or other securities or property (other
than cash) of the Company which such holder would hold on the date of such
exercise had it been the holder of record of the security receivable upon
exercise of this Warrant on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise, retained
such shares and/or all other additional stock available by it as aforesaid
during such period, giving effect to all adjustments called for during such
period by the provisions of this Section 11.
11.5 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment pursuant to this Section 11, the Company at its
expense shall promptly compute such adjustment and readjustment in accordance
with the terms hereof and furnish to each holder of this Warrant a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Company shall, upon the
written request, at any time, of any such holder, furnish or cause to be
furnished to such holder a like certificate setting forth: (i) such adjustments
and readjustments; (ii) the Exercise Price at the time in effect; and (iii) the
number of shares and the amount, if any, of other property which at the time
would be received upon the exercise of the Warrant.
11.6 NO IMPAIRMENT. The Company will not, by any voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Company, but will at all times in
good faith assist in the carrying out of all the provisions of this Section 11
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the holders of this Warrant against impairment.
12. REGISTRATION RIGHTS. Upon exercise of this Warrant, the
Holder shall have and be entitled to exercise, together with all other holders
of Registrable Securities possessing registration rights under Section 3.8 of
that certain Merger Agreement, dated July 23, 1999, among the Company, VM1
Acquisition Corp., a Delaware corporation ("VM1"), and Mariner Systems, Inc., a
Colorado corporation, as amended by that certain Assignment and Assumption
Agreement, dated August 2, 1999, by and between VM1 and VM4 Acquisition Corp., a
Delaware corporation (as amended, the "Merger Agreement"), the rights of
registration granted under Section 3.8 of the Merger Agreement to Registrable
Securities (with respect to the Shares issued on exercise of this Warrant). By
its execution of this Agreement, Holder agrees to be bound by the terms of
Section 3.8 of the Merger Agreement upon exercise of this Warrant as a party
thereto.
7
<PAGE>
13. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed
by and construed in accordance with the laws of the State of California.
(b) ATTORNEYS' FEES. If any party to this Agreement
shall take any action to enforce this Agreement or bring any action or commence
any arbitration for any relief against term hereof as described in Section 1
above, by the surrender of this Warrant and the Notice of any other party,
declaratory or otherwise, arising out of this Agreement, the losing party shall
pay to the prevailing party a reasonable sum for attorneys' and experts' fees
and costs incurred in taking such action, bringing such suit and/or enforcing
any judgment granted therein, all of which shall be deemed to have accrued upon
the commencement of such action and shall be paid whether or not such action is
prosecuted to judgment. Any judgment or order entered in such action shall
contain a specific provision providing for the recovery of attorneys' and
experts' fees and costs due hereunder shall be determined by a court of
competent jurisdiction and not by a jury. For the purposes of this Section,
attorneys' and experts' fees and costs shall include, without limitation, fees
incurred in the following: (a) post-judgment motions; (b) contempt proceedings;
(c) garnishment, levy, and debtor and third party examinations; (d) discovery;
and (e) bankruptcy litigation.
IN WITNESS WHEREOF, Company has caused this Warrant to be
executed by its officers thereunto duly authorized.
Dated: _____________, 1999
By: _____________________________
Joel M. Harris, President
HOLDER: __________________
8
<PAGE>
NOTICE OF EXERCISE
To: ________________
(1) The undersigned hereby elects to purchase ____ shares of
Common Stock of ___________, pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby
confirms and acknowledges that the shares of Common Stock or the Common Stock to
be issued upon conversion thereof are being acquired solely for the account of
the undersigned and not as a nominee for any other party, and for investment,
and that the undersigned will not offer, sell, or otherwise dispose of any such
shares of Common Stock except under circumstances that will not result in a
violation of the Securities Act of 1933, as amended, or any state securities
laws.
(3) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
---------------------------------
[Name]
---------------------------------
[Name]
(4) Please issue a new Warrant for the unexercised portion of
the attached Warrant in the name of the undersigned or in such other name as is
specified below:
---------------------------------
[Name]
---------------------------------
- ------------------------ ---------------------------------
[Date] [Signature]
9
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this
Warrant hereby sells, assigns and transfers unto the Assignee named below all of
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock (or Common Stock) set forth below:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- ------------------------ --------------- -------------
<S> <C> <C>
</TABLE>
and does hereby irrevocably constitute and appoint __________________ Attorney
to make such transfer on the books of ___________ maintained for the purpose,
with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof,
the Assignee acknowledges that this Warrant and the shares of stock to be issued
upon exercise hereof or conversion thereof are being acquired for investment and
that the Assignee will not offer, sell or otherwise dispose of this Warrant or
any shares of stock to be issued upon exercise hereof or conversion thereof
except under circumstances which will not result in a violation of the
Securities Act of 1933, as amended, or any state securities laws. Further, the
Assignee has acknowledged that upon exercise of this Warrant, the Assignee
shall, if requested by the Company, confirm in writing, in a form satisfactory
to the Company, that the shares of stock so purchased are being acquired for
investment and not with a view toward distribution or resale.
DATED: ________________
---------------------------------
Signature of Holder
---------------------------------
(Witness)
10
<PAGE>
EXHIBIT 10.11
PENDLETON PROMISSORY NOTE
Sacramento, California
$148,000 July 15, 1997
On or before July 15, 2000, Richard Pendleton promises to pay VantageMed
Corporation the principle sum of One Hundred Forty-eight Thousand Dollars
$148,000), with interest at the rate of 5.25 percent per year (computed on the
basis of a 365-day year). Interest only payments are payable annually on July 15
of each year, beginning on July 15, 1998 or together with payment of the
principle sum of this Note.
MAKER
/s/ Richard Pendleton
- -------------------------------------
Richard Pendleton
<PAGE>
EXHIBIT 10.12
VANTAGEMED
FRIEDLI CONSULTING AGREEMENT
July 27, 1999
Gentlemen:
This letter confirms our agreement between VANTAGEMED ("the Company")
and the Friedli Corporate Finance Inc. ("Friedli") in connection with
the investment by Friedli in the Company and to provide financial
consulting and management services pursuant to the following
procedures, terms and conditions:
1. Term
The Company hereby retains Friedli, and Friedli hereby accepts such
engagement, for a term commencing on August 1, 1999 and terminating on
July 31, 2002.
2. The Company's Obligation
(a) At Friedli's request, the Company will furnish written
quarterly status reports to Friedli describing both positive
and negative events, financial information or from time to
time as needed within 20 days of request.
(b) At Friedli's request, the Company at its own expense will make
presentations to investors in Switzerland once a year at their
own expense.
(c) The Company agrees to give Friedli exclusivity for any private
equity transaction in Switzerland.
(d) The Company shall keep the terms of this Agreement and any
terms on a financial transaction confidential and shall not
release any information to third parties without the written
consent of Friedli.
(e) The Company agrees to elect Peter Friedli as a Director.
3. Duties and Representation of Friedli
(a) Friedli will provide services to the Company in the form of
consultation, advice and assistance upon the reasonable
request of the Company and at such times as are convenient to
Friedli in its reasonable discretion. Such services may
include, but are not limited to, (i) providing general
business, financial and investment advice to the Company
during the terms of this Agreement, and (ii) serving as a
liaison between Friedli clients/investors and the Company by
disseminating information, including proxy and other
shareholder material, to such investors on behalf of the
Company.
<PAGE>
(b) Friedli agrees to use its best efforts in performing the
foregoing services.
4. Compensation
(a) In consideration of the services to be provided by Friedli
hereunder, the Company shall pay Friedli US$2,000 per month.
5. Status of Consultant
Friedli agrees to render services to the Company as an independent
contractor to, and not as an employee of, the Company. Friedli
acknowledges and agrees that it will be an independent contractor for
all purposes including, but not limited to, payroll and tax purposes,
and that Friedli shall not represent itself to be an employee or
officer of the Company.
6. Termination
This Agreement may be terminated by the Company or Friedli upon thirty
(30) days prior written notice to the other party. If terminated
without cause by the Company, the full balance through July 31, 2002 of
the consulting fee will be immediately due, including the accrued
balance.
7. Assignment
The terms of this Agreement shall inure to the benefit of the
respective successors and permitted assigns of the parties hereto, and
the obligations and liabilities assumed in this Agreement by the
parties hereto shall be binding upon their respective successors and
permitted assigns. This Agreement may not be assigned by the Company or
Friedli without the prior written consent of the other party hereto.
8. Confidentiality
Except as the Company may otherwise consent for Company's benefit,
Friedli agrees to keep confidential and not to disclose or make any use
of, at any time, either during or subsequent to the terms of this
Agreement, any inventions, trade secrets, confidential information,
knowledge, data or other information of the Company relating to
products, processes, know-how, designs, formulas, test data, customer
lists, business plans, marketing plans and strategies, pricing
strategies, or other information pertaining to the Company or any of
its affiliates.
<PAGE>
9. Governing Law
This Agreement shall be governed by the laws of the State of
California, USA without giving effect to the principles of conflicts of
the law; and the parties hereby consent to the jurisdiction of the
State and Federal courts in the State of California for themselves and
their assets.
10. Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which together shall
be deemed to be the same agreement.
If the foregoing is in accord with your understanding of our agreement,
please sign in the space provided below and return a signed copy of
this letter to the Company.
Sincerely,
VantageMed, Inc.
By: /s/
-----------------------------------
Joel Harris
Accepted and agreed:
Friedli Corporate Finance Inc.
By: ___________________________
<PAGE>
EXHIBIT 10.14
VANTAGEMED CORPORATION
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of _______________, 1999, is made by and
between VANTAGEMED CORPORATION, a Delaware corporation (the "Company"), and
______________________________ (the "Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of
directors and officers are often difficult to apply, ambiguous, or conflicting,
and therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers
and agents and the directors, officers and agents of its subsidiaries to assume
the risk of huge judgments and other expenses which may occur in cases in which
the director, officer or agent received no personal profit and in cases where
the director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that he is usually the only witness with knowledge
of the essential facts and exculpating circumstances regarding such matters, and
that the long period of time which usually elapses before the trial or other
disposition of such litigation often extends beyond the time that the director,
officer or agent can reasonably recall such matters; and may extend beyond the
normal time for retirement for such director, officer or agent with the result
that he, after retirement or in the event of his death, his spouse, heirs,
executors or administrators, may be faced with limited ability and undue
hardship in maintaining an adequate defense, which may discourage such a
director, officer or agent from serving in that position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced
<PAGE>
individuals to serve as directors, officers and agents of the Company and its
subsidiaries and to encourage such individuals to take the business risks
necessary for the success of the Company and its subsidiaries, it is necessary
for the Company to contractually indemnify its directors, officers and agents
and the directors, officers and agents of its subsidiaries, and to assume for
itself maximum liability for expenses and damages in connection with claims
against such directors, officers and agents in connection with their service to
the Company and its subsidiaries, and has further concluded that the failure to
provide such contractual indemnification could result in great harm to the
Company and its subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that he is furnished
the indemnity provided for herein.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. DEFINITIONS.
(a) AGENT. For the purposes of this Agreement, "agent" of the Company
means any person who is or was a director, officer, employee or other agent of
the Company or a subsidiary of the Company; or is or was serving at the request
of, for the convenience of, or to represent the interests of the Company or a
subsidiary of the Company as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company, or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) EXPENSES. For purposes of this Agreement, "expenses" include all
out-of-pocket costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements), actually and
reasonably incurred by the Indemnitee in connection with either the
investigation, defense or appeal of a proceeding or establishing or
2
<PAGE>
enforcing a right to indemnification under this Agreement or Section 145 or
otherwise; provided, however, that "expenses" shall not include any judgments,
fines, ERISA excise taxes or penalties, or amounts paid in settlement of a
proceeding.
(c) PROCEEDING. For the purposes of this Agreement, "proceeding" means
any threatened, pending, or completed action, suit or other proceeding, whether
civil, criminal, administrative, or investigative.
(d) SUBSIDIARY. For purposes of this Agreement, "subsidiary" means any
corporation of which more than 50% of the outstanding voting securities is owned
directly or indirectly by the Company, by the Company and one or more other
subsidiaries, or by one or more other subsidiaries.
2. AGREEMENT TO SERVE. The Indemnitee agrees to serve and/or continue
to serve as agent of the Company, at its will (or under separate agreement, if
such agreement exists), in the capacity Indemnitee currently serves as an agent
of the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided, however, that nothing contained in this Agreement is intended
to create any right to continued employment by Indemnitee.
3. LIABILITY INSURANCE.
(a) MAINTENANCE OF D&O INSURANCE. The Company hereby covenants and
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) RIGHTS AND BENEFITS. In all policies of D&O Insurance, the
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) LIMITATION ON REQUIRED MAINTENANCE OF D&O INSURANCE.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. MANDATORY INDEMNIFICATION. Subject to Section 9 below, the Company
shall indemnify the Indemnitee as follows:
3
<PAGE>
(a) SUCCESSFUL DEFENSE. To the extent the Indemnitee has been
successful on the merits or otherwise in defense of any proceeding (including,
without limitation, an action by or in the right of the Company) to which the
Indemnitee was a party by reason of the fact that he is or was an Agent of the
Company at any time, against all expenses of any type whatsoever actually and
reasonably incurred by him in connection with the investigation, defense or
appeal of such proceeding.
(b) THIRD PARTY ACTIONS. If the Indemnitee is a person who was or is a
party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the Company) by reason of the fact that he is or
was an agent of the Company, or by reason of anything done or not done by him in
any such capacity, the Company shall indemnify the Indemnitee against any and
all expenses and liabilities of any type whatsoever (including, but not limited
to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by him in connection with the
investigation, defense, settlement or appeal of such proceeding, provided the
Indemnitee acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and its stockholders, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
(c) DERIVATIVE ACTIONS. If the Indemnitee is a person who was or is a
party or is threatened to be made a party to any proceeding by or in the right
of the Company by reason of the fact that he is or was an agent of the Company,
or by reason of anything done or not done by him in any such capacity, the
Company shall indemnify the Indemnitee against all expenses actually and
reasonably incurred by him in connection with the investigation, defense,
settlement, or appeal of such proceeding, provided the Indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and its stockholders; except that no indemnification
under this subsection 4(c) shall be made in respect to any claim, issue or
matter as to which such person shall have been finally adjudged to be liable to
the Company by a court of competent jurisdiction unless and only to the extent
that the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such amounts which the court shall deem proper.
(d) ACTIONS WHERE INDEMNITEE IS DECEASED. If the Indemnitee is a
person who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that he is or was an agent of the Company, or
by reason of anything done or not done by him in any such capacity, and if prior
to, during the pendency of after completion of such proceeding Indemnitee
becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors
and administrators against any and all expenses and liabilities of any type
whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes
and penalties, and amounts paid in settlement) actually and reasonably incurred
to the extent Indemnitee would have been entitled to indemnification pursuant to
Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive.
(e) Notwithstanding the foregoing, the Company shall not be obligated
to indemnify the Indemnitee for expenses or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) for which payment is actually made to
or on behalf of Indemnitee under a valid and collectible
4
<PAGE>
insurance policy of D&O Insurance, or under a valid and enforceable indemnity
clause, by-law or agreement.
5. PARTIAL INDEMNIFICATION. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by him in the investigation, defense, settlement or
appeal of a proceeding, but not entitled, however, to indemnification for all of
the total amount hereof, the Company shall nevertheless indemnify the Indemnitee
for such total amount except as to the portion hereof to which the Indemnitee is
not entitled.
6. MANDATORY ADVANCEMENT OF EXPENSES. Subject to Section 8(a) below,
the Company shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to which
the Indemnitee is a party or is threatened to be made a party by reason of the
fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall be determined ultimately that the Indemnitee is not entitled to be
indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company. In the event that the Company fails to pay expenses as incurred by the
Indemnitee as required by this paragraph, Indemnitee may seek mandatory
injunctive relief from any court having jurisdiction to require the Company to
pay expenses as set forth in this paragraph. If Indemnitee seeks mandatory
injunctive relief pursuant to this paragraph, it shall not be a defense to
enforcement of the Company's obligations set forth in this paragraph that
Indemnitee has an adequate remedy at law for damages.
7. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the
commencement of a proceeding pursuant to Section 7(a) hereof, the Company has
D&O Insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on
behalf of the Indemnitee, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently
5
<PAGE>
incurred by the Indemnitee with respect to the same proceeding, provided that
(i) the Indemnitee shall have the right to employ his counsel in any such
proceeding at the Indemnitee's expense; and (ii) if (A) the employment of
counsel by the Indemnitee has been previously authorized by the Company, (B) the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and the Indemnitee in the conduct of any such
defense, or (C) the Company shall not, in fact, have employed counsel to assume
the defense of such proceeding, then the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance
expenses to the Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) LACK OF GOOD FAITH. To indemnify the Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted by
the Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) UNAUTHORIZED SETTLEMENTS. To indemnify the Indemnitee under
this Agreement for any amounts paid in settlement of a proceeding unless the
Company consents to such settlement, which consent shall not be unreasonably
withheld.
9. NON-EXCLUSIVITY. The provisions for indemnification and advancement
of expenses set forth in this Agreement shall not be deemed exclusive of any
other rights which the Indemnitee may have under any provision of law, the
Company's Certificate of Incorporation or Bylaws, the vote of the Company's
stockholders or disinterested directors, other agreements, or otherwise, both as
to action in his official capacity and to action in another capacity while
occupying his position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. ENFORCEMENT. Any right to indemnification or advances granted by
this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee
in any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting his claim. It shall be a defense to any
action for which a claim for indemnification is made under this Agreement (other
than an action brought to enforce a claim for expenses pursuant to Section 6
hereof, provided that the required undertaking has
6
<PAGE>
been tendered to the Company) that Indemnitee is not entitled to indemnification
because of the limitations set forth in Sections 4 and 8 hereof. Neither the
failure of the Corporation (including its Board of Directors or its
stockholders) to have made a determination prior to the commencement of such
enforcement action that indemnification of Indemnitee is proper in the
circumstances, nor an actual determination by the Company (including its Board
of Directors or its stockholders) that such indemnification is improper, shall
be a defense to the action or create a presumption that Indemnitee is not
entitled to indemnification under this Agreement or otherwise.
11. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. SURVIVAL OF RIGHTS.
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that Indemnitee was serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. INTERPRETATION OF AGREEMENT. It is understood that the parties
hereto intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. SEVERABILITY. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever,
(i) the validity, legality and enforceability of the remaining provisions of the
Agreement (including without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. MODIFICATION AND WAIVER. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any
7
<PAGE>
other provisions hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.
16. NOTICE. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
17. GOVERNING LAW. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
The parties hereto have entered into this Indemnity Agreement effective
as of the date first above written.
THE COMPANY:
VANTAGEMED CORPORATION
By:
------------------------------------------
Title:
---------------------------------------
Address:
--------------------------------------
--------------------------------------
--------------------------------------
INDEMNITEE:
----------------------------------------------
[Indemnitee's Printed Name]
Address:
-------------------------------------
-------------------------------------
-------------------------------------
8
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF VANTAGEMED CORPORATION:
ATEK Computer Distributors, Inc., a Delaware corporation
VM1 Acquisition corporation, a Delaware corporation
VM2 Acquisition Corporation, a Delaware corporation
VM3 Acquisition corporation, a Delaware corporation
Trend Sierra Corporation, a Delaware corporation
VM5 Acquisition Corporation, an Arkansas corporation
Mariner Systems, Inc., a Delaware corporation
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
November 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VANTAGEMED
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997 DEC-31-1999
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1997 JAN-01-1999
<PERIOD-END> JUN-30-1999 DEC-31-1998 DEC-31-1997 SEP-30-1999
<CASH> 192 435 680 1,190
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,902 1,517 799 2,102
<ALLOWANCES> 231 311 68 329
<INVENTORY> 114 105 50 273
<CURRENT-ASSETS> 2,218 1,849 1,528 3,846
<PP&E> 2,996 2,668 463 3,601
<DEPRECIATION> 826 436 267 1,028
<TOTAL-ASSETS> 15,390 11,391 5,189 29,295
<CURRENT-LIABILITIES> 6,903 6,436 1,446 8,025
<BONDS> 0 0 0 0
0 0 0 0
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<CGS> 4,429 5,752 2,474 7,065
<TOTAL-COSTS> 4,429 5,752 2,474 7,065
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<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 295 207 20 419
<INCOME-PRETAX> (3,836) (4,264) (629) (6,612)
<INCOME-TAX> (1,132) (343) (195) (3,284)
<INCOME-CONTINUING> (2,704) (3,921) (434) (3,328)
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<NET-INCOME> (2,704) (3,921) (434) (3,328)
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